IG SEISMIC SERVICES

IG SEISMIC SERVICESAnnual Report 2013

Annual Report by IGSS for 2013

About the Company

Address from the Management

Strategy Manage-ment’s Report

Corporate Governance

Capital Markets

Corporate Social Responsibility

Consolidated Financial Statements

Contents

3 Company Today

6 Key Financial and Operating Results

12 Geographical Footprint

13 Key Events of 2013

16 Company History

25 Market Overview

34 Strategic Priorities of IGSS

40 New Technologies

44 Risk Chart

50 Select Financial and Operating Information

53 Seismic Services Market Conditions

54 Seasonality

55 Seismic Services Market Trends in 2013

56 Major Events of the Year 2013

75 Qualitative and Quantitative Disclosures about Market Risk

78 Subsequent Events

79 Directors’ Responsibility Statement

108 Shares

111 Credit Ratings and Bonds

83 Systems and Principles of Corporate Governance

85 Annual General Meeting

86 Board of Directors

96 Board of Directors Committees

102 Executive Management

105 Information Disclosure

114 Corporate Social Responsibility

116 Labor Safety

118 Cooperation with Local Communities

119 Ecology

19 Address from the Chairman

21 Address from the CEO

122 General Information

123 Report of the Board of Directors

126 Independent Auditors’ Report

128 Consolidated Statement of Financial Position

130 Consolidated Statement of Comprehensive Income

132 Consolidated Statement of Cash Flows

134 Consolidated Statement of Changes in Equity

135 Notes to the Consoli-dated Financial Statements

3


Company Today IGSS is a leading pure-play land and transition zone seismic company providing high-quality seismic acquisition, data processing and interpretation services to clients primarily in Russia and the CIS. IGSS is among the world’s largest land seismic contractors.

IGSS provides oil and gas companies with high-quality solutions in the acquisition, processing and interpretation of seismic data. The company offers a complete range of seismic services in all of the key hydrocarbon regions of Russia, including Western and Eastern Siberia, Southern Russia and the Timano-Pechora area.

IGSS has extensive operational experience in the markets of the CIS, India, North Africa, and the Middle East. IGSS focuses its work in two main directions: field seismic data acquisition and geophysical data processing and interpretation.

IGSS is the only company in Russia to offer integrated seismic services on land and in transition zones. IGSS counts some of the largest international and Russian oil and gas companies as its customers.

IGSS manages 67 well-equipped seismic crews, the largest among seismic companies in Russia. The company owns 28 operational bases and 9 modern data processing and interpretation centers.

IGSS implements cutting-edge technologies, conducts active R&D, flexibly adapts to the changing demands of the dynamic and growing market for seismic services. IGSS was the first Russian company to implement Schlumberger’s UniQ technology. UniQ is a one-of-a-kind system of geophysical hardware and software that allows for high-resolution seismic surveys.

About the Com pa ny

4


IGSS was established in December 2011 as the result of the combination of seismic assets in Russia and the CIS of three leading seismic services companies. IGSS has a diversified shareholder structure and adheres to the highest standards of corporate governance.

On December 11, 2012, the global depository receipts (GDR) of IGSS were admitted to trading on the Main Market of the London Stock Exchange. In 2013, GEOTECH Seismic Services (the largest geophysical company of the IGSS Group) placed debut issue of bonds worth RUR 3 billion. IGSS was also assigned for the first time credit ratings by the top international rating agencies: Standard and Poor’s (”B” Positive) and Moody’s (”B2” Stable).

One of the key advantages of the company is its highly qualified staff. IG Seismic Services employs a staff of over 12,000, including experienced geologists, geophysicists, engineers and IT specialists. The company’s top concern remains the professional development and well-being of its employees. IGSS implements programs to support the local communities where it works and continuously works to improve the environmental safety of its operations.

About the Com pa ny

5


IGSS GROUP STRUCTURE

Stavropolneftegeophysica OJSC (Russian Federation)

Sibneftegeophyzika OJSC (Russian Federation)

Evgeo LLC (Russian Federation)

Azimuth Energy Services JSC (Kazakhstan)

Illimpey Geophysical Expedition LLC (Russian Federation)

GEOTECH–Eastern Geophysical Company LLC (Russian Federation)

Boguchan Geophysical Expedition LLC (Russian Federation)

Orenburg Geophysical Research Expedition OJSC (Russian Federation)

Khantymansiyskgeophysics OJSC (Russian Federation)

Severgeophyzika OJSC (Russian Federation)

Naryan–Marseismorazvedka OJSC (Russian Federation)

GeoRes LLC (Russian Federation)

Eniseygeophysica OJSC (Russian Federation)

Geostan JSC (Kazakhstan)

GeoPrime LLC (Russian Federation)

GEOTECH Seismic Services PJSC (Russian Federation, Tyumen)

GEOTECH Holding CJSC(Russian Federation, Moscow)

IG Seismic Services PLC

Data Processing and Interpretation

Seismic Block

Financial investments

About the Com pa ny

6


Key Financial and Operating ResultsKey Financial ResultsMM USD, unless otherwise stated 2013 2012 2011 PF 2013 vs. 2012 Change

Revenue 607.2 608.5 616.3 –0.20%

EBITDA 132.8 119.1 115.8 11.48%

EBITDA Margin 21.9% 19.6% 18.8% 230 bp

Normalized Net Profit / (Loss)* 11.6 5.8 (31.9) +100%

Net (Loss) / Profit (12.6) 12.5 (85.1) –

Operating Cash Flow 148.9 84.1 68.1 77.16%

Capital Expenditures 100.8 56.7 83.8 77.75%

Net Debt** 389.9 390.2 376.4 –0.09%

Average FX rate for the period (RUR/USD) 31.85 31.09 0.76 2.44%

MM RUR, unless otherwise stated 2013 2012 2011 PF 2013 vs. 2012 Change

Revenue 19,340 18,920 18,113 2.22%

EBITDA 4,229 3,703 3,402 14.19%

EBITDA Margin, % 21.9% 19.6% 18.8% 230 bp

Normalized Net Profit / (Loss)* 367 180 (938) +105%

Net (Loss) / Profit (401) 389 (2,501) –

Operating Cash Flow 4,743 2,614 2,002 81.46%

Capital Expenditures 3,210 1,763 2,464 82.06%

Net Debt 12,761 11,853 12,117 7.67%

2013

19.3

2013

4.2

2012

18.9

20122011 PF

3.73.4

2011 PF

18.1

Revenue, RUR bn

EBITDA & EBITDA Margin, RUR bn

* Before FX diference, one-off and non-recirring items; ** Net Debt is calculated using FX rate as at the end of the period (RUB/USD): 32.73 as at 31 December 2013 and 30.37 as at 31 December 2012.

21.9%19.6%

18.8%

Source: Audited consolidated FS under IFRS as of and for the period ended 31 December 2013 and 2012; Pro-forma Income Statement for 2011 year

About the Com pa ny

7


Key Operating Results

2013 2012 2011 PF 2013 vs. 2012 Change

Kilometers

2D (km) 8,433 11,072 20,030 –24%

3D (sq.km) 14,004 20,139 18,910 –30%

HD (km) 1,001 – – –

HD (sq.km) 1,140 – – –

Shot Points

2D 215,548 247,681 377,101 –13%

3D 952,314 1,202,476 1,178,116 –21%

HD 442,597 –

TOTAL performed by IGSS crews 1,610,459 1,450,157 1,555,217 11%

including

Russia 1,458,999 1,281,342 1,254,365 14%

Kazakhstan 113,300 158,924 274,373 –29%

Other 38,160 9,891 26,479 286%

TOTAL subcontracted 20,351 88,576 96,003 –77%

■ Shot Point

A shot point is a seismogram (seismic log) recorded at a point of signal generation. A shot point can be produced by an explosive, electromagnetic, pneumatic or vibration pulse source.

About the Com pa ny

8


Seismic Services

■ Order Book Breakdown by Region (including VAT)*

As of 31.12.2013 As of 31.12.2012 Ch.

RUR mln USD mln RUR mln USD mln RUR, %

Western Siberia 11,635 356 6,665 220 75%

Eastern Siberia 14,034 429 11,470 378 22%

Timano–Pechora 5,836 178 5,314 175 10%

South of Russia 520 16 1,889 62 –72%

Kazakhstan 113 3 284 9 –

Other (India and Azerbaijan) 1,533 47 0 0 –

TOTAL, including 33,671 1,029 25,622 844 31%

Contracts signed** 27,525 841 20,649 680 33%

Tenders won, contracts to be signed 6,146 188 4,973 164 24%

■ Order Book Breakdown by Year (including VAT)* 2013

33.7

2012

25.6

Seismic Order Book as of 31 December 2013 and 2012, RUR bn

As of 31.12.2013

RUR mln USD mln

2013 331 10

2014 19,490 596

2015 13,850 423

TOTAL 33,671 1,029

Note* FX rate as of 31 December 2013 is 32.7292 RUR/USD and 30.3727 RUR/USD as of 31 December 2012..** Signed contracts may be subject to renegotiation of volumes and/or other terms or even cancellation, and both signed contracts and tenders

won may not proceed as originally planned at all.

+31%

About the Com pa ny

9


Data Processing and Interpretation

■ Order Book as of 31 December 2013 (including VAT)*

As of 31.12.2013 As of 31.12.2012

RUR mln USD mln RUR mln USD mln

Contracts signed** 306 9 405 13

Tenders won, contracts to be signed 78 3 – –

TOTAL 384 12 405 13

* FX rate as of 31 December 2013 is 32.7292 RUR/USD and 30.3727 RUR/USD as of 31 December 2012.** Signed contracts may be subject to renegotiation of volumes and/or other terms or even cancellation,

and both signed contracts and tenders won may not proceed as originally planned at all.*** India and Azerbaijan.

Seismic Order Book by Region as of 31 December of Reporting Period

4.6% – Other*** (USD 47 mln) 1.1% – Kazakhstan (USD 9 mln)0.3% – Kazakhstan (USD 3 mln) 7.4% – South of Russia (USD 62 mln)1.6% – South of Russia (USD 16 mln)

20.7% – Timano-Pechora (USD 175 mln)

17.3% – Timano-Pechora (USD 178 mln)26.0% – Western Siberia (USD 220 mln)

2013 2012

41.7% – Eastern Siberia (USD 429 mln)

34.6% – Western Siberia (USD 356 mln)

44.8% – Eastern Siberia (USD 378 mln)

About the Com pa ny

10


Seismic Revenue by Customer

Seismic Revenue by Region

Others – 15.2%

Others – 19.2%

Others – 28.5%

Bashneft – 9.2%

Kazakhstan – 4.5%

Kazakhstan – 4.1%

Kazakhstan – 6.3%

Bashneft – 6.5%

Shell – 1.2%

South of Russia – 14.3%



Surgutneftegaz – 3.0% Timano-Pechora – 17.9%

Timano-Pechora – 18.4%

Timano-Pechora – 12.2%

Surgutneftegaz – 3.5%

Surgutneftegaz – 6.8%

LUKOIL – 9.8%

TNK-BP – 9.5%

TNK-BP – 7.9%

SPD – 2.4%

Rosnedra – 10.2%

Russneft – 2.9%

Russneft – 1.7%

0.3% – Russneft

9.3% – Rosnedra

10.6% – Rosnedra

4.8% – LUKOIL

4.2% – LUKOIL

11.9% – Rosneft

9.3% – Rosneft

8.6% – Rosneft

3.5% – Slavneft

1.8% – Slavneft

0.8% – Slavneft

3.3% – Novatek29.9% – Eastern Siberia

21.2% – Eastern Siberia

25.0% – Eastern Siberia

1.1% – Other

0.6% – Other

2.3% – Other

3.9% – Novatek

1.8% – Novatek

10.3% – Gazprom

13.1% – Gazprom

14.5% – Gazprom

2013 2013

2012

2011

2012

2011

22.1% – Gazprom Neft

32.3% – Western Siberia





About the Com pa ny

11


Personnel

2013 2012 2011

Field Seismic 10,383* 9,822 10,902

Data Processing and Interpretation 357 362 408

Administrative 1,002 1,002 1,075

Support 1,087 1,144 1,487

TOTAL 12,829 12,330 13,872

* Field Seismic personnel increase in 2013 was due to increased amount of work in this segment.

About the Com pa ny

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The company offers a complete range of seismic services in all of the key hydrocarbon regions of Russia, including Western and Eastern Siberia, Southern Russia and the Timano-Pechora area. Special attention is paid to prospective markets such as Eastern Siberia, the Timano-Pechora area and the Yamal-Nenets Autonomous District. IGSS has accumulated extensive operational experience in the foreign markets, including the CIS, India, North Africa, and the Middle East.

GEOTECH Holding, the managing company of IGSS Group, is headquartered in Moscow with regional offices in all of the key hydrocarbon provinces of Russia and Kazakhstan. The company has 28 operational bases scattered across various regions. Many of these function as specialized centers for the maintenance and repair of vehicles and equipment. The company operates nine modern data processing and interpretation centers: eight in Russia and one in Kazakhstan.

Geographical Footprint

Timano-PechoraField Seismic Crews – 11Operational Bases – 8

YaNADField Seismic Crews – 7Operational Bases – 2

KHMAD and Tomsk RegionField Seismic Crews – 23Operational Bases – 5

KazakhstanField Seismic Crews –2 Operational Bases – 4

Eastern SiberiaField Seismic Crews – 17Operational Bases – 5

Other countriesField Seismic Crews – 2

South of RussiaField Seismic Crews – 5Operational Bases – 4

Amudarya Basin

South Turgai

Almaty

Moscow

Orenbung

Tyumen

TomskKrasnoyarsk

Boguchany

Sakhalin

Khanty-Mansiysk

St. Petersburg

Key Hydrocarbon Provinces

Operational Bases/ Production Facilities

DPI Facilities

Ukhta

67 field

crews*

28 operational

bases

9 data pro-

cessing and interpretation

centers**

* In 2013 several seismic crews were consolidated for larger projects

** GeoPrime DPI center comprises 3 subsidiaries in Moscow, Tyumen & Tomsk

Source: Company data

About the Com pa ny

13


Key Events of 2013New Contracts

January 2013

July 2013

July 2013

November 2013

GEOTECH Holding and Gazprom Neft signed a three-year seismic contract. Total area covered by the contract may reach 5,000 sq km by the end of 2015. For the first time in Russia, exploration will be conducted with UniQ high-density innovative seismic technology.

A two-year contract for seismic exploration in India signed with major Indian oil and gas company CAIRN INDIA LIMITED. 3D seismic works under the contract may cover over 1,500 sq km.

A seismic contract was signed with NOVATEK to use UniQ high-density innovative seismic technology in North-Russkoye license area at Yamal during the winter season of 2013-2014. IGSS is the exclusive provider of UniQ technology services in Russia and the CIS.

Schlumberger extended its effective agreement with IGSS for the exclusive rights to use UniQ technology in Russia and the CIS through the end of 2019. Customers are able to resolve the most complex geological tasks by using field data obtained through high-resolution UniQ technology. UniQ considerably improves the level of data detail compared to other seismic methods.

About the Com pa ny

14


Optimizing Operations and Implementing New Solutions

Expanding Presence in Capital Markets

April 2013

October 2013

September October 2013

GEOTECH Holding completed the implementation of a business intelligence (BI) system provided by Optima Group. The new BI system allows the company to conduct detailed operational analyses of all business units, analyze operating and economic indicators, and model the impact of various factors within a particular project on profitability. Such a system enables the company to promptly evaluate and adjust managerial processes optimally.

GEOTECH Holding implemented a system to gather data on workplace injuries, investigations, and remedial actions related to Health, Safety and Environment (HSE ERM). The new subsystem will increase employee safety and prevent workplace injuries and accidents.

Standard & Poor’s (S&P) Rating Agency assigned IG Seismic Services PLC a long-term corporate credit rating “B”, and assigned GEOTECH Seismic Services a “positive” outlook. In addition, S&P assigned GEOTECH Seismic Services a “ruA” rating. Moody’s Agency assigned IG Seismic Services PLC a long-term corporate credit rating of “B2” with a “stable” outlook.

About the Com pa ny

15


Expanding Presence in Capital Markets

Beyond 2013

November 2013

February 2014

The bonds of GEOTECH Seismic Services were included into the Lombard list of the Bank of Russia.

International Rating Agency Standard & Poor’s (S&P) confirmed IG Seismic Services long-term corporate credit rating “B” with a “positive” outlook for IG Seismic Services PLC and its affiliate, GEOTECH Seismic Services.

October 2013

GEOTECH Seismic Services placed a debut issue of five-year bonds worth RUR 3 billion with a put option in three years. The bonds provide an option of early redemption at the call of the issuer and the bond holder. The bond offering was organized by VTB Capital and Sberbank CIB.

About the Com pa ny

16


Company History

IGSS was established in December 2011 as the result of the combination of seismic assets in Russia and the CIS of three leading companies: GEOTECH Holding (Russia’s largest seismic company), Schlumberger (the global leader in oilfield services), and Integra (a diversified Russian oilfield services company). The combination of the global experience and technologies of Schlumberger with the powerful regional infrastructure and local knowledge of GEOTECH Holding and Integra allows IGSS to maintain market leadership and to successfully implement its strategy of growth and operational efficiency.

The companies which make up IGSS were among the first in Russia to bring technology to exploration and they played a key role in developing seismic technologies. IGSS was able to apply its collective years of experience to the modern oilfield services industry. As a modern and dynamic company, IGSS continuously upgrades equipment, implements cutting-edge technology, and engages in R&D to ensure highly efficient and effective seismic exploration.

About the Com pa ny

17


Khantymansiyskgeophysics

■ IGSS HISTORY

1941 1947 1948 1951 1958 1964 1965 1968 1971 1972 1979 2000 2004 2010 2011 20122006–2008

Severgeophyzika and Orenburg Geophysical Research Expedition

Tomsk Geophysical Trust

Geostan

Boguchan Geophysical Expedition

Eniseygeophysica

Establishment of Integra on the basis of oil field services assets

Combination of the seismic assets of Integra and Schlumberger, based in Russia and the CIS, into the joint venture IG Seismic Services

Naryan–Marseismorazvedka

Central Geophysical Expedition

SibneftegeophyzikaTuymennefte-geophysika

Yamalgeophysika–Vostok

Azimuth Energy Services

Establishment of GEOTECH Holding on the basis of leading Russian seismic companies

IG Seismic Services (IGSS) emerged in its current form as a result of combination of IG Seismic Services and GEOTECH Holding

Admission of IG Seismic Services GDRs to trading on the London Stock Exchange Main Market

Read more at the Company’s site: igseis.com/en/about-us/company-history

About the Com pa ny

http://igseis.com/en/about-us/company-history

Address from the Management


19

Add res s f rom the Ma nagement

Address from the Chairman

Dear Shareholders,

The year 2013 was the second year for IGSS to operate in its current configuration and its first year as a public company.

At present, IG Seismic Services is a world-class seismic company able to conduct some of the most complex geophysical exploration studies. We lead the Russian and CIS seismic markets while actively expanding elsewhere in the world. IGSS is the only seismic company in Russia and the CIS that continuously invests in R&D and develops its own technology solutions.

Over the past year, IGSS was able to strengthen its market positions, post positive financial and operational results, achieve vital technological development targets, and further improve corporate governance.

Corporate revenues in 2013 were USD 607.2 million, while EBITDA reached USD 132.8 million. I would like to emphasize that the international financial markets have given us good marks for our achievements – our global depositary receipts at the London Stock Exchange are trading 58% higher over the course of 2013.

Our strategy is to further develop IGSS to maximize value for our shareholders. In the past year, the Company has shown clear progress in all key areas of our strategic development.

Sergey Generalov

■ IGSS Mission Statement

IGSS provides the world of oil and gas exploration with quality seismic data acquisition, processing and interpretation solutions. This is delivered via cutting-edge technology and integrated services and supported by flexible project management and ongoing R&D activities.


20


One of the promising directions for the Company is in high-tech services involved in the acquisition and processing of high-definition seismic data. Russia’s National Energy Strategy until 2030 provides for a considerable increase in seismic exploration investments. In May 2013, the Russian government approved a government program for natural resources replacement and utilization that will increase investment in hydrocarbon field development by 81% by 2020. This opens up new opportunities for the seismic sector. IGSS, as the largest player in the industry, will be able to fully enjoy these advantages.

I would like to focus on the Board of Directors’ work for the reporting period. I would like emphasize the Board of Directors’ adherence to the company’s interests in corporate development and in the implementation of its mission and strategy. All Board members share the firm belief that only by considering the reasonable interests of all stakeholders will the Company be led to long-term business success and stability. IGSS’ system of corporate governance complies with regulatory requirements and global best practices. The board met seven times in 2013; Board committees, namely the Audit, Nomination and Remuneration, and Technology Committees, have been working actively throughout the year. Key corporate documents have been adopted and ratified.

The well-being of our staff and the communities where we work and environmental protection are among our key objectives. In these areas we strive to be a model corporate citizen.

For 2014, the Board has raised the bar to further strengthen the leadership of IG Seismic Services in the Russian seismic exploration industry. We will focus on implementing new technologies, improving organizational structure and corporate governance, further enhancing operational efficiency and quality, maintaining long-term partnerships, attracting new customers, and developing our human resource potential.

I sincerely believe that we will be able to accomplish these tasks.

I would like to express gratitude to all those who contributed to the Company’s success in 2013 and to wish all of us productive work in 2014.

Sergey Generalov

■ IGSS Mission Statement

We think globally and act locally - making the most of our exploration experience in Russia and beyond. We also believe in the pioneering spirit of our business and aim to be the first in everything we do.

Our number one concern remains the health, safety and wellbeing of our employees. We are also mindful of our impact on the environment and the communities in which we operate. When it comes to these priorities, we strive to lead by example.


21

Address from the CEODear Shareholders,

Several years ago we established a new company that was revolutionary in the Russian seismic exploration market by combining the technological and human resources and expertise of the key players in the industry. Throughout 2013, we have been actively working to take advantage of the synergies from this combination, improve efficiency, reduce costs, and further develop our business by satisfying demands for innovative services. It is now apparent that these goals have been accomplished.

IG Seismic Services now functions at a new level of operational efficiency. Our operational and financial indicators are growing while we continue to optimize processes and reduce costs. The Company has created a new market segment of innovative, high density seismic services at the Russian market, and IGSS has assumed a well-earned leading role in this sector.

Looking closer at the figures, the number of shot points made by our seismic crews over the past year increased by 11% to 1,610 thousand, more than a quarter (443 thousand) of which were in our new high-tech line. The future for global seismic operations and for our company lies in this segment.

Most of our shot points were made in Russia – 1,459 thousand shot points over the past year, which is 14% more than in 2012. However, our company is developing operations in other regions as well: 113 thousand shot points were made in 2013 in Kazakhstan, and 38 thousand in other regions where the Company works.

In 2013, we successfully completed our first session of working with the innovative high-resolution seismic technology, UniQ. This is the first time it has been implemented in Russia at the Vakunaisky license area of Irkutsk Region.


Nikolay Levitskiy

We continue to actively expand through new contracts and through the share of long-term contracts in our portfolio.


22

The new technology allowed us to set a record for operational efficiency for a seismic crew at 2 thousand shot points per day and to collect 16 times more seismic data than a comparable project using traditional 3D technology. For our company it stands for new level of geological exploration efficiency, while our customers have an opportunity to gain a much fuller picture of a reservoir’s structure and to do geological work that would have been unimaginable with traditional seismic technologies.

It is now clear that these new technologies will enjoy high market demand. In addition to the contract with Gazprom Neft, our first UniQ client, in 2013 we also signed an agreement with NOVATEK to implement UniQ in the North-Russkoye license area of Yamal.

Our order book over the past year increased by 31%. For the first time our portfolio now includes a contract for seismic exploration in India. We continue to expand our international presence, which will improve the seasonal diversification of operations.

We continue to actively expand through new contracts and through the share of long-term contracts in our portfolio. The Group has also shown good trends in our data processing and interpretation business as there were USD 12 million in orders booked in 2013.

We continue to improve the operational management structure of the Company. In April 2013, the Group’s managing company, GEOTECH Holding, completed the implementation of its business intelligence system. This new tool allows the Company to conduct detailed operational analysis of all of its business units, analyze operational and economic indicators, and model the impact of various factors onto the profitability of particular projects.

The successful implementation of our strategy resulted in strong financial results. Given 2013 revenues of USD 607.2 million, which is comparable to 2012’s USD 608.5 million, EBITDA increased from USD 119.1 million to USD 132.8 million. The Company’s EBITDA profitability also increased from 19.6% in 2012 to 21.9% in 2013.


The financial stability of the Company, our reliability as a business partner, and the deliberateness of our financial policy have been confirmed by the leading international rating agencies, Standard & Poor’s and Moody’s.


23

The financial stability of the Company, our reliability as a business partner, and the deliberateness of our financial policy have been confirmed by the leading international rating agencies, Standard & Poor’s and Moody’s. In September 2013, Standard & Poor’s assigned IGSS corporate credit rating “B”, and our affiliated company, GEOTECH Seismic Services, was rated “ruA” on the national scale.

In October, Moody’s also assigned IGSS a rating of “B2,” with a “stable” outlook. In February 2014, Standard & Poor’s confirmed its corporate credit rating of IGSS at “B” with a “positive” outlook.

In October 2013, the largest member of the Group, GEOTECH Seismic Services, successfully placed its debut issue of five-year ruble-denominated bonds. In November the Russian Central Bank included these bonds on its Lombard list, a respected endorsement of the quality of our bonds.

We strongly believe that only with a careful and reasonable approach to people, environment, and society, as well as with a clear understanding of our responsibility to future generations, will the Company be able to achieve its full potential in harmony with today’s world. In 2013, we implemented a new system to analyze work in the areas of health, safety, and environment (HSE ERM).

Last year, we established a solid foundation for future stable corporate development: high operational and financial results, substantial progress with our in-house research and development, and a successful strategic partnership with an international leader in technology, Schlumberger, which is now one of our shareholders. Last year, Schlumberger extended our agreement on the exclusive use of UniQ technology by IGSS in Russia and the CIS. In 2013 our company also applied and was accepted into the International Association of Geophysical Contractors (IAGC).

IGSS’s strategy for 2014-2015 is focused on increasing the business value in the interests of all stakeholders – our shareholders, business partners, customers, and workforce. I am assured that the market position of IGSS, our experience and professionalism, our powerful operational and financial base, our technological leadership, and the overall growth of the seismic industry will allow us to fully utilize new opportunities in the years to come.

Nikolay Levitskiy


We strongly believe that only with a careful and reasonable approach to people, environment, and society, as well as with a clear understanding of our responsibility to future generations, will the Company be able to achieve its full potential in harmony with today’s world.

Strategy


25

Market Overview Russia’s seismic market is now showing stable growth and holds considerable growth potential.*

Market growth is tied to growth in demand for seismic exploration services, both for further exploration of existing brownfields and for development of new unexplored greenfields. The combined annual growth rate (CAGR) of the Russian market in 2013-2014 is projected to be 12%. A trend of growing demand for high-tech and high-density seismic services became apparent in 2013, including high-tech data processing and interpretation.

Russia’s National Energy Strategy until 2030 provides for increased investment in exploration, which will lead to more seismic exploration in unexplored zones, complex seismic surveys of brownfields, including further seismic exploration of producing fields. The Russian government is deploying new initiatives aimed at stimulating

the sector’s development. New amendments to the Tax Code are being prepared to allow for a tax deduction for geological exploration costs from subsurface extraction taxes paid by major oil and gas companies. The Tax Code already provides a series of tax benefits designed to promote the development of seismic exploration in underexplored areas, the optimization of brownfield operations, the development of fields with complex geology, and the development of viscous oil extraction projects.

Considerable growth is anticipated soon in the Russian seismic market:

> The volume of explored oil and gas reserves is on the decline.

