Key Messages

• Gas sales volumes are 11 %¹ higher comparing Jan-Jul in 2010 with Jan-Jul in 2009
• Gas transportation flows through Russian UGSS normalized in 1Q2010 comparing with abnormal 1Q2009
• Operating cash flow generation increase by 106 % comparing RR 483 bn in 1Q2010 with RR 234 bn in 1Q2009
• Leverage easing:
  • Net Debt decreased by 29 % as of the end of 1Q2010 due to cash and cash equivalents increase and short-term and long-term loans decrease (mostly as a result of Gazenergoprombank reclassification)
  • Net Debt/Adj.EBITDA LTM dropped to 0,8x as of the end of 1Q2010 comparing with 1,3x as of the end of 2009
• Profit for the period² amounted RR 325 bn in 1Q2010 up 213% comparing with 1Q2009
• Free cash flow³ generation increased 9x up to RR 265 bn in 1Q2010

• ¹ Preliminary management estimates
• ² Profit for the period attributed to owners of OAO Gazprom
• ³ Free cash flow is calculated as Net cash provided by operating activities minus Capital expenditures

Financial Performance

The profit for the three month period ended March 31, 2010 increased significantly compared to that for three month period ended March 31, 2009 mainly for the following reasons:

• increase in sales of refined products and in sales of electric and heating energy
• decrease in finance expenses

Net sales of refined products (net of excise tax, VAT and customs duties) increased by RR 55,741, or 57%, to RR 153,545 in the three months period ended March 31, 2010 in comparison with the same period of the prior year. The increase mainly resulted from the increase of world prices for refined products and increase in volumes sold in the three months period ended March 31, 2010 compared to the same period of the prior year. In the three months periods ended March 31, 2010 and 2009 Gazprom neft Group’s sales comprised 82% and 86% of the total amount of our net sales of refined products, respectively.

Net sales of electric and heat energy (net of VAT) increased by RR 35,809, or 60% to RR 95,416 in the three months period ended March 31, 2010 compared to the same period of the prior year. This increase was mainly due to consolidation of TGC-1 starting from December 31, 2009 and increase of sales of electric and heat energy related to activity of Mosenergo, WGC-2 and WGC-6 by RR 17,318, or 32%.

Finance expenses decreased mainly due to reduction in exchange losses. Exchange losses decreased by RR 250,711 to RR 4,686 in the three months period ended March 31, 2010 from RR 255,397 in the three months period ended March 31, 2009. The decrease in exchange gains and exchange losses resulted from lower fluctuation of USD and EURO exchange rates against RR in the three months ended March 31, 2010 in comparison with the same period of the prior year.

Financial Position

Short-Term Financial Assets

Financial assets held for trading primarily comprise marketable equity and debt securities intended to generate short-term profits through trading.

Available-for-sale financial assets primarily comprise third parties’ promissory notes maturing within twelve months of the balance sheet date and debt securities.

As of 31 December 2009 short-term financial assets owned by the Group’s banking subsidiaries amounted to RR 35,535. As of 31 March 2010 short-term financial assets owned by the Group’s banking subsidiaries are classified as financial assets within disposal group held for sale in amount of RR 32,274.

Accounts Receivable and Prepayments

Accounts receivable and prepayments are presented net of impairment provision of RR 149,881 and RR 156,872 as of 31 March 2010 and 31 December 2009, respectively.

As of 31 December 2009 other receivables include RR 42,640 relating to the operations of the Group’s banking subsidiaries. This balance mainly represents deposits with other banks and loans issued to customers at commercial rates based on credit risks and maturities. As of 31 March 2010 other receivables related to the operations of Group’s banking subsidiaries are classified as accounts receivable and prepayments within disposal group held for sale in amount of RR 19,564.

Property, Plant and Equipment

Production assets are shown net of provision for impairment of RR 54,387 as of 31 March 2010 and 31 December 2009. Assets under construction are presented net of provision for impairment of RR 96,966 and RR 97,157 as of 31 March 2010 and 31 December 2009, respectively.

Included in the property, plant and equipment are social assets, such as rest houses, housing, schools and medical facilities, vested to the Group at privatisation with a net book value of RR 2,120 and RR 2,265 as of 31 March 2010 and 31 December 2009, respectively.

Investments in Associated Undertakings and Jointly Controlled Entities

Summarized financial information on the Group’s principal associated undertakings and jointly controlled entities is presented in tables below.

The values, disclosed in the tables, represent total assets, liabilities, revenues, profit (loss) of the Group’s principal associated undertakings and jointly controlled entities and not the Group’s share.

As of 31 March 2010

As of 31 March 2009

The estimated fair values of investments in associated undertakings for which there are published price quotations were as follows:

Long-term Accounts Receivable and Prepayments

Long-term accounts receivable and prepayments are presented net of impairment provision of RR 14,929 and RR 24,922 as of 31 March 2010 and 31 December 2009, respectively.

