No. 1, 2010

Interview of Azat Shamsuarov, Vice President of LUKOIL, General Director of LUKOIL-Western Siberia

Q: It is fifteen years now since LUKOIL-Western Siberia was set up. How do you assess the Company's performance during the years since then?

A: LUKOIL-Western Siberia was established on November 16, 1995 by resolution of the Board of Directors of LUKOIL. Ever since then, the company has been LUKOIL's biggest subsidiary.

The Western Siberian holding company accounts for over half of all the oil produced by the Company. We produce oil and gas on the territory of the Khanty-Mansi and Yamalo-Nenets Autonomous Areas. The company is made up of five territorial production divisions - Langepasneftegaz, Urayneftegaz, Kogalymneftegaz, Pokachevneftegaz and Yamalneftegaz.

The years that have passed have shown that LUKOIL-Western Siberia copes successfully with its set tasks. In comparison with 1995, annual oil production is now 16% higher. In 2009, over 48 million tons of oil were produced. Also compared with 1995, there has been an almost 125% rise in associated gas production, which now amounts to about 4 billion m3.

In 2000, we launched development of the fields in the Bolshekhetskaya depression in the Yamalo-Nenets Autonomous Area, where the Nakhodkinskoye, Yuzhno-Messoyakhskoye, Pyakyakhinskoye and Khalmerpayutinskoye gas and gas condensate fields and the Salekapsky and Vareysky license areas are located.

In April 2005, the Nakhodkinskoye gas field came into production, its gas reserves amounting to over 250 billion m3 and oil reserves to about 9 million tons. The unique 140-kilometer Nakhodka-Yamburg twin pipe gas line with a 22-kilometer pipe subway across the Tazovskaya Bay was laid from the field under permafrost conditions. These projects were implemented by LUKOIL-Western Siberia in a record 14 months. This was the first time such work was carried out in Russia under permafrost conditions.

Q: What is LUKOIL-Western Siberia currently doing within the scope of the Yamal project?

A: The Pyakyakhinskoye field is the second hydrocarbon production project implemented by Yamalneftegaz. The recoverable reserves of the field as of the end of 2008 amounted to 61 million tons of oil and 141 billion m3 of gas, plus 9.5 million tons of condensate.

So far, within the scope of the Pyakyakhinskoye field investment project, a 24 MW power unit has been built to provide us with electric power for the period of construction and operation.

We have launched construction of the development wells, the first of which was drilled in April 2009. It is planned ultimately to drill 55 gas condensate and 186 oil production wells.

Serious and painstaking work is currently under way to prepare the design documentation. In 2010, we plan to initiate active construction of oil and gas treatment facilities and transport communications, including terminal structures at the Vankorskoye field of Rosneft.

The gas produced will transit via the Nakhodkinskoye field, where a head compressor station is to be built, and then enter Gazprom's gas transport system. Oil and condensate will be pumped into the Vankor-Purpe oil pipeline and thence into the Transneft trunk line system.

Industrial start-up is planned for 2013. We have no doubt that the project will be completed on time, according to the schedule and within the investment volumes set by the Management Board of LUKOIL.

Q: LUKOIL has inherited from Soviet times a multitude of fields with a high degree of reserves depletion and water content. The experts forecast a drop in oil production in this region. What is LUKOIL-Western Siberia doing to replenish the resource base?

A: The last five years have, indeed, demonstrated a stable tendency for hydrocarbon production to fall. The rate of decline reached 6-8%. That was the trend.

We have carried out active work to organize a balanced development system for the company. It was important to properly adjust the company's strategy and balance it in terms of investment projects commissioning priority and ranking in such a way as to ensure, at one and same level of operating and capital costs, a stable level of or even a rise in production.

As a result, we have designed a medium-term development strategy for LUKOIL-Western Siberia.

Its first stage provided for stabilizing hydrocarbon production volumes. This task has been fulfilled: over the last six months of 2009, the company's production volume did not change.

