No. 2, 2008

Oil of Russia magazine talks to Vladimir Kaluzhenov, General Director of JSC LUKOIL-Severo-Zapadnefteprodukt

LUKOIL-Severo-Zapadnefteprodukt is the biggest LUKOIL subsidiary in the region, currently owning a network of 180 gasoline filling stations. It is planned to increase this figure by 50% up to 2013. During the last year, LUKOIL gasoline filling stations in the region switched to selling Euro 4 diesel fuel and Euro 3 gasoline. The company’s own ecologically clean fuel EKTO is being actively promoted on the market.

Q: The company traces its origins back to LUKOIL-St. Petersburg, which was registered on March 30, 1993, but it has gained visibility on the market for retail fuel sales over the last five years.

А: Indeed, we began developing actively in the Northwest in 2001 and now one in five vehicles in St. Petersburg fills up at LUKOIL filling stations. The restructuring, that involved setting up JSC LUKOIL-Severo-Zapadneftepro-dukt in 2000, was initiated after the parent company set the task of expanding its presence on the market in the Northwest of Russia. For this purpose, the gasoline filling stations, operating in the region under the LUKOIL banner, had to be united under a single management and their network had to be substantially expanded. By late 2001 – early 2002, the Pskov, Novgorod, Karelia and Murmansk subsidiaries had been set up and in November 2007, the Kaliningrad subsidiary. In February-March, the 31 LUKOIL gasoline filling stations operating on the territory of the Kaliningrad Region were merged into LUKOIL-Severo-Zapadnefteprodukt.

Q: Yet simultaneous inclusion of so many gasoline filling stations into your commercial turnover was bound to create additional difficulties?

А: It was not in this case. These were LUKOIL gasoline filling stations that were already in operation, with strong teams and experienced management. It was an intragroup transaction. At the time these filling stations were transferred to us, there was no drop in sales volumes in fact.

True, the Company acquired not only a new subsidiary, but also a new line of business – retail and export sale of domestic liquefied gas. As part of the Kaliningrad subsidiary, we also absorbed a gas filling station. Yet we were prepared for this, since we are planning to build gas filling stations in the Leningrad Region.

Q: What was the source of the 23-percent rise in retail fuel sales in 2007?

А: Factorial analysis shows that over 40% of the increase was provided by new gasoline filling stations, while the rest of the increase resulted from strengthening of the LUKOIL brand, active engagement of corporate customers and individual drivers.

Q: The company seems to be concentrating on petroleum products sales by gasoline filling stations, rather than large or small wholesales?

А: If we compare the total volume of petroleum product sales, large and small wholesale and retail, in 2007 retail accounted for 54%, against 45% the previous year. This shows that the share of retails is growing.

Q: Where do you intend to focus the retail development this year?

А: First of all in St. Petersburg: during the year, we are planning to complete construction of 27 gasoline filling stations. We are considering building 14 gasoline filling stations in the Leningrad Region, 4 in the Pskov subsidiary and 3 in the Republic of Karelia. We are also looking into the possibility of locating filling stations on the Kaliningrad bypass highway being planned.

Q: The investment program for this year seems to envisage primarily new construction?

А: Of the planned investments, 70% will be in the construction of new gasoline filling stations.

Q: Apart from filling stations construction, where do you plan to direct your investment flows?

А: This year we will continue the program for expanding and modernizing tank farms. For the purpose of supplying the gasoline filling station network with fuel, in 2006-2007 the Company has increased substantially its own fuel storage capacities. We acquired two tank farms outside St. Petersburg and commissioned the first stage of the Pskov area tank farm after reconstruction. Today we have a network of tank farms covering Murmansk, Petrozavodsk, St. Petersburg, and the Pskov and Leningrad Regions.

Q: Do the projects include any fundamentally new or unusual ones?

А: The project for two water-side filling stations in St. Petersburg can, without exaggeration, be called unique. These are automatic filling stations – one on the bank of the Neva and one on Bolshaya Nevka (a branch of the Neva as it flows into the Bay of Finland). Both are in the city center. They are intended for refueling of both motor vehicles and water craft: privately owned launches, motor vessels and water buses. It is not profitable to maintain stationary filling stations on the shore to provide fuel for water transport, since the navigation period in St. Petersburg is only from May to October, inclusively, which is why we decided to build dual-purpose automatic gasoline filling stations.

Q: Are there any special environmental requirements on these filling stations?

А: Although the filling stations are automatic (meaning that they do not envisage the presence of an operator), during the navigation period there will be a company employee present at each of them. In addition, at the wharf there will be a duty launch, oil-spill booms (sort of strings of floats to act as a barrier to potential oil spills), absorbents capable of rapidly absorbing the oil-spill from the surface and other specialized equipment will be at the ready. On the shore, there will be special reservoirs for fuel made in Eastern Europe under a U.S. license.

We have four years’ experience of operating a petroleum products terminal on the Bay of Finland, which is the subsidiary of LUKOIL-Severo-Zapadnefteprodukt.

It should be stressed, moreover, that the environmental safety technology there has been brought to perfection.

Q: The Government of Moscow, judging from announcements in the press, has officially prohibited the sale of motor fuel below the Euro 3 standard in the capital. If the St. Petersburg authorities introduce a similar ban, will this create any difficulties for your company?