As of 31 December 2009 long-term accounts receivable included RR 62,967 relating to the operations of Group’s banking subsidiaries. This balance mainly represents deposits and long-term loans issued to customers at commercial rates based on credit risk and maturities.

As of 31 March 2010 long-term accounts receivable related to the operations of the Group’s banking subsidiaries are classified as accounts receivables and prepayments within disposal group held for sale in amount of RR 31,679.

Available-for-Sale Long-Term Financial Assets

Available-for-sale long-term financial assets, in total amount of RR 98,039 and RR 106,658, are shown net of provision for impairment of RR 2,038 and RR 5,354 as of 31 March 2010 and 31 December 2009, respectively.

As of 31 December 2009 available-for-sale long-term financial assets owned by the Group’s banking subsidiaries amounted to RR 25,809 and are shown net of provision for impairment of RR 1,473.

As of 31 March 2010 available-for-sale long-term financial assets owned by the Group’s banking subsidiaries are classified as financial assets within disposal group held for sale in amount of RR 17,203 and are shown net of provision for impairment of RR 696.

Disposal Group Held for Sale

ZAO Gazenergoprombank and its banking subsidiaries are involved in various transactions with Group companies as well as transactions with external companies in different regions of the Russian Federation.

On 29 March 2010 the respective Boards of directors of OAO AB Rossiya, a bank not related to the Group, and ZAO Gazenergoprombank approved the reorganization in the form of the merger of ZAO Gazenergoprombank to OAO AB Rossiya. As a result of the decision, assets and liabilities of ZAO Gazenergoprombank as of 31 March 2010 were classified as held for sale.

Prior to the Boards’ approval this transaction had been agreed with the Federal Anti-monopoly Service of the Russian Federation. In April 2010 shareholders of both banks approved the reorganization in the form of the merger of ZAO Gazenergoprombank to OAO AB Rossiya and the conversion ratio.

According to the merger agreement, all assets and liabilities of ZAO Gazenergoprombank are to be transferred to OAO AB Rossiya. In exchange for its existing controlling interest in ZAO Gazenergoprombank, the Group receives non-controlling interest in OAO AB Rossiya. In August 2010 reorganization process was finalized.

Below is the breakdown of major classes of assets and liabilities of disposal group held for sale:

The above total assets and total liabilities exclude RR 45,222 and RR 46,858 of intercompany balances, respectively.

The net assets of ZAO Gazenergoprombank as of 31 March 2010 amount to RR 14,566. No impairment of assets was necessary as a result of the decision to reorganize this subsidiary.

Long-Term Borrowings

Long-term borrowings include fixed rate loans with a carrying value of RR 1,097,572 and RR 1,149,288 and fair value of RR 1,145,262 and RR 1,199,339 as of 31 March 2010 and 31 December 2009, respectively.

All other long-term borrowings generally have variable interest rates linked to LIBOR, and the difference between carrying value of these liabilities and their fair value is not significant.

As of 31 December 2009 long-term borrowings include RR 57,365 relating to the operations of the Group’s banking subsidiaries. As of 31 March 2010 long-term borrowings relating to the operations of the Group’s banking subsidiaries are classified as borrowing within disposal group held for sale in amount of RR 22,679.

As of 31 March 2010 and 31 December 2009 long-term borrowings, including current portion, of RR 23,714 and RR 27,118 were secured by revenues from export supplies of gas to Western Europe.

Maturity analysis

Provisions for Liabilities and Charges

The Group operates a defined benefit plan, concerning the majority of the employees of the Group. These benefits include pension benefits provided by the non-governmental pension fund, NPF Gazfund, and certain post-retirement benefits from the Group provided upon retirement.

The net pension assets related to benefits, provided by the pension plan NPF Gazfund in the amount of RR 243,982 as of 31 March 2010 and 31 December 2009 are presented within other non-current assets in the consolidated balance sheet.

In accordance with IAS 19, pension assets are recorded at estimated fair market values subject to certain limitations. As of 31 March 2010 and 31 December 2009 management estimated the fair value of these assets at approximately RR 541 billion and RR 514 billion, respectively.

The pension assets comprise shares of OAO Gazprom, shares of OAO Gazprombank and other assets held by NPF Gazfund.

Profit Tax

Differences between the recognition criteria in Russian statutory taxation regulations and IFRS give rise to certain temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes and for profit tax purposes. The tax effect of the movement on these temporary differences is recorded at the statutory rate of 20%.

Taxable temporary differences recognized for the three months ended 31 March 2010 include the effect of applying of special depreciation coefficient 2 for property, plant and equipment working in aggressive environment.

