No. 2, 2009

Oil of Russia magazine talks to Ravil Maganov, LUKOIL First Executive Vice-President

Despite substantial manifestations of the ongoing world economic crisis LUKOIL Group maintains and reaffirms its leading position within the fuel and energy complex of Russia. The resource, production and financial potential of the Company remains sustainable and offer a good outlook for its long-term development.

Q: The LUKOIL Group is continuously expanding the geography of its operations. Are there any areas that could compete with Western Siberia in terms of oil and gas production and reserves in the long run?

A: Western Siberia is a unique area. By Western Siberia I mean not just the areas adjacent to the cities of Lan­gepas, Kogalym, Pokachi and Uray, but also the assets of the Company in the Yamal-Nenets Autonomous Area.

At the moment I do not see any assets of a similar resource and production potential as those located in Western Siberia.

Q: Is LUKOIL planning to develop any new areas in Russia, say, in Eastern Siberia or the Russian Far East?

A: Eastern Siberia and the Far East are very complex. Naturally, we carry out regular surveys there, but analysis data have shown that so far there is little hope for high reserves increment in the area. In addition, every large reservoir available in Eastern Siberia has its own license holder already. Therefore, we are exploring this territory jointly with Gazprom as it is already operating in the area. I believe the Arctic shelf offers good prospects. True, the latest edition of the Law on Subsoil says that only companies with more than 51% of shares owned by the RF Government shall be entitled to operate on the Arctic shelf. Nonetheless, we hope that operations in the Arctic will pay back. We may be involved in consortiums with government-owned companies as no other Russian company has a similar expertise in offshore operations as we have.

Today, we are producing hydrocarbons in the Baltic. In the Caspian Sea, we have discovered a unique oil- and gas-bearing province on the Russian shelf which was previously given up as hopeless. Its reserves add up to over a billion tons of oil equivalent. Next year the first field will be put on production. We will be able to produce up to 16-18 million tons of oil and up to 25-26 billion m3 of natural gas annually. In 2008, we opened the Zapadno-Rakushechnoye field, a joint venture with Rosneft and Gazprom. We see the sea shelf as promising areas in Russia today, above all, in the Barents and Kara seas; the Chukchee Sea is of some interest to us as well.

Q: To continue with the subject... the Bolshekhetskaya Depression, the Timan-Pechora oil-and gas-bearing province, hydrocarbon shelf reserves in the Caspian... Shall we expect similar major discoveries in other areas in the near future?

A: There are some quite good prospects in the Republic of Komi, with large and highly productive reserves. At the moment, LUKOIL continues with detailed appraisal there. We hope that these fields would develop into something more important. Relevant examples are available. For instance, Western Siberia's Bolshekhetskaya Depression, well No. 2099 of the Khalmerpayutinskoye field. According to our geologists' estimates, additional reserves are found below the productive formations with already booked reserves. We will try to reach these reserves through this well, and relevant engineering solutions have been found. Then absolutely new reserves will emerge which would change the general picture of the Bolshekhetskaya Depression. This year, we have completed detailed appraisal of the Severo-Khalmerpayutinskoye field. Previously, its booked reserves amounted to some 5 billion m3 of gas. Today, it is safe to say that there are at least 50 billion m3 of gas there. As work is still in process, the volume of its reserves may prove even bigger. So, in Western Siberia, new reserves may be discovered in areas which already belong to the Company, even if inferior to those in new provinces of the Northern Caspian or the Timan-Pechora oil- and gas-bearing province, but still sufficient to be developed. In addition, reserves of 150 to 200 billion m3 of gas are likely to be discovered in potential locations on Gydansky Peninsula, on Yamal.

Q: Basically, oil production growth is provided for by drilling. What would LUKOIL rely upon if it happens so that the volume of drilling operations is to be reduced?

A: We expect oil production if not to grow then at least to be stabilized whatever the price scenario. But growth seems most likely. It all depends on oil prices. We take every measure to reduce the volume of drilling as much as possible. We are negotiating with our contractors and suggesting that they sacrifice their profit for one year.

We believe that the first half of 2009 will really be a hard time. We suggest operating at, say, zero profitability but retaining the personnel. The price situation is sure to improve and this may happen in the second half of 2009 or may be in 2010. As there cannot be more oil, the recession would gradually decrease, and the economy would grow. At the moment, we are trying to replace outside contractors with teams of the Eurasia drilling company - our main contractor. Some teams will be transferred from Western Siberia partly to the Perm Territory and partly to the Republic of Komi, while some will be drilling in the Caspian Sea at the Yury Korchagin field. Therefore, if drilling is reduced, this will be in the smallest possible measure. Negotiations are underway and I believe will be successfully completed. After all, what can drilling be replaced with? With a focus on geological and technical arrangements we make. And with better quality. And, what is most important, in 2009, the austerity policy should be more rigid and the application of funds more efficient. It is clear that we should spend less on nonproduction costs and review the way reserves are used.

