No. 2, 2008

Within the next few years the Caspian Region will come to occupy an important place in LUKOIL's strategic program for increasing oil and gas production

Within the next few years and in the longer term, the Caspian Region will become a key offshore oil and gas producer for LUKOIL, the leader of Russia’s oil and gas complex. By now the Company has already brought out 10 promising prospects and discovered 6 fields off the Caspian shore containing among them over 2 billion tons of oil equivalent.

Unique projects

In many respects, the Company’s Caspian projects are unique in Russia’s recent record of subsoil use as regards the amount of research done, the effectiveness of geological survey operations carried out and the significance of the hydrocarbon resources discovered. Since the end of 1995, the Company has conducted a geological-geophysical survey of the entire 63,000 km² Russian sector of the Caspian without mobilizing any public funds for the purpose.

For the first time in the history of Russia’s offshore shelf development, integrated surface facilities complete with a common transport system and on-shore installations will be erected on several fields. One of the fields, Khvalynskoye, will be equipped with surface facilities on a fifty-fifty basis with the Republic of Kazakhstan. The Atash structure in the Atashsky license area within the bounds of Kazakhstan’s offshore space has been prepared for deep drilling.

Exploratory success ratio has been 100%, which means that each field was struck at the first try. Incidentally, incremental cost per ton of oil equivalent turned out to be just a fraction that registered by leading Western oil companies.

Extension efficiency constituted over 17,200 tons per 1 meter of progress. Evaluation of the resource base goes to show that a new oil- and gas-bearing subprovince has been discovered in the Russian section of the Caspian to become, at short notice, a major source of boosting hydrocarbon production in a region of strategic importance to Russia.

Sweeping accomplishments

The Company has worked out the Northern and Central Caspian offshore field development concept which is being continuously adjusted to suit the findings of geological survey. In 2007, the Company emphasized the following priorities taking into consideration the latest geological survey findings as well as hydro-meteorological, seismic and other conditions of the region: construction of about 30 ice-resistant offshore fixed drilling platforms for the recovery and treatment of stratum products from depths of down to 40 meters; and construction of an integrated 1,000 km long system for oil and gas transportation from Northern Caspian fields.

The Yury Korchagin field located on the Northern Caspian shelf at a depth of 11-13 meters below sea level 240 km away from the Port of Makhachkala is the first to go into commercial production in 2009. It is to produce 1.5 million tons of oil as early as 2009. Its infrastructure will comprise an ice-resistant platform complete with all its facilities and the central processing platform. LUKOIL will start the development of the field with sinking 26 producing, three water-injection and one gas-injection wells. The field’s projected production potential is 36 billion m³ of gas and 31 million tons of oil.

The next to come on stream is the Vladimir Filanovsky field, Russia’s largest of those discovered over the past 20 years. At the end of 2005, the pioneer well started producing free-flowing low-density, pure sweet oil at the rate of over 800 t/d and at a pressure of 0.2 MPa. Such flow rates are extremely rare in Russia, the national average being 10,5 t/d. This field accounts for nearly 70%, or over 215 million tons, of LUKOIL’s recoverable oil reserves. Maximum production level will amount to 10 million tons/y.

Along with Kazakhstan’s Kazmunaygaz public company, LUKOIL is drawing up front-end engineering design documents for the construction of another major gas-condensate field – Khvalynskoye.

The field, discovered in 2002, is located in the Northern Caspian, 260 km away from Astrakhan, at a depth of 25-30 meters. Its proved reserves amount to over 320 billion m³ of natural gas, 17 million tons of condensate, and 36 million tons of oil. At a preliminary estimate, the Khvalynskoye field will give LUKOIL 323 billion m³ of gas altogether. Annual gas output is expected to amount to over 8 billion m³. The field is expected to come on stream in 2014-2015.

The Company’s Northern Caspian fields are to go into commercial operation one by one, and its concept of their construction provides for their close functional integration especially as regards their transport infrastructure uses.

Attaining strategic objectives

Engineering decisions for construction of the Northern and Central Caspian fields and structures are made with regard for natural, climatic and ecological factors, such as glacial conditions, seismic activity, local conservation areas, prohibition on casing-head gas flaring, and observation of the Company’s zero-discharge principles. In line with strict environmental requirements made on oil and gas companies in the Caspian and seeking to optimize costs, LUKOIL is making a sustained effort to bring technological operations at sea – in particular, the use of large-tonnage ships – to a minimum.

Over the period of 1997-2007, within the framework of the exploration monitoring program, the Company has arranged 48 comprehensive marine expeditions which embraced practically the entire water space of the Western Caspian, and 23 expeditions to drilling operations areas. In order to replenish the Caspian Sea’s sturgeon population LUKOIL has been financing the breeding of 2 million sturgeon fry a year since 2001. As a result, the development by the Company of offshore Caspian oil fields has no adverse effect on the preservation and reproduction of fish population in that region. Since the onset of the Northern and Western Caspian offshore field projects realization, LUKOIL has spent over 382 million rubles on environmental protection.

By now, 6 fields with an estimated production potential of about 12 million tons of oil and 12 billion m³ of gas a year have been discovered there, and LUKOIL plans to build integrated surface facilities on several of them complete with a common transport system and shore installations.

Geological exploration in the Caspian is proceeding fast and efficiently. Another 10 promising structures have been found off the Northern and Central Caspian shore in addition to those discovered there earlier. The commissioning of new fields will make it possible to double, at least, the production of Caspian oil and to increase natural gas production 50% by the year 2020 compared with the 2015 figures.

The Company’s No. 1 strategic objective is to build up its growth potential and, consequently, to augment the volume and to improve the quality of its resource base. Geological prospecting is among the key means toward that end. The Company prospectors’ record of achievement features, in particular, the discovery of a new major oil- and gas-bearing province in the Russian sector of the Caspian.