Deferred tax liability related to property, plant and equipment was recognized in the amount of RR 23,088.

IFRS Consolidated Interim Condensed Statement of Comprehensive Income

Sales

• Gas

  Net sales of gas accounted for 64% and 73% of total net sales in the three months periods ended 31 March 2010 and 2009, respectively.

  Net sales of gas increased from RR 609,564 in the three months period ended 31 March 2009 to RR 612,830 in the three months period ended 31 March 2010 or by 1%.

  Net sales of gas to Europe and other countries decreased in the three months period ended 31 March 2010 compared to the three months period ended 31 March 2009, by RR 80,118, or 22%, to RR 286,218. The overall decrease in net sales of gas to Europe and other countries was primarily driven by decrease in average prices. The gross average RR price (including excise tax and customs duties) decreased by 36% for the three months period ended 31 March 2010, compared to the three months period ended 31 March 2009. At the same time volume of gas sold for the three months period ended 31 March 2010 increased by 37% compared to the same period of the prior year.

  Net sales of gas to FSU countries increased in the three months period ended 31 March 2010 compared to the three months period ended 31 March 2009, by RR 8,548, or 10%, to RR 93,829. This increase was mainly due to increase in volumes of gas sold to FSU countries by 75% in the three months period ended 31 March 2010 compared to the three months period ended 31 March 2009. At the same time the gross average RR price (including customs duties, net of VAT) decreased by 24% in the three months period ended 31 March 2010 compared to the same period of the prior year.

  Net sales of gas in the domestic market increased in the three months period ended 31 March 2010 compared to the same period of the prior year, by RR 74,836, or 47%, to RR 232,783. This increase was due to the increase in the gross average price for domestic gas sales by 34% in the three months period ended 31 March 2010 compared to the same period of the prior year due to increase in tariffs which are set by the Federal Tariffs Service (FTS), and increase in the volumes of gas sold by 10% in the three months period ended 31 March 2010 compared to the same period of the prior year.

• Refined Products

  Net sales of refined products (net of excise tax, VAT and customs duties) increased by RR 55,741, or 57%, to RR 153,545 in the three months period ended 31 March 2010 in comparison with the same period of the prior year. The increase mainly resulted from the increase of world prices for refined products and increase in volumes sold in the three months period ended 31 March 2010 compared to the same period of the prior year. In the three months periods ended 31 March 2010 and 2009 Gazprom neft Group’s sales comprised 82% and 86% of the total amount of our net sales of refined products, respectively.

• Electric and Heat Energy

  Net sales of electric and heat energy (net of VAT) increased by RR 35,809, or 60% to RR 95,416 in the three months period ended 31 March 2010 compared to the same period of the prior year. This increase was mainly due to consolidation of TGC-1 starting from 31 December 2009 and increase of sales of electric and heat energy related to activity of Mosenergo, WGC-2 and WGC-6 by RR 17,318, or 32%.

• Crude Oil and Gas Condensate

  Net sales of crude oil and gas condensate (net of excise tax, VAT and customs duties) increased by RR 8,629, or 24%, to RR 44,584 in the three months period ended 31 March 2010 compared to RR 35,955 in the three months period ended 31 March 2009. The increase was mainly caused by the increase of oil price in the three months period ended 31  March 2010 compared to the same period of the prior year. Also the increase was supported by the increase of the volume of gas condensate sold in the three months period ended 31 March 2010 compared to the same period of the prior year. Sales of crude oil included in net sales of crude oil and gas condensate (net of excise tax, VAT and customs duties), amounted to RR 38,503 and RR 33,705 in the three months periods ended 31 March 2010 and 2009, respectively.

• Gas Transportation

  Gas transportation net sales (net of VAT) increased by RR 12,322, or 96%, to RR 25,147 in the three months period ended 31 March 2010 from RR 12,825 in the three months period ended 31 March 2009. The increase was mainly caused by increased gas volumes transported for independent gas suppliers during the three months period ended 31 March 2010 compared to the same period of the prior year.

• Changes in accounting policy

  The presentation of interim condensed financial statements for the three months ended 31 March 2009 related to sales of gas, electric and heat energy has been changed to be consistent with the net presentation of trading activity result. The effect of this reclassification on sales for the three months ended 31 March 2009 was a reduction of RR 94,247 and had no effect on operating income and cash flows.

Operating Expenses

Finance Income

Finance Expenses

Basic and Diluted Earnings per Share, Attributable to Shareholders of OAO Gazprom

Earnings per share have been calculated by dividing the profit, attributable to equity shareholders of OAO Gazprom by the weighted average number of shares outstanding during the period, excluding the weighted average number of ordinary shares purchased by the Group and held as treasury shares.

There were 22.9 and 23.6 billion weighted average shares outstanding for the three months ended 31 March 2010 and 2009, respectively.