> Oil production is becoming substantially more complex.

> Maintaining current production rates is a priority of the Russian government and the industry.

> Seismic technology is required to explore and develop greenfields and to improve the efficiency of existing brownfields.

* We used the following data sources: REnergyCO Russian Upstream and Oilfield Services; BP Statistical Review of the World Energy, June 2013; Federal State Unitary Enterprise All-Russian Geological Research and Development Oil Institute (FGUP VNIGNI); Ministry of Energy; Renaissance Capital, 2013; Russian Federation Energy Strategy for the Period up to 2030 and IGSS data.

S t rategy


26

Russian Federation Energy Strategy for the Period to 2030—Exploration Seismology, ‘000s km

20172015

2022–2030

Source: REnergyCO forecast as of April 2014

Source: Russian Federation Energy Strategy for the Period up to 2030

2014

2015–2022

20182016

2013-2020 CAGR: 12%

20132012

Untill 2015

4,0763,998

5,594 5,285 5,2676,072

6,8847,840

9,002

1,5791,5012,451

1,861 1,914 1,979 2,038

2,4972,497

3,143 3,423 3,3534,092

4,8475,742

6,832

2,098 2,169

730

1,180

1,500

210 150

190

240

120

350500

180

350

270350

500

2019 2020

Forecast Growth in Russian Seismic Market, ‘000 shot points

2D

3D

Eastern Siberia

Western Siberia

Other Regions

The Seas of Russia

20062004


2003 200720052002

380421

459 470 481 491 489 494 505 512

201 222248 260 268 271

44

87

36

96

40

97

53

97 100

52

101

50

44

103

41

106

39

111

28

74

39

117116

2734

141750

54

20

37

23

37

24

46

24

43

27

52

31

65

30

114

39

82

40

27

89

271 264 260 256 255 250

2008 2009 2010 2011 2012 2013

Russia Oil Production, MM Tonnes

Timano-Pechora

YaNAD

Volga-Urals

KhMAD

Other

518 523

20172015


2014 20182016

2013-2020 CAGR: 11%

20132012

1,5591,3361,282 1,295

1,5681,857

2,2092,646

3,189

268224 174 187 208 221 234

1,1461,007978 978

1,2081,464

1,7782,171

2,661

145105130 130

152172

196225

260

250 267

2019 2020

Forecast of Russian Seismic Market by Product, USD MM

2D

3D

Processing & Interpretation

S t rategy


27

Russia ranks eighth in the world for quantity of discovered oil reserves and second for oil production. Growth in oil production and consumption far surpasses growth in reserves. In Russia, reserves increased by 14.7% from 2002 to 2012 while production increased by 37.3%.

TOP-10 Countries by Oil Reserves, Bbbl Top-10 Countries by Oil Production, ‘000 bpd

Venezuela

+284.9%

77.3

297.6

Saudi Arabia

+29.4%

8,907

11,530

Saudi Arabia

+1.1%

262.8 265.9

Russia

+37.3%

7,755

10,643

Canada

–3.6%180.4173.9

USA

+16.8%

7,626

8,905

Iran

+20.1%

130.7150.7

China

+24.0%

3,3514,155

Iraq

+30.4%

115.0

150.0

Canada

+30.9%

2,8583,741

Kuwait

+5.2%

96.5101.5

Iran

+2.8%

3,5803,680

UAE

0%97.8 97.8

UAE

+38.6%

2,4393,380

Russia

+14.7%

+14.7%

76.187.2

Kuwait

+53.9%

2,032

3,127

Livia

+33.4%

36.048.0

Iraq

+47.2%

2,116

3,115

Nigeria

+8.3%34.3 37.2

Mexico

–19.0%

3,5932,911

2002 2012 change 2002-2012 Source: BP Statistical Review of the World Energy, June 2013

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28

Oil in Russia is mainly produced from brownfields, which were discovered and developed in Soviet times. In 2012, the period of reserves replacement (the ratio of reserves to production, or R/P) in Russia was 22 years, compared to the global average of 53 years. In addition, this figure in Russia has been falling while the global average has been slightly growing. Virtually no new fields are left at the existing Russian Subsurface Resources Pool. The last remaining large fields at Lodochnoye, Spielman, and Imilor

fields were allocated in 2012. According to data from the Russian Federal Agency of Subsurface Resources Management (Rosnedra), the current levels of geological exploration in Russia are not bearing out major new fields. Therefore the replacement of Russian reserves is through brownfields and the development of greenfields discovered before 2000. The stability of oil production is negatively affected by the small volume of the larger part of oil fields discovered in Russia in the recent years.

2002 2002 20022004 2004 20042008 2008 20082006 2006 20062010 2010 20102012 2012 2012

100 100 100

120 120 120

140 140 140

Oil Production, ‘000 bpd

Oil Consumption, ‘000 bpd

Oil Reserves, Bbbl

Russia Russia Russia

The world excl. Russia



Source: BP Statistical Review of the World Energy, June 2013, rebased to 2002 year, %

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29

The development of new fields resolves the problem of declining brownfield oil reserves. A pattern is emerging in the development of new fields in use in eastern Siberia, Yamal-Nenets Autonomous District, and Sakhalin. The sources of oil production in Russia are shifting from traditional fields to fields with complex geology. These new fields call for integrated seismic exploration and the use of cutting-edge processes and equipment.

Only 38% of Russia’s newly discovered resources have been at traditional sites, the share of low-permeability reserves is 31%, oil under gas-cap is at 8%, and viscous oil is at 8%. In order to develop this sector in Russia, technological capacity must be built to develop more elusive reserves. High-tech and high-density seismic services are required to develop and explore these complex fields.

North America

39

Europe & Asia

22

Asia Pacific

14

Middle East

78

Africa

38

53 years world average

Russia

22

0–0.1 0.1–0.3 0.3–1 1–3 3–10 10–15 15–60 60–300 >300 mn t

141165

322361 358

93

183

84

12

138106 125

8061

19 206 0

124103

135

83 63

19 13 8 0

South & Central America

122

Russia’s Oil Reserves Life vs. Oil Reserve Life of Key Regions of the World

Number of Deposits in Russian State Unallocated Subsoil Reserves Fund

Source: BP Statistical Review of the World Energy, June 2013Source: Federal State Unitary Enterprise All-Russian Geological Research and Development Oil Institute ( FGUP VNIGNI)

2010

2000

1993

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30

IGSS sees considerable potential for growth in the segment of high-density exploration: long-term agreements for high-density seismic services have already been signed with Gazprom Neft and NOVATEK.

The seismic market is growing due to the development of unexplored zones with poor infrastructure and complex conditions, optimization at already explored or near fields, and increased exploration of transition zones. New projects aim to explore complex fields that require new methods.

The market now shows considerable growth in the share of 3D surveys, reflecting a demand to optimize the development and efficiency of brownfields and more complex reservoirs. This trend is expected to continue.

Key growth points of the seismic market

> Expansion of seismic exploration zones in previously unexplored regions.

> Increased high-tech demand at developed fields.

> Growth in transition zone exploration.

> Improvement of operational efficiency with world-class cutting-edge technologies.

Source: REnergyCO, April 2014

52%

57%61%

Incremental Production from Simple Optimizations, ‘000s km

Production from Artificial Lift Optimization

Production from Fracturing

Production from Well-bore Stimulation

Share in Incremental Production

44% 43% 41%

2006

30.1

9.1

10.6

10.4

2005

31.4

10.2

11.0

10.2

2004

35.7

11.8

14.0

9.9

2007

27.2

6.6

9.3

11.3

2008

26.8

5.3

8.9

12.6

2009

25.7

5.4

9.1

11.2

2010

25.7

5.5

8.3

11.9

40%

2011

22.0

4.8

7.5

9.7

37%

21.4

6.6

10.4

4.4

2012

38%

22.7

7.7

10.3

4.7

2013

37.8%

S t rategy


31

Due to higher demand for such services within Russia and insufficient development in the area, there is an enormous potential for increasing the volume of high-density seismic services.

As the largest player of the Russian seismic market that demands high-quality seismic services, IGSS is in a position to utilize this market growth potential to the fullest extent. According to ReEnergyCO, IGSS has the largest number of seismic crews in Russia.

The key competitive advantages of IGSS include exclusive access to high-density seismic technology, “UniQ,” as well as an ability to expand into high-margin and high-tech services.

Competitive advantages of IGSS

> The largest and the most technologically advanced seismic company in Russia.

> The leader in the main regions with brownfield projects, as well as greenfield regions, such as western Siberia, Eastern Siberia and the Timano-Pechora area.

> Unique positioning in the market – offering high-density 3D seismic survey services with exclusive rights to Schlumber’s first-class “UniQ” technology.

> Capacity to boost market share for premium high-margin and high-tech services.

Structure of Russian Oil Reserves & Production by Complexity

11% – Bitumen Oil

15% – Heavy Oil

8% – Heavy Oil

31% – Low Permeability Reservoirs*

32% – Low Permeability Reservoirs*

8% – High Viscosity Oil**

5% – High Viscosity Oil**

8% – Below the Gas Cap Oil

5% – Below the Gas Cap Oil

11% – Conventional Reserves



78% – Hard to Recover Oil

Resources

Reserves

Production

Source: Ministry of Energy, Renaissance Capital estimates, 2013* Less than 50mD.** More than >30 mPa/s.

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32

Middle East and North Africa

Middle East and North Africa

Russia

Channels per Project Shot Points per Day

Russia

up to 10,000

up to 1,500

up to 100,000

up to 25,000

Upside to Global Market Standards, units

Strong Growth of 3D Segment Expected to Continue, USD mln

Source: IGSS Source: REnergyCO forecast as of April 2014

2019 20192013 2013

2D 3D

2009 2009

213497

268

1,146

250

2,171

■ Geological Seismic Exploration

It is one of the leading geophysical methods used to study the structure, texture and composition of subsurface layers. Acquisition of seismic data is based on principles of seismology, including the analysis of reflected seismic waves caused by a controlled source. Seismic wave generation is classified by explosive, vibration, and pulse methods.

Artificial seismic waves reflect from the boundaries of various types of rock and are recorded with special equipment called geophones. Then the collected data is analyzed and interpreted to build geological models of reservoirs and to determine the subsurface layers structure.

Seismic data is used for the preliminary exploration of new fields to evaluate the reserves of oil and gas and to increase reserve recovery rates at already explored existing brownfields.

You can find additional information at the site: www.igseis.com at the Our Services section.

10x 17x

+26%

+131%

+89%

–7%

S t rategy

http://www.igseis.com/en/our-business/services


33

SamaraNGPh 6

Sibnats

BashNGPh

10

10

TNG-Group 20

YakutskGPh 6

SibNGPh

10

IGSS 67

GeoResurs

PermNGPh

Rosgeology

TSGK

StavropolNGPh

SaratovNGPh

6

5

5

3

3

2

Number of Seismic Crews in Russia

Source: IGSS, REnergyCO Russian Upstream and Oilfield Services

2009

2009

2007

2007

2006

2006

2010

2010

2008

2008

2005

2005

18

88

20

77

25

76

22

75

22

53

32

56

33

40

34

40

4654

2011 2012

2011

2013

2012 2013

Growth in Russian 3D Seismic Market

Growth in Russian 2D Seismic Market

Source: REnergyCO, of April 2014

1,3161,014896

1,192 1,207

1,7421,836

2,085

2,886

1,2981,2351,319 1,3561,011 1,111

8,00 9631,192

3D ‘000 sqm

2D ‘000 sqm

3D ‘000 shot points

2D ‘000 shot points

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34

Strategic Priorities of IGSS

Further strengthening leadership in Russia’s geological exploration market

Researching, developing and implementing new technologies

Implementing innovations

Improving organizational structure and corporate governance

Improving operational efficiency and quality

Controlling and optimizing costs

The strategic value of seismic exploration in the Russian economy is stipulated by the important role of oil and gas production for the national economy.

IGSS, as the leader of the Russian seismic services market, holds a unique competitive edge and has considerable potential for further development.

Strategic objective of IGSS: maximize shareholder value

Improving employee potential

Maximizing the efficient use of occupational health and safety protection systems

Developing long-term partnerships and attracting new customers

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35

Further Strengthening Leadership in Russia’s Geological Exploration Market

Researching, Developing and Implementing New Technologies

IGSS has operational bases and field crews in every federal district of the Russian Federation. The company offers geological exploration services to the largest Russian subsurface extraction companies across Russia. The operational scale of IGSS already far surpasses that of similar companies in Russia. IGSS plans to strengthen its unique market position first by developing its high-tech services business. The company is working to increase its market share in Eastern Siberia using its developed regional infrastructure. Its seismic data acquisition businesses will expand in transition zones of Russia, Caspian Sea states, and Central Asia. Our work in partnership with Schlumberger will also expand beyond Russia and the CIS.

Optimizing oil production at brownfields requires cutting-edge seismic exploration technology. We believe that demand will continue to gradually grow for high-tech services such as high-density seismic services and complex seismic data processing.

The company works with technology to optimize the use of vibration sources and telemetry equipment. IGSS invests considerably in upgrading equipment and technologies to strengthen its competitive advantages.

The company is introducing new high-density seismic services with its exclusive access to Schlumberger technology and equipment. IGSS is also developing non-explosive pulse signal sources and prototypes for shear wave sources with SmartSource technology.

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36

Implementing Innovations

Improving Organizational Structure and Corporate Governance

IGSS not only merely implements, but creates its own cutting-edge technology solutions. The company’s research and development arm cooperates with leading higher education institutions. For example, IGSS has developed a special technology for working with electromagnetic pulses in seismic waves using pulse sorces developed and manufactured in-house. This technology is now used in Russia and has been expanded to other countries.

The company successfully integrated its collective assets in 2012. The company applies uniform operational and organizational procedures throughout its operations, logistics, and finances. The company’s processes conform to leading international standards.

In 2013, IGSS continued to grow as a public company. The Company worked on refurbishing and upgrading its assets, increasing productivity as well as improving operational and logistical processes. The company’s corporate governance follows the best practices in the industry. Business transparency and managerial efficiency are critical to successful growth of IGSS.

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37

Improving Operational Efficiency and Quality

Controlling and Optimizing Costs

Quality is the defining factor when choosing a provider for complex and technology-driven products such as seismic services. IGSS strives to provide the highest product and service quality in the industry while focusing on operations efficiency.

IGSS seeks to reduce costs by closing redundant operational bases and consolidating data processing centers. Operational efficiency is improved through careful logistical planning, lower costs for transporting crews and equipment, and utilizing assets during off-seasons.

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38

Maximizing the Efficient Use of Occupational Health and Safety Protection Systems

IGSS Group has successfully developed and implemented an HSE management system. The Group’s enterprises systematically analyze and manage risks. In 2013, the company launched HSE-ERM in order to collect and analyze data on workplace injuries, investigations, and remedial measures to protect workplace safety and the environment. The Group is always improving occupational health and safety systems partly with the help of professional associations such as the International Association of Geophysical Contractors (IAGC).

Improving Employee Potential

IGSS devotes a great deal of attention to preserving and building its human capital. The company holds ongoing training programs for staff and has initiated a special program for the development of junior staff. We believe that the professional growth of each employee is tied to the successful development of the company.

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39

Developing Long-term Partnerships and Attracting New Customers

IGSS has a diversified customer base through its cooperation with the largest Russian oil and gas companies, international hydrocarbon producers, and the Federal Agency for Subsurface Resources Management. IGSS continually works to expand its customer base.

IGSS establishes long-term mutually-profitable relationships with customers and partners. Typically, Russian oilfield service companies sign only one-year contracts. IGSS works to increase

the share of long-term contracts in its portfolio in order to reduce transport costs, maximize the use of fixed assets, and to reduce overall costs and risk. In addition, long-term contracts allow for better planning of operations and investments by tailoring to the requirements of each customer.

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40

New Technologies Among the priorities of IGSS are implementing cutting-edge technology at each stage of production while researching and developing new technologies. Engaging in research and development allows the company to be flexible and adapt to changes in the dynamic and growing seismic services market.

IGSS seismic crews use state-of-the-art technology in seismic exploration and are able to work in any type of terrain. The type of equipment used directly affects the quality of the data collected.

IGSS has exclusive rights in Russia and the CIS until 2019 to use advanced UniQ technologies by Schlumberger to gather high-density seismic data and to process the data with the latest technology.

UniQ was used for the first time in the Russian Federation under a joint venture by GEOTECH Holding and Gazprom Neft at the Vakunaiskoye district of Irkutsk Region. In January 2013,

GEOTECH Holding and Gazprom Neft signed a three-year UniQ seismic services contract at the Chonsky project in Eastern Siberia, the Gazpromneft-Noyabrskneftegaz sections of the Yamal-Nenets Autonomous District, as well a number of other projects. The contract may cover up to 5,000 square kilometers by the end of 2015.

In July 2013, GEOTECH Holding and NOVATEK signed a UniQ seismic services contract for the North-Russkoye license area of Yamal.

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41

■ UniQ Technology

UniQ is a set of geophysical equipment and software that efficiently explores reserves using high-definition seismic methods. The processed data produced by UniQ provides a level of structural detail that allows for geological modeling, most closely approaching reality. The modeling substantially increases the effectiveness of exploratory drilling and reduces the cost of further field development.

UniQ is unmatched in its field and has been used successfully by international oil and gas companies over the past several years. UniQ is perfectly suited for exploring complex greenfield reserves as well as for improving production on existing brownfields that have outgrown conventional seismic methods.

UniQ generates large volumes of high-quality seismic data to facilitate exploration in complex conditions with subsalt structures and overthrusts. In addition, under certain conditions, the latest data processing technologies with UniQ can distinguish

oil, gas, and water within structures and improve accuracy in resource evaluation and modeling. The technology provides high-quality data that can be adapted to work in any climate ranging from deserts to the Far North. UniQ makes it possible to study regions that were previously inaccessible to traditional methods. It allows customers to optimize their exploration with the most advanced understanding of reservoir structures.

Under the strategic partnership with Schlumberger, IGSS provides multilateral technical and technological project support. IGSS specialists undergo training to work with the new equipment at the Schlumberger training center in the United Arab Emirates.

An important feature of UniQ technology is a virtual absence of technical restrictions on the number of active channels. Simultaneous recording from 10,000 to 200,000 channels creates a flow of

information that is one to two orders of magnitude higher than standard 3D survey methods.

All of the seismic equipment with individually-assigned IP addresses is organized on a network that can easily bypass obstacles and also automatically redirect data flows if there is a bad link between modules.

UniQ today is the most versatile, modern, and among the least costly methods to improve the efficiency of exploring new and existing oil reserves.

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42

IGSS not only uses the cutting-edge technologies of the industry, but also conducts its own research and development to produce new solutions and products at its own research center in Minusinsk, Krasnoyarsk Region.

IGSS owns a plant that produces non-explosive electromagnetic sources of seismic waves. This plant is currently developing a multi-component wave source, and a “smart source” that minimizes the human factor’s effect on results. Near-term plans of the company call for adapting sources to operate in feedback mode, where the source evaluates the noise-to-signal ratio and determines whether the quality of data is acceptable. Then at the final processing stage, specialists can obtain high-quality data to be used in full 2D or 3D processing. A prototype of a non-explosive pulse source with monotype shear waves was created in March 2013.

In 2013, for the first time in Russia, IGSS specialists took 23,000 shot points in one winter season with the use of sled-mounted non-explosive sources (Yenisei SEM) in very complex conditions of Eastern Siberia.

IGSS is studying opportunities to develop technologies for offshore fields in partnership with Schlumberger, with its modern technologies and equipment from similar projects. There is significant potential for IGSS in this segment due to combination of IGSS extensive experience at the Russian market with Schlumberger’s technological capabilities. Offshore field data processing may be performed at IGSS’ seismic data processing and interpretation center.

■ The latest High-density Seismic Methods

The latest high-density seismic methods allow for the collection of several times more data of higher quality than traditional 2D and 3D methods. They also provide a much

fuller understanding of reservoir structures and allow for tasks that would have been impossible with traditional seismic methods. Applying the latest technology,

acquired by IGSS’ experience in Russia and through its partnership with Schlumberger, has substantially increased accuracy in estimating reserves and creating subsoil models.


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43

IGSS is continually implementing new technologies in not only operations, but also in management. In cooperation with Optima Group in 2013, GEOTECH Holding, the managing company for IGSS, implemented a BI system that allows senior management to conduct daily detailed analysis of the Holding’s business units. Managers can analyze operational (recording, logging, and surveying) and economic (margin, revenue, and cost) indicators and model the impact of various factors on a project’s profitability. The company plans to expand the BI system to provide analysis of finances, investment activities, and annual business plans.

In 2013, the company launched its HSE ERM – a system used to collect and analyze data on workplace injuries, investigations, and remedial actions to ensure health and safety in the workplace and to protect the environment. The new system will increase the level of process automation and efficiency.

■ Processing and Interpretation of Geophysical Data

Field data is consolidated into a seismic data set (seismogram) and delivered to geophysical data processing and interpretation centers. The centers use it to build geological models of reservoirs with varying

complexity and to determine the geological structure of a given area. To process and interpret seismic data, IGSS uses powerful hardware and software systems with the latest technologies in data processing and

interpretation. Local knowledge of certain geophysical features and experience with interpreting data in a specific region are important factors.


S t rategy

http://www.igseis.com/our-business/our-services



44

Risk Chart

IGSS has developed systems for risk management that allow managers to promptly identify and minimize any risks. Risk management at IGSS is incorporated in the decision-making processes for key investment and strategic issues. In addition, risk management is used in operations. IGSS uses a balanced approach to risk management, with a special emphasis on minimizing the potential for negative impacts.

Within IGSS, the Internal Control Department is tasked with risk management by providing managers and shareholders with independent and reasonable assurances of procedural efficiency. The Internal Control Department is responsible for sistematizing and coordinating risk management, as well as providing regulatory support and methodologies. In its activity, the Department follows Internal Control Charter and international standards of risk management.

In addition to these functions, the Internal Control Department supports compliance with policies and procedures by:

> supporting and consulting the Audit Committee in its supervision of legal and regulatory compliance within the company;

> controlling and monitoring compliance with the corporate code of conduct and ethics within the company;

> monitoring compliance with the regulations of the London Stock Exchange, including: - the disclosure and transparency of financial

information; - insider trading and working with insider

information.

In 2013, IGSS took measures to improve the system of risk management and internal controls, including:

> Automating budgeting processes, managerial accounting, treasury operations and certain accounting procedures

> Improving control procedures for settlements

> Improving the orderliness of business processes

> Enhancing the credibility of managerial accounting

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45

Functional and administrative subordination

Reporting

Membership in audit committees / auditing commissions

■ Risk Management Systems Within the Corporate Structure

Board of Directors

Management Representation in Audit Committees in Affiliated Companies

Representation in Auditing Commissions of Affiliated Companies

Audit Committee

Internal Controls and Risk Management

Internal Control Department

> Creation of corporate codes of business conduct and ethics

> Division of key roles and responsibilities in critical areas

> Reduction of human-factor impacts onto decision-making processes

> Improvement of the internal execution discipline among company staff

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46

Control Environment

Risk Assessment

Regulating Company Activities

Information and Communication

Monitoring

■ Elements of IGSS’ Risk Management and Internal Control System

The Company’s internal control system is based on best internal control practices and includes the following elements: Control environment – Risk assessment – Regulating company activities – Information and communication – Monitoring

The Company applies an integrated approach to risk analysis and management

■ Approach to Risk Analysis

Risk analysis

Risk assessment Risk management Risk monitoring

Identification Control Operational risks

Measurement Breakdown or transfer Strategic risks

Prioritization Diversification or prevention Corporate risks

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47

■ Distribution of Typical Key Area-specific Risks in the Industry in 2013

Financial

StrategicPrice volatility

New competitive technologies

Disadvantageous tax policies

Access to reserves: constraining political factors, competition for explored reserves

Cost containment

HSE risks

Risk grows

Risk declines

No change over time

Staff shortages

New operational challenges and new work environments

Climate changeUncertainties of Energy Policy

Operational

Legal compliance

High risk Low risk

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48

■ IGSS Risk Chart

IGSS classifies its operational risks into four main categories: financial, strategic, operational and regulatory risks.

Downward price pressure from competition

Volatile exchange rates

Volatile interest rates

Credit risk

Liquidity risk

Negative environmental impacts

Foreign operation risk

Reliability of subcontractors

Labor shortages

Operational safety risk

Business sustainability risks

Leaks of proprietary electronic information

Management of change

Quality control

Health, safety and environment regulations

Use of labor resources

Operations in Kazakhstan

Difficulties in implementing Schlumberger technologies

Loss of key customers

Changes in the law leading to lower demand for services from the oil and gas industry

Decreased demand for geological exploration services by the oil and gas sector

Risk of barriers to business development

Demand for services

Market share

Dependence on customers

Access to technologies

International projects

Country–specific risk

Risk of civil claims filed against the company

Violations of laws and regulations

Financial Operational Strategic Compliance with rules and regulations

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50

Select Financial and Operating Information in thousand US$, unless otherwise stated 2013 2012 Change %

Revenue 607,246 608,482 (1,236) –0.20%

EBITDA 132,781 119,103 13,678 11.48%

EBITDA margin 21.9% 19.6% 230 bp –

Net (loss) / profit* (12,580) 12,523 (25,103) –

Operating cash flow 148,922 84,063 64,859 77.16%

Capital Expenditures 100,761 56,688 44,073 77.75%

Net Debt** 389,907 390,245 (338) –0.09%

Average exchange rate for the period (RUB/USD) 31.85 31.09 0.76 2.44%

in thousand RUB, unless otherwise stated 2013 2012 Change %

Revenue 19,339,562 18,919,502 420,060 2.22%

EBITDA 4,228,807 3,703,264 525,543 14.19%

EBITDA margin 21.9% 19.6% 230 bp –

Net (loss) / profit* (400,648) 389,377 (790,025) –

Operating cash flow 4,742,866 2,613,767 2,129,099 81.46%

Capital Expenditures 3,209,035 1,762,597 1,446,438 82.06%

Net Debt 12,761,344 11,852,794 908,550 7.67%

* Net (loss) / profit for 2013 and 2012, respectively, were significantly affected by certain number of one-off and non-recurring items which are discussed below in the “Adjusted EBIT and adjusted EBITDA” section;

** Net Debt is calculated using FX rate as at the end of the period (RUB/USD): 32.73 as at 31 December 2013 and 30.37 as at 31 December 2012.

Ma nagement ’s Repor t


51

2013 2012 Change %

Kilometers

2D (km) 8,433 11,072 –2,639 –24%

3D (sq.km) 14,004 20,139 –6,135 –30%

HD (km) 1,001 – 1,001 100%

HD (sq.km) 1,140 – 1,140 100%

Shot Points performed by IGSS crews

2D 215,548 247,681 –32,133 –13%

3D 952,314 1,202.476 –250,162 –21%

HD 442,597 – 442,597 100%

TOTAL performed by IGSS crews 1,610,459 1,450,157 160,302 11%

including

Russia 1,458,999 1,281,342 177,657 14%

Kazakhstan 113,300 158,924 –45,624 –29%

Other 38,160 9,891 28,269 286%

TOTAL subcontracted 20,351 88,576 –68,225 –77%

Operational Statistics

The following discussion and analysis of our financial condition and results of operations is for the year ended 31 December, 2013 (the “Report”). It should be read in conjunction with our Audited Consolidated Financial Statements for the year ended 31 December, 2013 and related notes. Financial informa-tion as of and for the year ended 31 December, 2013 has been derived from our Audited Consolidated Financial Statements prepared in accordance with IFRS.

This Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including but not limited to the risks discussed in the section of this Report entitled “Qualitative and Quantitative Disclosures about Market Risk” and elsewhere in this Report.

References to “IGSS”, “the Group”, “we”, “our” and “us” are references to IG Seismic Services plc and its subsidiaries and equity affiliates.