In recent years, we have also been quite active in purchasing licenses for hydrocarbon exploration and production in the Khanty-Mansi autonomous Area. This will allow the Company, in the medium term (3-5 years), to maintain the current level of production and possibly, given specific circumstances, raise it. We have thus nearly reached a figure where acquired reserves are comparable with the annual volume of production.

We are taking major steps to replenish the resource base of LUKOIL-Western Siberia in the regions where the company operates.

In the context of declining production, application of innovative production technologies is of particular importance. We have done much to improve and apply hydrofracturing and sidetracking processes. It would take quite a time to list all the processes we are using. We believe that our achievements will, one way or another, be embodied in design documents and eventually become a practice.

Q: What is the company doing to maintain the natural balance in this unique region, largely untouched by civilization?

A: All structural units of the company abide by the annually drafted LUKOIL-Western Siberia Environmental Safety Program, agreed with the government environmental agencies.

One of the measures designed to ensure environmental safety is associated gas utilization.

It enables rational use of the fuel and harmful emissions reductions. After processing at the Lokosovsk gas refinery, the environmentally clean fuel is used widely for industrial purposes. LUKOIL-Western Siberia's Kogalymneftegaz and Pokachevneftegaz divisions utilize 95 to 97% of associated gas.

Associated gas is also used for generating electricity at gas turbine power plants built at the Vatyeganskoye and Tevlino-Russkinskoye fields of Kogalymneftegaz. These are the biggest facilities generating electricity for own needs in the Khanty-Mansi Autonomous Area.

A clear example of how the Company is using environment-friendly processes is the development by Urayneftegaz of a license area located on the territory of the Kondinskiye Lakes natural park. The park consists of a system of lakes and marshes covering a total of 43,900 ha. The natural park status, unlike that of a nature reserve, permits limited use of natural resources under special operating conditions that LUKOIL-Western Siberia strictly observes. These conditions are, for instance, sumpless drilling, nonflame production and cluster site dewatering.

There are 24 cluster sites on the territory of the park and a multiphase booster pump station. Since 1999, the park's specialists, together with Tyumen State University, have been carrying out integrated environmental monitoring. The monitoring network includes three observation posts keeping an eye on the state of the environment: the hydrological state of rivers and lakes, ground water and soils. From 1999 through 2009, LUKOIL-Western Siberia received not a single complaint with respect to changes in water and soil samples or a threat being posed to elements of the environment.

Q: Human resources are the main asset of any company. Are there any specifics in the HR policy pursued by LUKOIL-Western Siberia?

A: The most profitable investment is, as they say, in education.

Last year, together with the British company SHL, which is the leader in personnel assessment developments, we conducted a diagnosis of our personnel in all possible spheres: professional skills, psychological stability, and assessment by colleagues, subordinates and managers. This is called a 360 degree appraisal system. As a result, a profile was compiled of each individual and we hope to rank our specialists in different spheres on this basis.

We have substantially increased our outlays on education. Today, we have quite a few educational programs for our staff to fill in knowledge gaps.

The company has a finely tuned social safety net which covers all spheres of life and work - production activities, labor protection and remuneration, state of work places, rest, and leisure social guarantees and benefits. The collective bargaining agreement at LUKOIL-Western Siberia has been recognized as one of the best among all of Russia's oil and gas companies, for which it has received a 1st degree diploma from the Oil and Gas Construction Industry Trades Union of the Russian Federation.

Q: How does social partnership fit in the Company's activities?

A: Our territorial production units are the biggest local employers in the areas where they operate and it is quite natural that LUKOIL-Western Siberia takes a major part in development of these areas and cities.

In 2009 alone, almost a billion rubles were allocated for these purposes. We financed programs and projects aimed at infrastructure development, construction and upgrading of educational, medical, cultural and sports facilities, supporting veterans and public organizations, housing and road construction, village, town and district development in the Khanty-Mansi and Yamalo-Nenets Autonomous Areas.

Work with the indigenous population is based on economic agreements envisaging monetary compensation, provision with means of transport, apartments and free medical care for the Khanty, Mansi and Nenets peoples.