There are no dilutive financial instruments outstanding.

IFRS Consolidated Interim Condensed Statement of Cash Flows

Net cash provided by operating activities

Net cash provided by operating activities amounted to RR 483,116 in the three months period ended 31 March 2010 compared to RR 233,963 in the three months period ended 31 March 2009. The increase was primarily due to growth of our operating profit in the three months period ended 31 March 2010 in comparison with the same period of the prior year, which was supplemented by positive dynamics of changes in working capital.

Net cash used for investing activities

Net cash used for investing activities increased by RR 13,990, or 6%, to RR 250,061 in the three months period ended 31 March 2010 compared to RR 236,071 in the three months period ended March 31, 2009. In a context of increase in total capital expenditures the increase of net cash used for investing activities was also due to second installment paid in March 2010 for the acquisition of controlling interest in SeverEnergiya in the amount of RR 34,715. These effects were partly offset by receipt of proceeds from redemption of preference shares by Sakhalin Energy Investment Company Ltd. in the amount of RR 9,910.

Net cash used for financing activities

Net cash used for financing activities amounted to RR 48,882 in the three months period ended 31 March 2010 compared to RR 16,249 in the three months period ended 31 March 2009. This change was due to decrease in proceeds from long-term borrowings in the three months period ended 31 March 2010 compared to the same period of the prior year.

IFRS Consolidated Interim Condensed Statement of Changes in Equity

Basis of Presentation

The consolidated interim condensed financial information is prepared in accordance with International Accounting Standard 34 «Interim Financial Reporting» («IAS 34»). This consolidated interim condensed financial information should be read together with the consolidated financial statements for the year ended 31 December 2009 prepared in accordance with International Financial Reporting Standards («IFRS»).

The official Russian Rouble («RR») to US dollar («USD») exchange rates as determined by the Central Bank of the Russian Federation were 29.36 and 30.24 as of 31 March 2010 and 31 December 2009, respectively.

The official RR to Euro exchange rates as determined by the Central Bank of the Russian Federation were 39.70 and 43.39 as of 31 March 2010 and 31 December 2009, respectively.

Summary of Significant Accounting Policies and Accounting Estimates

In 2010 the Group has adopted all IFRS, amendments and interpretations which are effective 1 January 2010 and which are relevant to its operations.

Amendments to IAS 27, IAS 38, IFRS 2, IFRS 4, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IAS 1, IAS 7, IAS 17, IAS 36, IAS 39 IFRS 5 and IFRS 8 are effective for annual periods beginning on or after 1 January 2010. The improvements consist of a mixture of substantive changes and clarifications.

• Standards, Amendments or Interpretations effective in 2010

  • IAS 1 “Presentation of Financial Statements”

    The amended IAS 1 changes non-current/current classification of liabilities settled by equity instruments.

  • IAS 7 “Statements of Cash Flows”

    The amended IAS 7 clarifies that only expenditures that result in a recognised asset are eligible for classification as investing activities.

  • IAS 17 “Leases”

    The amended IAS 17 clarifies the considerations for classification of land leases and setting out transition requirements for reclassification of unexpired leases.

  • IAS 27 “Consolidated and Separate Financial Statements”

    The revised IAS 27 requires an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the previous standard required the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control over a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group applied the amendment from 1 January 2010.

  • IAS 36 “Impairment of Assets”

    The amended IAS 36 clarifies that a cash generating unit shall not be larger than an operating segment before aggregation.

  • IAS 38 “Intangible Assets”

    The amended IAS 38 supplements measurement of fair value of intangible assets acquired in a business combinations, providing additional guidance on techniques used in the absence of an active market

  • IAS 39 “Financial Instrument: Recognition and Measurement”

    The amended IAS 39 excludes from its scope certain forward contracts resulting in business combinations, clarifies the period of reclassifying gains or losses on the hedged instruments from equity to profit or loss and provides guidance for circumstances when prepayment options are closely related to the host contract. The amendment to IAS 39 also clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations.

  • IFRS 2 “Share based Payment”

    The amended IFRS 2 clarifies that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2. The amendments also provide a clear basis to determine the classification of share-based payment awards in consolidated financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard.

  • IFRS 3 “Business Combinations”

    The revised IFRS 3 allows entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. Measurement of the non-controlling interests at fair value has a corresponding effect on consolidated goodwill (goodwill attributable to non-controlling interest should be recognized). The revised IFRS 3 is more detailed in providing guidance on the application of the acquisition method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill is measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred, the amount recognised for the non-controlling interest and the fair value of the net assets acquired. Acquisition-related costs are accounted for separately from the business combinations and therefore recognized as expenses rather than included in goodwill. An acquirer should recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group applied the new provisions of this standard to business combinations after 1 January 2010.

  • IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”

    The amended IFRS 5 clarifies disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations.

  • IFRS 8 “Operating Segments”

    Amendments to IFRS 8 changes disclosure requirements for a measure of segment assets under IFRS 8.

  • IFRIC 9 “Financial instruments”

    Amendments to IFRIC 9 clarify that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within the scope of IFRIC 9.

  • IFRIC 16 “Hedges of a Net Investment in a Foreign Operation”

    Amendments to IFRIC 16 remove the restriction that hedging instruments may not be held by the foreign operation that itself is being hedged.

  • IFRIC 17 “Distributions of Non-cash assets to owners”

    The interpretation provides guidance on accounting for distribution of assets other than cash (non-cash assets) as dividends to its owners acting in their capacity as owners. It also clarifies the situations, when entity gives its owners a choice of receiving either non-cash assets or a cash alternative.

  • IFRIC 18 “Transfers of Assets from customers”

    The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers.

• Standards, Amendments and Interpretations to existing Standards that are not yet effective and have not been early adopted by the Group

  • IAS 24 “Related Party Disclosures”

    Amendment to IAS 24 “Related Party Disclosures” which is 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 from the definition 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 the Group’s consolidated financial statements.

  • IAS 32 “Financial Instruments: Presentation”

    Amendment to IAS 32 “Financial Instruments: Presentation” which is 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 application of this amendment is not expected to materially affect the Group’s consolidated financial statements.

  • IFRS 9 “Financial Instruments”

    IFRS 9 “Financial Instruments” (issued in November 2009, effective for annual periods beginning on or after 1 January 2013, with earlier application permitted). IFRS 9 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. 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.

    The Group is currently assessing the impact of the standard on consolidated financial statements.

  • IFRIC 14 “Prepayments of a Minimum Funding Requirment”

    Amendment to IFRIC 14 “Prepayments of a Minimum Funding Requirement” (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 application of this amendment is not expected to materially affect the Group’s consolidated financial statements.

  • IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”

    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 application of this interpretation is not expected to materially affect the Group’s consolidated financial statements.

Scope of Consolidation

These financial statements consolidate subsidiaries, associated undertaking and joint ventures of the Group. Significant changes in the Group’s structure in 2009 are described below.

• In February 2009 the Group acquired a 51% interest in Naftna Industrija Srbije and obtained control over Naftna Industrija Srbije.
• In the period from April to June 2009 the Group acquired 54.71% of the ordinary shares of Sibir Energy plc and obtained control over Sibir Energy plc.
• In December 2009 the Group completed the series of transactions and accumulated 51.8% of ordinary shares of OAO TGC-1 and obtained control over OAO TGC-1.

Acquisition of the Controlling Interest in Naftna Industrija Srbije (NIS)

On 3 February, 2009, the Group acquired a 51% interest in NIS for RR 18.5 billion (Euro 400 million). As part of the purchase agreement the Group pledged to invest Euro 547 million (approximately RR 24.6 billion as at acquisition date) to rebuild and upgrade NIS’s refining facilities by 2012. NIS is one of the largest vertically integrated oil companies in Central Europe, operating two oil refineries in Pancevo and Novi Sad, Serbia with a total processing capacity of 7.3 million tons per year. NIS also has crude oil production of approximately 0.6 million tons per year from its oil and gas exploration and production operations in Serbia and operates a network of retail stations throughout Serbia.

As of 31 March 2010 the Group has finalized assessment of the estimated fair values of certain assets and liabilities acquired in accordance with IFRS 3 «Business Combinations». There were no changes to the estimated fair values as of 31 December 2009.

Details of the assets acquired and liabilities assumed are as follows:

Acquisition of the Controlling Interest in Sibir Energy PLC (SIBIR)

In the period from 23 April 2009, being the date of the Group’s first acquisition of shares in Sibir, until 23 June 2009, the Company invested GBP 1,057 million (approximately RR 53 billion) to acquire 54.71% of the ordinary shares of Sibir. This transaction provided the Group with effective control over Sibir and accordingly Sibir became a subsidiary of the Group at this date.

Sibir is a vertically integrated oil company operating in the Russian Federation. Sibir’s primary upstream assets include OAO Magma Oil Company (95% Sibir owned) and a 50% interest in Salym Petroleum Development N.V. (a joint venture with Royal Dutch Shell). Sibir’s upstream assets are located in Khanty-Mansiysk Autonomous Region and comprise annual production interest of over 10,600 tons of oil per day.

Sibir also holds a 38.63% stake in the OAO Moskovsky NPZ and a network of 134 retail stations in Moscow and the Moscow region through OAO Moscow Fuelling Company and OAO Mosnefteproduct.