52

■ Seismic Services Order Book as of 31 December, 2013 (including VAT)

FX 32.73 RUR/USD

RussiaKazakhstan and

international TOTAL

RUR mln USD mln RUR mln USD mln RUR mln USD mln

TOTAL including 32,025 979 1,647 50 33,672 1,029

Contracts signed* 25,879 791 1,647 50 27,526 841

Tenders won, contracts to be signed 6,146 188 – – 6,146 188

As of 31 December 2013, the Company’s total seismic services order book amounted to approximately USD 1,029 million (inclusive of VAT), of which approximately USD 841 million (inclusive of VAT) accounted for signed contracts and approximately USD 188 million (inclusive of VAT) represented tenders awarded this year. The seismic services order book as of December 31, 2013 increased by 22% compared to the order book as of December 31, 2012.

■ Data Processing & Interpretation Order Book as of December 31, 2013 (including VAT)

FX 32.73 RUR/USD RUR mln USD mln

TOTAL including 384 12

Contracts signed* 306 9

Tenders won, contracts to be signed 78 2

* Signed contracts may be subject to renegotiation of volumes and/or other terms or even cancellation, and both signed contracts and tenders won may not proceed as originally planned at all.



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Seismic Services Market ConditionsOur results of operations are affected by the conditions in the seismic services market, and more generally, the oil and gas field services market in Russia and the CIS.

Since the beginning of 2012, conditions in this market have been gradually improving due to positive oil price dynamics and changes in Russian upstream and corporate taxation. However, excess capacity and lower prices in the market which emerged as a result of the global economic downturn still persist despite the gradual improvement. As a result, our costs have been gradually increasing, driven by raising of the cost of labor and equipment, growth of fuel prices while our ability to transfer these costs on to our clients has been limited during the periods under review due to competition in the seismic services market.

Volatility in demand for services is partially mitigated by the fact that state-related clients, such as state-controlled oil companies including Gazprom Neft, Rosneft and Gazprom and government authorities including Rosnedra, which accounted for approximately 22.1%, 11.9%, 10.3% and 10.2% of our revenues from seismic survey operations respectively for the year ended 31 December 2013, tend to demonstrate a greater degree of commitment to earlystage exploration projects even during the financial downturn, compared to private businesses. In addition, some hydrocarbon licenses in Russia include specific annual targets for seismic surveys, which requires the respective license holders to continue undertaking seismic services and prioritize them over most other capital expenditures, in order to retain the licenses.



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SeasonalityIn the year ended 31 December 2013, we derived over 90% of our revenues from our field seismic works operations

There is a limited season for conducting such operations in Siberia as we cannot access many areas in certain periods due to flooding caused by spring thawing and the melting of bogs, following which, the working area is usually characterized by swampy conditions. These conditions restrict the provision of field seismic services in Siberia to a period from December to April. In the first half of the year, our order book is typically lower than in the subsequent quarters, as we usually enter into contracts for the next season in the second half of the year. During the third quarter of the year, we enter the preparation stage, which typically results in an increase in our debt and working capital levels. In addition, on certain occasions, volumes in the second quarter can be negatively affected

by early spring thaw. We expect to continue our geographic diversification to reduce the impact of seasonality on our operations, in particular by re-deploying our crews to other locations, such as Southern Russia, Kazakhstan, Uzbekistan and certain countries outside the CIS, during off-peak seasons in Siberia. However, while such redeployment helps us better utilize our capacity throughout the year, increasing revenues, profits and return on capital, it also negatively affects our margins as seismic surveys performed in warmer climates and less demanding conditions generally yield lower margins as compared to seismic surveys performed in regions with more harsh weather conditions.



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Seismic Services Market Trends in 2013In 2012 the Russian oil industry has entered a new stage of development. The vast majority of Russian production comes from increasingly mature fields discovered and in most cases developed during the Soviet period.

The Russian government and oil companies are aware that, in order to replace falling production at these brownfields, it will be necessary to develop new fields and to apply new approaches to production at already producing fields, including through the exploration and development of new, yet-to-find, fields and tight oil reservoirs, and through the use of new technologies to develop more complex, discovered but undeveloped reservoirs and to optimize production from mature reservoirs at currently producing fields. An increasing proportion of Russian oil production is already accounted for by reservoirs with more complex geologies than those traditionally developed, which requires more complicated geological evaluation and production technologies.

Thus, we expect that the growth of the seismic exploration market will be driven by increased seismic activity at existing brownfields, additional seismic exploration of tight oil reservoirs, new exploration in new regions and potentially also by offshore projects.

The Russian Federation Energy Strategy for the Period to 2030 provides for significant increase in spending on exploration seismology. As a result, in 2013 the seismic market has followed the market trends that started in 2012, such as significant shift of customer focus towards frontier areas and greenfields; and significant increase in customer demand for high density seismic exploration technologies.

Maintaining production is increasingly becoming a key priority for the Russian government, which is reflected in a series of already introduced and potential tax benefits.



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Major Events of the Year 2013

■ Second Agreement on UniQ Technology Signed

The very first contract for provision of innovative, high-density UniQ seismic acquisition technology developed by IGSS shareholder Schlumberger was signed by IGSS in December 2012. GEOTECH Holding (the managing company for IGSS assets) and Gazprom Neft signed an agreement on the seismic exploration of the Vakunayskoe deposit of the Chonsky project in the Irkutsk Region. The UniQ technology makes it possible to explore areas that cannot be explored using conventional seismic operations, using high resolution of data, and provides for the most advanced understanding of reservoirs possible with current technologies. Although the UniQ technology has been successfully used during the previous few years by leading foreign oil and gas companies abroad, it is new to Russia and in the first half of 2013 has been used in the Russian Federation for the first time.

In July 2013 IGSS signed the second agreement for seismic works using the UniQ technology, this time with NOVATEK. GEOTECH Holding (the managing company for IGSS assets) and NOVATEK signed an agreement for seismic exploration at the North-Russkoye license area at Yamal. The UniQ technology will help to solve there a specific geological challenge that has not been solved by conventional seismic. The challenge of the North-Russkoye site is that the upper part of the section includes permafrost layers of complicated geological structure that distort multiwave seismic field within the range of target horizons. At the same time the target body has a thin-layer multilayer section which requires especially high quality of seismic data to provide for building a correct geological hydrodynamic model and, consecutively, for successful deposits development.

Revenue for the full year amounted to USD

607.2 mln which is 0.2% below the Revenue for the same period of 2012 of USD 608.5 mln.



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■ Two-year International Contract in India

In July 2013 IGSS signed a two-year contract for 3D seismic exploration in India. Azimuth Energy Services (Kazakhstan subsidiary of IGSS) and CAIRN INDIA, a large private Indian oil company, have signed a two-year contract for seismic exploration works at the site near Barmer City of Rajasthan State. This contract increases the Company’s geographic diversification to reduce the impact of seasonality on operations, since the exploration works in India can be conducted all-year round. Having won the contract in a competition with large international companies from India, USA, Poland and Kazakhstan, IGSS has once again proved that it satisfies the highest world-level standards for a seismic contractor.

■ IGSS Obtained Exclusive Right for UniQ until 2019 Year-End

In July 2013 Schlumberger renewed its effective agreement with IGSS for the exclusive right to use the UniQ technology in Russia and CIS until 2019 year-end.

■ Standard and Poor’s and Moody’s Assigned IGSS Corporate Credit Ratings

In September 2013 Standard & Poor’s Ratings Services (S&P), one of the most influential rating agencies in the world, assigned its ‘B’ long-term corporate credit rating to IG Seismic Services PLC and to its subsidiary GEOTECH Seismic Services JSC (GEOTECH). The outlook is positive. S&P also assigned its ‘ruA’ Russia national scale rating to GEOTECH. According to Standard & Poor’s, the positive outlook reflects expectation that the Russian seismic market, particularly the volume and complexity of its services, will grow from its current low level as Russia’s key oil provinces mature and oil companies use more advanced technologies, such as high-density seismic services, to save on drilling costs.

EBITDA increased by 11.5% year-on-year and amounted to USD

132.8 mln.

EBITDA margin increased by

230 bp year-on-year to 21.9% of sales compared to 19.6% of sales for the same period of 2012.



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In October 2013 Moody’s Investor Service, one of the most influential rating agencies in the world, assigned a ‘B2’ corporate family rating to IG Seismic Services PLC, the leading pure-play land and transition zone seismic company in Russia and the CIS and one of the largest land seismic companies globally. The outlook is stable. According to Moody’s, the stable outlook reflects expectation that IGSS’s market will continue to demonstrate healthy growth, and the company will adhere to conservative financial and liquidity management policies.

■ Geotech Seismic Services Placed Debut Issue of 5-year Bonds Worth RUR 3 Billion

In October 2013 Geotech Seismic Services, the largest operational company of IG Seismic Services PLC (IGSS), placed its debut issue of series 01 bonds worth RUR 3 bn. The bonds mature in five years and have a put option after three years.

■ IGSS Announced Change in Shareholders

In November 2013 Nyala Investments Limited, which represents the interest of Volga Group (formerly known as Volga Resources), has sold its 13% stake in IG Seismic Services to a company within the Industrial Investors Group of Sergey Generalov, the Chairman of the Board of Directors of IGSS.

■ The Bank of Russia Included Geotech Seismic Services Bonds into the Lombard List

In December 2013 the Bank of Russia Included Geotech Seismic Services (the largest operational company of IG Seismic Services) Bonds into the Bank of Russia Lombard List.

Normalized Net Profit* increased by 100% in USD year-on-year and amounted to USD

11.6 mln.

Operating Cash Flow for the full year increased by

77.2% over the same period of 2012 to USD 148.9 mln.

* before foreign exchange difference, one-off and non-recurring items.



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The following table sets forth selected financial statements as of and for the year ended 31 December 2013 and 2012 extracted from our Audited Consolidated Financial Statements prepared in accordance with IFRS.

2013 2012

Revenue 607,246 608,482

Cost of sales (477,076) (489,800)

Gross profit 130,170 118,682

Selling, general and administrative expenses (68,447) (74,345)

Other operating income 7,426 14,049

Other operating expense (16,285) (17,039)

Operating profit 52,864 41,347

Finance income 579 802

Finance expense (45,736) (46,241)

Net foreign exchange (loss)/gain (7,802) 1,608

Share of profit of an associate 3,988 6,399

Profit before tax 3,893 3,915

Current income tax expense (57) (1,816)

Income tax (expense)/benefit (16,416) 10,424

(Loss)/profit for the year (12,580) 12,523

■ Revenue

During the year ended 31 December 2013, revenue amounted to $607.2m which is slightly lower than $608.5m for the year ended 31 December 2012. In rouble terms the Company experienced revenue growth of 2.2% that was

offset by 2.4% depreciation of the Russian ruble against the US dollar (when comparing average rates for 2012 and 2013 full years). Increase in revenue (excluding exchange rate effect) was driven by increase in sales in Russia segment (2.0% excluding exchange rate effect) and Kazakhstan business (5.8% in US dollar terms).



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Moderate increase in revenue (excluding exchange rate effect) during the year ended 31 December 2013 as compared to the corresponding period ending 31 December 2012 with simultaneous improvement in key operational and financial performance metrics: shot points performed by IGSS crews, Gross profit, EBITDA represents Company’s focus on newly established premium segment of seismic market. That segment is characterized by high-density technology used for seismic work performance that leads to decrease of average price per 1 shot point and at the same time increase in margins in absolute and relative terms.

The following table sets forth a breakdown of our revenue by geography :

2013 2012

Russia 580,688 583,374

Kazakhstan 26,558 25,108

Total external sales 607,246 608,482

During the years ended 31 December 2013 and 2012, 95.6% and 95.9% of revenues, respectively, was generated by operations in Russia, with the remaining 4.4% and 4.1% of the revenues, respectively, attributable to operations in Kazakhstan.

The following table sets forth a breakdown of our revenue by types of services rendered for the period indicated:

2013 2012

Field seismic operations 573,016 578,686

Data processing and interpretation 23,291 20,836

Other revenue 10,939 8,960

Total 607,246 608,482

Seismic business segment revenue in rouble terms increased by 1.4% that was driven by a number of factors:

> Increase in revenue and volumes performed by own IGSS crews in Russia that was driven by seismic volumes structure change in favor of high density seismic projects that produce higher shot points volumes and result in higher margin earned in absolute and relative terms.



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> Due to the company’s growing ability to perform more volumes using its own crews there was partial reduction in subcontracted “turn-key” pass-through contracts that led to higher margin earned with neutral effect on overall Russia seismic volumes and revenue compared to the corresponding period of previous year.

> Kazakhstan seismic business segment revenue increased from US$24.5 million to US$25.9 million due to rendering of large seismic contract in India using Kazakhstan crews. Positive effect was offset by reduction in volumes in Kazakhstan itself as a result of increased competition on local seismic market.

Revenue from processing and interpretation of geophysical information increased by US$2.5 million, or approximately 12%, from US$20.8 million in 2012 to US$23.3 million in 2013. This increase was attributable to overall growth of seismic volumes processed and our increased focus on DP&I services.

Other revenue increased by US$2.0 million, from US$9.0 million in 2012 to US$10.9 million in 2013. Main reason behind other revenue growth is an increase in sales of internally built impulse sources with production base in Minusinsk.

During the year ended 31 December 2013 and the 2012, 94.4% and 95.1% of revenues, respectively, was generated by field seismic operations.

■ Cost of Sales

Cost of sales decreased by US$12.7 million, or 2.6%, in the year ended 31 December 2013 and amounted to US$477.1 million, as compared to US$489.8 million in the year ended 31 December 2012. Decrease of 2.4% was due to the depreciation in the value of the Russian ruble, and 0.2% due to business factors, such such as (i) reduction of costs attributed to subcontracted pass-through contracts, (ii) lower operating lease costs due to more efficient own equipment utilization, (iii) lower average cost per 1 shot point for high-density projects.



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The following table summarizes the cost of sales by type of expense during the periods indicated:

2013 2012

Labor and wages, including mandatory social contribution 181,702 182,330

Materials and supplies 99,057 98,210

Depreciation of property, plant and equipment and amortization of intangible assets 67,545 63,172

Oilfield services 63,543 83,565

Transportation services 29,047 23,557

Other third parties services 18,899 17,687

Operating lease payments 13,163 15,810

Loss from the contract in Yemen 273 1,817

Other 3,847 3,652

Total 477,076 489,800

■ Labor and Wages, Including Mandatory Social Contribution

Expenses related to labor and wages, including mandatory social contribution, decreased by US$0.6 million, or 0.3%, to US$181.7 million in the year ended 31 December 2013, as compared to US$182.3 million in the year ended 31 December 2012, of which a decrease of 2.4% was due to the depreciation in the value of the Russian ruble, while increase of 2.1% due to considerable 11.1% shot points growth in volumes performed by IGSS own crews that was partially offset by reduction

of labor expenses necessary to perform the same volume of shot points using high-density technologies (UniQ) and successful efforts by the Group’s management to control personnel costs. Increase in wages and salaries as a percentage of total cost of sales (from 37% to 38%), resulted from certain reduction in the share of seismic services of subcontractors in the total cost of services.



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■ Materials and Supplies

Materials and supplies expenses increased by US$0.8 million, or 0.9%, to US$99.1 million in the year ended 31 December 2013, as compared to US$98.2 million in the year ended 31 December 2012, of which a decrease of 2.4% was due to the depreciation in the value of the Russian ruble, and an increase of 3.3% due to considerable 11.1% shot points growth in volumes performed by IGSS own crews that was partially offset by reduction of materials and supplies expenses necessary to perform the same volume of shot points using high-density technologies (UniQ).

■ Depreciation of Property, Plant and Equipment and Amortization of Intangible Assets

Depreciation of property, plant and equipment and amortization of intangible assets increased by US$4.4 million, or 7%, to US$67.5 million in the year ended 31 December 2013, as compared to US$63.2 million in the year ended 31 December 2012. As a percentage of total cost of sales, depreciation increased from 12.9% for 2012 to 14.2% for 2013. The increase in absolute dollar terms was primarily the result of our significant

capital expenditures in property, plant and equipment due to development of new high density product line as well as sustaining investment to support traditional technology production volumes.

■ Oilfield Services

Oilfield services decreased by US$20.0 million, or 24%, to US$63.5 million in the year ended 31 December 2013, as compared to US$83.6 million in the year ended 31 December 2012. Decrease in oilfield services was due to significant reduction of subcontracted pass-through contracts.

■ Transportation Services

Transportation services expenses increased by US$5.5 million, or 23.3%, to US$29.0 million in the year ended 31 December 2013, as compared to US$23.6 million in the year ended 31 December 2012. Increase in transportation services was due to more crew movements in Russia and a larger number of projects performed by crews outside their main regions of operations (especially in YaNAD and Timano-Pechora regions).



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■ Operating Lease Payments

Operating lease payments decreased by US$2.6 million, or 16.7%, to US$13.2 million in the year ended 31 December 2013, as compared to US$15.8 million in the year ended 31 December 2012. Decrease of operating lease costs was due to optimization of utilized geophysical equipment throughout geophysical season and realization of investment program that allowed reducing company dependence from external suppliers of rental equipment.

■ Gross Profit

As a result of the foregoing, our gross profit increased by US$11.5 million, or 9.7%, to US$130.2 million in the year ended 31 December 2013, as compared to US$118.7 million in the year ended 31 December 2012.



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■ General and Administrative Expenses

General and administrative expenses decreased by US$5.9 million, or 7.9%, from US$74.3 million in the year ended 31 December 2012 to US$68.4 million in the year ended 31 December 2013. As a percentage of total revenue, General and administrative expenses decreased to 11.3% for 2013 from 12.2% for 2012. The following table summarizes general and administrative expenses by type of expense during the periods indicated:

2013 2012


Third party services 10,799 9,972

Taxes, other than income tax 4,738 5,434

Operating lease 2,862 2,869


Bank charges 1,481 0,895

Bad receivables write–offs and provisions 5,118 9,921

Other 3,302 3,500

Total 68,447 74,345

Labor and wages expenses decreased by US$1.2 million, or 3.1%, to US$37.6 million in the year ended 31 December 2013, as compared to US$38.8 million in the year ended 31 December 2012 due to the on-going process of overlapping functions elimination in corporate center of Company.

Third party services expenses increased by US$0.8 million, or 8.3%, to US$10.8 million in the year ended 31 December 2013, as compared to US$10.0 million in the year ended 31 December 2012.



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■ Other Operating Income

Other operating income decreased by US$6.6 million, or 47.1%, to US$7.4 million in the year ended 31 December 2013 from US$14.0 million in the year ended 31 December 2012. The decrease is mainly due to decrease of income derived from write-off of accounts payable which comprised US$2.4 million for year ended 31 December 2013 as compared with US$6.3 million for year ended 31 December 2012.

■ Other Operating Expenses

Other operating expense decreased by US$0.8 million, or approximately 4.4%, to US$16.3 million in the year ended 31 December 2013 from US$17.0 million in the year ended 31 December 2012. The following table summarizes other operating expenses by type of expense during the periods indicated:

2013 2012

Loss on disposals of property, plant and equipment and other assets 4,926 5,655

Penalties and fines paid 3,866 6,087

VAT not recoverable 1,038 541

Net loss from service plants and facilities 773 628

Administrative charges and state duties 774 338

Other expenses 4,908 3,790

Total 16,285 17,039

■ Operating Profit

As a result of the foregoing, our operating profit reported for the year ended 31 December 2013 comprised US$52.9 million as compared to US$41.3 million operating profit incurred in the year ended 31 December 2012 demonstrating US$11.5 million or 27.9% year-on-year improvement.

Improvement in key operational and financial performance metrics (shot points performed by IGSS crews, gross profit, EBITDA, operating profit) as a result of Company’s focus on newly established premium segment of seismic market. That segment is characterized by high-density technology used for seismic work performance that leads to decrease of average price per 1 shot point and at the same time increase in margins in absolute and relative terms.



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■ Finance Expense

Finance expense decreased by US$0.5 million, or 1.1%, from US$46.2 million in the year ended 31 December 2012 to US$45.7 million in the year ended 31 December 2013. The following table summarizes finance expenses by type of expense during the periods indicated:

2013 2012

Interest expense on loans and borrowings 43,670 43,022

Bank charges on loans and loan accounts 995 1,163

Interest expense on finance lease 452 2,056

Other finance expenses 619 –

Total finance expenses 45,736 46,241

■ Net Foreign Exchange Gain / (Loss)

The Group has incurred US$7.8 million net foreign exchange loss for the year ended 31 December 2013 as compared to US$1.6 million net foreign exchange gain reported in FY 2012. This was primarily due to an unfavorable shift in exchange rates in relation to the amount of US dollar-denominated and EUR- denominated liabilities.

■ Share in Profit / (Loss) of an Associate

Share of profit of associate decreased by US$2.4 million from US$6.4 million profit in the year ended 31 December 2013 to US$4.0 million profit in the year ended 31 December 2012. This decrease was due to a corresponding shift of financial performance of Sibneftegeophyzika, in which we control a 39.5% interest, and OJSC Stavropolneftegeofizika, in which we control a 25.4% interest in the year ended 31 December 2013.

■ Profit / (Loss) Before Tax

As a result of the foregoing, profit before tax did not changed significantly and comprised US$3.9 million for both years presented.



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■ Current and Deferred Income Tax

Current income tax expense decreased by US$1.8 million, or 97.0%, from US$1.8 million in the year ended 31 December 2012 to US$0.1 million in the year ended 31 December 2013. This was primarily due to implementation of new tax accounting policy of the Group and shift to utilization of tax loss accumulated for the previous years.

During the year ended 31 December 2013 the Group has incurred US$16.4 million deferred tax expense as compared to US$10.4 million deferred tax benefit reported for the year ended 31 December 2012. This was primarily affected by one-off items which in 2013 resulted in additional deferred tax expense of US$13.6 million related to Group restructuring in September-October 2013, while 2012 was affected by non-recurring deferred tax benefit from recognition of deferred tax asset on tax loss for the prior periods of US$5.8 million and deferred tax benefit related to finalization of purchase price allocation in 2012 of US$3.5 million.

■ (Loss) / Profit for the Year

As a result of the foregoing, the Group has incurred net loss of US$12.6 million for the year ended 31 December 2013 as compared to net profit of US$12.5 million for the year ended 31 December 2012. These financial results were affected by number of one-off and non-recurring items which is discussed below.

■ Adjusted EBIT and Adjusted EBITDA

Group monitors the operating results for the purpose of making decisions about resource allocation and performance assessment on the basis of adjusted EBIT and adjusted EBITDA.

Adjusted EBIT is defined as operating profit from continuing operations including depreciation and amortization and excluding any non-recurring transactions included within operating profit from continuing operations.



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Adjusted EBITDA is defined as operating profit from continuing operations before depreciation and amortization excluding any non-recurring transactions included within operating profit from continuing operations.

In addition to the financial metrics above and segment information disclosed in respective note to Audited Consolidated Financial Statements the Group presents normalization of the financial results for the years ended 31 December 2013 and 2012 to the effect of one-off and non-recurring items in addition to those affecting adjusted EBITDA and adjusted EBIT.

2013 2012

(Loss) / profit for the period as reported (12,580) 12,523

Net foreign exchange gain / (loss) 7,802 (1,608)

Share of profit of an associate (3,988) (6,399)

Restructuring and redundancy costs 4,700 7,043

Transaction related expenses 1,763 1,677


Deferred tax expense related to Group restructuring 13,640 –

Recognised deferred tax asset on tax loss for the prior periods – (5,760)

Deferred tax benefit related to finalization of purchase price allocation in 2012 – (3,510)

Normalized financial results for the period 11,610 5,783

Financial income and expense, net 45,157 45,439

Deferred income tax expense / (benefit) for the period w/o one–offs 2,776 (1,154)

Current income tax expense 57 1,816

Adjusted EBIT for the period 59,600 51,884

Depreciation of property, plant and equipment 67,120 63,024

Amortization of intangible assets 2,958 3,272

Loss / (gain) on disposals of property, plant and equipment and other assets 3,103 923

Adjusted EBITDA for the period 132,781 119,103



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Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from our operating activities and partially bank loans. We expect to continue financing a certain portion of our capital expenditures using cash from operations and partially bank financing. We believe that cash flows generated from

operations in 2013 and 2014 will be sufficient to finance our working capital needs and to repay our existing obligations as they become due and that bank financing will be available to us on commercially acceptable terms.

Cash Flows

The following table sets out Group’s summary cash flow information for the year ended 31 December 2013 and 2012:

2013 2012

Net cash from operating activities 148,922 84,063

Net cash used in investing activities (91,277) (27,761)

Net cash used in financing activities (53,012) (51,797)

■ Net Cash From Operating Activities

During the year ended 31 December 2013, cash flows from operating activities increased by US$64.9 million, or 77.2%, to US$148.9 million, as compared to US$84.1 million in the year ended 31 December 2012. This increase was primarily attributable to changes in working capital, and in particular to changes in accounts receivable,



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inventories, provisions, and prepayments and other current assets, all of which had a positive effect on our cash flows from operating activities as well as significant improvement in operating results and margin levels for the current year.

■ Net Cash Used in Investing Activities

During the year ended 31 December 2013, cash flows used in investing activities increased by US$63.5 million, from US$27.8 million in the year ended 31 December 2012 to US$91.3 million in the year ended 31 December 2013. This increase was primarily attributable to significant

increase in CAPEX programme associated with implementation of high-density UniQ seismic acquisition technology as well as US$4.3 million of prepayment issued in late 2013 to acquire non-controlling interests. The transaction itself is expected to be settled in the first half of 2014.

■ Net Cash Used in Financing Activities

During the year ended 31 December 2013, cash flows used in financing activities increased by US$1.2 million, from US$51.8 million in the year ended 31 December 2012 to US$53.0 million in the year ended 31 December 2013.



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Capital Expenditures

The combined capital expenditures were approximately US$56.7 million and US$100.8 million in the years ended 31 December 2012 and 2013, respectively.

2013 2012

Investing activities: Purchases of property, plant and equipment 87,622 33,988

Financing activities: Repayment of finance lease obligations 7,947 17,508

Financing activities: Redemption of CAPEX promissory notes 5,192 5,192

Total cash CAPEX 100,761 56,688

Our capital expenditures are presented on the basis of cash paid for the respective period. These capital expenditures consist primarily of purchase of equipment and software used in our operations, repayment of finance lease obligations and redemption of promissory notes issued by us to finance our capital expenditures. As of 31 December 2013, we had no firm commitments in respect of future capital expenditures.



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Capital Resources

The following table sets forth the Group’s total debt as of 31 December:

31 December 2013 31 December 2012

Non–current liabilities

Long–term bank loans 225,073 225,799

Bonds 90,556 –

Total non–current loans and borrowings 315,629 225,799

Current liabilities

Short–term bank loans 47,038 125,851

Current portion of long–term bank loans 16,426 35,929

Total current borrowings 63,464 161,780

Total borrowings 379,093 387,579

At the beginning of 2013 the Group entered into non-revolving credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15%. Amount of raised financing amounts to 14,900,000 euro (19,485,000 US dollars) and matures in December 2017. The liability over this credit line in the amount of 12,274 and 4,095 is reported within Long-term bank loans and Current portion of long-term bank loans, respectively as of 31 December 2013.

The Group also had liability under credit agreement with Raiffeisenbank denominated in Russian rubles at interest rate calculated as one month MOSPRIME plus 6%. The loan was fully prepaid in September 2013.

All other loans and borrowings presented in the table above are at fixed rates and are denominated in Russian rubles.



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In October 2013, the Group placed issue of documentary interest-bearing non-convertible bearer stock bonds (registration number 4-01-55378-E) with a total nominal value of RUB 3 billion and the term of 5 years. Coupon payments are made on semi-annual basis of fixed rate of 10.5% p.a. for the first six coupon periods. These bonds provide for early repurchase in three years at the request of a bond holder as set in the respective offering documents. According to the Bank of Russia Board of Directors Resolution as of November 29, 2013, bonds were included into the Lombard List.

