No.4, 2005

Oil of Russia magazine talks to Vladimir Nekrasov, First Vice-President of LUKOIL

To LUKOIL Group Western Siberia is of special strategic importance. It is there that the Company originated, that most of its personnel were trained, and that its latest oil and gas production technologies were tested. Today, Western Siberia is the main resource base of LUKOIL, the leader of Russia's oil industry. The Company's prospects are largely associated with the further development of that region

Q: LUKOIL-Western Siberia came into being ten years ago. How do you assess its work during this period?

A: JSC LUKOIL-Western Siberia was established on November 16, 1995, by decision of the LUKOIL Board of Directors. It was, and still is, LUKOIL's largest subsidiary. The West-Siberian company accounts for 62% of LUKOIL's entire oil production. It produces oil and gas on the territory of the Khanty-Mansi and Yamal-Nenets Autonomous Areas of the Tyumen Region. The Company includes five territorial production units: Langepasneftegaz, Uray-neftegaz, Kogalymneftegaz, Pokachev-neftegaz and Yamalneftegaz. LUKOIL-Western Siberia was established ten years ago for the purpose of raising oil and gas production in all areas where it operated, including the territories where oil production was started back in the 1960s, such as the Shaim region.

The past years have shown that LUKOIL-Western Siberia has been successfully coping with its tasks. Compared with 1997, its annual oil production has grown by 19%. In 2004 it totaled more than 52 million tons. Associated gas production has increased by almost 40%, reaching nearly 2.5 billion m³. The annual output of marketable products has registered, in the dollar equivalent, an increase of 50%, exceeding the sum of 117 billion rubles. The volume of annual investment is approaching the 30 billion ruble mark.

The Company is doing extensive work in the sphere of environmental protection and industrial safety. Its efforts are applied in accordance with The Program of Ensuring Industrial Safety and Better Working Conditions at JSC LUKOIL's Facilities and The Program of Ensuring the Ecological Safety of Operation by LUKOIL-Western Siberia. I can assure you that today practically all of the Company's projects are the best in Russia and that they hold leading positions in the world as well. We have done tremendous work introducing the latest oil production technologies and equipment. Traditionally, the policy of the Company and the entire LUKOIL Group has been aimed at raising the efficiency of operations and production. At the oil producing territorial units oil recovery efficiency has been steadily rising. Today, it averages 30%, while three years ago it was 28%, and ten years ago - 25%.

Our sustained efforts aimed at raising production efficiency have made it possible in recent years to increase labor productivity by 44%, while cutting back outlays for turning out marketable products by 12%. During the year 2004 the wages of the Company's personnel increased by nearly 30% as compared with 2003. In the level of wages today the Company holds the leading place among the other oil and gas enterprises of the Tyumen North (the Khanty-Mansi Autonomous Area-Yugra and the Yamal-Nenets Autonomous Area). And, of course, we cannot but feel pleased by the fact that the well-being of our personnel has improved even further.

Q: From year to year the LUKOIL Group produces more and more hydrocarbons. Does the LUKOIL-Western Siberia play an important role in that?

A: There is no doubt about that: this company is LUKOIL's main oil and gas production base and is responsible for the growth of its output. In 2004 the Company attained a record production growth - 5,050,000 tons of crude oil. Besides, the Company began producing natural gas on the Yamal peninsula. At present LUKOIL-Western Siberia is working at 43 oil fields. The Company plans to produce over 53.5 million tons of crude oil in 2005. LUKOIL-Western Siberia has managed to attain such a high rate of production growth by improving the technology of geological survey, increasing the oil production rate, and using widely the latest, highly efficient technologies and technical equipment in the construction of oil wells. In realizing these plans, LUKOIL-Western Siberia has been greatly assisted by LUKOIL President Vagit Alekperov. Owing to all that, the Company has been working successfully, and personnel can look to the future with confidence.

Q: To LUKOIL and Russia's oil and gas industry as a whole Western Siberia is of particular significance. How long, do you suppose, will it play the role of Russia's main oil province?