As a result of the acquisition of the ordinary shares of Sibir, the Group also obtained control over OAO Moskovsky NPZ, having increased its cumulative share in OAO Moskovsky NPZ from 38.63% to 77.26%. The Group previously accounted for its 38.63% interest in OAO Moskovsky NPZ as equity investment. As a result of the Group obtaining control over OAO Moskovsky NPZ, the Group’s previously held 38.63% interest was re-measured to fair value, resulting in a revaluation surplus of RR 9,911 recognised in other comprehensive income. The purchase consideration includes approximately RR 15 billion representing the cost of the purchase of the previous equity interest.

In accordance with IFRS 3 “Business Combinations”, the Group recognized the acquired assets and liabilities assumed based upon their fair values. The fair value of the purchase consideration and the purchase price allocation is preliminary as the Group is in the process of finalizing the fair value estimates for certain assets and liabilities, primarily for property, plant and equipment and determined the completeness of liabilities recorded. Management is required to finalize the purchase accounting within 12 months of the date of acquisition. Any revisions to the provisional values will be reflected as of the acquisition date.

Details of the assets acquired and liabilities assumed are as follows:

Acquisition of the Controlling Interest in OAO TGC-1

As of 31 December 2009, the Group completed a series of transactions and obtained the controlling interest in OAO TGC-1. The Group’s controlling interest of 51.8% have been accumulated through the acquisition of OOO Gazprom investproekt (former name - OOO Russian Energy Projects) which owned 19.5% interest in OAO TGC-1 in November 2009 and acquisition of additional 3.6% interest in OAO TGC-1 in the fourth quarter 2009.

The Group accounted for 28.7% interest in OAO TGC-1 owned prior to the fourth quarter of 2009 as an investment in associated undertakings and jointly controlled entities that was accounted as equity investment.

In accordance with IFRS 3 “Business Combinations”, the Group recognized the acquired assets and liabilities based upon their fair values. In the interim condensed financial information, management revised the preliminary assessment disclosed in consolidated financial statements for the year ended 31 December 2009. As a result, the fair value of items of property, plant and equipment and deferred tax liability have been increased by RR 5,305 and RR 1,061, respectively, with a corresponding decrease in goodwill. Revisions made to the preliminary assessment applied in consolidated financial statements were reflected as of the acquisition date. As of 31 March 2010 the Group has finalized assessment of the estimated fair values of certain assets and liabilities acquired in accordance with IFRS 3 “Business Combinations”.

The total purchase consideration primarily includes the cost of shares acquired in the fourth quarter 2009 in amount of RR 28.3 billion and the fair value of the equity investment of RR 33.2 billion.

Details of the assets acquired and liabilities assumed are as follows:

Segment Description

The Group operates as a vertically integrated business with substantially all external gas sales generated by the Distribution segment.

The Board of Directors and Management Committee of OAO Gazprom (chief operating decision maker (CODM)) provide general management of the Group, an assessment of the operating results and allocate resources using different internal financial information. Based on that the following reportable segments within the Group were determined:

• Production of gas – exploration and production of gas;
• Transport – transportation of gas;
• Distribution – sales of gas within Russian Federation and abroad;
• Gas storage – storage of extracted and purchased gas in underground gas storages;
  • Production of crude oil and gas condensate – exploration and production of oil and gas condensate, sales of crude oil and gas condensate;
• Refining – processing of oil, gas condensate and other hydrocarbons, and sales of refined products; and
  • Electric and heat energy generation and sales.

Other activities have been included within «All other segments» column.

The inter-segment sales mainly consist of:

• Production of gas – sales of gas to the Distribution and Refining segments;
• Transport – rendering transportation services to the Distribution segment;
  • Distribution – sales of gas to the Transport segment for own needs and to the Electric and heat energy generation and sales segment;
• Gas storage – sales of gas storage services to Distribution segment;
  • Production of crude oil and gas condensate – sales of oil and gas condensate to the Refining segment for further processing; and
• Refining – sales of refined hydrocarbon products to other segments.

Internal transfer prices, mostly for Production of gas, Transport and Gas storage segments, are established by the management of the Group with the objective of providing specific funding requirements of the individual subsidiaries within each segment.

The CODM assesses the performance, assets and liabilities of the operating segments based on the internal financial reporting. The effects of certain non-recurring transactions and events, such as business acquisitions, and the effects of some adjustments that may be considered necessary to reconcile the internal financial information to IFRS consolidated financial statements are not included within the operating segments which are reviewed by the CODM on a central basis. Gains and losses on available-for-sale financial assets, and financial income and expenses are also not allocated to the operating segments.