We typically incur a significant portion of our expenses during the preparation and mobilization stages, which normally occur in the period of August to October, and effect drawdowns under our credit facilities.

To assess the debt levels the Group uses Gross Debt measure which is a sum of Loans and borrowings, promissory notes issued and finance lease obligations as at reporting date and Net Debt which is calculated by deduction of cash and cash equivalents from Gross Debt.

Gross debt and Net Debt as of 31 December 2013 and 2012 are presented below:

31 December 2013

31 December 2012

Loans and borrowings 379,093 387,579

Notes issued 32,366 15,340

Finance lease obligations 183 5,941

Gross debt 411,642 408,860

Less: cash and cash equivalents (21,735) (18,615)

Net debt 389,907 390,245

Off-Balance Sheet Arrangements

As of 31 December 2013, the Group did not have any material off-balance sheet arrangements.



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Qualitative and Quantitative Disclosures about Market Risk

The Group’s activities expose it to a variety of market risks including credit, interest rate, currency and other risks arising from adverse movements in the price of oil, foreign currency

exchange rates and changes in interest rates. Our overall risk management objective is to reduce the potential adverse effects of these risks on our financial performance.

Credit Risk

Credit risk is the risk that a customer or counterparty to a financial instrument will fail to pay amounts due or fail to perform obligations causing financial loss to the Group. The Group’s credit risk principally arises from cash and cash equivalents and from credit exposures of its

customers relating to outstanding receivables and loans provided to third parties. The Group has not used any financial risk management instruments in this or prior periods to hedge against this exposure.



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The Group only maintains accounts with reputable banks and financial institutions such as Sberbank, Alfa Bank and Nomos Bank and therefore believes that it does not have a material credit risk in relation to its cash or cash equivalents.

The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. The carrying amount of accounts receivable, net of provision

for impairment of receivables, represents the maximum amount exposed to credit risk. The Group has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the allowance already recorded.

Interest Rate Risk

At the beginning of 2013 the Group entered into non-revocable credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15%. The following

demonstrates the sensitivity of the Group’s profit before tax to a reasonably possible change in EURIBOR rate, with all other variables held constant.

Market Risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. The Group manages market risk

through periodic estimation of potential losses that could arise from adverse changes in market conditions.

Change of EURIBOR rate, %

Effect on income/(loss) before tax

+0.1% (15)

–0.1% 15



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Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial liabilities. Liquidity requirements are monitored

on a regular basis and management ensures that sufficient funds are available to meet any commitments as they arise.

Foreign Currency Risk

The Group is not engaged in any hedging activity to mitigate its foreign currency risk. The Group limits foreign currency risk by monitoring changes in exchange rates in the currencies in which its loans and borrowings are denominated



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Subsequent Events

Financing

During the period subsequent to the reporting date the Group has entered into a number of revocable credit line agreements with Sberbank and Alfa-Bank with aggregated credit limit of 110,170. All financing is RUR denominated, and mature from 30 to 47 months and bear interest rate from 10.65%

to 13.5% per annum. The Group has also entered into number of USD denominated non-revocable credit line agreements with Sberbank: 5-year credit line at 10.0% per annum in the amount of 8,149 and 3-year credit line at 9.75% per annum in the amount of 10,003.

Shareholder Structure

As of 15 April 2014 Mr. Nikolay Levitskiy became the ultimate controlling shareholder of the Group.

Shareholder structure as of 15 April 2014:

55.82% – Mr. Nikolay Levitskiy

12.00% – Schlumberger

24.40% – Other institutional and private shareholders

7.78% – Industrial Investors Group



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Directors’ Responsibility Statement

The report and the attached Audited Consolidated Financial Statements, including the financial information contained herein, are the responsibility of, and have been approved by, the directors of the Group. The directors are responsible for ensuring that management prepares the Financial Report in accordance with the IFRS and the Listing Rules of the Financial Services Authority.


Corporate Governance


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Dear Shareholders,

On behalf of the Board of Directors of IG Seismic Services, we place a high priority on matters of corporate governance. We believe that only by considering the reasonable concerns of all of the Company’s stakeholders will we achieve long-term business prosperity.

Our system of corporate governance is based on best practices in the industry.

Within our Board of Directors, the Chief Executive Officer and the Chairman of the Board of Directors have divided functions. In addition, special committees have been set up within the Board of Directors to focus on certain issues.

In particular, we have established the following committees:

> The Audit Committee is made up of non-executive directors and chaired by finance expert Peter O’Brian;

> The Nomination and Remuneration Committee also has non-executive director members and is chaired by independent director Dmitry Lipyavko, a management specialist with extensive experience;

> The Technology Committee was established since innovation is critical to IGSS and is chaired by Boris Aleshin, an independent director who is also a member of the Russian Academy of Sciences.

Sergey Generalov, Chairman of the Board, IGSS

Corporate Governa nce


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All Board committees have been working actively in the past year on various programs, including the improvement of corporate governance.

In 2013, the Board approved an Internal Control Charter, Share Dealing Procedures, Insider Information Regulation, and an Insider List.

We place great importance on cooperation with and feedback from investors. In particular, the Board of Directors regularly reviews financial analysts reports and feedback on the Company’s operational results.

The Board’s Nomination and Remuneration Committee has been working to improve the program of long-term incentives for executives so that remuneration is linked to the Company’s strategic growth of shareholders’ value.

I would like to take the opportunity to thank all members of the board for their hard work. At the December board meeting we approved the work plan for 2014 and I believe that this year will be no less productive and successful for corporate governance than it was in 2013.

Sergey Generalov

We place a high priority on matters of corporate gov-ernance. We believe that only by considering the rea-sonable concerns of all of the Company’s stakehold-ers will we achieve long-term business prosperity.



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Systems and Principles of Corporate Governance

IG Seismic Services PLC abides by its Memorandum of Association and Articles of Association. The highest managing authority belongs to the General Meeting of Shareholders, while the strategic management of the Сompany falls under the Board of Directors, and operational management is delegated to executive directors and senior management.

The main subsidiaries are located in the Russian Federation and thus we comply with Russian laws and the advice of financial markets regulators, including the Central Bank and its predecessors.

We understand the importance of complying with the principles of corporate governance and transparency of business processes. Therefore we have developed a system of corporate governance at IGSS that is based

on local practices where the Сompany works. Under this system, we have adopted a number of codes and internal policies for the Group that define the procedures for corporate governance, namely the Corporate Governance Code, the Code of Business Conduct and Ethics, and procedural manuals for Board committees. Following best practices, we established the Audit Committee, the Nomination and Remuneration Committee, and considering the innovative nature of the Сompany, the Technology Committee.

■ Codes and Internal Policies of the Сompany

The Board of Directors approved a number of codes, internal policies and rules to govern the activities of management and staff.



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■ Corporate Governance Code

The Сompany has adopted the Corporate Governance Code, which is available on the Сompany’s website. The code defines the principles of corporate governance and transparency of the Сompany by providing efficient mechanisms and procedures for corporate governance. The Сompany aspires to meet the expectations of stakeholders in its managerial processes, efficient work by the Board, the allocation of remunerations, and other areas.

■ Code of Business Conduct and Ethics

The Сompany has adopted the Code of Business Conduct and Ethics, which is available on the Сompany’s website. The code defines the norms of corporate behavior that apply to a wide range of important requirements for operational efficiency, including requirements for occupational health and safety, conflict of interests, and confidentiality.

■ Insider Information Regulation

The Сompany has developed Insider Information Regulation that controls access to sensitive information. The regulation specifies Insider List of who has access to insider information.

■ Share Dealing Procedure

This document defines the procedure for trading the Сompany’s securities by persons discharging managerial responsibilities and their connected persons.

The texts of the published documents are available on the Сompany’s website in the “Corporate Governance” section: www.igseis.com


http://www.igseis.com/en/about-us/corporate-governance


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Annual General Meeting

According to the IGSS Articles of Association, the highest managing authority is the General Meeting of Shareholders.

The Company is required to call an annual general meeting of shareholders every year. In between annual meetings, the Company may call an extraordinary general meetings of shareholders. At the annual general meeting, shareholders review and approve the financial statements of the Company and the reports of the Board of Directors and auditors. They also consider the appointment of the new members to the board, the auditor, remunerations, and other issues that are important and relevant to the Сompany.

An annual general meeting of shareholders was held on June 14, 2013. The following resolutions were adopted at the meeting:

> The financial statements of 2012 by IFRS were approved, as well as the reports of the Board of Directors and the auditor.

> Ernst & Young LLC was approved to be the auditor of the Сompany for 2013.

> Independent directors Boris Aleshin, Peter O’Brian and Sergey Generalov were re-elected. The text of

the resolutions of the general meeting of shareholders is available on the Сompany’s website in the “Press Releases” section.


http://www.igseis.com/en/press-centre/press-releases


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Board of Directors The Board of Directors provides strategic management for the Сompany. The success of the Company is to a large degree determined by efficiency of the Board, whose members hold relevant skills and experience, have specific knowledge of the Сompany, and have sufficient independence in judgment when making strategic decisions.

The Board is governed by the Terms of Reference that were adopted in 2012. The Terms of Reference specify job functions, areas of competence, composition, rights and obligations, and the organizational structure of the Board.

The Board’s role is to manage the Company with reasonable and efficient controls that allows them to assess and manage risks. The Board of Directors sets strategic goals for the Сompany and ensures that the Company has sufficient financial and human resources

to accomplish them. This is required both for the Company to reach its goals and to assess managerial performance. The Board of Directors is fundamentally responsible for the rational use of resources, transparency and openness, risk management, internal controls, compliance with corporate principles, operational organization, nominating and presenting candidates for board positions to shareholders, assessments of executive management, and compliance with the Сompany’s principles of corporate social responsibility and corporate governance.



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In order to provide a uniform division of management functions, to prevent concentrations of power and information within a limited circle of officers, to enable independent and fair consideration of opinions in decision making, the Board includes independent directors, executive directors and non-executive directors. The roles of the Board Chairman and the CEO are clearly delineated and performed by different directors.

In 2013, the Board had nine members: independent non-executive Chairman Sergey Generalov, two executive directors (Nikolay Levitskiy and Denis Cherednichenko), six non-executive directors (Boris Aleshin, Peter O’Brian, Dmitry Lipyavko, Maurice Dijols, Felix Lyubashevsky, and Kurt Suntay). Four of the nine directors were appointed by the Board as

independent directors (Sergey Generalov, Boris Aleshin, Peter O’Brian and Dmitry Lipyavko). In November 2013, Kurt Suntay resigned from the board.

The Board of Directors qualifies non-executive directors as independent according to the Articles of Association and the Corporate Governance Code.

In particular, the Articles of Association define an independent director as a “member of the Board of Directors who does not perform managerial or administrative functions within the Сompany, is independent from the management of the Сompany, and is not in any business or other relationship that would substantially affect the expression of his/her independent judgment.”

Main Operating Principles of the Board of Directors:

> Leadership – the Board of Directors is responsible for the long-term success of the Company.

> Efficiency – the Board and its committees must possess an appropriate balance of knowledge, experience, independ-ence of judgment, and understanding of the Company’s business.

> Accountability – The Board of Directors provides comprehen-sive evaluations of posi-tions and prospects of the Company, including controls and assessments of risks that are typical to the Company.



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■ Directors Status and Year of Appointment

Director Position Year of First Appointment Committee Membership

1 Sergey Generalov Independent Non–Executive Director, Chairman of the Board of Directors 2012 Audit Committee

2 Boris Aleshin Independent Non–Executive Director 2011 Technology Committee (Chairman)

3 Peter O’Brien Independent Non–Executive Director 2012 Audit Committee (Chairman)

4 Denis Cherednichenko Executive Director 2011 Technology Committee

5 Maurice Dijols Non–Executive Director 2011Technology Committee Nominations and Remuneration Committee

6 Nikolay Levitskiy Executive Director, CEO 2011 Technology Committee

7 Dmitry Lipyavko Independent Non–Executive Director 2012 Nominations and Remuneration Committee (Chairman)

8 Felix Lubashevsky Non–Executive Director 2012 Nominations and Remuneration Committee

9 Kurt Suntay Non–Executive Director 2011 Audit Committee

In 2013, Kurt Suntay was a member of the Board of Directors. After Industrial Investors Group purchased IGSS shares from Volga Group, Kurt Suntay resigned from the Board in November 2013 at his own initiative.

To ensure quality in management, the Board should include directors that have specific knowledge of areas from finance and

management to narrowly specialized technical knowledge about seismic exploration. Brief biographies of the Board members are provided below. Their unique experiences indicates that the Board in its current composition has sufficient knowledge, skills, experience and moral and ethical principles to perform their functions at the highest possible level.

> Remuneration – Remuneration must be set at a reasonable level while allowing the Company to attract, maintain, and motivate qualified staff. The procedures for to determine remuneration for managers must be formal and transparent.

> Relations with shareholders – The Board of Directors is responsible for maintaining a dialog with shareholders based on a common understanding of the Сompany’s goals.



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Board of Directors Background

Sergey GeneralovChairman Independent Non-Executive DirectorAudit Committee Member

In 2003, Sergey Generalov established (and remains the principal owner and president today) the Industrial Investors Group – one of the largest private investors for industrial and infrastructure projects. Sergey Generalov has implemented a number of projects in Russia, including KrasUgol, AgromashHolding, Russian Alcohol, and transportation group FESCO. Mr. Generalov has always taken an active part in the management and development of these companies, including by serving in key positions such as chairman or president.

From 1999 to 2003, Mr. Generalov was elected to the Russian State Duma and was Deputy Chairman of the State Duma Committee on Economic Policy and Entrepreneurship, as well as Chairman of the Permanent Commission of the State Duma for the Protection of Investors’ Rights. In 1998-99, he was the Russian Minister of Fuel and Energy.

Since 2001, Mr. Generalov has been co-chairman of the Russian national public organization “Delovaya Rossiya.” Since 2003 he has been a member of the National Council on Corporate Governance, as well as a member of Managing Bureau of the Russian Union of Industry Investors and Entrepreneurs, the Chairman of the Committee on Competition Development and a member of the Transport Committee of the Russian Union of Industry Investors and Entrepreneurs. From 2002 to 2005, he was co-chairman of the Board of Directors of the Russian Association for the Protection of Investors’ Rights. Since 2006, he has been member of the board of trustees of IBLF in Russia and since 2008 he has been a member of the Global Consulting Council of the Oxford University.

Mr. Generalov graduated with honors from the Moscow Energy Institute, and later from the Ordzhonikidze Higher School of Management, majoring in international management. He was born in 1963.



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Boris AleshinIndependent Non-Executive Director Technology Committee Chairman

Peter O’BrienIndependent Non-Executive Director Audit Committee Chairman

Since 2009, Mr. Aleshin has been the general director of the N. E. Zhukovsky Central Aerohydrodynamic Institute. In 2011, was elected President of the International Organization for Standardization (ISO). Prior to this he held other senior executive positions to include those of First Deputy Minister of Industry, Science and Technology of the Russian Federation, Chairman of the State Committee for Standardization and Metrology, Head of the Federal Agency for Industry, president of JSC AVTOVAZ, first deputy director and commercial director of the State Research Institute of Aviation Systems, director of the Microelectronics Centre of Aviation Industry. Between 2003 and 2004, Mr. Aleshin was Deputy Prime Minister of the Russian Federation.

Mr. Aleshin graduated from Moscow Institute of Physics and Technology with a degree in automatic control systems and holds a Ph. D in the Engineering. He is a corresponding member of the Russian Academy of Sciences.

Between 2006 and 2011, Mr. O’Brien was a member of the management board and vice president for finance and investments at Rosneft. Prior to this, he was co-head of Investment Banking in Russia for Morgan Stanley and vice president at Troika Dialog in Russia. Mr. O’Brien has more than 15 years of experience in the financial services sector – primarily with oil and gas companies in Europe and the former Soviet Union. He is also a director of TMK Group and the European Pension Fund.

Mr. O’Brien holds an MBA from Columbia Business School. He also has a Bachelor of Arts degree in Russian Studies from Duke University.



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Denis CherednichenkoExecutive Director Technology Committee Member

Maurice DijolsNon-Executive Director Technology Committee Member Nominations and Remuneration Committee Member

Mr. Cherednichenko is Executive Vice President of IGSS. Нe was one of the founders of GEOTECH Holding where he held several positions since 2007, including Vice President for corporate development and investments. Prior to that, Mr. Cherednichenko held the position of legal counsel and deputy head of the corporate projects department of MDM-Group and CJSC SUEK (Siberian Coal Energy Company).

Mr. Cherednichenko graduated from the Urals State Law Academy, Yekaterinburg, and holds a Master of Law degree from the University of Manchester, UK.

Mr. Dijols has served on the board of directors of Eurasia Drilling Company Limited since 2011. Currently he holds the positions of Chairman of the Russian Schlumberger companies and also Senior Advisor to the Schlumberger CEO. Mr. Dijols has held a variety of executive positions during his 30-year career with Schlumberger. From 2003 to 2011 Mr. Dijols served as President of Schlumberger Russia. In the past he served as President of SchlumbergerSema, North Central Europe and CIS. Mr. Dijols also held positions as the Chief Information Officer of Schlumberger Limited and as the President of Schlumberger Oilfield Services North and South America.

Mr. Dijols is a graduate of both the Ecole d’Ingenieurs de Marseille and the Ecole Superieure d’Electricite de Paris.



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Nikolay LevitskiyChief Executive Officer Executive Director Technology Committee Member

Dmitry LipyavkoIndependent Non-Executive Director Nominations and Remuneration Committee Chairman

Mr. Nikolay Levitskiy was one of the founders of GEOTECH Holding. Since 2006, he served as President of GEOTECH Holding. Prior to this Mr. Levitskiy was First Deputy Head of the Komi Republic, Russia. Не has served as СЕО at CJSC EuroChem Mineral and Chemical Company from 2001 to 2003. Mr. Levitskiy was Vice-President of OJSC Oil and Gas Company SLAVNEFT from 1998 to 2000.

Mr. Levitskiy graduated from St. Petersburg University of Economics and Finance named after N.A. Voznesensky with a degree in Economics. He also holds a PhD in Economics.

Mr. Lipyavko has served as Chairman of the Board of directors of Roza Mira Group since July 2010. Mr. Lipyavko was one of the founders of Roza Mira in 1993 and helped develop the Сompany into one of the largest independent oil processing and trading companies in Russia. Mr. Lipyavko started his professional career on the Tyumen commodities exchange as an oil trader.

Mr. Lipyavko is General Director and one of the founders of BlueLine Project, which constructs and operates modern associated gas utilization plants. BlueLine Project was awarded for successful implementation of associated gas utilization by the World Bank.

Mr. Lipyavko is a graduate of the Tyumen State Oil and Gas University and has completed an executive training programme at the Academy of the National Economy in Economics and Management.



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Felix LyubashevskyNon-Executive DirectorNomination and Remuneration Committee Member

Kurt SuntayNon-Executive Director Audit Committee Member

He has been a member of the board of directors of Integra Group since 2010. He also served as the president of Integra Group between 2005 and 2010, and returned to this role in March 2012. Mr. Lyubashevsky oversaw Integra Group’s IPO in 2007, as well as its subsequent development as a diversified oilfield services company. Prior to joining Integra Group, from 1998 to 2005, Mr. Lyubashevsky held a number of senior positions at TNK-BP, including in Oilfield Services and Supply Chain Management. While there, he completed integration of SIDANCO’s oilfield service assets, among other initiatives.

Mr. Lyubashevsky graduated from the Russian Academy of Economics named after Plekhanov with a degree in Economic Cybernetics.

Mr. Suntay also sits on the boards of Russian Sea Group, MC Kolmar, Russian Sea – Catching and Russian Time. Since 2006, he has served as a Managing Director of Ural Invest, an investment advisory company. Between 2001 and 2006, Mr. Suntay was a First Vice President at Rothschild Bank’s asset management division, based in Switzerland. Prior to this, he was a member of Mergers and Acquisitions and Investment Banking teams for Wasserstein Perella & Co and, later, Bear Stearns in New York.

Mr. Suntay graduated from Columbia University with a Bachelor of Arts in Economics and received an MBA from London Business School



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Frequency of Meetings and Attendance

During 2013, Board meetings were held according to the Board activities plan, but no less than one meeting per quarter. According to the Board rules, meetings may be held in person or by correspondence. If a Board member is unable to participate in a meeting in person, another member may vote by proxy.

The Board held seven meetings in 2013: three were held by correspondence and four in person

■ Board of Directors Attendance in 2013

Date of the meeting Participation*

1 21 January 2013 9/ 9

2 19 April 2013 9/ 9

3 18 June 2013 9/ 9

4 16 July 2013 7/ 9

5 27 September 2013 8/ 9

6 12 November 2013 9/ 9

7 13 December 2013 6/ 8

■ Directors Attendance at the Board Meetings in 2013

Director

Number of Board meetings attended**

1 Sergey Generalov

Chairman, Independent Non–Executive Director 7/ 7

2 Boris Aleshin Independent Non–Executive Director 7/ 7

3 Peter O’Brien Independent Non–Executive Director 7/ 7

4 Denis Cherednichenko Executive Director 7/ 7

5 Maurice Dijols Non–Executive Director 7/ 7

6 Nikolay Levitskiy CEO, Executive Director 7/ 7

7 Dmitry Lipyavko Independent Non–Executive Director 5/ 7

8 Felix Lubashevsky Non–Executive Director 4/ 7

9 Kurt Suntay Non–Executive Director 6/ 6

* Number of directors participating in a meeting compared to a total number of directors.** Number of meetings attended compared to a total number of meetings.



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The following issues were considered by the Board of Directors in 2013:

> Reports by chairmen of Board committees outlining work done in 2013 and activities plans for 2014.

> Business plan of the Group development, partnership with Schlumberger, tender work, and the creation of a joint venture with OJSC Rusgeology.

> Target structure of the Group, senior management appointments, approval of major corporate transactions.

> Group budgets, investment plans, and optimization of financial and economic indicators, including working capital, debt, reserves, and others.

> Reports by executive management on the operational and financial results for 2013.

> Approval of external auditors and consolidated financial statements recommended by the Audit Committee.

> Approval of management’s remuneration for 2012, determination of incentive programs for the seasons of 2012-2013 and 2013-2014, development of long-term management incentive programs recommended by the Nomination and Remuneration Committee.

> Preparation for and the results of the 2013 general shareholders meeting and investor relations issues.

> Corporate documents including the Internal Control Charter, Share Dealing Procedure, Insider Information Regulation and Insider List.

> Results of the Board of Directors activities in 2013 and activities plans for 2014.



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Board of Directors Committees

Audit Committee

The Audit Committee works under the Audit Committee Terms of Reference adopted by the Board of Directors in 2012. According to the Terms of Reference, it is composed of at least three members of the Board, with at least one member being an independent non-executive director. Meetings of the Committee are held at least four times per year. Five Committee meetings were held in person in 2013.

The main responsibilities of the Audit Committee are to review:

> the quality of the Сompany’s financial statements,

> efficiency of the internal controls and risk management systems,

> external audit policies and auditor opinions,

> conditions of appointment and remuneration of auditors,

> submission of financial statements,

> regulatory compliance,

> compliance with internal rules and other corporate governance documents.

For most of 2013, the Audit Committee was composed of three non-executive directors: Peter O’Brian – an independent director, Sergey Generalov – an independent director, and Kurt Suntay. After notice of Mr. Suntay’s resignation from the IGSS Board was received on November 18, 2013, Maurice Dijols was elected to replace him in the Audit Committee by a resolution of the Board as of December 13, 2013.

According to the best corporate governance practice, the Board of Directors established three Committees that will focus on specific areas:

> Audit Committee

> Nomination and Remuneration Committee

> Technology Committee



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The Committee’s chairman is Peter O’Brian, who holds an M.B.A. degree from Columbia University, New York, USA. He has more than five years of experience as a Board member and vice president for finance and investments at Rosneft.

The Board believes that the existing members of the Audit Committee have sufficient experience and knowledge to ensure compliance with the Company’s Corporate Governance Code. Independent professional experts may be involved to resolve any problems that would require additional skills. In addition, the Audit Committee is authorized to request any necessary information from any employee of the Company or the Group, to obtain legal or other professional consultations at the Group’s expense on matters relevant to the Committee, and to invite any staff member to participate in Committee meetings.

■ Directors Attendance at the Audit Committee Meetings in 2013

Director Position

Number of Meetings attended by the Director out of total possible

1 Peter O’Brien

Independent Non–Executive Director, Chairman of the Committee

5 / 5

2 Sergey Generalov

Independent Non–Executive Director, Chairman of the Board

5 / 5

3 Kurt Suntay Non–Executive Director 4 / 4

The following were considered by the Audit Committee in 2013

> Financial statements: - the preparation of audited consolidated

financial statements (in the presence of external auditors) and quarterly results;

- the approval of audited financial statements for 2012 and the first half of 2013 (in the presence of external auditors).



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> Internal controls and risk management: - the regular discussion of internal control and

risk management issues based on reports by the Internal Controls Department;

- the consideration and review of documents ordering the procedures of internal control and risk management, approval of the Internal Control Charter and Risk Management Policy;

- a discussion of the report on the improvement of internal control procedures prepared by an external auditor, based on the 2012 audited statements;

- a discussion of the possibility to set up a Compliance Committee;

- a review of activities plans for the Internal Control Department.

> Corporate governance:

The following documents were approved and recommended to the Board of Directors:

- Share Dealing Procedure; Insider Information Regulation; Insider List;

- the report on the Committee’s activities in 2013 and regulatory compliance;

- the Committee’s activities plan for 2014.

> Audit: - a review of potential candidates to be

the external auditor of IGSS and the main companies of the Group in the Russian Federation and Kazakhstan;

- the submission of recommendations to the Board of Directors on the appointment of Ernst & Young LLC as the external auditor of IGSS, FinExpertiza as the external auditor for the companies of the Group in Russian Federation, and CenterAudit Kazakhstan for the companies of the Group in Kazakhstan;

- a discussion of remuneration for auditor services;

- a discussion of the activities plan for the preparation of the 2013 audited statements, a progress report by the external auditor, and control over the amount of non-auditing services provided to the Group by the auditing firm.

> Business issues: - the implementation of ERP system in the

Сompany; - the mid- and long-term business plan of the

Group; - staff changes in the financial arm of the

Сompany, training programs for staff of financial divisions within the Group’s companies.



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Nomination and Remuneration Committee

The Committee is composed of at least three members of the Board of Directors, while the Committee must be chaired by an independent non-executive director. Committee meetings must be conducted at least three times per year, and may be held in person or by correspondence. Three Committee meetings were held in 2013 – two were in person and one was by correspondence.

Independent professional experts may be brought on to resolve any problems that would require additional skills. In addition, the Audit Committee is authorized to request any necessary information from any employee of the Сompany or the Group, to obtain legal or other professional consultations at the Group’s expense on matters relevant to the Committee, and to invite any staff member to participate in Committee meetings.

The Committee’s responsibilities include:

> determination of criteria for the selection of candidates for the Board of Directors and development of nomination procedures;

> regular monitoring of the structure, size, and composition of the Board of Directors, as well as its committees;

> an assessment of the results of the Board of Directors’ activities;

> the development and improvement of the Group’s policies on remunerations for both members of the Board and top executives of the Group, including long-term and short-term incentives programs.

During 2013, the following members belonged to the Nomination and Remuneration Committee: Maurice Dijols – a non-executive director, Dmitry Lipyavko – an independent non-executive director, and Felix Lyubashevsky – a non-executive director. The Nomination and Remuneration Committee was chaired by Dmitry Lipyavko.

Remuneration principles

The remuneration of the Сompany’s management is composed of two parts:guaranteed and premium.