A: Making predictions is a risky undertaking. However, I believe that Western Siberia will always remain the main oil province for Russia - just as Texas is for the United States and the North Sea shelf for Norway. Of course, it is quite possible that new oil fields will be discovered in Eastern Siberia and on the shelf of the Arctic Ocean. However, the already proven reserves of hydrocarbons and the existence of a developed infrastructure and trained personnel make the West-Siberian region quite unique. The mineral raw materials base there is being expanded successfully, advanced production technologies are being introduced, roads and towns are being built, and the professional training of workers is being improved. The prospects of an increase in the "black gold" production in the already-exploited fields of Western Siberia are quite realistic. And that is a most important consideration.

Q: Does LUKOIL-Western Siberia company plan to prospecting for oil and developing new oil fields in Western Siberia?

A: Of course, it does. Today, the company has 18 prospecting blocks in the Uray region, which are in the proximity of the already-discovered fields. This year it is planned to drill three prospecting wells there. The Company will continue exploring the fields in 2006. All of the oil fields discovered as a result of prospecting works will be developed. In order to acquire new promising blocks LUKOIL-Western Siberia plans to take part in bids and auctions held in the Khaty-Mansi and Yamal-Nenets Autonomous Areas.

Q: This year LUKOIL-Western Siberia has started producing gas on the Yamal peninsula. What in your view are the immediate prospects of the operation at the Nakhodkinskoye gas field and in the Bolshaya Kheta depression?

A: With the Nakhodkinskoye gas field having been put into operation, LUKOIL's gas has entered into the unified gas-transporting system of Russia. Under an agreement concluded between LUKOIL and JSC Gazprom, in 2006 Gazprom will be supplied with up to 8 billion m³ of gas. The potential output of gas at the Nakhodkinskoye gas field is 9 billion m³ a year. The fields in the Bolshaya Kheta depression form the basis of the company's future gas business. It is no accident that LUKOIL President Vagit Alekperov has described the start of the development of gas fields on the Gydan peninsula as "an important milestone along the road of LUKOIL's transformation from an oil company into an oil and gas enterprise".

Such projects as the development of Gydan's hydrocarbons resources, starting the exploitation of the Nakhodkinskoye field, and the construction, in permafrost conditions, of the Nakhodka-Yamburg gas pipeline with a 22-km tunnel across the Taz Bay - were all completed by our company within a record period of 14 months. In the harsh conditions of the northern latitudes such projects were realized in Russia for the first time. Yuzhno-Messoyakhskoye is the next field we plan to develop. Under our license obligations, its exploitation is to be started in 2007. The only place in the Bolshaya Kheta depression where crude oil reserves have been discovered is the Pyakyakhinskoye field. It is next to be developed after the Yuzhno-Messoyakhskoye field whose geological model is presently being construed. Exploratory wells will soon be drilled to complete its prospecting. The Khalmerpayutinskoye field has already been prepared for exploitation, and its hydrocarbon reserves have been approved at the State Commission on the Mineral Reserves of the Russian Federation. As for the Vareysky license section, not a single well has been drilled there so far. However, a large number of minor oil-bearing structures are expected to be found there. A prospecting well will have to be drilled to ascertain their potential.

In 2004 alone, investments into the gas production projects in which we are engaged outside the Khanty-Mansi Autonomous Area reached a sum of 30 billion rubles. Meanwhile, the investment program at oil fields - our traditional sphere of activity - has totaled 22 billion rubles.

Q: Western Siberia is one of those places on earth, which have a great diversity of flora and fauna, mostly untouched by civilization. What is the LUKOIL-Western Siberia doing to preserve the natural balance in this unique region?

A: Environmental protection of this wonderful land, ensuring its ecological safety, is a priority task for LUKOIL-Western Siberia. In their activity all of the company's structural divisions are guided by a special ecological safety program which is being elaborated on a yearly basis. The company agrees its program with the state bodies in charge of environmental protection control. In 2004 the outlays for the implementation of the program totaled more than two billion rubles. This year we plan to spend over three billion rubles for the purpose.