Segment Revenues

A reconciliation of reportable segments’ external sales to sales in statement of comprehensive income is provided as follows:

Sales

Segment Result

A reconciliation of reportable segments’ external sales to sales in statement of comprehensive income is provided as follows:

IFRS Consolidated interim condensed statement of comprehensive income

Segment Assets

Reportable segments’ assets are reconciled to total assets in balance sheet as follows:

IFRS Consolidated interim condensed statement of comprehensive income

Segment Liabilities

Segment liabilities mainly comprise operating liabilities. Profit tax payable, deferred tax liabilities, provisions for liabilities and charges, short-term and long-term borrowings, including current portion of long-term borrowings, short-term and long-term promissory notes payable and other non-current liabilities are managed on a central basis.

IFRS Consolidated interim condensed statement of comprehensive income

Taxation

The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes.

Tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments. Management believes that its interpretation of the relevant legislation as of 31 March 2010 is appropriate and all of the Group's material tax, currency and customs positions will be sustainable.

Financial Guarantees

Included in financial guarantees are amounts denominated in USD of USD 1,447 million and USD 1,569 million as of 31 March 2010 and 31 December 2009, respectively.

In July 2005 Blue Stream Pipeline Company B.V. (BSPC) refinanced some of the existing liabilities, guaranteed by the Group, by means of repayment of the liabilities to a group of Italian and Japanese banks. For the purpose of this transaction loans in the amount of USD 1,185.3 million were received from Gazstream S.A. The Group guaranteed the above loans.

As of 31 March 2010 and 31 December 2009, outstanding amounts of these loans were RR 14,960 (USD 509 million) and RR 18,317 (USD 606 million), respectively, which were guaranteed by the Group, pursuant to its obligations.

In 2006 the Group guaranteed Asset Repackaging Trust Five B.V. (registered in Netherlands) bonds issued by five financing entities: Devere Capital International Limited, Blackrock Capital Investments Limited, DSL Assets International Limited, United Energy Investments Limited, EM Interfinance Limited (registered in Ireland) in regard to bonds issued with due dates December 2012, June 2018, December 2009, December 2009 and December 2015, respectively.

Bonds were issued for financing of construction of transit pipeline in Poland by SGT EuRoPol GAZ S.A. In December 2009 loans issued by DSL Assets International Limited and United Energy Investments Limited were redeemed. As a result as of 31 March 2010 and 31 December 2009 the guarantees issued on behalf of Devere Capital International Limited, Blackrock Capital Investments Limited and EM Interfinance Limited amounted to RR 15,358 (USD 523 million) and RR 16,357 (USD 541 million), respectively.

In 2007 the Group provided a guarantee to Wintershall Vermogens-Verwaltungsgesellschaft mbH on behalf of ZAO Achimgaz as a security of loans received and used for additional financing of the pilot implementation of the project on the development of Achimsky deposits of the Urengoy field. The Group’s liability with respect to loans is limited by 50% in accordance with the ownership interest in ZAO Achimgaz. As of 31 March 2010 and 31 December 2009 the above guarantee amounted to RR 4,250 (Euro 107 million) and RR 4,841 (Euro 112 million), respectively.

In January 2008 the Group provided a guarantee to Europipe GmbH, supplier of large-diameter steel pipes, on behalf of Nord Stream AG related to pipe supply contract for construction of Nord Stream pipeline. As of 31 March 2010 and 31 December 2009 the above guarantee amounted to RR 2,430 (Euro 61 million) and RR 2,655 (Euro 61 million), respectively.

In April 2008 the Group provided a guarantee to Credit Suisse International and National Reserve bank (OAO) on behalf of MRK Energy DMCC related to loan received by MRK Energy DMCC. The purpose of the loan is financing of construction of gas pipeline «Kudarsky pereval – Tskhinval» (South Ossetia). As of 31 March 2010 and 31 December 2009 the above guarantee amounted to RR 8,369 and RR 8,620, respectively.

In May 2008 the Group provided a guarantee to OAO Bank of Moscow on behalf of OAO Group E4 as a security of loans for obligations under contracts for delivering of power units. As of 31 March 2010 and 31 December 2009 the above guarantee amounted to RR 3,412 (Euro 86 million) and RR 3,729 (Euro 86 million), respectively.

In April 2009 the Group provided a guarantee to OAO Gazprombank on behalf of OOO Stroygazconsulting as a security of credit facility for construction supply of Bovanenkovskoye, Yamburgskoe fields and Bovanenkovo-Ukhta gas trunk-line system. As of 31 March 2010 and 31 December 2009 the above guarantee amounted to RR 7,000 and RR 8,841, respectively.

In January 2010 the Group provided a guarantee to OAO Bank VTB on behalf of OOO Production Company VIS as a security of credit facility for financing of projects of construction industrial units for Gazprom Group, including priority investment projects of construction generating capacities of OAO WGC-6. As of 31 March 2010 the above guarantee amounted to RR 2,230.