> The guaranteed part rep-resents the base salary and associated benefits, such as medical insur-ance.

> The premium part is rep-resented by bonuses, which are linked to an-nually set performance indicators.



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■ Nomination and Remuneration Committee Directors Attendance Statistics in 2013

Director Position Number of Meetings attended by the Director out of total possible

1 Maurice Dijols Non–Executive Director 3 / 3

2 Dmitry Lipyavko

Independent Non–Executive Director, Chairman of the Committee

3 / 3

3 Felix Lubashevsky

Non–Executive Director 2 / 3

The following issues were considered by the Nomination and Remuneration Committee in 2013:

> The approval of the Committee Regulation;

> Recommendations for candidates for the Board of Directors and for changes in the Company’s management;

> A review of management’s achievement of key performance indicators in 2012 and recommendations to the Board on remuneration;

> A review of short-term Company management incentive programs for f 2012-2013 and 2013-2014. Discussion of long-term management incentive program.

> A review of the results of the Committee’s activities in 2013 and the activities plan for 2014.



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Technology Committee

According to the Terms of Reference, the Committee is composed of at least three members of the Board with one being an independent non-executive director. One Committee meeting was held in person in 2013.

The Committee is responsible for the following:

> the strategic development of the R&D and technological potential of the Сompany;

> evaluating the R&D portfolio;

> allocating research and development resources;

> implementing new technologies;

> information technology and systems;

> cooperating with educational institutions.

In 2013 the Committee had the following members: Boris Aleshin – an independent non-executive director, Denis Cherednichenko – an executive director, Maurice Dijols – a non-executive director and Nikolay Levitskiy – Chief Executive Officer. The Technology Committee is chaired by Boris Aleshin.

The following issues were considered by the Committee in 2013:

> A discussion of the prospects for applying new technologies (adaptive high-density seismic, shear and compression waves based technology, triple-component seismic, and microseismic);

> UniQ technology and its prospects;

> Cooperating with Schlumberger in three areas: UniQ equipment, processing and interpretation of UniQ data, and offshore seismic services;

> A project to improve pulse sources to accomplish specific geological tasks in Eastern Siberia.



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Executive Management

Nikolay LevitskiyCEO Board of Directors Member

Denis Cherednichenko Executive Vice President Board of Directors Member

Mr. Nikolay Levitskiy has been IGSS CEO since April 2012. He was one of the founders of GEOTECH Holding. Since 2006, he served as President of GEOTECH Holding. Prior to this Mr. Levitskiy was First Deputy Head in the administration of the Komi Republic, Russia. Не has served as СЕО at CJSC EuroChem Mineral and Chemical Company from 2001 to 2003.

Mr. Levitskiy was Vice-President of OJSC Oil and Gas Company SLAVNEFT from 1998 to 2000. Mr. Levitskiy graduated from St. Petersburg University of Economics and Finance named after N.A. Voznesensky with a degree in Economics. He also holds a PhD in Economics.

Mr. Cherednichenko is Executive Vice President of IGSS. Нe was one of the founders of GEOTECH Holding where he held several positions since 2007, including Vice President for corporate development and investments. Prior to this, Mr. Cherednichenko he held the position of legal counsel and Deputy Head of the corporate projects department of MDM-Group and CJSC SUEK (Siberian Coal Energy Company).

Mr. Cherednichenko graduated from the Urals State Law Academy, Yekaterinburg, and holds a Master of Law degree from the University of Manchester, UK.



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Ilona PetrovaChief Financial Officer

Rustam Rakhmatulin Senior Vice President for Sales and Marketing

Mrs. Petrova has been IGSS Chief Financial Officer since April 2012. She joined GEOTECH Holding as Vice President for Economics in 2007 and was later promoted to Chief Financial Officer. Mrs. Petrova has over 18 years of senior executive experience including deputy general director at both Kirovsky Machine-building Plant and Agromashholding. She has also held senior positions at Eurochem, Rusal and Krasnoyarsk Aluminum Smelter (a Rusal subsidiary).

Mrs. Petrova graduated from Moscow Management Institute named after Sergo Ordzhonikidze with a degree in Economics and also holds a PhD in the same field from St. Petersburg Technical University.

Mr. Rakhmatulin has served as Senior Vice President for Sales and Marketing since February 2012. Between 2000 and 2003 he occupied executive positions, including that of a marketing director, in MCC Eurochem, a major manufacturer of fertilizers. Between 2003 and 2006, he was the CEO of IG Geotar-Media LLC, a Russian publishing house of professional literature. Mr. Rakhmatulin has joined GEOTECH Holding in 2007, where he held positions of vice president for commerce and senior vice president for sales and marketing. He has been the Chairman of the Board of Directors of Khantymansiyskgeofizika since January 2009.

Rustam holds a degree in International economic relations and foreign languages, magna cum laude, from Moscow State Institute of International Relations (MGIMO).



104

Salavat ZaripovSenior Vice President for Russian Operations

Vladimir Chugunov Vice President for Technical Support

Mr. Zaripov has served as Senior Vice President for Russian Operations since October 2013, previously as Vice President for Russian Operations since Februry 2012. He joined GEOTECH Holding in 2010. Prior to that, Mr. Zaripov spent 30 years at TNG Group, a Russian oil and gas field services company, and its predecessors, including most recently the position of director for exploration geophysics.

Mr. Zaripov graduated from Sverdlovskiy Institute of Mining with a degree in Geophysics.

Mr. Chugunov has served as Vice President for Technical Support since July 2012. Prior to this he was Business Manager of Seismic Services at Schlumberger and Chief of Seismic Party at Schlumberger and WesternGeco. Mr. Chugunov has over 35 years of industry experience, including positions at Aktyubinsk Geophysical Expedition and Oilfield Support Services.

Mr. Chugunov graduated from Perm State University with a degree in Engineering Geophysics.



105

Information Disclosure

IG Seismic Services discloses information pursuant to applicable laws and regulations associated with its GDR listing at the London Stock Exchange in 2012. Such information is primarily provided through the Company’s website (www.igseis.com). Regulatory messages related to the trading of GDRs at the London Stock Exchange are disclosed through the RNS system.

In addition, the Company tracks compliance with Russian, Kazakh, and other laws on information disclosure as it relates to its affiliates and subsidiaries in Russia, Kazakhstan, and other countries.

For the purpose of controlling information disclosure, the Сompany has developed and implemented a set of policies and procedures. These are targeted to provide complete, trustworthy, and prompt information disclosure and include: the Information Policy, Insider Information Regulation, and the Corporate Code of Business Conduct and Ethics.

The Information Policy establishes the procedures and key principles of information disclosure about the Company and its affiliates to the investment community and the mass media, as well as rights and obligations of various Company divisions. The Insider Information Regulation requires staff members to adhere to rules of confidentiality regarding the Company and its securities, which would be unknown to third parties and may qualify as insider information that would affect the share price of the Company’s securities. Whenever necessary, these documents are updated by the Board’s Audit Committee.

The Group’s companies publish annual and quarterly reports as required by law, and also announce significant news and other corporate events. For instance, PJSC GEOTECH Seismic Services (Russia’s largest geophysical company and a member of IGSS) has implemented internal procedures and regulations on releasing required information by its structural divisions in order to fully and promptly disclose information through significant factual statements.



106

We make every effort to ensure that our shareholders, investors, and other stakeholders make informed and objective decisions. Therefore, in addition to mandatory disclosures, the Сompany voluntarily provides additional disclosures of financial documents and press releases. Additional disclosures are made along with disclosures required by the law and the IFRS to give investors and shareholders a better understanding of Company’s actions.

We also strive to enhance the level of transparency and understanding of the “seismic market” among all stakeholders, particularly in the Russian market. To this end, we supplement our presentations with various strategic, marketing, and statistical information about the industry that is collected from various available and relevant sources.

The Company is taking steps to increase the level of information disclosures. For example, we disclose our portfolio of orders in quarterly reports. These disclosures, in our view, are the most detailed of any company working in the Russian oilfield services sector. The implementation of the business intelligence system in 2013 has provided new opportunities

to analyze performance of both individual business units and various production and economic indicators. This will further enhance the value of the information provided by the Company.

In order to increase the quantity and quality of information disclosed, management holds regular meetings with investors to provide a better understanding of the Company and Russia’s seismic market in general. In addition, direct communication with investors allows management to receive feedback from investors community. At the same time, the Company adheres to the principle of avoiding selective disclosure of significant information.

In 2013, the Company conducted three roadshows in Europe and Russia with assistance of Morgan Stanley, Citi, and Gazprombank. Three conferences with investors took place in February, August and September, organized by Morgan Stanley, Bank of America Merrill Lynch and Gazprombank, respectively, as well as numerous meetings with investors and analysts. The Сompany received letters of recognition and positive reviews by investors on the quality of the events.

Web site: www.igseis.comLSE ticker: IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L)


http://igseis.com/en/investor-relations/share-information/share-chart

Capital Markets


108

Shares

IGSS has issued 20,833,400 shares with a par value of USD 0.01. Global depository receipts (GDRs) of IG Seismic Services PLC are traded on the Main Market of the London Stock Exchange under the ticker IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L). Each depository receipt represents two ordinary shares of IG Seismic Services PLC. J.P. Morgan Chase Bank is the depository bank under the Company’s GDR program.

■ Shareholder Structure

ShareholdersShare as of

December 31, 2013, %

Share as of March 31,

2014, %

N. Levitskiy 26.8 55.82

S. Generalov, Industrial Investors Group 13.0 7.78

Schlumberger 12.0 12.0

Institutional and private investors 48.2 24.4

100.0 100.0

■ Changes in Shareholder Structure

During 2013, two significant events took place in relation to large holdings of Company shares: in November 2013, 13% changed hands and information was circulated about a possible acceptance of an offer to purchase shares.

Nyala Investments, Ltd., representing the interests of Volga Group (previously known as Volga Resources) sold its 13% holding of IGSS shares on November 14, 2013, to an entity that was part of Industrial Investors Group, representing IGSS Chairman Sergey Generalov.

LSE ticker: IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L)

Ca pita l Ma rkets

http://igseis.com/en/investor-relations/share-information/share-chart


109

On November 15, 2013, it was reported that U.C.E. Synttech Holdings Limited (a company owned by Nikolay Levitskiy, the principal beneficiary of IGSS) was considering the possibility of making a buyout offer to purchase IGSS shares. On December 30, 2013, such an offer was posted to give notice to IGSS shareholders.

The offer by Synttech to purchase IGSS shares at the price of USD 15.00 per security (equivalent to USD 30 per GDR) was valid until February 26, 2014. As a result of the offer Synttech purchased 5,423.147 shares of IGSS, amounting to 26.03% of all issued shares.

RTS index normalized to period start

FTSE 100 index normalized to period start

GDR price, USD

USD No. of shares

Historical IGSS GDR Price Performance at LSE

0

5

10

15

20

25

30

35

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

Volume of trade, pcs

05.11.2013 27.11.2013 29.12.2013 28.01.2014 18.02.2014 12.03.2014 31.03.2014 15.04.2014

,

,

,

,

,

,

,

Ca pita l Ma rkets


110

■ Analyst Coverage

Despite the fact that 2013 was the first year of the Company’s being public, several investment banks considered IGSS securities as an interesting investment offer and began analyst coverage of the Company. This focus on IGSS was happening at the same time as an overall shrinkage of analyst divisions at investment banks. In 2013, reports on the Сompany were published by Renaissance Capital, VTB Capital, Gazprombank, and Citi. Three banks recommended “buy” and one recommended “hold.”

Bank Report Release date

Renaissance Capital Russian oilfield services. The sweet spot February 25, 2013

VTB Capital OFS 2013 Outlook. When facts change… OFS shine March 25, 2013

GAZPROMBANK IG Seismic Services: the next Russian OFS stock to break through

July 29, 2013

Citi IG Seismic Services New champion of Russia’s promising seismic industry

October 9, 2013

■ Analyst Coverage of IG Seismic Services:

Ca pita l Ma rkets


111

Credit ratings and bondsIn 2013, the Сompany received its first credit ratings from leading international rating agencies Standard and Poor’s (S&P) and Moody’s:

> On September 19, 2013, S&P assigned a long-term corporate credit rating “B” with a “positive” outlook to IG Seismic Services and its affiliate PJSC GEOTECH Seismic Services. In addition, on its national scale, S&P assigned PJSC GEOTECH Seismic Services the level of “ruA.”

> On October 31, 2013, Moody’s assigned a corporate credit rating “B2” with a “stable” outlook to IG Seismic Services.

Higher ratings allow the Group to attract additional financing on more attractive terms, whether it is issuing debt securities or in negotiations with lenders.

■ Credit Ratings

Company Credit agency Rating Outlook Rating

date

IG Seismic Services S&P B Positive 19.09,2013

GEOTECH Seismic Services

S&P B/ruA Positive 19.09,2013

IG Seismic Services Moody`s B2 Stable 31.10,2013

Ca pita l Ma rkets


112

In order to attract additional financing to develop operations, the IGSS Board of Directors approved an issue of RUR-denominated bonds by its largest Russian affiliate, PJSC GEOTECH Seismic Services, on September 27, 2013. On October 23, 2013, PJSC GEOTECH Seismic Services placed its debut issue of five-year bonds worth RUR 3 billion (with an interim put option in 3 years). The demand for the bonds surpassed the supply, attesting to the reliability and investment attractiveness of the Сompany’s debt instruments.

Placement organizers: VTB Capital, Sberbank CIB. Technical underwriter – VTB Capital.

On November 29, 2013, the Bank of Russia included bonds issued by PJSC GEOTECH Seismic Services (state registration number 4-01-55378-E) in the Bank of Russia’s Lombard list.

Trading Volume RUR

Market Price % of par Value

GEOTECH Seismic Services PJSC Historical Bonds Price Performance at the Moscow Stock Exchange

05.11.2013 27.11.2013 29.12.2013 28.01.2014 18.02.2014 12.03.2014 31.03.2014 15.04.2014

100,000,000

0

300,000,000

200,000,000

400,000,000

500,000,000

600,000,000100.6

100.4

100.2

100.0

99.8

99.6

99.4

99.2

99.0

98.8

98.6

Market Price % of par Value

Trading Volume RUR

Ca pita l Ma rkets




114


Personnel

Highly-qualified staff is one of the key competitive advantages of IGSS. As of December 31, 2013, the total number of IGSS employees surpassed 12,000, including over 350 experienced geologists, geophysicists, IT engineers and specialists employed at data processing and interpretation centers.

The stability of social and labor relations in the Сompany is achieved through strict compliance with the requirements of social and labor laws, collective bargaining agreements, and the development and adoption of internal rules.

The Сompany is taking steps to increase the morale of staff and provides each employee with an opportunity to make personal contributions into their development. IGSS not only complies with legal requirements to provide

social support for its staff, but also implements its own initiatives. IGSS uses a set of special programs that allow employees to be granted various benefits to cover training and medical services. The Сompany also maintains programs of corporate insurance against general injuries and voluntary medical insurance.

The Сompany also offers material aid to its retired employees.

Principles of corporate social responsibility at IGSS:

> Respect for history, culture, traditions, lifestyle and heritage.

> Openness and transparency.

> Trust and sincerity.

> Unconditional compliance with existing federal and regional laws.

> Adherence to Russian and international standards.

> Responsible compliance with contractual obligations.

Corporate S ocia l Res pon s ib i l i t y


115

One of the morale incentives used by the Company is to make available awards by ministries and state agencies and corporate awards for special achievements. Award ceremonies are normally held in conjunction with their professional holiday – Geologist Day.

IGSS geophysical projects are usually located at a long distance from major educational and cultural centers. This presents barriers to attracting and keeping qualified staff. The Company carefully tracks local labor markets and monitors social, demographic and migration issues. IGSS has developed a set of measures aimed at resolving human resource and social issues and attracting and retaining qualified staff.

■ Employee Training and Replenishment of Staff Reserves

In order to ensure uninterrupted and multilateral professional development of its staff, IGSS provides integrated education and training programs. The Company sponsors education benefits for its staff. Group companies offer programs to attract a qualified workforce and specialists from across the Russian Federation.

IGSS companies provide on-site seminars to study seismic, topographic and drilling equipment used by the Сompany. Managers of seismic crews, technical managers, and prospective staff reserve members undergo annual training courses led by instructors from the top educational institutions of Russia and foreign companies.

The Company is always working to increase the qualification levels of its employees and to acquire relevant qualifications. The education program exceeds what is required by law. Any worker at the seismic crew is entitled both to enhance his or her existing qualifications and to acquire a new relevant qualification.

In addition, the Company focuses considerable attention to programs that train students in secondary education and trade schools by cooperating with the top universities in Russia including the Moscow, Saratov, Kazan, Tomsk, and Orenburg State Universities, the Russian State Geological Exploration University, the Isovsky Geological Exploration Technical School, and other specialized educational institutions. Under the program, students have an opportunity to be accepted to paid internships at IGSS and be provided room, board, and travel expenses.

IGSS builds stable relations with its staff under the following principles:

> Provide workplaces with competitive salaries and social benefits.

> Unconditional compliance with the norms of social and labor relations established by the law and collective bargaining agreements.

> Provide safe labor conditions.

> Ongoing upgrades of social and housing conditions at worksites, which are prioritized according to staff safety and health needs.

> Assistance in multilateral professional and cultural development of staff.



116

Labor SafetyIGSS Group uses an integrated system of Health, Safety and Environment management.

The system that manages the Health, Safety and Environment (HSE) of IGSS Group has been developed pursuant to Russian law, international ISO and OHSAS standards, and supplemented by the experience of professional organizations such as the International Association of Oil and Gas Producers (OGP) and the International Association of Geophysical Contractors (IAGC), of which IGSS is a member.

IGSS houses a dedicated HSE Department, whose staff (engineers and medical staff) are present in each company of the Group and among staff of each field crew. In order to reduce the number of workplace injuries, the Сompany continually implements programs for labor safety training, use of personal protecting equipment, and increased awareness about workplace risks. Through short-term training programs, IGSS enterprises hold trainings and

certifications of staff according to the HSE laws throughout the year.

■ Certificate of Membership of IGSS in the International Association of Geophysical Contractors (IAGC)

IGSS views issues of occu-pational health and safety and environment protection as the premier indicator of management quality, which in turn promotes successful business development.



117

The elements of the Health, Safety and Environment management system include:

> Creating and maintaining an efficient system to manage Health, Safety and Environment, following Russian laws and international best practices.

> Consistently reducing workplace injury indicators, occupational diseases, accident rates and negative environmental impacts following international best practices in the industry.

> Supporting the organization of operational safety and environment protection with systematic analysis and management of production risks.

> Continuously improving labor conditions and the status of occupational and environmental safety.

■ HSE ERM System

In 2013, IGSS Group implemented its HSE ERM system that is used to collect and analyze data on workplace injuries, their investigations, and remedial actions related to occupational health and safety and environmental protection. The system provides regular reports to the management of production divisions. At present, the system includes over 800 active users in all IGSS enterprises in Russia, Kazakhstan, and elsewhere. The implementation of HSE ERM

provides high level of automation and a considerable increase in efficiency in internal corporate activities in this area.

The system software can promptly record any events and notify all stakeholders and regulators about the event. The system automates the processes for the internal investigation of accidents, the planning and performance of mitigating actions, and the provisions for monitoring potentially

hazardous conditions and work at the enterprise. The system allows for all HSE departments to interact and analyze workplace incidents. Therefore it increasing the efficiency of preventive actions. The system supports operation with the use of low-speed channels of data communication and allows for uninterrupted operation of software by means of web-access even at field posts, which solely rely on satellite communication for Internet access.



118

Cooperation with Local Communities IGSS is actively involved with local communities in the regions of where the Сompany works. The Сompany has implemented a set of programs to support indigenous peoples of the North.

IGSS enterprises enter into binding agreements with owners of community family lands regarding the use of land where there are natural resources and the compensation for possible damage to natural resources, habitats, or traditional fishing and hunting activities. Compensation may be issued both in physical goods and in monetary payments.

Taking into consideration that most of the indigenous people dwell in yurts, away from large settlements, the Сompany works to

procure and deliver to their location not only objects required for conducting their traditional lives, but also home appliances, furniture, manufactured consumer goods, as well as housing repair and construction materials.

As part of its efforts in preserving national traditions and the culture of indigenous peoples of the north, IGSS participates in the celebration of Fisherman Day and Deer Farmer Day in their homelands.

The main principles of cooperation between IGSS and indigenous peoples of the North include:

> improving the socio-economic living conditions of indigenous peoples of the North;

> mutually beneficial cooperation between the Сompany and family communities;

> preserving and developing traditional ways of living, national lifestyle, and cropping activities;

> respecting national traditions and preserving the unique identities of the peoples.



119

EcologyIGSS Group adheres to principles of environmental stewardship, strives to preserve the abundance of natural resources and biodiversity, and minimizes the negative impact of operations onto flora and fauna in the regions where it works.

In addition to Russian federal laws and regulations, IGSS also abides by environmental guidelines adopted by the International Association of Geophysical Contractors (IAGC).

The key environmental risks for IGSS are related to hazards of oil spills and waste management. In order to minimize the risks, IGSS has developed a procedure for operational environmental control, procedures to control waste, and accident response plans. The Сompany uses a system of monthly and quarterly environmental reports to allow IGSS’ environmental impact to be analyzed.

To minimize the negative environmental impact, the Сompany uses waste incineration units Forsage-1 and Forsage-2M, which efficiently dispose of and process solid waste.

Additional environmental protection actions include the following:

> restricting any type of hunting and fishing while present in the field;

> restricting the purchase or acceptance as gift of self-made presents produced from objects of local flora and fauna;

> avoiding the contamination of soil, discharge of production, domestic and other types of waste into water sources;

> restricting the collection of artifacts or destruction of monuments of archaeological or historical value.

Environmental priorities of IGSS:

> Compliance with existing environmental laws, rules, and regulations of the Russian Federation, and international legal guidelines related to environment protection.

> Priority of preventive actions over remedial ones.

> Availability of environmental information regarding the Сompany’s operations for all stakeholders and parties.

> Bolstering the positive environmental reputation of the Сompany.



120

With the goal of accelerating the process of obtaining environmental permits, the Сompany has procured specialized software to track environmental activity, “Ecolog,” which allows the Сompany to develop models for maximum contaminant emissions, norms of waste generation and disposal limits, and also assists in accomplishing other environmental targets.

Several vivid examples of seismic operations in natural areas under special protection include projects completed by OJSC Naryan-Marseismorazvedka, an IGSS company, at Kuzhminsky, west of the source of the Pechora River, on the border with Nizhne-Pechorsky regional nature reserve and state wilderness area Nenetsky, as well as in the region of a state wilderness area. Thanks to the proper application of non-explosive seismic wave sources, the Сompany was able to conduct a full high-quality exploration of the territories adjacent to the protected zones. This proves

that it is possible to operate fields discovered in these regions without causing any damage to delicate and complex northern ecosystems.

Experienced engineers and geologists at the Сompany are permanently working to upgrade the seismic processes used in operations. A research group based in Minusinsk, Krasnoyarsk Region, develops pulse sources using the proprietary technology, Yenisei. Yenisei is a unique technology that converts the pulse of electromagnetic drive into a directed seismic wave. Pulse sources demonstrate a wide range of advantages: they are capable of penetrating rock formations, they facilitate the performance of field work at outposts where use of explosive, drilling or vibroseismic technologies would be impossible, and they generally minimize the environmental damage.

The high level of environmental safety at all enterprises of IGSS Group is proved by the absence of compliance notices regarding breach of environmental laws of the Russian Federation, as well as the experience of seismic works in natural areas under special protection.

> Provision of rational natural resources utilization.

> Provision of favorable environment conditions as a necessary prerequisite for improvement of the quality of life and health improvement.


Annual report by IGSS for 2013

121

Consolidated Financial Statements

as of and for the year ended 31 December 2013

Contents

122 General Information

123 Report of the Board of Directors

126 Independent Auditors’ Report

128 Consolidated Statement of Financial Position

130 Consolidated Statement of Comprehensive Income

132 Consolidated Statement of Cash Flows

134 Consolidated Statement of Changes in Equity

135 Notes to the Consolidated Financial Statements

Con sol idated F ina ncia l S tatements


122

General Information

■ Directors

Sergey Generalov, Chairman, Independent Non-Executive Director (appointed on 24 September 2012)

Nikolay Levitskiy, Chief Executive Officer, Executive Director (appointed on 30 December 2011)

Boris Aleshin, Independent Non-Executive Director (appointed on 30 December 2011)

Peter O’Brien, Independent Non-Executive Director (appointed on 10 January 2012)

Dmitry Lipyavko, Independent Non-Executive Director (appointed on 12 November 2012)

Denis Cherednichenko, Executive Director (appointed on 30 December 2011)

Maurice Dijols, Non-Executive Director (appointed on 30 December 2011)

Felix Lubashevsky, Non-Executive Director (appointed on 18 June 2012)

Kurt Suntay, Non-Executive Director (appointed 30 December 2011, resigned on 18 November 2013)

■ Company Secretary

A.T.S. Services Limited Arch. Makariou III, 2-4 Capital Center, 9th floor 1065 Nicosia Cyprus

■ Registered Office

Arch. Makariou III, 2-4, Capital Center, 9th floor 1065 Nicosia, Cyprus

■ Independent Auditor

Ernst & Young Cyprus Limited 36 Byron Avenue P.O. Box 21656 1511 Nicosia, Cyprus



123

Report of the Board of Directors (in thousands of US dollars)

The Board of Directors of IG Seismic Services plc (the “Company”) (together with its subsidiaries referred to as “the Group”) present their report and audited financial statements as of and for the year ended 31 December 2013. The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and the requirements of Cyprus Companies Law, Cap. 113.

■ Principal Activities

The principal activity of the Group during the year continued to be provision of land and transition zone seismic data acquisition and data processing and interpretation to the petroleum industry in the Russian Federation, the Commonwealth of Independent States (“CIS”) and other countries outside of the CIS.

■ Review of Developments, Position and Performance of the Group’s Business

The results of the Group for the period are set out on page 130 of the consolidated financial statements. Sales of the Group in 2013 reached 607,246, compared with 608,482 in 2012. Adjusted EBITDA in 2013 was 132,781 (2012: 119,103). EBIDTA calculation is presented in Note 6. Profits for the year are retained.

■ Dividends

The holders of ordinary shares are entitled to receive dividends as declared. One share has one vote at annual and general shareholders’ meetings of the Company. No dividends were declared and paid for ordinary shares in respect of 2013 and 2012.


Mr. Nikolay Levitskiy 55.82%

Schlumberger 12.00%

Industrial Investors Group 7.78%

Other institutional and private shareholders 24.40%

■ Principal Risks and Uncertainties

The Group’s critical accounting estimates and judgements and financial risk management are disclosed in Notes 4, 5 and 30 to the consolidated financial statements. The Group’s commitments and contingencies are disclosed in Note 31 to the consolidated financial statements.



124

■ Future Development

The Board of Directors does not expect any significant changes in the activities of the Group for the foreseeable future. The Group’s strategic objective is to strengthen its position as a leading seismic player in Russia. The Group will also continue its focus on effective cost management.

In the light of bonds issue discussed in Note 18, in the beginning of 2014 Standard & Poor’s, international rating agency, affirmed long-term corporate credit rating “В” to IG Seismic Services plc (LSE: IGSS) and to its subsidiary GEOTECH Seismic Services JSC. The outlook is positive.

■ Share Capital

Share capital of the Group is described in Note 17 to the financial statements.

■ Board of Directors

The structure of the Board of Directors during the year and as at 31 December 2013 and at the date of this report is presented on page 122. Directors are subject to appointment or removal according to the provision of Shareholders Agreement. Independent Directors are subject to re-election at regular intervals.