А: We have a vested interest in strengthening of the environmental legislation. LUKOIL, as a vertically integrated company – from oil well to gasoline filling station – engages in production and refining of oil, transportation of fuel and its sale at its own gasoline filling stations. The structure of the LUKOIL Group embraces the most advanced refineries in Russia, which produce world standard fuel. As the environmental requirements are tightened, LUKOIL’s products will be in greater demand. Our company is already implementing a program for transferring to sale of new types of fuel. Since last year, we have been selling Euro 4 standard diesel fuel at all our filling stations in the Northwest of the country and only Euro 3 standard gasoline has been on sale at our filling stations in St. Petersburg and the Leningrad Region for over a year now. Moreover, from April 2008, all the Company’s gasoline filling stations have transferred to such fuels.

Q: In what way is the new LUKOIL fuel currently promoted on the market as EKTO specific?

А: In the spring of 2006, LUKOIL put a new brand on the domestic market – EKTO. This is our own fuel, which the filling stations in the Northwest began receiving in December of the same year. EKTO, meaning Ecological Fuel with cleansing properties, is obtained on the basis of Euro 3 standard gasoline and Euro 4 standard diesel fuel. EKTO gasolines and diesel fuel contain special additives. The components of the additives have a powerful cleansing and anticorrosive action, keeping the engine and the fuel system perfectly clean. In addition, the additives ensure more effective combustion of the fuel. The carcinogenic emissions from EKTO are 15-20% lower. From March 2008, two-thirds of the filling stations in St. Petersburg and the Leningrad Region were transferred to selling EKTO.

Q: What are the factors behind the growing strength of the LUKOIL Group brand name?

А: First of all, there is the high quality of the products. The LUKOIL refineries are continuously improving production and we are intensifying quality control at all stages. Since 2006, we have been developing annual quality control programs for petroleum products supplied to tank farms and filling stations. In accordance with the program for this year, we are continuing to provide filling stations with instruments for testing the quality of fuel deliveries, are planning to acquire a second mobile laboratory for express analysis and are modernizing the laboratory at one of the tank farms outside St. Petersburg.

Further evidence of the growing strength of the LUKOIL brand is provided by the recent conclusion by LUKOIL of a contract with the Toyota works in St. Petersburg. We are now, also, concluding a contract with the St. Petersburg representative office of General Motors. Both these manufacturers fill the tanks of their new vehicles with LUKOIL fuel before they are sold.

Q: Many firms today are developing target programs for attracting and keeping customers. What about you?

А: In conjunction with the St. Petersburg representative office of LUKOIL-Inter-Card, we are developing a Loyalty Program. The idea is to issue personified discount cards, thereby creating a unified client base: all the information about how often each card-holder driver fills up, with which fuel and at which gasoline filling stations will be gathered at the processing center. On the basis of the results, we will be able to maintain contact with the most active and regular customers – offering them additional discounts and benefits. We intend to set up an incentive, that is, gift fund to demonstrate our gratitude for their loyalty to LUKOIL and, at the same time, encourage further purchases. The program will be introduced in St. Petersburg and the Leningrad Region before the end of the year. In the future, we intend to expand the program’s coverage to all regions in which we operate.

Q: LUKOIL is recognized as a socially responsible company. How would you explain this concept?

А: Two aspects need to be identified here – social responsibility in relation to our employees and in relation to the inhabitants of the territories where LUKOIL is developing its business. The absolute majority of our employees are trade union members. The company (as the employer) and the trade union have signed a collective bargaining agreement which protects the rights of the employees. The commitments within the framework of the collective bargaining agreement are fulfilled on the basis of corporate programs drawn up by the trade union and the company. Our employees enjoy substantial social benefits.

As for social responsibility toward the region’s residents, this involves concern for the environmental safety of facilities, regular payment of all taxes and charitable aid. Charitable work constitutes a separate subject. Let me just note that we are governed by two main principles: we support programs that fit within the social policy of the region’s administration and provide assistance on a long-term basis. The priorities are children’s and medical institutions.

Q: Are you satisfied with your relations with the administrations of the constituent entities of the Russian Federation where you operate?

А: I believe we always manage to reach a mutual understanding. LUKOIL has concluded cooperation agreements with the Government of the Leningrad Region and the Government of St. Petersburg, and we live up to our commitments. The company is a conscientious taxpayer. Last year, we remitted 740 million rubles to the budgets of all levels and this year we plan to remit 1 billion rubles. In the spring of 2007, LUKOIL-Severo-Zapadnefteprodukt was awarded a commemorative of the Governor of St. Petersburg and the title of Best Taxpayer.

Our company is also a major employer. At the beginning of 2008, our staff numbered almost 3,000 and this figure will rise up to 4,500 by the end of the year (the Kaliningrad subsidiary included). At the same time, qualified experts are in demand. Since last year, our Study Center has had a license to train gasoline filling station operators and the training is provided at the company’s expense.

Q: The growth rate of the number of filling stations in St. Petersburg is double the increase in the number of vehicles. In mid-2007, the city had 348 filling stations, while by the end of 2008 they are expected to number 450. How confident can you fill given this increasingly fierce competition?

А: For all the rise in the number of filling stations in the region, over the last five years our filling stations have each pumped a stable average of about 10 tons of fuel per day. This means that our customers remain loyal to us.

We enjoy trust on the part of both wholesale buyers and filling stations customers. We operate with confidence, moreover, because we know that we will never let the customer down in terms of either the quality of our output or timeliness of deliveries. After all, we are supported by a huge team of high-class LUKOIL experts and our success is a result of the targeted work of the entire LUKOIL company.