No. 3, 2009

In spite of the global economic crisis, LUKOIL is achieving good results in its multifaceted activities

The Annual General Meeting of Shareholders of JSC LUKOIL, held on June 25, 2009 in Moscow, gave a discerning assessment of everything achieved over the previous year and reaffirmed the Company's strategy under the conditions of fierce competition on the domestic and global oil markets.

Weighty achievements

LUKOIL President Vagit Alekperov reported on the Company's performance in 2008 and further prospects for its development. He noted in particular that the Company's net profits last year amounted to $9,144 million and returns on invested capital equaled 17.4%. In spite of high capital expenditures on stabilization of oil production on old fields and development of new ones, implementation of the refinery upgrade program, extension of the filling station network and expansion of its operations, the free cash flow reached a record $3,775 million.

The report stressed in particular that in the upstream business segment, the Company spared no effort to increase the volume of highly profitable production in new regions and stabilize production in traditional ones, while abiding strictly by the strategic goal of building up the resource base to secure sustainable long-term growth.

In 2008, hydrocarbon reserves were assessed under conditions of a sharp deterioration of the situation on global commodity markets. The substantial drop in oil prices resulted in some reserves being transferred from the "proved reserves" category to resources. Even so, there were no plans to bring them into production in the near future and their write-off would not affect the Company's current plans. If oil prices go up again, the reserves withdrawn for economic reasons are expected to be recategorized as proved ones.

No matter how difficult it was to compensate for the natural drop in production in traditional areas, LUKOIL managed to demonstrate positive dynamics in hydrocarbon production, thanks to development investments made earlier. The 2008 results indicated that production went up by almost 1% to reach 2.19 million barrels of oil equivalent a day for the Group as a whole.

Last year proved to be a difficult one for the Company from the point of view of sustainable production growth but, thanks to the startup of the Yuzhno-Khylchuyuskoye field, the Group's biggest field in Timan-Pechora, we managed to compensate substantially for the natural production drop in Western Siberia. The startup of production on the Yuzhno-Khylchuyuskoye field was an important event for the Company and heralded a new stage in cooperation with our American partner ConocoPhillips, which owns a 30% stake in the project. In 2009, the field is nearing its planned production level, which will help fulfill the Company's strategic goal of expanding production in new regions.

Moreover, hydrocarbon production growth for LUKOIL was largely due to gas production under the Kandym-Khauzak-Shady project in Uzbekistan. The Khauzak field was put on stream in November 2007 and last year already achieved its planned production level. The Company was also active in other projects of the international upstream business segment. For instance, the Group acquired the company SNG Holdings Ltd., which owns a 100-percent stake in the production sharing agreement for the Southwest Gissar and Ustryurt region fields in the Republic of Uzbekistan. In addition, LUKOIL and PdVSA signed an agreement on joint exploration of the Junin-3 block in Venezuela. In all, hydrocarbon production under international projects has increased by almost a quarter.

A matter of strategic importance

Striving to overcome the negative trends, the Company keeps building up the number of its EOR operations. In 2008, for instance, 5,376 EOR operations were carried out, this being almost 100 operations more than in 2007. In 2008, these technologies accounted for almost 23 million tons out of the total oil production figure of 95.2 million tons, which is in keeping with LUKOIL's concept of providing for at least 20% of total production through application of EOR methods.

LUKOIL makes active use of diverse physical, chemical, hydrodynamic and thermal bed stimulation methods. The bulk of incremental ultimate recovery (14 million tons or 61.3%) was obtained through use of physical methods, above all hydrofrac operations. In 2008, the Company carried out 711 such operations to secure an average oil flowrate increment of 9.4 tons a day. Use of chemical methods increased from 1,004 operations in 2007 to 1,324 operations in 2008 to give a production increment of 1.6 million tons (over 20%). Another highly effective EOR method is current well sidetracking. In 2008, 260 such wells were drilled (188 in 2007) to produce an average oil flowrate increment of 18.1 tons a day. During the reporting period, vertical ring drilling from existing well was also continued, which, for relatively low costs, makes it possible both to stimulate production and to develop hard-to-recover reserves. Last year, 91 such operations were carried out, producing an average oil flowrate increment of 6 tons a day. In order to make oil production efficient, LUKOIL is also drilling horizontal wells to achieve a 50% well productivity growth. In 2008, 112 new horizontal wells were started up, with an average oil flowrate of 58.4 tons a day.

LUKOIL is also actively developing a field development monitoring system using geological-hydrodynamic models (GHM). Model-building makes it possible to raise the oil recovery ratio and cut field development costs. The Company makes active use of such models for drilling and application of production enhancement methods. It is planned to increase the number of geological-hydrodynamic models of the Group's fields in Russia to 300 by 2010, thus raising the percentage of the Company's GHM fields in Russia to 85% of the total.