The Group is managed by the Board of Directors which is collectively responsible to the shareholders for the success of the Group. The Board sets the strategic objectives and ensures that the necessary resources are in place to enable these objectives to be met. The Board is fully involved in decision making in the most important areas of business and conducts regular reviews of the Group’s operational and financial performance.

There were no significant changes in the assignment of responsibilities of the Board of Directors. Composition of the Board of Directors remained unchanged except for resignation of Kurt Suntay, Non-Executive Director on 18 November 2013.



125

■ Events After the Reporting Date

All significant events that occurred after the reporting date are described in Note 33 to the consolidated financial statements.

■ Independent Auditor

The independent auditors, Ernst & Young Cyprus Limited, have expressed their willingness to continue in office. A resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting.

By order of the Board

Denis Cherednichenko Director

Nicosia

12 April 2014



126

Independent Auditor’s Report

To the Members of IG Seismic Services plc

■ Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of IG Seismic Services plc (the “Company”) and its subsidiaries (together with the Company, the “Group”), which comprise the consolidated statement of financial position as at 31 December 2013, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

■ Board of Directors’ Responsibility for the Consolidated Financial Statements

The Board of Directors is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

■ Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.



127

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap. 113.

■ Report on Other Legal Requirements

Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013, we report the following:

> We have obtained all the information and explanations we considered necessary for the purposes of our audit.

> In our opinion, proper books of account have been kept by the Company, so far as appears from our examination of these books.

> The consolidated financial statements are in agreement with the books of account.

> In our opinion and to the best of our information and according to the explanations given to us, the consolidated financial statements give the information required by the Cyprus Companies Law, Cap. 113, in the manner so required.

> In our opinion, the information given in the report of the Board of Directors is consistent with the consolidated financial statements.

■ Other Matter

This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 and 2013 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.

Stavros Pantzaris Certified Public Accountant and Registered Auditor for and on behalf of

Ernst & Young Cyprus Limited Certified Public Accountants and Registered Auditors

Nicosia 15 April 2014



128

Consolidated Statement of Financial Position (in thousands of US dollars)

Note* At 31 December 2013 At 31 December 2012

Assets

Non-current assets

Property, plant and equipment 10 464,810 471,665

Goodwill 7 114,885 123,798

Intangible assets other than goodwill 9 9,475 12,129

Investments in associates 11 30,859 29,203

Deferred tax assets 12 7,200 12,580

Other non–current assets 1,462 1,251

Total non-current assets 628,691 650,626

Current assets

Inventories 13 68,138 70,273

Accounts receivable and prepayments 14 231,116 230,590

Other financial assets 15 6,966 6,762

VAT receivable 21,135 18,450

Prepayments for income tax 3,037 1,979

Other current assets 799 1,026

Cash and cash equivalents 16 21,735 18,615

Total current assets 352,926 347,695

Total assets 981,617 998,321

Equity and liabilities

Equity

Share capital 17 208 208

Share premium 17 443,712 443,712

* The accompanying notes are an integral part of these consolidated financial statements.



129

Note* At 31 December 2013 At 31 December 2012

Reverse acquisition reserve 17 (192,849) (192,849)

Other non–distributable reserves 17 94,979 94,979

Foreign currency translations reserve (25,225) (2,729)

Accumulated losses (40,530) (10,253)

Total shareholders' equity 280,295 333,068

Non–controlling interest 55,202 39,740

Total equity 335,497 372,808

Non-current liabilities

Loans and borrowings 18 315,629 225,799

Finance lease liabilities 19 59 305

Promissory notes payable 20 18,318 9,719

Deferred tax liabilities 12 45,287 35,179

Total non-current liabilities 379,293 271,002

Current liabilities

Loans and borrowings 18 63,464 161,780

Promissory notes payable 20 14,048 5,621

Accounts payable 20 143,198 128,479

Income tax payable 652 3,402

Other taxes payable 21 44,122 46,647

Provisions 1,219 2,946

Finance lease liabilities 19 124 5,636

Total current liabilities 266,827 354,511

Total liabilities 646,120 625,513

Total liabilities and equity 981,617 998,321

These consolidated financial statements were approved for issue by the Board of Directors on 12 April 2014 and were signed on its behalf by:

Nikolay Levitskiy, Director

Denis Cherednichenko, Director




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Consolidated Statement of Comprehensive Income (in thousands of US dollars)

Note* 2013 2012

Revenue 23 607,246 608,482

Cost of sales 24 (477,076) (489,800)

Gross profit 130,170 118,682

General and administrative expenses 25 (68,447) (74,345)

Other operating income 26 7,426 14,049

Other operating expense 26 (16,285) (17,039)

Operating profit 52,864 41,347

Finance income 27 579 802

Finance expense 27 (45,736) (46,241)

Net foreign exchange (loss)/gain 28 (7,802) 1,608

Share in profit of an associate 11 3,988 6,399


Current income tax expense 12 (57) (1,816)

Deferred income tax (expense)/benefit 12 (16,416) 10,424

(Loss)/profit for the year (12,580) 12,523

Other comprehensive (expense)/income to be reclassified to profit/loss in subsequent periods

Translation difference (24,731) 8,815

Total comprehensive (expense)/income (37,311) 21,338




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Note* 2013 2012

(Loss)/profit for the year attributable to:

Shareholders of the IG Seismic Services plc (16,647) 11,840

Non–controlling interest 4,067 683

Total comprehensive (expense)/income attributable to:

Shareholders of the IG Seismic Services plc (39,143) 18,445

Non–controlling interest 1,832 2,893

(Loss)/earning per share

Basic and diluted, (loss)/earning for the year attributable to shareholders of the IG Seismic Services plc 29 (0.80) 0.57




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Consolidated Statement of Cash Flows (in thousands of US dollars)

Note* 2013 2012

Cash flows from operating activities

Profit before tax from continuing operations 3,893 3,915

Adjustments for:

Depreciation and amortization 24, 25 70,078 66,296

Bad debt and inventory allowance 5,095 9,882

Loss on disposals of property, plant and equipment and other assets 26 4,926 5,655

Net interest expense 27 45,157 45,439

Net foreign exchange loss/(gain) 28 7,802 (1,608)

Share in profit of an associate 11 (3,988) (6,399)

Cash flows from operating activities before changes in working capital 132,963 123,180

Working capital adjustments net of acquisitions

Change in accounts receivable (15,991) 41,216

Change in inventories (9,338) (1,801)

Change in prepayments and other current assets (6,730) (1,428)

Change in accounts payable 31,969 (48,831)

Change in taxes payable other than income tax 19,473 (25,966)

Change in provisions (1,539) (301)

Cash flows before income tax 150,807 86,069

Income tax paid (1,885) (2,006)

Net cash from operating activities 148,922 84,063




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Note* 2013 2012

Investing activities

Purchases of property, plant and equipment (87,622) (33,988)

Proceeds from the sale of property, plant and equipment 767 4,410

Short–term loans issued (289) (1,811)

Payment to acquire of non–controlling interests (4,288) –

Repayment of loans issued – 3,274

Interest received 29 137

Dividends received 126 217

Net cash used in investing activities (91,277) (27,761)

Financing activities

Proceeds from loans and borrowings 559,447 295,999

Payment of loans and borrowings (652,529) (281,568)

Proceeds from bonds 93,930 –

Payment of finance lease obligations (7,947) (17,508)

Interest paid (40,721) (43,528)

Redemption of promissory notes (5,192) (5,192)

Net cash used in financing activities (53,012) (51,797)

Net increase in cash and cash equivalents 4,633 4,505

Cash and cash equivalents at the beginning of year 16 18,615 13,187

Effect of foreign exchange on cash and cash equivalents (1,513) 923

Cash and cash equivalents at the end of year 16 21,735 18,615




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Consolidated Statement of Changes in Equity (in thousands of US dollars)

Attributable to shareholders of IG Seismic Services plc

Non-controlling

interest Total equity Share

capitalShare

premium

Reverse acquisition

reserve

Other non-distributable

reserves

Foreign currency

translations reserve

Accumulated (losses) / retained earnings Total

Balance as at 1 January 2012 208 443,712 (192,849) 94,979 (9,334) (21,566) 315,150 36,320 351,470

Net profit for the period – – – – – 11,840 11,840 683 12,523

Translation difference – – – – 6,605 – 6,605 2,210 8,815

Total compehensive expense – – – – 6,605 11,840 18,445 2,893 21,338

Change in non–controlling interest

– – – – – (527) (527) 527 –

Balance as at 31 December 2012 208 443,712 (192,849) 94,979 (2,729) (10,253) 333,068 39,740 372,808

Balance as at 1 January 2013 208 443,712 (192,849) 94,979 (2,729) (10,253) 333,068 39,740 372,808

Net (loss) for the period – – – – – (16,647) (16,647) 4,067 (12,580)

Translation difference – – – – (22,496) – (22,496) (2,235) (24,731)

Total compehensive income – – – – (22,496) (16,647) (39,143) 1,832 (37,311)

Change in non–controlling interest

– – – – – (13,630) (13,630) 13,630 –

Balance as at 31 December 2013 208 443,712 (192,849) 94,979 (25,225) (40,530) 280,295 55,202 335,497

Companies which do not distribute 70% of their profits after tax, as defined by the relevant tax law, within two years after the end of the relevant tax year, will be deemed to have distributed as dividends 70% of these profits. Special contribution for defense at 20% for the tax years 2012 and 2013 and 17% for 2014 and thereafter (in 2011 the rate was 15% up to 30 August 2011 and 17% thereafter) will be payable on such deemed dividends distribution. Profits and to

the extent that these are attributable to shareholders, who are not tax resident of Cyprus and own shares in the Company either directly and/or indirectly at the end of two years from the end of the tax year to which the profits relate, are exempted. The amount of deemed distribution is reduced by any actual dividends paid out of the profits of the relevant year at any time. This special contribution for defense is payable by the Company for the account of the shareholders.



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Notes to the Consolidated Financial Statements *

1. Corporate Information

■ Organizational Structure and Operations

These are consolidated financial statements of IG Seismic Services plc (the “Company” or “IGSS”) and its subsidiaries (together referred to as the “Group”) which is engaged in provision of land and transition zone seismic data acquisition and data processing and interpretation to the petroleum industry in the Russian Federation, the Commonwealth of Independent States (“CIS”) and other countries outside of the CIS.

IG Seismic Services Limited was incorporated in Cyprus as a private company in accordance with the provisions of the Companies Law, Cap. 113. Its registered office is located at 2-4 Arch. Makariou III Avenue, Capital Center, 9th floor, P.C. 1065, Nicosia, Cyprus. On 10 October 2012 the Company changed its legal form from private limited company into public limited company.

On 11 December 2012 the Company’s GDRs were admitted to the Official List maintained by the UK Listing Authority and started trading on the London Stock Exchange’s main market on 12 December 2012. Global Depositary Receipts (GDRs) of the Company representing two ordinary shares each are listed and traded on the Main Market of the London Stock Exchange under the ticker IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L). As of 31 December 2013, the free float of the Company amounted to approximately 43.2% of the issued share capital. The JP Morgan Chase Bank is the depositary bank for the GDR programme of the Company.

* As of and for the year ended 31 December 2013 (in thousands of US dollars)



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Shareholder structure as of 31 December 2013:



Schlumberger 12.00%


The information related to major operating subsidiaries of the Group as at 31 December 2013 and 2012 is presented below. The Group did not pursue any business acquisitions throughout 2013. All changes in effective ownership interest pertained to transactions within the Group. Operating segment information is presented in Note 6.

Company Segment activity Country of incorporation

Effective ownership interest at 31 December

2013 2012

CJSC GEOTECH Holding Company Holding company Russian Federation 99.76% 99.86%

OJSC Geotech Seismic Services Seismic services Russian Federation 88.41% 88.41%

LLC Geoprime Data processing and interpretation Russian Federation 88.41% 100.00%

JSC Azimuth Energy Services Seismic services Kazakhstan 84.18% 95.21%

JSC Geostan Data processing and interpretation Kazakhstan 84.27% 99.50%

OJSC Naryan–Marseismorazvedka Seismic services Russian Federation 76.19% 86.06%

OJSC Severgeofizika Seismic services Russian Federation 88.41% 99.86%

OJSC Khantymansiyskgeofizika Seismic services Russian Federation 83.11% 93.87%

OJSC Orenburgskaya Geophisicheskaya Expeditsiya

Seismic services Russian Federation 64.34% 68.32%

LLC Boguchanskaya Geophisicheskaya Expeditsiya


LLC GEOTECH–Vostochnaya Geophisicheskaya Kompaniya


OJSC Yeniseigeofizika* Seismic services Russian Federation 41.76% 44.33%

LLC Ilimpeiskaya Geophisicheskaya Expeditsiya


LLC Geologiya Reservuara Data processing and interpretation Russian Federation 71.47% 80.73%

LLC Evenkiageofizika Seismic services Russian Federation 88.40% 99.26%

* – Although the effective interest of the Group in the company didn’t exceed 50%, this company was considered a subsidiary of the Group because the Group has had control over the operating and financial activities through a majority of representatives in the Board of Directors of the company, and non-Group ownership interest has been diluted among a significant number of non-controlling shareholders.



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2. Basis of Preparation

■ Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.113.

The Group entities registered in the territory of the Russian Federation (“RF”) maintain accounting records and prepare financial reports in accordance with Federal Law No.402-FZ Concerning Accounting, the Statute Concerning Accounting and Reporting in the RF and Accounting Statements as approved by relevant orders of the RF Ministry of Finance. The Group entities registered in the territory of the Kazakhstan (“KZ“) maintain accounting records and prepare financial reports in accordance with Law of the Republic of Kazakhstan No. 234-III Concerning Accounting.

These consolidated financial statements have been prepared based on the Russian and Kazakh statutory accounting data adjusted for the purposes of compliance with IFRS.

■ Basis of Measurement

These consolidated financial statements have been prepared on a historical cost basis, except for certain items that have been measured at fair value as disclosed in the accounting policies below. The consolidated financial statements are presented in US dollars and all values are rounded to the nearest thousand except when otherwise indicated.

■ Functional and Presentation Currency

Functional currency is the currency of the primary economic environment in which an entity operates and is normally the currency in which the entity primarily generates and expends cash.

The US dollar (“USD”) is the presentation currency for the Group. The functional currency of the major subsidiaries of the Group is Russian Rouble (“RUR”).



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Translation from functional currency to the presentation currency is made in accordance with IAS 21 The Effect of Changes in Foreign Exchange Rate as follows:

> asset and liability accounts at the rate of exchange in effect at the reporting date;

> revenues and expenses at the exchange rate at the date of transaction or at the weighted average exchange rate for the year, if it approximates the exchange rates at the dates of transactions; and

> shareholders equity accounts at historical exchange rates. Translation gains or losses are recorded as a separate component of the shareholders’ equity. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

The official RUR to USD exchange rates established by the Central Bank of the Russian Federation (“CBR”), as at 31 December 2013 and 2012 were RUR 32,7292 and 30,3727 for one USD, respectively. The average RUR to USD exchange rates for 2013 and 2012 were 31,8480 and 31,0930 for one USD, respectively. The official RUR to USD exchange rate established by CBR as at 12 April 2014 was 35,6239 RUR for one USD.

■ Basis of Consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2013. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct and indirect ownership of voting rights. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated in full. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:

> Derecognises the assets (including goodwill) and liabilities of the subsidiary;

> Derecognises the carrying amount of any non-controlling interest;



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> Derecognises the cumulative translation differences recorded in equity;

> Recognises the fair value of the consideration received;

> Recognises the fair value of any investment retained;

> Recognises any surplus or deficit in profit or loss;

> Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate.

■ Going Concern

These consolidated financial statements have been prepared on the going concern basis which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. These accompanying financial statements do not include any adjustments that may be necessary if the Group is unable to continue as a going concern.

In 2013 the Group reported net loss of 12,580 (net profit for 2012 of 12,523) which was significantly affected by one-off expenses including utilization of deferred tax asset against profit originated from sales of subsidiaries’ shares within the Group which was eliminated on consolidation and unfavorable shift in RUR to USD exchange rates resulting in significant foreign exchange loss. For a number of years, the Group has been able to successfully refinance its short-term debt, obtain new equity capital from existing and new investors and generate sufficient operating cash flow to ensure that it does not face a liquidity shortfall or default on its debt obligations.

As a result, the Group’s management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate.



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3. Summary of Significant Accounting Policies

■ Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments:

Recognition and Measurement, is measured at fair value with changes in fair value recognised either in either profit or loss or as a change to other comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.



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Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

■ Investment in Associates

The Group’s investment in its associates, an entity in which the Group has significant influence, is accounted for using the equity method.

Under the equity method, the investment in the associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The profit or loss reflects the Group’s share of the results of operations of the associate. When there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

The Group’s share of profit or loss of an associate is shown on the face of the profit or loss and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate.

The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, then recognises the loss as separate line item in the profit or loss.

Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.



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■ Non-controlling Interest

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately within the Group’s equity and consist of the amount of those interests at the date of obtaining control plus their share of changes in equity since that date. They are measured at acquisition fair value or at proportionate share of net assets acquired and this choice is made for each acquisition separately. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. Changes in the Parent’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

■ Transactions Eliminated on Consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

■ Foreign Currencies

Transactions in foreign currencies are translated to the respective functional currency, which is Russian Ruble and Kazakh Tenge for the subsidiary companies at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated

in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency using the exchange rate at the date that the fair value was determined. Foreign currency differences arising in translation are recognized in the statement of comprehensive income.

■ Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable for goods provided or services rendered less any trade discounts, value-added tax and similar sales-based taxes after eliminating sales within the Group.

Revenue is recognized as follows:

> Revenue arising from production activity is recognized on the date of delivery of goods and the transfer of title thereto.

> Interest income is accrued on a regular basis by reference to the outstanding principal amount and the applicable effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

> Dividend income is recognized where the shareholder’s right to receive a dividend payment is established.

> Revenue under long-term contracts is recognized in accordance with IAS 11 Construction Contracts as described below.



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■ Construction Type Contracts

The Group principally operates fixed price contracts. If the outcome of such a contract can be reliably measured, revenue associated with the construction contract is recognized by reference to the stage of completion of the contract activity at year end (the percentage of completion method).

The outcome of a construction contract can be estimated reliably when: (i) the total contract revenue can be measured reliably; (ii) it is probable that the economic benefits associated with the contract will flow to the entity; (iii) the costs to complete the contract and the stage of completion can be measured reliably; and (iv) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. When the outcome of a construction cannot be estimated reliably, contract revenue is recognized only to the extent of costs incurred that are expected to be recoverable.

In applying the percentage of completion method, revenue recognized corresponds to the total contract revenue (as defined below) multiplied by the actual completion rate based on the proportion of total contract costs (as defined below) incurred to date and the estimated costs to complete.

Contract revenue – contract revenue corresponds to the initial amount of revenue agreed in the contract and any variations in contract work, claims and incentive payments to the extent that it

is probable that they will result in revenue, and they are capable of being reliably measured.

Contract costs – contract costs include costs that relate directly to the specific contract and costs that are attributable to contract activity in general and can be allocated to the contract. Costs that relate directly to a specific contract comprise: site labor costs (including site supervision); costs of materials used in construction; depreciation of equipment used on the contract; costs of design, and technical assistance that is directly related to the contract.

The Group’s contracts are typically negotiated for the construction of a single asset or a group of assets which are closely interrelated or interdependent in terms of their design, technology and function. In certain circumstances, the percentage of completion method is applied to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts.

Assets covered by a single contract are treated separately when:

> The separate proposals have been submitted for each asset;

> Each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset;

> The costs and revenues of each asset can be identified.



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A group of contracts are treated as a single construction contract when:

> The group of contracts is negotiated as a single package; the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin;

> The contracts are performed concurrently or in a continuous sequence.

■ Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses, if any. The initial cost of the asset includes the purchase price or expenditures incurred that are directly attributable to the acquisition of the assets. The purchase price is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Major replacements of property, plant and equipment are capitalized. All other repair and maintenance costs are charged to the profit and loss component of the consolidated statement of comprehensive income during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives, as follows:

Buildings and structures 30–40 yearsMachinery and equipment 5–25 yearsVehicles 3–8 yearsOther 2–10 years

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

■ Leases

Group as a lessee

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Finance leases that transfer substantially all the risks and benefits incidental to ownership of the leased item to the Group, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the profit or loss.



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A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an operating expense in the profit or loss on a straight-line basis over the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and benefits of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

■ Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

■ Intangible Assets Other than Goodwill

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in profit and loss in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the profit or loss as the expense category that is consistent with the function of the intangible assets.



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Intangible assets with a finite life are amortized on a straight-line basis over their expected useful lives. The useful lives of the Group’s intangible assets are as follows:

Software 5–10 years

Other 3–10 years

Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

Research costs are expensed as incurred. Development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate:

> The technical feasibility of completing the intangible asset so that the asset will be available for use or sale;

> Its intention to complete and its ability to use or sell the asset;

> How the asset will generate future economic benefits;

> The availability of resources to complete the asset;

> The ability to measure reliably the expenditure during development.

Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. Amortisation is recorded in cost of sales. During the period of development, the asset is tested for impairment annually.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the profit or loss when the asset is derecognised.

■ Financial Assets

Initial recognition and measurement

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.

All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.



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Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as described below:

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39.

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the profit or loss.

Financial assets designated upon initial recognition at fair value through profit or loss are designated at their initial recognition date and only if the criteria under IAS 39 are satisfied. The Group has not designated any financial assets at fair value through profit or loss.

The Group evaluates its financial assets held for trading, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify them. The reclassification to loans and receivables, available-for-sale or held to maturity depends on the nature of the asset. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation, as these instruments cannot be reclassified after initial recognition.

Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated at fair value though profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in profit or loss. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on



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acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the profit or loss. The losses arising from impairment are recognised in the profit or loss in finance costs for loans and in cost of sales or other operating expenses for receivables.

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold them to maturity. After initial measurement, held to maturity investments are measured at amortised cost using the EIR, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance income in the profit or loss. The losses arising from impairment are recognised in the profit or loss in finance costs. The Group did not have any held-to-maturity investments during the years ended 31 December 2013 and 2012.

Available-for-sale financial investments

Available-for-sale financial investments include equity investments and debt securities. Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available-for sale reserve to the profit or loss in finance costs. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the EIR method.

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intention to do so significantly changes in the foreseeable future, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or until maturity. Reclassification to the held to maturity category is permitted only when the entity has the ability and intention to hold the financial asset accordingly.

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on the asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost



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and the maturity amount is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the profit or loss. The Group did not have any available-for-sale investments during the years ended 31 December 2013 and 2012.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

> The rights to receive cash flows from the asset have expired;

> The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Impairment of financial assets

The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether



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significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as finance income in the profit or loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the profit or loss.

Available for sale financial investments

For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. ‘Significant’ is evaluated against the original cost of the investment and ‘prolonged’ against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the profit or loss – is removed from other comprehensive income and recognised in the profit or loss. Impairment losses on equity investments are not reversed through profit or loss; increases in their fair value after impairment are recognised directly in other comprehensive income.

In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the profit or loss.



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Future interest income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit or loss, the impairment loss is reversed through the profit or loss.

■ Financial Liabilities

Initial recognition and measurement

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, financial guarantee contracts, and derivative financial instruments.

Subsequent measurement

The measurement of financial liabilities depends on their classification as described below:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

Gains or losses on liabilities held for trading are recognised in the profit or loss.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss.



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Loans and borrowings

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the profit or loss.

Financial guarantee contracts

Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the profit or loss.

■ Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

■ Inventories

Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows:



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> Raw materials: purchase cost on a first in, first out basis;

> Finished goods and work in progress: cost of direct materials and labour and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs.

Where payment for inventories is deferred and such an arrangement actually contains elements of financing, the difference between the purchase price which is normally paid on trade credit terms and the consideration paid is recognized as interest expense over the term of the credit and is charged to the statement of comprehensive income.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

■ Impairment of Non-financial Assets

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year.

Impairment losses of continuing operations, including impairment on inventories, are recognised in the profit or loss in expense categories consistent with the function of the impaired asset, except for a property previously revalued when the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation.

The following assets have specific characteristics for impairment testing:



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Goodwill

Goodwill is tested for impairment annually as at 31 December and when circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.

Intangible assets

Intangible assets with indefinite useful lives are tested for impairment annually as at 31 December either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired.

■ Cash and Cash Equivalents

Cash represents cash in hand and in the Group’s bank accounts and interest bearing deposits, which can be effectively withdrawn at any time without prior notice or penalties reducing the principal amount of the deposit. Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and have original maturities of three months or less from their date of purchase. They are carried at cost plus accrued interest, which approximates fair value.

■ Share Capital

Ordinary shares are classified as equity. Any excess of the fair value of consideration received over the par value of shares issued is recognized also as share premium.

■ Dividends

Dividends are not recognized as a liability or deducted from equity as at the reporting date unless they have been declared / approved by the shareholders on or before the reporting date. Dividends are disclosed in financial statements if they have been declared after the reporting date, but before the date when the financial statements are authorized for issue.

■ Government Grants

A government grant is recognized in the statement of financial position initially as deferred income when there is reasonable assurance that it will be received and that the company will comply with the conditions attached to it. Grants that compensate the company for expenses incurred are recognized as other operating income on a systematic basis in the same periods in which the expenses are incurred. Government grants include grants for research and development.



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■ Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the profit or loss net of any reimbursement.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as finance costs.

Warranties

Provisions for warranty-related costs are recognised when the product is sold or service provided to the customer. Initial recognition is based on historical experience. The initial estimate of warranty-related costs is revised annually.

Restructuring provisions

Restructuring provisions are recognised only when the recognition criteria for provisions are fulfilled. The Group has a constructive obligation when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs, and an appropriate timeline. Furthermore, the employees affected have been notified of the plans main features.

Contingent liabilities recognised in a business combination

A contingent liability recognised in a business combination is initially measured at its fair value. Subsequently, it is measured at the higher of the amount that would be recognised in accordance with the requirements for provisions above or the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with the requirements for revenue recognition.



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■ Income Tax

Income tax for the year comprises current and deferred tax. Income tax is recognized in the statement of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Parent company is Cyprus resident whereas all subsidiaries are registered in Russia and Kazakhstan.

Current income tax

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income.

Current income tax relating to items recognised directly in equity is recognised in equity and not in the profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred tax

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

> When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;

> In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:

> When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;



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> In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction to goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognised in profit or loss.

■ Value-added Tax

The Russian tax legislation permits settlement of value added tax (“VAT”) on a net basis. VAT is payable to the state budget upon invoicing and delivery of goods, performing work or rendering services, as well as upon collection of prepayments from customers. VAT on purchases, even not settled at the reporting date, is deducted from the amount of VAT payable.

Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. VAT recoverable arises when VAT input related to purchases exceeds VAT output related to sales.

■ Offsetting

Assets and liabilities are only offset and reported at the net amount in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and the Group intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously.



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■ Social Expenditures

To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognized in the statement of comprehensive income as incurred.

■ Employee Benefits

In the normal course of business the Group contributes to the Russian Federation state pension scheme on behalf of its employees. Mandatory contributions to the governmental pension scheme are expensed when incurred. Discretionary pensions and other post-employment benefits are included in labor costs in the statement of comprehensive income, however, separate disclosures are not provided as these costs are not material. There are no other pension plans. The Group contributes to the Russian Federation state social insurance, medical insurance and unemployment funds on behalf of its employees.

■ Financial Income and Expenses

Finance income comprises interest income on funds invested, dividend income, and changes in the fair value of financial assets at fair value through profit or loss, and foreign currency gains.

Interest income is recognized as it accrues in the statement of comprehensive income, using the effective interest method. Dividend income is recognized in the statement of income on the date that the Group’s right to receive payment is established, except for dividends from associates, which are deducted from investment in associates and not recognised in profit and loss.