One of the measures aimed at ensuring ecological safety is the utilization of associated gas. Today, the enterprises of LUKOIL-Western Siberia utilize about 93% of their associated gas. This enables them to use fuel rationally and to avoid discharging harmful substances produced by the burning of gas into the atmosphere. After being processed by the Lokosovo plant, a specialized enterprise utilizing associated gas, the resulting ecologically safe fuel is widely used for industrial purposes.

All of the company's territorial production enterprises exercise systematic control over the state of the atmosphere, as well as of the soil, surface water reservoirs and bottom sediments at all of the industrial facilities. The environmental protection laboratories of all of the company's structural divisions have the Gosstandart of Russia accreditation certificate. In 2005 the company's quality control system was assessed as corresponding to the requirements of the international standard ISO 9001:2000. This high assessment was made by the international certification body of the Contstand certification center in regard to oil production at the fields of LUKOIL-Western Siberia's territorial production unit Kogalymneftegaz. Taking part in the Yugra-Ecology-2003 international exhibition organized by the government of the Khanty-Mansi Autonomous Area, the LUKOIL-Western Siberia won the first-class diploma For the ecological safety of production. And this year the company has won another first-class diploma at a local territorial contest headed The best environmentally friendly company of the Khanty-Mansi Autonomous Area - Yugra.

Q: In the regions where it is active the LUKOIL Group has assumed socially significant obligations. What humanitarian activity is being carried on by LUKOIL-Western Siberia?

A: I wouldn't call our humanitarian activity "obligations". I'd rather describe it as "a good tradition." After all, the activity of LUKOIL-Western Siberia has always been founded on the principles of social responsibility to the regions where our company is present - the Tyumen Region with its Khanty-Mansi and Yamal-Nenets Autonomous Areas. Our territorial production units are town-forming, and it is quite natural that LUKOIL-Western Siberia is greatly interested in the development of the cities and territories in which it is active. That is the principle we have adhered to since the time our company was founded.

In our social activity we are guided by the watchword: "LUKOIL is one big family". And so today the towns of Kogalym, Langepas, Uray and Pokachy are among the best-provided with all proper amenities and public services in the Khanty-Mansi Autonomous Area - Yugra.

All kinds of humanitarian assistance amounting to a sum of more than 22 million rubles was rendered in the regions where we are active. This policy will remain unchanged in the future. LUKOIL-Western Siberia is active on territories, which are the traditional land of the indigenous peoples of the North. Therefore, LUKOIL-Western Siberia attaches great importance to cooperation with organizations representing these peoples - the Rescue of Yugra association in the Khanty-Mansi Autonomous Area and the Yamal for the Posterity! association in the Yamal-Nenets autonomous area. In 2004 we signed an agreement on cooperation between LUKOIL-Western Siberia and the indigenous peoples of the Russian North, thereby formalizing our long-standing support for their independent national development. Oil production on the ancestral land of the indigenous peoples of the North is conducted on the basis of the Federal Law On Land Traditionally Used by Small Indigenous Nations and by concluding socio-economic agreements with the native population, involving payment of a solid material remuneration for the use of their traditional land. In 2004 LUKOIL-Western Siberia company spent over 131 million rubles to meet all of its economic obligations.

At the Fifth Congress of the Peoples of the North, Siberia and the Far East held in April 2005 the Coordinating Council of the Association of Small Indigenous Nations praised the Company highly for its cooperation and respect shown for the rights of small indigenous nations. The association declared LUKOIL-Western Siberia Russia's best industrial company in 2004. The significant results attained by our company in its work over the past decade confirm the correctness of the sustained development policy pursued by the company's leadership. There is every indication that LUKOIL-Western Siberia will be able to steer the same course in the future, demonstrating its adherence to the high corporate standards both in the production and social spheres of its activity.