Other guarantees of the Group included guarantees, issued by the Group’s banking subsidiaries to third parties, in the amount of RR 5,440 and RR 5,700 as of 31 March 2010 and 31 December 2009, respectively.

Investments

In May 2010 the Group acquired additional 25.66% of the ordinary shares of Sibir Energy plc. In July 2010 the Group sold 3.02% of the ordinary shares of Sibir Energy plc to OAO Central Fuel Company which is controlled by the Government of Moscow. As a result of these transactions the Group’s interest in Sibir Energy plc equals to 77.35%.

In August 2010 the reorganization in the form of the merger of ZAO Gazenergoprombank to OAO AB Rossiya was finalized. As a result of the reorganization the Group received non-controlling interest in OAO AB Rossiya in exchange for its existing controlling interest in ZAO Gazenergoprombank.

Borrowings and Loans

In February 2010 the Group signed an agreement to obtain a long-term loan from Citibank N.A. in the amount of USD 367 million due in 2021 at an interest rate of LIBOR +1.6%. In June 2010 the Group obtained USD 287 million under this agreement.

In April 2010 the Group issued bonds in the amount of RR 20,000 due in 2013 at an interest rate of 7.15%.

In June 2010 the Group obtained a loan from Credit Agricole CIB in amount of USD 250 million due in 2013 at an interest rate of LIBOR +2.15%.

In June 2010 the Group obtained a loan from Deutsche Bank AG in the amount of USD 300 million due in 2014 at an interest rate of 6.23%.

In July 2010 the Group signed an agreement to obtain a long-term participation loan from a consortium of banks in the amount of USD 1,500 million due in 2015 at an interest rate of LIBOR +2.1%. The Bank of Tokyo-Mitsubishi UFJ, Natixis SA and Societe Generale were appointed as bank agents.

Long-term borrowings

Government

The Government of the Russian Federation is the ultimate controlling party of OAO Gazprom and has a controlling interest (including both direct and indirect ownership) of over 50% in OAO Gazprom.

The Government does not prepare financial statements for public use. The 11 seats on the Board of Directors include six State representatives. Governmental economic and social policies affect the Group’s financial position, results of operations and cash flows.

As a condition of privatisation in 1992, the Government imposed an obligation on the Group to provide an uninterrupted supply of gas to customers in the Russian Federation at government controlled prices.

Parties under control of the Government

In the normal course of business the Group enters into transactions with other entities under Government control. Prices of natural gas sales and electricity tariffs in Russia are regulated by the Federal Tariffs Service (“FTS”). Bank loans with related parties are provided on the basis of market rates. Taxes are accrued and settled in accordance with Russian tax legislation.

As of 31 March 2010 and 31 December 2009 and for the three months ended 31 March 2010 and 2009, the Group had the following significant transactions and balances with the Government and parties under control of the Government:

Three months ended 31 March 2010

Three months ended 31 March 2009

Gas sales and respective accounts receivable, oil transportation expenses and respective accounts payable included in the table above are related to major State controlled companies.

In the normal course of business the Group incurs electricity and heating expenses. A part of these expenses relates to purchases from the entities under Government control. Due to the specifics of the electricity market in the Russian Federation, these purchases can not be accurately separated from the purchases from private companies.

See the consolidated interim condensed statement of changes in equity for returns of social assets to governmental authorities during the three months ended 31 March 2010 and 2009. See Property, Plant And Equipment Analysis for net book values as of 31 March 2010 and 31 December 2009 of social assets vested to the Group at privatisation.

Key Management Personnel

Key management personnel (the members of the Board of Directors and Management Committee of OAO Gazprom) receive short-term compensation, including salary, bonuses and remuneration for serving on the management bodies of various Group companies.

Government officials, who are directors, do not receive remuneration from the Group. The remuneration for serving on the Boards of Directors of Group companies is subject to approval by the General Meeting of Shareholders of each Group company.

Compensation of key management personnel (other than remuneration for serving as directors of Group companies) is determined by the terms of the employment contracts. Key management personnel also receive certain short-term benefits related to healthcare.

According to Russian legislation, the Group makes contributions to the Russian Federation State pension fund for all of its employees including key management personnel. Key management personnel also participate in certain post-retirement benefit programs. The programs include pension benefits provided by the non- governmental pension fund, NPF Gazfund, and a one-time retirement payment from the Group. Employees of the majority of Group companies are eligible for such benefits.

Associated Undertakings and Jointly Controlled Entities

For the three months ended 31 March 2010 and 2009 and as of 31 March 2010 and 31 December 2009 the Group had the following significant transactions and balances with associated undertakings and jointly controlled entities:

Revenues and Expenses

IFRS Consolidated Interim Condensed Statement of Comprehensive Income

Assets and Liabilities

IFRS Consolidated Interim Condensed Balance Sheet