Finance expenses comprise interest expense on loans and borrowings, unwinding of the discount on provisions, dividends on preference shares classified as liabilities, foreign currency losses, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets. All borrowing costs are recognized in the statement of comprehensive income using the effective interest method. Foreign currency gains and losses are reported on a net basis.

■ Reclassifications

A number of items presented in the Group’s 2012 consolidated financial statements have been reclassified to ensure the comparability of information in the consolidated financial statements for the year ended on 31 December 2013. This primarily included classification of interest liability within accounts payable.



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4. Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Group as of 1 January 2013:

> IAS 1 Financial Statement Presentation (Amended) – Presentation of Items of Other Comprehensive Income.

> IAS 19 Employee Benefits (Revised)

> IFRS 7 Financial Instruments: Disclosures (Amended) - Offsetting Financial Assets and Financial Liabilities

> IFRS 13 Fair Value Measurement

> IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

> Annual Improvements to IFRSs – 2009 – 2011 Cycle

The adoption of standards and interpretations is described below:

IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1

The amendments to IAS 1 introduce a grouping of items presented in OCI. Items that will be reclassified (‘recycled’) to profit or loss at a future point in time (e.g., net loss or gain on AFS financial assets) have to be presented separately from items that will

not be reclassified (e.g., revaluation of land and buildings). The amendments affect presentation only and have no impact on the Group’s financial position or performance.

IAS 19 Employee Benefits (Revised)

IAS 19 initiates a number of amendments to the accounting for defined benefit plans, including actuarial gains and losses that are now recognised in other comprehensive income (OCI) and permanently excluded from profit and loss; expected returns on plan assets that are no longer recognised in profit or loss, instead, there is a requirement to recognise interest on the net defined benefit liability (asset) in profit or loss, calculated using the discount rate used to measure the defined benefit obligation, and; unvested past service costs are now recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. Other amendments include new disclosures, such as, quantitative sensitivity disclosures. Above amendments have no impact on the Group’s financial position or performance.

IFRS 7 Financial Instruments: Disclosures (Amended) - Offsetting Financial Assets and Financial Liabilities

These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g. collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for



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all recognized financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. The effect of this amendment has no impact on the Group’s financial position or performance.

IFRS 13 Fair value measurement

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not impacted the fair value measurements carried out by the Group.

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

This interpretation applies to waste removal (stripping costs) incurred in surface mining activity, during the production phase of the mine. The interpretation addresses the accounting for the benefit from the stripping activity. The effect of this interpretation has no impact on the Group’s financial position or performance.

The IASB has issued the Annual Improvements to IFRSs – 2009 – 2011 Cycle, which contains amendments to its standards and the related Basis for Conclusions. The annual improvements project provides a mechanism for making necessary, but non-urgent, amendments to IFRS. The effect of these improvements is summarized below:

IAS 1 Clarification of the Requirement for Comparative Information (Amendment)

These amendments clarify the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The amendments clarify that the opening statement of financial position (as at 1 January 2012 in the case of the Group), presented as a result of retrospective restatement or reclassification of items in financial statements does not have to be accompanied by comparative information in the related notes.

As a result, the Group has not included comparative information in respect of the opening statement of financial position as at 1 January 2012. The amendments affect presentation only and have no impact on the Group’s financial position or performance.

IAS 16 Property, Plant and Equipment:

This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. This improvement has no impact on the Group’s financial position or performance.



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IAS 32 Financial Instruments, Presentation:

This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. This improvement has no impact on the Group’s financial position or performance.

IAS 34 Interim Financial Reporting:

The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures.

The Group has also early adopted the following standards:

IAS 28 Investments in Associates and Joint Ventures (Revised)

As a consequence of the new IFRS 11 Joint arrangements and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates, has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. This improvement has no impact on the Group’s financial position or performance.

IFRS 10 Consolidated financial statements and IAS 27 Separate Financial Statements

IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also addresses the issues raised in SIC-12 Consolidation – Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 require management to exercise significant judgment to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard has no impact on the currently held investments of the Group.

IFRS 11 Joint Arrangements

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The new standard has no impact on the Group’s financial position or performance.



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IFRS 12 Disclosures of Interests in Other Entities

IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The amendment affects presentation only and has no impact on the Groups financial position or performance.

Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)

The IASB issued amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities. The amendments change the transition guidance to provide further relief from full retrospective application. The date of initial application’ in IFRS 10 is defined as ‘the beginning of the annual reporting period in which IFRS 10 is applied for the first time’. The assessment of whether control exists is made at ‘the date of initial application’ rather than at the beginning of the comparative period. If the control assessment is different between IFRS 10 and IAS 27/SIC-12, retrospective adjustments should be determined. However, if the control assessment is the same, no retrospective application is required. If more than one comparative period is presented, additional relief is given to require only one period to be restated. For the same reasons IASB has also amended IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities to provide transition relief. The effect of these amendments has no impact on the Group’s financial position or performance.

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

The amendment applies to a particular class of business that qualify as investment entities. The IASB uses the term ‘investment entity’ to refer to an entity whose business purpose is to invest funds solely for returns from capital appreciation, investment income or both. An investment entity must also evaluate the performance of its investments on a fair value basis. Such entities could include private equity organisations, venture capital organisations, pension funds, sovereign wealth funds and other investment funds. Under IFRS 10 Consolidated Financial Statements, reporting entities were required to consolidate all investees that they control (i.e. all subsidiaries). The Investment Entities amendment provides an exception to the consolidation requirements in IFRS 10 and requires investment entities to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them. The amendment also sets out disclosure requirements for investment entities. The effect of these amendments has no impact on the Group’s financial position or performance.

IAS 36 Impairment of Assets (Amended) – Recoverable Amount Disclosures for Non-Financial Assets

These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognised or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. The Group has early adopted these amendments to IAS



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36 in the current period since the amended/additional disclosures provide useful information as intended by the IASB. Accordingly, these amendments have been considered while amending accounting policies and disclosures for impairment of non-financial assets.

■ Standards Issued but not Yet Effective

The Group has not yet adopted any other standard, interpretation or amendment that was issued but is not yet effective. The Group is in the process of assessing the impact of these amendments on its next annual financial statements. The Group intends to adopt these standards, if applicable, when they become effective.

Standards, amendments and interpretations to existing standards that are not effective yet and have not been early adopted by the Group:

Issued by the IASB and adopted by the European Union

IAS 32 Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 (effective on or after 1 January 2014)

These amendments clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2014.

Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) (effective for annual periods beginning on or after 1 January 2014)

The amendments provide an exception to the requirement to discontinue hedge accounting in certain circumstances in which there is a change in counterparty to a hedging instrument in order to achieve clearing for that instrument. The amendments are applied retrospectively, in accordance with the requirements of IAS 8 for changes in accounting policy. The amendments are, in effect, a relief from the hedge accounting requirements, and will allow entities to better reflect hedge relationships in the circumstances in which the novation exception applies. The amendment has no impact on the Group.

Issued by the IASB but not yet adopted by the European Union

IFRS 9 Financial Instruments – Classification and Measurement (tentatively effective for annual periods beginning on or after 1 January 2018)

IFRS 9, as issued, reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase



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of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but will not have an impact on classification and measurements of financial liabilities. The Group will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued.

IFRIC Interpretation 21 –Levies (effective for annual periods beginning on or after 1 January 2014)

IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. These amendments are not expected to impact the Group’s financial position or performance.

IAS 19 Defined Benefit Plans: Employee Contributions (Amendments) (effective for annual periods beginning on or after 1 July 2014)

The pronouncement amends IAS 19 Employee Benefits (2011) to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service, in that contributions, can, but are not required, to be recognised as a reduction in the service cost in the period in which the related service is rendered.

Annual Improvements to IFRSs 2010–2012 Cycle (effective for annual periods beginning on or after 1 July 2014)

This publication is expected to set out minor amendments to IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38.

IFRS 2 Share-based Payment

Amends the definitions of ‘vesting condition’ and ‘market condition’ and adds definitions for ‘performance condition’ and ‘service condition’ (which were previously part of the definition of ‘vesting condition’).

IFRS 3 Business Combinations (with consequential amendments to other standards)

This improvement clarifies that contingent consideration that is classified as an asset or a liability shall be measured at fair value at each reporting date.

IFRS 8 Operating Segments

Aggregation of operating segments requires an entity to disclose the judgements made by management in applying the aggregation criteria to operating segments.

Reconciliation of the total of the reportable segments’ assets to the entity’s assets

Clarifies that an entity shall only provide reconciliations of the total of the reportable segments’ assets to the entity’s assets if the segment assets are reported regularly.



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IFRS 13 Fair Value Measurement (amendments to the basis of conclusions only, with consequential amendments to the bases of conclusions of other standards)

This improvement clarifies that issuing IFRS 13 and amending IFRS 9 and IAS 39 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting if the effect of not discounting is immaterial.

IAS 16 Property, Plant and Equipment

This improvement clarifies that when an item of property, plant and equipment is revalued the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount.

IAS 24 Related Party Disclosures

This improvement clarifies that an entity providing key management personnel services to the reporting entity or to the parent of the reporting entity is a related party of the reporting entity.

IAS 38 Intangible Assets

This improvement clarifies that when an intangible asset is revalued the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount.

Annual Improvements to IFRSs 2011–2013 Cycle (effective for annual periods beginning on or after 1 July 2014)

This publication is expected to set out minor amendments to IFRS 1, IFRS 3, IFRS 13 and IAS 40:

IFRS 1 First-time Adoption of International Financial Reporting Standards (changes to the Basis for Conclusions only)

This improvement clarifies that an entity, in its first IFRS financial statements, has the choice between applying an existing and currently effective IFRS or applying early a new or revised IFRS that is not yet mandatorily effective, provided that the new or revised IFRS permits early application. An entity is required to apply the same version of the IFRS throughout the periods covered by those first IFRS financial statements.

IFRS 3 Business Combinations

This improvement clarifies that IFRS 3 excludes from its scope the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

IFRS 13 Fair Value Measurement

This improvement clarifies that the scope of the portfolio exception defined in paragraph 52 of IFRS 13 includes all contracts accounted for within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet the definition of financial assets or financial liabilities as defined in IAS 32 Financial Instruments: Presentation.



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IAS 40 Investment Property

This improvement clarifies that determining whether a specific transaction meets the definition of both a business combination as defined in IFRS 3 Business Combinations and investment property as defined in IAS 40 Investment Property requires the separate application of both standards independently of each other.

IFRS 14 Regulatory Deferral Accounts (effective for annual periods beginning on or after 1 January 2016)

IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for ‘regulatory deferral account balances’ in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.

During the year ended 31 December 2013 the Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.



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5. Significant Accounting Judgments, Estimates and Assumptions

The Group makes a number of assumptions and estimates, which may affect the reporting of assets and liabilities in the next financial year. Estimates and assumptions are continuously assessed and are based on the management experience and other factors, including expectations of future events, and are reasonable under the circumstances. In addition to these estimates, management also relies on certain judgments in applying the accounting policies. Most significant judgments, which affect the amounts recorded in the consolidated financial statements, and estimates, which may result in significant adjustment of the carrying value of assets and liabilities in the next financial year are presented below.

■ Business Valuation and Impairment Test

The preparation of the 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 date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates. The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

The following methodologies (in the course of priority) were applied to most assets valuations:

> market valuation;

> discounted cash flow (DCF) method;

> multiples method.

In most cases the asset value obtained using the primary method is controlled using a secondary method. If the controlling method produces a result which is different from that obtained using the primary method, the following algorithm is used:

> the assumptions used in the primary and controlling methods are double-checked;

> the factors causing the variation are tried to be determined.

In case of identification of objective factors explaining the variation in valuation results, the result produced by the primary method shall be used. In the absence of objective factors explaining the difference in valuation results, the average of the two value estimates is used. Valuation techniques are in part based on assumptions that are not supported by observable market prices or rates. Management believes that changing any such assumption would not result in a significantly different value.



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Management has made a number of judgments, estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRS. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

■ Construction Type Contracts

The Group applies judgments in measuring and recognizing contracts accounted for in accordance with IAS 11 Construction Contracts. Revenue from construction contracts is recognized in the amount referred to the stage (percent) of the work performed depending on the completion of the contract. The percentage of completion is determined based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

■ Provision for Doubtful Accounts Receivable

Provision for doubtful accounts receivable is based on the assessment of probability of collecting receivables from certain counterparties. In case of overall deterioration of the customers’ solvency or when an actual outstanding debt exceeds the estimated level, the actual results may differ from these estimates.

■ Contingent Tax Liabilities

Russian tax legislation is subject to varying interpretations and changes occur frequently. When the Group’s management believes that it is highly probable that tax authorities may challenge the Group’s interpretation of the legislation applied and its position as related to the accuracy of tax calculation and payment, an appropriate provision is formed in the consolidated financial statements.

■ Litigations

The Group’s management exercises considerable judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities.

Judgment is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and quantifying the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, if available, or with the support of outside consultants, such as actuaries or legal counsel. Revisions to the estimates may significantly affect future operating results.



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6. Segment Information

For management purposes, the Group is organized into business units based on their products and services, and has two reportable operating segments which are Seismic segment and Data processing and interpretation (DPI) segment. Seismic segment includes conducting seismic works with the purpose of search and exploration of oil and gas fields, comprising oilfield seismic works in two or three dimensions, field seismic works in a land-sea transit zone. DPI segment includes processing of seismic and geophysical data, structural interpretation of results of processing, dynamic processing and interpretation of results of processing.

Information on transactions of the holding and managerial companies which conduct managerial services and financial and investment activities was included into the Corporate block, that

is not separate operating segment. Information on transactions of the non-core companies (subsidiaries) was included into the Other block, that is not separate operating segment.

Transfer prices between Seismic segment, DPI segment and Corporate block are on an arm’s length basis in a manner similar to transactions with third parties. Internal revenues and expenses primarily pertain to management services rendered by Corporate block to Seismic segment and DPI segment. In the periods presented below, the Group operated in the Russian Federation and Kazakhstan.

Segment information for years ended 31 December 2013 and 2012 by segment is as follows:

For year ended 31 December 2013: Seismic segment DPI segment Others Corporate blockAdjustments and

eliminations Total

Revenue 585,338 21,451 356 101 – 607,246

Revenues from transactions with other operating segments of the Group

2,809 11,487 2,038 31,698 (48,032) –

Cost of sales (453,726) (20,548) (2,802) – – (477,076)

Intersegment expenses (43,103) (4,386) (533) (10) 48,032 –

Gross profit/(loss) 131,612 903 (2,446) 101 – 130,170

Selling, general and administrative expenses (40,458) (4,115) (775) (23,099) – (68,447)

Other operating income 6,143 43 1,059 181 – 7,426

Other operating expense (13,225) (693) (1,465) (902) – (16,285)

Operating profit/(loss) 84,072 (3,862) (3,627) (23,719) – 52,864



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eliminations Total

Revenue 591,211 15,952 457 862 – 608,482

Revenues from transactions with other operating segments of the Group

1,063 3,214 861 31,869 (37,007) –

Cost of sales (472,332) (15,387) (2,081) – – (489,800)

Intersegment expenses (34,999) (1,870) (26) (112) 37,007 –

Gross profit/(loss) 118,879 565 (1,624) 862 – 118,682

Selling, general and administrative expenses (51,473) (3,235) (1,137) (18,500) – (74,345)

Other operating income 9,057 1,172 2,138 1,682 – 14,049

Other operating expense (15,679) (219) (391) (750) – (17,039)


Calculation of the adjusted EBIT and adjusted EBITDA from operating profit/(loss):


eliminations Total


Restructuring and redundancy costs 3,426 464 810 – – 4,700

Transaction related expenses – – – 1,763 – 1,763

Loss from the contract in Yemen 273 – – – – 273

Distribution of Corporate overheads (20,369) (746) – 21,115 – –

Adjusted EBIT 67,402 (4,144) (2,817) (841) – 59,600

Depreciation of property, plant and equipment 64,089 1,365 1,531 135 – 67,120

Amortization of intangible assets 626 2,246 – 86 – 2,958

Loss/(gain) on disposals of property, plant and equipment and other assets

2,944 (68) (1) 228 – 3,103

Adjusted EBITDA 135,061 (601) (1,287) (392) – 132,781



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eliminations Total


Restructuring and redundancy costs 7,043 – – – – 7,043

Transaction related expenses – – – 1,677 – 1,677

Loss from the contract in Yemen 1,817 – – – – 1,817

Distribution of Corporate overheads (16,204) (437) – 16,641 – –

Adjusted EBIT 53,440 (2,154) (1,014) 1,612 – 51,884

Depreciation of property, plant and equipment 61,621 578 685 140 – 63,024

Amortization of intangible assets 903 2,327 – 42 – 3,272

Loss/(gain) on disposals of property, plant and equipment and other assets

698 (39) 273 (9) – 923

Adjusted EBITDA 116,662 712 (56) 1,785 – 119,103

Restructuring and redundancy costs were incurred in connection with the ongoing process of integration and optimization of two seismic businesses merged in late 2011. During the 2013 this process continued resulting in the downsize of administrative personnel as well as disposal of non-core fixed assets which were not expected to be occupied or utilised on the basis going forward in amounts of 2,877 and 1,823, respectively (2012: 2,311 and 4,732).

During the year ended 31 December 2013 and 2012, the Group’s revenue analyzed by geographical area was as follows:

2013 2012

Russia 580,688 583,374


Total 607,246 608,482

As of 31 December 2013 and 2012 the Group’s goodwill, intangible assets, property, plant and equipment and investments in associates analyzed by geographical area were as follows:

31 December

2013 2012

Russia 592,120 606,834


Total 620,029 636,795

In 2013, the Group earned transaction revenues from operations each exceeding 10 percent of the Group’s consolidated revenues with four major customers in the amounts of 126,742, 68,059, 58,840 and 58,635, reported within revenues from field seismic operations (2012: two customers in the amounts of 80,054 and 75,534).



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7. Goodwill

The table below presents movement in the carrying amount of goodwill:

Carrying amount

As at 31 December 2011 116,787

Translation difference 7,011


Translation difference (8,913)


For impairment testing purposes, goodwill acquired as a result of the business combination was attributable to one separate cash-generating unit – Seismic.

Recoverable amount of the cash generating unit has been determined by calculating value-in-use using cash-flow projections up to 2018 and terminal value of working capital and non-current assets as of the projection period end. A pre-tax discount rate of 16.3% (2012: 15.0%) derived from the weighted average cost of capital has been applied to the projected cash-flows. These calculations are based on 5-year projections and all the assumptions in relation to production volumes and pricing growth rates are determined by reference to management’s past experience and industry forecasts. Terminal growth rate of 2.0% has been applied. The terminal growth rate used is consistent with the forecasts included in industry reports.

In calculating the value-in-use of the assets, the following assumptions have been regarded as most significant: marginal income, discount rates and the growth rate used to extrapolate cash flows beyond the planned period.

Risks inherent in the oil service industry are directly related to economic conditions in the oil sector shaped by global oil prices. The key factors of risk include slumping oil prices, which cause oil companies to sharply cut their exploration costs and minor investors to quit the industry. In addition, these trends are exacerbated by deteriorating customer solvency leading to growth in receivables and a slower turnover or shortage of working capital and ultimately triggering growth in payables.

As at 31 December 2013, the Group determined that the recoverable amount of seismic assets exceeds the carrying amount of the unit and, therefore, no impairment on this unit was recognized.

With regard to the assessment of value in use cash-generating units, management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of the unit to materially exceed its recoverable amount.

No impairment for seismic assets was recognized in 2012.



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8. Material Partly-owned Subsidiaries

Financial information of subsidiaries that have material non-controlling interests is provided below:

Proportion of equity interest held by non-controlling interests:

NameCountry of incorporation and operation 2013 2012

OJSC Geotech Seismic Services Russian Federation 88.41% 88.41%

JSC Azimuth Energy Services Kazakhstan 84.18% 95.21%

OJSC Yeniseigeofizika Russian Federation 41.76% 44.33%

Accumulated balances of material non-controlling interest:

2013 2012

OJSC Geotech Seismic Services 27,230 27,660

JSC Azimuth Energy Services 10,390 3,492

OJSC Yeniseigeofizika 10,352 8,315

Profit/(loss) allocated to material non-controlling interest:

2013 2012

OJSC Geotech Seismic Services 1,627 746

JSC Azimuth Energy Services (9) 206

OJSC Yeniseigeofizika 1,441 1,501



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The summarised financial information of these subsidiaries is provided below. This information is based on amounts before inter-company eliminations.

Summarised statement of profit or loss for 2013 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Revenue 270,053 31,697 31,844

Cost of sales (215,193) (28,153) (28,442)

Administrative expenses (20,918) (3,779) (1,207)

Other operating expense, net (3,803) (656) (749)

Finance (expense)/income, net (4,432) 2,653 (318)

Net foreign exchange loss (1,202) (1,906) (2)

Profit/(loss) before tax 24,505 (144) 1,126

Income tax (10,463) 90 1,349

Profit/(loss) for the year 14,042 (54) 2,475

Total comprehensive income 14,042 (54) 2,475

Attributable to non–controlling interests 1,627 (9) 1,441

Summarised statement of profit or loss for 2012 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Revenue 223,697 28,310 36,253

Cost of sales (180,862) (25,109) (34,337)

Administrative expenses (22,122) (2,437) (1,620)

Other operating (expense)/income, net (13,626) 187 3,679

Finance (expense)/income, net (3,369) 2,228 (399)

Net foreign exchange (loss)/gain (112) 1,725 2

Profit/(loss) before tax 3,606 4,904 3,578

Income tax 2,831 (606) (882)

Profit/(loss) for the year 6,437 4,298 2,696

Total comprehensive income 6,437 4,298 2,696

Attributable to non–controlling interests 746 206 1,501



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Summarised statement of financial position as at 31 December 2013 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Property, plant and equipment, intangible assets and other non–current assets 381,140 51,097 14,911

Inventories, receivables, cash and cash equivalents and other current assets 167,675 21,611 20,045

Loans and borrowings, promissory notes and finance lease liabilities (187,445) – (5,882)

Deferred tax liabilities, net (16,263) (1,921) (1,168)

Accounts payable and other current liabilities (110,160) (5,110) (10,132)

Total equity 234,947 65,677 17,774

Attributable to shareholders of the IG Seismic Services plc 207,717 55,287 7,422

Non–controlling interest 27,230 10,390 10,352

Summarised statement of financial position as at 31 December 2012 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Property, plant and equipment, intangible assets and other non–current assets 240,951 56,649 15,969

Inventories, receivables, cash and cash equivalents and other current assets 166,778 21,869 22,140

Loans and borrowings, promissory notes and finance lease liabilities (100,001) – (10,330)

Deferred tax liabilities, net (6,571) (2,045) (2,726)

Accounts payable and other current liabilities (62,504) (3,580) (10,117)

Total equity 238,653 72,893 14,936

Attributable to shareholders of the IG Seismic Services plc 210,993 69,401 6,621

Non–controlling interest 27,660 3,492 8,315

Summarised cash flow information for year ending 31 December 2013 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Operating 82,231 619 1,717

Investing (13,497) (4,826) (93)

Financing (69,012) 3,000 –

Net (decrease)/increase in cash and cash equivalents (278) (1,207) 1,624



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Summarised cash flow information for year ending 31 December 2012 OJSC Geotech Seismic Services JSC Azimuth Energy Services OJSC Yeniseigeofizika

Operating 18,290 7,410 2,429

Investing (62,965) (5,044) 156

Financing 42,135 (901) (3,513)

Net (decrease)/increase in cash and cash equivalents (2,540) 1,465 (928)

9. Intangible Assets Other than Goodwill

As of 31 December

2013 2012

Development costs 2,614 4,608

Software 10,917 11,245

Other 1,032 924

Total cost 14,563 16,777

Less: accumulated amortization (5,088) (4,648)

Total net book value 9,475 12,129



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10. Property, Plant and Equipment

Property, plant and equipment as at 31 December 2013 comprised the following:

Buildings and structures

Machinery and equipment Vehicles Other

Construction in progress Total

Gross book value

Balance as at 31 December 2012 126,742 387,063 99,263 9,015 4,526 626,609

Additions 7,201 75,305 17,231 793 170 100,700

Transfers 520 3,448 105 193 (4,266) –

Disposals (1,801) (9,535) 497 124 – (10,715)

Translation difference (8,113) (31,542) (9,860) (1,876) (211) (51,602)

Balance as at 31 December 2013 124,549 424,739 107,236 8,249 219 664,992

Accumulated depreciation and impairment

Balance as at 31 December 2012 (21,881) (92,797) (36,655) (3,611) – (154,944)

Depreciation charge (8,348) (45,314) (11,539) (1,177) – (66,378)

Disposals 372 5,078 360 28 – 5,838

Translation difference 1,722 7,854 5,086 640 – 15,302


Net book value





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Buildings and structures

Machinery and equipment Vehicles Other

Construction in progress Total

Gross book value


Additions 2,841 52,306 5,978 1,933 4,287 67,345

Transfers 1 – – 17 (18) –

Disposals (4,798) (14,291) (4,433) (602) (8) (24,132)

Translation difference 7,176 19,680 4,836 358 100 32,150


Accumulated depreciation and impairment


Depreciation charge (7,815) (41,782) (12,271) (1,692) – (63,560)

Disposals 1,449 8,052 2,457 502 – 12,460

Translation difference (1,160) (4,195) (1,443) (213) – (7,011)


Net book value



Property, plant and equipment as at 31 December 2012 comprised the following:

The Group leases production equipment under a number of finance lease agreements. At the end of each of the leases the Group has the option to purchase the equipment at a beneficial price.



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The following is the analysis of the property, plant and equipment under finance leases recognized in Property, plant and equipment:

As of 31 December

2013 2012

Buildings and structures – 1,491

Machinery and equipment – 9,100

Vehicles 433 12,737

Other – 1,615

Total cost 433 24,943

Less: accumulated depreciation (73) (6,626)

Total net book value of leased property 360 18,317

Collateral

Properties with a carrying amount of 17,018 are subject to a registered debenture to secure bank loans (2012: 52,684) (Note 31).



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11. Investments in Associates

The Group’s equity associates were as follows:

As at 31 December

2013 2012

OJSC Sibneftegeofizika 39.5% 39.5%

OJSC Stavropolneftegeofizika 25.4% 25.4%

Movements in the carrying value of the Group’s investments in associate are summarized in the table below:

2013 2012

Carrying amount at the beginning of the year 29,203 21,574

Share in profit, net of income tax 3,988 6,399

Translation difference (2,332) 1,230

Carrying amount at the end of the year 30,859 29,203

Summarized statement of financial position of OJSC Sibneftegeofizika

As at 31 December

2013 2012

Non–current assets 52,914 51,827

Current assets 65,015 51,144

Total assets 117,929 102,971

Non–current liabilities (21,210) (36,191)

Current liabilities (55,721) (34,066)

Total liabilities (76,931) (70,257)

Summarized statement of comprehensive income of OJSC Sibneftegeofizika

2013 2012

Revenues 84,316 65,084

Profit for the period 12,564 16,349



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Summarised cash flow information of OJSC Sibneftegeofizika for year ending 31 December

2013 2012

Operating 11,174 6,386

Investing (2,999) (2,452)

Financing (11,194) (581)

Net (decrease) / increase in cash and cash equivalents

(3,019) 3,353

Summarized statement of financial position of OJSC Stavropolneftegeofisika

As at 31 December

2013 2012

Non–current assets 6,706 7,177

Current assets 4,789 7,322

Total assets 11,495 14,499

Non–current liabilities (902) (1,061)

Current liabilities (7,053) (5,546)

Total liabilities (7,955) (6,607)

Summarized statement of comprehensive income of OJSC Stavropolneftegeofisika

2013 2012

Revenues 10,022 15,653

Loss profit for the period (3,838) (233)



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12. Income Tax

Income tax (expense)/benefit for the years ended 31 December comprised the following:

2013 2012

Current income tax expense (57) (1,816)

Provisions and others 1,173 (1,123)

Deferred income tax (expense)/benefit (17,589) 11,547

Total income tax (expense)/benefit (16,473) 8,608

Reconciliation of effective tax rate is presented below:

2013 2012


Income tax (20% from Russian operations) (779) (783)

Deferred tax assets on tax loss not recognized (61) (1,347)

Adjustments in respect to current income tax of previous years

1,173 (72)

Deferred tax expense related to Group restructuring (13,640) –

Recognised deferred tax asset on tax loss for the prior periods

– 5,760

Other non–deductible (expenses)/income (3,166) 5,050

Income tax (expense)/benefit (16,473) 8,608

In the context of the Group’s current structure, tax losses and current tax assets of the different subsidiaries may not be set off against current tax liabilities and taxable profits of other subsidiaries and, accordingly, taxes may accrue even where there is a net consolidated tax loss. Therefore, deferred tax asset of one subsidiary of the Group is not offset against deferred tax liability of another subsidiary.