Focus on success

In the downstream business segment, the Company has focused primarily on upgrading capacity, increasing refining volumes, improving product quality and production safety, optimizing logistics and expanding the sales network. The total volume of oil refined at the Group's refineries and within the ISAB complex has gone up by almost 8% to reach a record 56.3 million tons.

Overall sales of oil and petroleum products in 2008 went up by 2.1% over the previous year and amounted to 134.7 million tons. LUKOIL's EKTO brand motor fuels, with improved operating qualities and environmental characteristics, are enjoying growing demand on the Russian market. This is evidenced by the rise in sales. In 2008, there were some 1,200 gasoline filling stations selling EKTO fuel in 27 regions, their total volume of sales of these fuels amounting to 734,000 tons, which is 281,000 tons or 62% more than in 2007.

The key event in 2008 was the establishment, jointly with ERG S.p.A., of a company to manage the ISAB refining complex in Italy. The Company's current share of 49% may increase in the future. ISAB is a major, high-tech refining complex with a capacity of 320,000 barrels a day (16 million tons a year) with a Nelson Complexity Index of 9.3. Participation in the joint venture will bring the Group a synergetic effect from supplying crude for refining and selling finished products on European markets.

The Company continued the active upgrading of Russian-based and overseas refineries in order to increase refining efficiency and finished product quality. In 2008, the Odessa Refinery was started up after a rehabilitation period of three years. Thanks to the continuing modernization of the Group's plants, the proportion of top bracket gasoline in the total output of this product topped the 90% mark and the proportion of environmentally clean diesel fuel was approaching 70%. In addition, the Company stepped up the production of motor fuels complying with European environmental standards.

In 2008, LUKOIL expanded its sales network considerably, allowing the product to be brought to consumers throughout the world. It acquired the Akpet company operating nearly 700 gasoline filling stations in Turkey. In addition, the Group purchased a number of Russian filling station networks. The LUKOIL retail network expanded by nearly 11% over the year. At the same time, attention was focused on sales efficiency and optimization of the filling station network. Sales per filling station amounted to 7,300 tons a day.

A new business sector, Power Generation, was added to the Company structure in 2008. LUKOIL's core asset in the new sector is UGK TGK-8 (TGK-8), which owns power stations in the regions of Astrakhan, Volgograd and Rostov, the territories of Krasnodar and Stavropol and the Republic of Dagestan. Their overall capacity is 3.6 GW. Acquisition of  TGK-8 should ensure efficient prices for the Company's gas as well as a major synergy effect from uninterrupted deliveries of natural gas to TGK-8 from LUKOIL fields located in the Northern Caspian and the Astrakhan Region.

The Company's activities in all the main areas last year meant it was given a consistently high rating by the leading world publications and agencies. At the beginning of this year, a study conducted by the prestigious Institutional Investor magazine put LUKOIL among the Top-5 European oil and gas companies recognized as leaders in terms of shareholder loyalty.

New heights to be scaled

"LUKOIL is a company working for the future. We are interested in maintaining high returns on our business for decades to come. The production, financial, structural and social policy of our Company is focused specifically on achieving this goal," Vagit Alekperov stressed in his speech.

In the opinion of leading Russian analysts, the realistic, well-thought-out plans and new oil and gas projects to be implemented by the Company over the next few years will raise the Company's shareholder value and make its shares even more attractive on the stock market.

The Meeting of Shareholders elected the 11-member Board of Directors of the Company: Vagit Alekperov, President of LUKOIL; Viktor Blazheev, Rector of the Moscow State Academy of Law; Valery Grayfer, General Director of RITEK; German Gref, President of the Management Board of Sberbank of Russia; Igor Ivanov, Professor of the Moscow State Institute of International Relations, former RF Foreign Minister and Secretary of RF Security Council; Ravil Maganov, First Executive Vice-President of LUKOIL; Richard Matzke, ex-Vice-Chairman of Chevron Corporation; Sergey Mikhailov, General Director of Management Consulting; Alexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs (Employers), President of the State University - Higher School of Economics; Nikolay Tsvetkov, Chairman of the Board of Directors of Financial Corporation URALSIB; and Donald Evert Wallette Jr., President of ConocoPhillips for the Russia/Caspian region.

At the meeting of the Board of Directors held after the Meeting of Shareholders, the General Director of RITEK, Prof. Valery Grayfer, was elected as its Chairman.

The Annual General Meeting of LUKOIL Shareholders, which was held in a constructive, businesslike atmosphere, and the well-considered measures it adopted for further implementation of the goals set testify convincingly to the realistic nature of the plans and extensive programs outlined, and confirm the Company's solid leading positions within the Russian oil and gas complex and in the national economy as a whole.