Q: LUKOIL has spent some $2 billion on prospecting works over the past five years. Did this investment pay back and how intensive and successful was the application of state-of-the-art technologies?

A: From 2004 to 2008, we had an increment of 517 million tons of liquid hydrocarbons and 710-715 million tons of oil equivalent, which is a big success. Average reserve renewability over this five-year period was some 123% (reserve increment to production ratio). Our reserves can be described as active: 710 million tons equal approximately 5 billion barrels. If we assume that the price is $2 per barrel, although this is not the real price as such reserves are sold at $4 to 6, you may see for yourself how much it will make. Even if we assume one dollar per barrel, the result is $5 billion. We would have spent that much if we were to buy these reserves. That is why, to my mind, we have the most efficient prospecting and exploration services today. Since 1993, we have had a positive trend in prospecting and we shall continue moving in this direction. To this end we apply new methods both offshore and onshore. The more so as access to these technologies (of domestic and foreign origin) is available.

Q: There was an opinion that LUKOIL made long-term investments in risky projects, for instance, in the Caspian Sea. Is it true today, in a new environment?

A: This region was considered unpromising. But we discovered more than billion-ton reserves there. We intend to get the Vladimir Filanovsky field to produce up to 8 million tons of hydrocarbons within eight years. There are wells with the initial production rate of 2,000 to 2,500 tons. This was a rare case even in Samotlor. These new reserves and fields alone will enable us to maintain and, moreover, increase production which is going down for objective reasons in Western Siberia and Kaliningrad, where the fields have been operated for some 30 years and already entered their advanced stage of development.

Q: Is the Company going to take part in new projects abroad? What regions are of interest to LUKOIL?

A: Yes, we shall participate. Operations abroad account for some 7% of production, or 10.3 million tons of oil equivalent a year (5.3% of liquid hydrocarbons and 5.3% of gas). We expect to reach the level of 14% (including around 4 to 4.5%, of oil and 9.5 to 10% of gas) by 2013.

We have 17 exploration projects, some of which proved successful and some did not. In areas that are new to us conditions are unusual in terms of geology and for that reason operating exposure is higher. While exploration success ratio in Russia is 75%, i.e. three out of four wells provide additional reserves, the figure for such areas is some 42%.

We are implementing projects in both CIS countries and in the Middle East. We have discovered two large fields in Iran and two in Saudi Arabia. Negotiations on an Iraqi project are underway, and we hope they will be successful. A hydrocarbon field was discovered in Columbia. There are some projects in West Africa. To date we have identified two priority areas abroad - West Africa and the Middle East. Among the CIS countries priority goes to Turkmenistan and Uzbekistan.

Q: What portion of profits comes from gas production? Will it change in the future?

A: The share of gas production will grow. While at present it accounts for some 12%, it will go up to about 26% by 2013. This applies not only to overseas projects. We are going to step up production on the Pyakyakhinskoye field in Western Siberia and in the Caspian Sea. The rate of associated petroleum gas recovery will also be increased.

Q: Hydrocarbon fields in Western Siberia were first discovered back in the 1960s. How promising is this region in terms of prospecting?

A: Western Siberia will continue to produce more oil than all other divisions of LUKOIL. As regards reserve increment and prospecting potentialities, as I have already said, it is above all the Bolshekhetskaya Depression in the Yamal-Nenets Autonomous Area. Small discoveries are expected in the Ob area. We expect an increment in natural gas and gas condensate production primarily in Western Siberia.

Q: In the words of your colleagues you are working ahead of time. What is your vision of LUKOIL in five years' time from this perspective?

A: Any person has to think about tomorrow. In five years, the calendar will show the year 2013. I think that by that time we will be producing around 140 million tons of oil equivalent. In 2013, the Vladimir Filanovsky field will be commissioned, full-scale production of hydrocarbons will be launched in the Caspian Sea at the Yury Korchagin field, and the Pyakyakhinskoye field will reach the level of 3.5 billion m3 of natural gas. These are the main points. In addition, we intend to make complete appraisal of the Bayandykskoye field in the Republic of Komi and hopefully we will discover new fields in the Caspian. We will boost the refining sector and start producing only EURO-3, EURO-4 and EKTO fuels. I am sure that in five years we will see these plans successfully implemented.