In Cyprus losses in respect of the years up to 2008, which were not set off against profits up to the years 2013, may not be carried forward to the year 2014 according to Cyprus tax legislation. As far as the Russian subsidiaries are concerned, tax loss carry forwards available for utilization expire in 2014-2023. Certain deductible temporary differences, unused tax losses or credits for which no deferred tax asset is recognised as of 31 December 2013 amounts to 7,043 (31 December 2012: 6,735).

At 31 December 2013, there was no recognised deferred tax liability (2012: Nil) for taxes that would be payable on the unremitted earnings of the Group’s subsidiaries. The Group has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future to the full extent. As of 31 December 2013 temporary differences associated with investments in associates, for which no deferred tax asset is recognised amount to 3,252 (31 December 2012: 7,500).



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Deferred tax relates to the following:

Consolidated statement of financial position

As at 31 December

2013 2012

Deferred tax assets and liabilities

Trade and other receivables 1,325 2,751

Inventories 1,019 21,871

Trade and other payables 185 985

Provisions 405 572

Tax loss 35,018 18,389

Other items 268 6,017

Property, plant and equipment (43,356) (48,107)

Trade and other receivables (32,176) (24,852)

Other items (775) (225)

Net deferred tax liabilities (38,087) (22,599)

Reflected in the statement of financial position as follows:

Deferred tax assets 7,200 12,580

Deferred tax liabilities (45,287) (35,179)



184

Consolidated income statement

2013 2012

Deferred tax assets


Inventories (23,681) 6,440

Trade and other payables (909) (1,418)

Provisions (190) (611)

Tax loss 18,885 5,927

Other items (6,530) 3,310

Deferred tax liabilities

Property, plant and equipment 5,395 12,173


Other items (622) 1,447

Deferred income tax (expense)/benefit (17,589) 11,547

The table below presents movement in the deferred tax positions:

2013 2012

Net deferred tax liability as at the beginning of the period (22,599) (33,788)

Deferred income tax (expense)/benefit for the period (17,589) 11,547

Translation difference (recognized in Other comprehensive income) 2,101 (358)

Net deferred tax liability as at end of the period (38,087) (22,599)



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13. Inventories

Inventories at 31 December comprised the following:

2013 2012

Raw materials, fuel and spare parts (net of provision for obsolete and slow–moving items)

63,855 67,160

Work–in–progress 1,626 2,093

Finished goods and goods for resale 2,657 1,020

Total 68,138 70,273

The amount of inventories recognized in cost of sales in 2013 and 2012 was 99,057 and 98,210 respectively. The amount of provision for inventory obsolescence was 1,364 as at 31 December 2013 (31 December 2012: 1,006).



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14. Accounts Receivable and Prepayments

Trade and other receivables as at 31 December comprised the following:

2013 2012

Financial receivables:

Trade receivables (net of bad debt provision) (Note 30) 44,714 65,005

Other receivables 4,452 8,738

Non-financial receivables:

Amounts due from customers for construction works 162,341 143,348

Advances issued 19,609 13,499

Total 231,116 230,590

Trade receivables are non-interest bearing and are normally settled within 12 months from the origination date. Receivables are presented net of provision for impairment of 7,601 and 5,081 as at 31 December 2013 and 31 December 2012, respectively.

See below the movements in the provision for impairment of receivables and prepayments:

At 31 December 2011 6,479

Charge for the period 1,791

Written off for the period (2,904)

Translation difference (285)


Charge for the period 5,355

Written off for the period (2,237)

Translation difference (598)




187

15. Other Financial Assets

Financial assets as at 31 December comprised the following:

Loans and receivables 2013 2012

Loans issued 5,163 5,368

Interest receivable on loans issued 1,803 1,374

Other financial assets – 20

6,966 6,762

Loans issued to third and related parties are unsecured and mature within one year and bear interest rate between 12% and 14%.



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16. Cash and Cash Equivalents

Cash and cash equivalents as at 31 December comprised the following:

2013 2012

Cash in hand 71 115

Cash denominated in RUR 12,929 14,014

Cash denominated in USD 354 124

Cash denominated in EUR 53 26

Cash denominated in other currencies 1,015 1,735

Short–term deposits in RUR 7,313 2,601

Total 21,735 18,615

Cash represents current bank accounts that carry no interest and demand deposits maturing in less than 3 months.



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17. Share Capital

The following table summarizes the change in share capital for the years ended 31 December 2013 and 2012 as follows:

Number of shares, units Share capital

Share premium

Balance at 31 December 2012 20,833.400 208 443,712

Balance at 31 December 2013 20,833.400 208 443,712

■ GDRs

On 11 December 2012 the Company’s GDRs were admitted to the Official List maintained by the UK Listing Authority and started trading on the London Stock Exchange’s main market at 8.00 a.m. London Time on 12 December 2012.

The authorised share capital of the Company consists of 20,833.400 shares with a nominal value of US$0.01 per share. All authorised shares are issued and fully paid.

Global Depositary Receipts (GDRs) of the Company representing two ordinary shares each are listed and traded on the Main Market of the London Stock Exchange under the ticker IGSS (Bloomberg: IGSS LI, Reuters: IGSSq.L).

There were no changes in share capital through year ended 2013. Share premium reserve is not available for distribution by way of dividends.

■ Reverse Acquisition Reserve

As of 31 December 2010, 2009 and 1 January 2009 reverse acquisition reserve comprises the difference between the issued share capital of IGSS and issued share capital of GEOTECH Holding JSC. As of 31 December 2011 reverse acquisition reserve represents the aggregate of fair value of consideration transferred in a business combination and issued share capital of GEOTECH Holding JSC immediately before the business combination less issued share capital of IGSS as of 31 December 2011.

■ Other Non-distributable Reserves

In March 2008 the parent Company of GEOTECH Holding JSC, Geotech Oil Services Holding contributed cash to its wholly owned subsidiary in the amount of 94,979 which was recorded in Equity as other non-distributable reserves as of 1 January 2009.



190

18. Loans and Borrowings

Long-term and short-term borrowings as at 31 December comprised the following:

Security Effective interest rate 2013

Current liabilities

Short–term bank loans secured 9.5%–12.0% 47,038

Current portion of long–term bank loans 16,426

Total short-term loans and borrowings 63,464


Long–term bank loans secured 2.5%–11.4% 225,073

Bonds 10.5% 90,556

315,629

Total loans and borrowings 379,093

Security Effective interest rate 2012

Current liabilities

Short–term bank loans secured 9.8%–12.5% 125,851

Current portion of long–term bank loans 35,929

Total short-term loans and borrowings 161,780


Long–term bank loans secured 9.5%–12.5% 225,799

225,799

Total loans and borrowings 387,579



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At the beginning of 2013 the Group entered into non-revolving credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15%. Amount of raised financing amounts to 14,900,000 euro (19,485,000 US dollars) and matures in December 2017. The liability over this credit line in the amount of 12,274 and 4,095 is reported within Long-term bank loans and Current portion of long-term bank loans, respectively as of 31 December 2013.

The Group also has liability under credit agreement with Raiffeisenbank denominated in Russian rubles at interest rate calculated as one month MOSPRIME plus 6%. The loan was fully prepaid in September 2013.

All other loans and borrowings presented in the table above are at fixed rates and are denominated in Russian rubles.

In October 2013, the Group placed issue of documentary interest-bearing non-convertible bearer stock bonds (registration number 4-01-55378-E) with a total nominal value of

RUB 3 billion and the term of 5 years. Coupon payments are made on semi-annual basis of fixed rate of 10.5% p.a. for the first six coupon periods. These bonds provide for early repurchase in three years at the request of a bond holder as set in the respective offering documents. According to the Bank of Russia Board of Directors Resolution as of 29 November 2013, bonds were included into the Lombard List.

Long-term loans and borrowings are payable in the following periods:

2013 2012

1 to 2 years 78,729 120,947

3 to 5 years 236,900 104,852

Total 315,629 225,799

Pledge obligations and description of security are disclosed in Note 31.



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19. Finance Leases

The Group leases property, plant and equipment under finance lease agreements denominated in RUR.

As at 31 December 2013, the amount of future minimum payments under the financial lease agreements and the discounted value of the minimum lease payments are as follows:

Future minimum

lease payments Future interest

Present value of minimum

lease payments

Within one year 153 29 124

In the second to fifth years inclusive 65 6 59

218 35 183

The weighted average rate implicit in the lease agreements as at 31 December 2013 was 15%.

As at 31 December 2012, the amount of future minimum payments under the financial lease agreements and the discounted value of the minimum lease payments are as follows:

Future minimum

lease payments Future interest

Present value of minimum

lease payments

Within one year 6,136 500 5,636

In the second to fifth years inclusive 333 28 305

6,469 528 5,941

The weighted average rate implicit in the lease agreements as at 31 December 2012 was 19%.



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20. Accounts Payable and Promissory Notes Payable

Trade and other payables as at 31 December comprised the following:

2013 2012

Trade payables 96,097 91,293

Payables to employees 25,783 21,584

Advances received 12,088 8,943

Amounts due to customers under construction contracts

3,488 2,759

Interest payable 3,484 273

Other payables 2,258 3,627

Total 143,198 128,479

Trade payables are non-interest bearing and are normally settled on 60-day terms. Other payables are non-interest bearing and have an average term of six month.

Interest rate

As at 31 December

2013 2012

Long-term promissory notes payable:

Notes issued to third parties for equipment (Sercel)

7.0% 5,001 9,719

Notes issued to third parties for equipment (UniQ)

4.0% 13,317 –

Short-term promissory notes payable:

Notes issued to third parties for equipment (Sercel)

7.0% 5,166 5,621

Notes issued to third parties for equipment (UniQ)

4.0% 8,882 –

32,366 15,340

Effective interest rate for promissory notes issued by the Group in 2013 was 7% while contractual interest rate comprised 4%. At the initial recognition the effect of discounting of underlying liability to fair value in the amount of 1,226 was recognised within finance income. Effective interest rate accrual in the amount of 408 was recognized within finance expense for the year ended 31 December 2013.



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21. Other Taxes Payable

As at 31 December other taxes and charges payable comprised the following:

2013 2012

Value–added tax 31,461 32,380

Personal income tax 5,734 7,373

Social taxes 5,144 4,541

Property tax 915 1,267

Other taxes and charges 868 1,086

Total 44,122 46,647



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22. Construction Type Contracts

The Group sales include revenues from seismic contracts of 573,016 and 578,686 for 2013 and 2012, respectively.

The status of construction type contracts in progress as at 31 December 2013 and 2012 is presented below:

As at 31 December

2013 2012

Costs under contracts in progress at the reporting date 296,848 184,808

Recognized profits less recognized loss under contracts in progress at the reporting date 78,604 40,558

Balance of advances received 11,767 5,503

The recognition of the revenue from construction type contracts uncompleted as of 31 December 2013 is primarily based on an assumption of profit margins expected to be earned from inception to completion of each contract. If such expected profit margin reduced by one percentage point, the revenue from such contracts would reduce by 4,927.



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23. Revenue

Revenue for the years ended 31 December comprised the following:

2013 2012

Field seismic operations 573,016 578,686

Data processing and interpretation 23,291 20,836

Other revenue 10,939 8,960

Total 607,246 608,482

24. Cost of Sales

Cost of sales for the years ended 31 December comprised the following:

2013 2012


Materials and supplies 99,057 98,210


Oilfield services 63,543 83,565

Transportation services 29,047 23,557

Other third parties services 18,899 17,687

Operating lease payments 13,163 15,810


Other 3,847 3,652

Total 477,076 489,800



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25. General and Administrative Expenses

General and administrative expenses for the years ended 31 December comprised the following:

2013 2012


Third party services 9,363 8,576

Taxes, other than income tax 4,738 5,434

Operating lease 2,862 2,869


Bank charges 1,481 895

Bad receivables write–offs and provisions 5,118 9,921

Auditors’ audit fees 1,046 1,236

Auditors’ other fees 390 160

Other 3,302 3,500

Total 68,447 74,345

Transaction costs in relation to LSE listing and related continuing obligations compliance of 1,763 (2012: 1,677) have been included within third party services.



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26. Other Operating Income and Expenses

Other operating income for the years ended 31 December comprised the following:

2013 2012

Write–off of accounts payable 2,439 6,291

Restoration of provision for probable claims from tax authorities

1,790 810

Penalties and fines received 47 79

Other income 3,150 6,869

Total 7,426 14,049

Other operating expenses for the years ended 31 December comprised the following:

2013 2012

Loss on disposals of property, plant and equipment and other assets

4,926 5,655

Penalties and fines paid 3,866 6,087

VAT not recoverable 1,038 541

Administrative charges and state duties 774 338

Net loss from service plants and facilities 773 628

Welfare assistance 738 534

Free–of–charge transfer of assets and charity 720 307

Provision for probable claims from tax authorities 223 409

Other expenses 3,227 2,540

Total 16,285 17,039

Penalties and fines relate to additional charges for breach in contractual obligations with counterparties in a normal course of business and additional non-income tax charges.



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27. Finance Income and Expenses

Finance income and expenses for the years ended 31 December comprised the following:

2013 2012

Interest income 579 802

Total finance income 579 802

Interest expense on loans and borrowings 43,670 43,022

Bank charges on loans and loan accounts 995 1,163

Interest expense on finance lease 452 2,056

Other finance expenses 619 –

Total finance expenses 45,736 46,241

Net finance expenses 45,157 45,439

28. Foreign Exchange

Transactions in foreign currencies are translated to the respective functional currency, which is Russian Ruble for the subsidiary companies located in the Russian Federation and Kazakh Tenge for subsidiary companies located in the Kazakhstan at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date.

Foreign currency differences arising in translation are recognized in the statement of comprehensive income. Net foreign exchange loss for year ended 31 December 2013 recognized in profit or loss amounted to 7,802 (gain for the year ended 31 December 2012 amounted to 1,608).



200

29. Earnings per Share

The information on the earnings and number of shares used for determining basic and dilutive earnings per share is presented below:

2013 2012

Net (loss)/profit attributable to ordinary equity holders of the parent from continuing operations (16,647) 11,840

Effect of dilution – –

2013 2012

Weighted average number of ordinary shares for basic earnings per share 20,833.400 20,833.400

Effect of dilution – –

No other transactions with ordinary shares or potential ordinary shares were performed between the reporting date and the date of these financial statements.



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30. Financial Instruments

The Group’s financial instruments comprise accounts receivable and payable, loans receivable, loans payable, and cash, which arise directly from its operations. During the reporting year, the Group did not undertake trading in financial instruments.

■ Credit Risk

Financial assets, which potentially subject Group entities to credit risk, consist principally of trade receivables (Note 14).

The Group has policies in place to ensure that sales of services are made to customers with an appropriate credit history. The carrying amount of accounts receivable, net of provision for impairment of receivables, represents the maximum amount exposed to credit risk. The Group has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the allowance already recorded.

The aging of accounts receivable at the reporting date was:


Gross Impairment Gross Impairment

Current 49,166 – 73,743 –

Past due 4,894 4,894 2,702 2,702

■ Interest Rate Risk

The Group is not engaged in hedging activity to mitigate its interest rate risk. At the beginning of 2013 the Group entered into non-revocable credit line agreement with Sberbank denominated in euro at interest rate calculated as EURIBOR plus 2.15%. The following demonstrates the sensitivity of the Group’s profit before tax to a reasonably possible change in EURIBOR rate, with all other variables held constant.

Change of EURIBOR rate, % Effect on income/(loss) before tax

'+0.1% (15)

'–0.1% 15

■ Market Risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. The Group manages market risk through periodic estimation of potential losses that could arise from adverse changes in market conditions.



202

■ Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial liabilities. Liquidity requirements are monitored on a regular basis and management ensures that sufficient funds are available to meet any commitments as they arise.

The following table shows the undiscounted contractual maturities of liabilities as at 31 December 2013:

0-6 months 7-12 months 2 to 5 years Over 5 years Total

Bank loans 8,540 54,924 225,073 – 288,537

Bonds – – 91,661 – 91,661

Interest payable 19,471 14,245 45,191 – 78,907

Notes payable 7,035 7,035 18,509 – 32,579

Lease liabilities 62 62 59 – 183

Trade accounts payable 96,097 – – – 96,097

Other payables 2,258 – – – 2,258

Total 133,463 76,266 380,493 – 590,222



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0-6 months 7-12 months 2 to 5 years Over 5 years Total

Bank loans 113,884 47,896 225,799 – 387,579

Interest payable 20,082 12,722 9,353 – 42,157

Notes payable 2,902 2,719 9,719 – 15,340

Lease liabilities 3,382 2,254 305 – 5,941

Trade accounts payable 91,293 – – – 91,293

Other payables 3,627 – – – 3,627

Total 235,170 65,591 245,176 – 545,937

The following table shows the undiscounted contractual maturities of liabilities as at 31 December 2012:

■ Foreign Currency Risk

The Group is not engaged in hedging activity to mitigate its foreign currency risk. The Group limits foreign currency risk by monitoring changes in exchange rates in the currencies in which its loans and borrowings are denominated.

As at 31 December 2013 and 2012 the Group has the following USD – denominated financial assets and liabilities:

As at 31 December

2013 2012

Accounts receivable 1,300 5,322

Advances issued 591 –

Finance lease liability – (2,788)

Promissory notes (23,542) –

Accounts payable (28,417) (7,114)

As at 31 December 2013 and 2012 the Group has the following EUR – denominated financial assets and liabilities:

As at 31 December

2013 2012

Accounts receivable – 15

Loans and borrowings (11,913) –

Accounts payable – (13,063)



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■ Sensitivity Analysis

The following demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities). For the purposes of the Group’s capital management, capital includes issued capital, share premium and all other equity reserves attributable to the equity holders.

As at 31 December 2013, it is estimated that a 10.21% strengthening of RUR against USD, with all other variables held constant, would increase the Group’s profit for the year by 5,253 (2012: 10.72% increase by 480). This analysis has been determined assuming that the change in foreign exchange rates had occurred at the reporting date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.

Respective 20.00% and 10.72% weakening of the RUR against USD at 31 December 2013 and 2012 would have had the opposite effect on the amounts shown above in the amount of 10,291 and 480 respectively, on the basis that all other variables remain constant.

Change of RUR to USD exchange rate, % Effect on income/(loss) before tax

2013 +20.00% (10,291)

–10.21% 5,253

2012 +10.72% (480)

–10.72% 480

The following demonstrates the sensitivity to a reasonably possible change in the EUR exchange rate, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities).

As at 31 December 2013, it is estimated that a 8.63% strengthening of RUR against EUR, with all other variables held constant, would increase the Group’s profit for the year by 1,093 (2012: 9.49% increase by 1,247). This analysis has been determined assuming that the change in foreign exchange rates had occurred at the reporting date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant.



205

Respective 20.00% and 9.49% weakening of the RUR against EUR at 31 December 2013 and 2012 would have had the opposite effect on the amounts shown above in the amount of 2,532 and 1,247 respectively, on the basis that all other variables remain constant.

Change of RUR to USD exchange rate, % Effect on income/(loss) before tax

2013 +20.00% (2,532)

–8.63% 1,093

2012 +9.49% (1,247)

–9.49% 1,247

■ Fair Value of Financial Instruments

The management believes that the fair value of the Group’s financial assets and liabilities approximates their carrying amounts.

■ Capital Management

The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to maintain an optimal capital structure to reduce cost of capital and to support its business and maximize shareholder value.

The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group’s current policy is not to pay any dividends.

The Group monitors capital using a range of ratios, including gearing ratio, which is net debt divided by total equity plus net debt. Within net debt the Group includes loans payable, promissory notes and finance lease obligations, less cash and cash equivalents.

As at 31 December

2013 2012

Loans and borrowings payable 379,093 387,579

Notes issued 32,366 15,340

Finance lease obligations 183 5,941

Less: cash and cash equivalents (21,735) (18,615)

Net debt 389,907 390,245

Total equity 335,497 372,808

Total equity and net debt 725,404 763,053

Gearing ratio 0.54 0.51



206

31. Risks, Commitments and Contingencies

■ Operating Environment of the Group

Whilst there have been improvements in the Russian economic situation, such as an increase in gross domestic product and a reduced rate of inflation, Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

■ Liquidity

The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian Government has introduced a range of stabilization measures aimed at providing

liquidity and supporting debt refinancing for Russian banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Group and its counterparties, which could affect the Group’s financial position, results of operations and business prospects.

While management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.

■ Taxation

Legislation and regulations regarding taxation in Russia continue to evolve. The various legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local, regional and national tax authorities. Instances of inconsistent opinions are not unusual.



207

The current regime of penalties and interest related to reported and discovered violations of Russia’s laws, decrees and related regulations is severe. Interest and penalties are levied when an understatement of a tax liability is discovered. As a result, the amounts of penalties and interest can be significant in relation to the amounts of unreported taxes.

In Russia tax returns remain open and subject to inspection for a period of up to three years. The fact that a year has been reviewed does not close that year, or any tax return applicable to that year, from further review during the three-year period.

The new Russian transfer pricing legislation, which came into force on 1 January 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market price.

The list of “controlled” transactions includes transactions performed with related parties and foreign trade transactions. The adopted Russian transfer pricing rules have considerably increased the compliance burden for the taxpayer compared to the transfer pricing rules which were in effect before 2012 due to, inter alia, shifting the burden of proof from the Russian tax authorities to the taxpayers. Pursuant to the new rules, the taxpayer shall justify the prices applied for such transactions. These rules are applicable not only to the transactions taking place in 2012 but also to the prior transactions with related parties if related income and expenses were recognized in 2012. The new provisions apply for both foreign trade and domestic transactions. For domestic transactions the transfer pricing rules apply only if the amount of

all transaction with related party exceeds RUR 3 billion in 2012, RUR 2 billion in 2013 and RUR 1 billion in 2014 and further. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities. Special transfer pricing rules apply to transactions with securities and derivatives.

In 2013, the Group determined its tax liabilities arising from these “controlled” transactions using actual transaction prices under such loan agreements. As for other controlled transactions, control procedures to ensure consistency between the prices used in the controlled transaction prices and the level of market prices for the purposes of taxation have been developed and approved. The activities performed focus on minimizing tax risks.

Overall, management believes that the Group has paid or accrued all taxes that are applicable. For taxes where uncertainty exists, the Company has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities which were identified by management at the reporting dates as those that can be subject to different interpretations of the tax laws and regulations and are not accrued in the consolidated financial statements for year 2012 and 2013 could be up to 35,847 and 45,581, respectively.



208

■ Compliance with Covenants

The Group is obliged to comply with a number of restrictive financial and other covenants contained in its loan agreements. Such covenants include maintaining certain financial ratios. As of 31 December 2013 and 2012, the Group was in compliance with all restrictive financial and other covenants contained in its loan agreements.

■ Insurance

The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Group property or relating to Group operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.

■ Litigation

Group companies remain as a defendant in legal actions filed through 2011-2014 against them by a number of third parties.

Management believes that there are no current claims outstanding, which could have a material effect on the consolidated results of operations or consolidated financial position of the Group and which have not been accrued or disclosed in these consolidated financial statements.

■ Pledge Obligations

Pledged property, plant and equipment

As at 31 December 2013 the Group entered into a number of loan agreements and revolving credit line agreements, which were secured by the Group’s property, plant and equipment. The carrying value of the property, plant and equipment pledged at the reporting date amounts to 17,018 (2012: 52,684).

Pledged rights to claim cash

As at 31 December 2013 the Group entered into a number of loan agreements and revolving credit line agreements, which were secured by the pledge of property rights representing rights to claim cash under the customer agreements for conducting seismic works. The pledged rights to claim cash at the reporting date amount to 171,627 (2012: 280,654).



209

Pledged shares

For the purpose of presentation in these financial statements, the value of pledged shares is based on the value of net assets (hereinafter, NAV) held by each of its subsidiaries, determined in accordance with International Financial Reporting Standards as at 31 December 2012.

The list and value of shares of subsidiaries, which are pledge obligation for loan agreements are presented below:

> 85.24% shares of OJSC Narian-Marseismorazvedka (as at 31 December 2012, NAV of the shares amounts to 26,506);

> 68.90% shares of OJSC Khantymansiyskgeofizika (as at 31 December 2012, NAV of the shares amounts to 22,580).

In September 2013 the Group and Nomos Bank have concluded additional agreements for the removal of pledge over shares of OJSC Narian-Marseismorazvedka and OJSC Khantymansiyskgeofizika.



210

32. Related Party Transactions

The nature of the related party relationship for those related parties with whom the Group entered into transactions or had balances outstanding at 31 December 2013 and 31 December 2012 are detailed below.

The Group’s related party transactions are disclosed below:

■ Revenue

Associated company

2013 2012

Field seismic operations 678 –

Operating lease services – 282

Companies under control of the controlling shareholder

2013 2012

Operating lease services – 89

Other revenue – 109

Interest income on loans – 305

Total – 503

■ Expenses

Associated company

2013 2012

Services rendered 117 9,620

Companies under control of the controlling shareholder

2013 2012

Interest expense on loans – 17

■ Outstanding Balances

Associated company


Accounts receivable 1,099 336

Advances issued 18 20

Accounts payable (828) (100)

Advances received (49) (52)



211

All outstanding balances with related parties are to be settled in cash or through services rendered in case of advances within six months after the reporting date. None of the balances is secured.

As a result of the Company’s GDRs admission to the London Stock Exchange (Note 17) controlling shareholder ceased to exist effective from December 2012 (see also Note 33).

Pricing policy

Related party transactions are based on market prices and are effected on an arm’s length basis in a manner similar to transactions with third parties.

■ Key Management Personnel

The Company enters into transactions with its directors and other key management personnel in the normal course of business. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly and includes Chief Executive Officer, Executive Director, members of the Board of Directors, Chief Financial Officer and Vice-Presidents of the Company. In 2013, remuneration paid to key management personnel amounted to 3,515 (2012: 2,566).



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33. Events Subsequent to the Reporting Date

■ Financing

During the period subsequent to the reporting date the Group has entered into a number of revocable credit line agreements with Sberbank and Alfa-Bank with aggregated credit limit of 110,170. All financing is RUR denominated, and mature from 30 to 47 months and bear interest rate from 10.65% to 13.5% per annum. The Group has also entered into number of USD denominated non-revocable credit line agreements with Sberbank: 5-year credit line at 10.0% per annum in the amount of 8,149 and 3-year credit line at 9.75% per annum in the amount of 10,003.

■ Shareholder Structure

As of 12 April 2014 Mr. Nikolay Levitskiy became the ultimate controlling shareholder of the Group.



Schlumberger 12.00%




Contacts:

11 B. Savvinsky pereulok, 9th Floor Moscow, Russia, 119435

Telephone: +7 (495) 580 7882 Fax: +7 (495) 580 7883

E-mail: [email protected], [email protected] http://www.igseis.com/

Documents

IG SEISMIC SERVICES