No. 1, 2004
Leonid Fedun, Vice-President of JSC LUKOIL
LUKOIL REACHES FOR NEW HORIZONS
At the end of 2003, JSC LUKOIL was declared the winner of the Best Russian Companies in 2003 contest in the Best Issuer in the Russian Stock Market nomination. The contest was organized jointly by the Russian Union of Industrialists and Entrepreneurs and the Russian Federation Chamber of Commerce and Industry. The nomination was instituted by the Moscow Interbank Currency Exchange.
This prestigious prize proves that our Company still holds a leading place in the Russian oil industry, which is graphically demonstrated by its stable financial position, its capitalization dynamics, the size of its open market borrowings, and the liquidity of its marketable securities.
Leading domestic analysts note that during the past year the Company's shares continued to be in high demand due, among other things, to regular publication of its quarterly and biannual consolidated financial reports drawn up in compliance with the US GAAP standards. The fact that Standard & Poor's raised LUKOIL's credit rating from BB- to BB has helped to increase the volume of trading in the Company's securities to some extent.
The Company's production activity in 2003 was characterized by stable growth in upstream and downstream operations, which provided for optimal business diversification.
The total oil production volume amounted to 81.5 million tons, compared with 78.2 million tons in 2002 as well as 5.5 billion m3 of gas, which is 8% higher than in 2002.
In 2003, LUKOIL refineries processed 42 million tons of crude, the Russian-based ones alone accounting for 32 million tons of oil (0.7 % more than in 2002). Whereas in 2002, LUKOIL exported 34.2 million tons of petroleum products beyond Russia's customs borders, in 2003, this index amounted to 37.5 million tons, respectively.
At the same time, Russian retailers sold 14.2 million tons of Company's petroleum products, 2,4 million tons were sold via the Company's gasoline filling station network.
Successful implementation of LUKOIL's Comprehensive Program for Field Development and Oil Production Optimization in 2003-2005 largely helped to carry out the main production tasks. This program was aimed at enhancing oilfield development efficiency at all stages of operation and boosting oil production by better development process control, higher oil pool development rates, liquid recovery and water injection optimization, and enhanced oil recovery (EOR) and resource-saving processes introduction. So, by implementing the measures set forth by the Program, the LUKOIL group as a whole was able to increase its average daily production to 224,000 tons in 2003, compared with 213,000 tons for the same period of the previous year. Moreover, there is a steady growth trend in the average daily production rate of operating wells, coupled with a reduction in the producing well stock by removing noncommercial producers from service and stabilizing the rate of well stream watering. The most significant increase in well production rates was achieved by JSC Naryanmarneftegaz and JSC LUKOIL-Komi. Another impressive achievement of last year was that the oil production volume amounted to 18.3 million tons thanks to the use of EOR methods.
LUKOIL attaches great attention to expanding and reinforcing its raw material base and is essentially the only Russian oil company to invest heavily in prospecting works in the regions of the country that have just come into its sphere of operation. In the northern part of the Caspian Sea shelf, the Company's efforts have essentially made it possible to discover a new oil- and gas-bearing region, where five large highly productive fields have been opened with actual reserves of 766 million tons of standard fuel. In the Russian North, in the Timan-Pechora oil- and gas-bearing province, the Company discovered new actual reserves in a short time, which made it possible to begin commercial production in this region. LUKOIL's strategy in the Nenets Autonomous Area (NNA) is aimed at significantly increasing investments in prospecting works. In 2003, this made it possible to increase commercial category C1 and C2 reserves to 371.4 million tons and 223.4 million tons, respectively.
During the past year, steadfast efforts continued to implement the program aimed at restructuring the LUKOIL Group and improving the management system. Three committees under the Board of Directors have been particularly active: the Strategic Planning Committee, the Personnel and Awards Committee, and the Auditing Committee.
Despite these impressive figures, it should be noted that one of the very important achievements of 2003 was that the Company finally shifted from gross indices to financial indices. Today the main thing for us is not simply to increase hydrocarbon reserves and oil production and refining volumes, but primarily to organize economically efficient upstream and downstream operations. This will also help solve the important task of shareholder profit optimization.
A vital aspect of our activity was adopting the LUKOIL Group Strategic Development Program for 2004-2013 at the Board of Directors meeting on November 21, 2003.
This program is aimed at significantly raising the return on investment by means of careful and painstaking selection of the Company's investment projects and at increasing the cash flow by intensifying production at existing fields in the short term and accelerating the introduction of new efficient projects in the Timan-Pechora oil- and gas-bearing province, on the shelf of the Caspian Sea, and abroad; implementing our gas production program; and ensuring more efficient distribution of crude oil and petroleum products by improved logistics aimed at reducing transportation costs and increasing petroleum products exports and sales through the gasoline filling stations network in the Refining and Sales business segment.
The LUKOIL Group's management strategy for 2004-2013 consists in raising the interest of the Company's strategic business segment executives in the economic results of their activity, and drawing up an investment plan based on a project-wise approach. Plans for 2004-2006 provide for selling several non-core assets, transferring to tender-based procurement of goods and services, reducing borrowing costs, and creating a reserve fund in order to insure against the risk of an abrupt drop in oil prices and to redeem corporate shares from the market should the situation prove favorable.
In compliance with this program, there are plans in the LUKOIL Group as a whole to increase reserves by at least 120 million tons of standard fuel in 2004. The factor of production increment via commercial category reserves increase will amount to 140%. In 2004, oil production by LUKOIL affiliates and subsidiaries, taking into account their share in product sharing projects, is designated at 84.9 million tons. Gas production is planned at a level of 5.8 billion m3. Approximately 46 million tons of crude oil are to be processed by the Company's refineries in 2004.
There are also plans to optimize the petroleum product supply system by giving it a face lift. The petroleum product retail sales volume for 2004 has been set at 5.8 million tons, taking into account franchising.
Nonproduction spending, primarily transportation costs, must still be cut back. The Company will achieve this by creating its own export infrastructure, in particular, by marine terminals in Varandei (NAA), Vysotsk (the Leningrad Region), and so on.
The volume of the LUKOIL Group's investment program for 2004 is estimated at $2.5 billion. Approximately 70% of this amount will be used to implement investment projects in the Prospecting and Oil and Gas Production business sector.
Based on the tasks set forth in the strategy, consistent efforts are currently being made to build on all the positive trends that began in 2003.
In his Message to the Federal Assembly, Russian Federation President Vladimir Putin set the ambitious goal of doubling the country's gross domestic product in ten years. There can be no doubt that Russian oil companies, including LUKOIL, will make a very significant contribution to resolving this rather challenging task.
