ALWAYS MOVING FORWARD OAO LUKOIL ANNUAL 2014 REPORT LUKOIL is one of the largest oil & gas vertical integrated companies in the world accounting for over 2% of crude production and circa 1% of proved hydrocarbon reserves globally. LUKOIL enjoys a full production cycle to control the entire value chain from upstream to downstream. The Company boasts a well-diversified portfolio of assets with core operations focused on four federal districts in Russia while its international projects account for circa 10% of production and reserves. Each and every day, the Company supplies its fuels, power and heat to millions of consumers in 34 countries thus improving livelihoods. LUKOIL employs over 110 thousand people who join their efforts and talents to secure the Company’s market leadership. RELIABILITY Over 20 years of sustainable growth EFFICIENCY LUKOIL is one of the most efficient companies in the Russian oil & gas industry VALUE Strong financial position and sound bottom line translate into ever increasing shareholder returns with dividends per share likely to be as high as RUB 154 for the full year of 2014 (+40% y-o-y growth), which offers a dividend yield of 7.6% MISSION Our mission is to harness the power of natural resources for the human benefit yb developing unique hydrocarbon fields in an efficient and responsible manner, ensuring business growth and contributing to the well-being of our staff within and the communities beyond. CORPORATE VALUES 1. PERSONNEL. Everything our Company does is done by and for 3. RESPONSIBILITY for the human lives and natural resources the people. entrusted with us in the regions where we operate. 2. ENVIRONMENT AND TECHNOLOGIES. As one of the world’s 4. OPENNESS AND PARTNERSHIP in collaboration with communities largest users of natural resources, LUKOIL strictly adheres to the and stakeholders. highest international environmental standards and is proud of its well-planned environmental management system all across the 5. INTEGRITY. True to its mission, LUKOIL does business in a fair and hierarchy. honest way, with respect and decency. OAO LUKOIL is the corporate center of LUKOIL Group (hereinafter also the «Group») which coordinates the operations of Group companies and promotes further development and globalization of the Group’s business. It focuses on coordination and management of subsidiaries in terms of organizational set-up, investments and financial operations. To this end, the corporate center aims to maximize the transparency of decision-making processes within the Group, to ensure shareholder protection and to enhance the investment appeal of OAO LUKOIL generally. FORWARD-LOOKING STATEMENTS • Some of the statements made in this report are not statements of fact, but rather Words such as “believes”, “expects”, “assumes”, “plans”, “intends”, “anticipates” and others represent forward-looking statements. These statements include, specifically: are used in those cases when we are talking about forward-looking statements. However, the ‣ plans and forecasts relating to income, profits (losses), earnings (losses) per share, proposed options for solving the problems included in the statements are neither singular nor dividends, capital structure, other financial indicators and ratios; exclusive. ‣ the plans, goals and objectives of OAO LUKOIL, including those related to products and • Forward-looking statements inherently imply certain unavoidable risks and ambiguous services; issues, both general and specific. There is a risk that the plans, expectations, forecasts, and some of the forward-looking statements will not be realized. Due to a number ‣ future economic indicators; of different factors, the actual results may differ materially from the plans, goals, ‣ the prerequisites on which the statements are based. expectations, assessments and intentions expressed in such statements. 2 Letter to shareholders О компании ABOUT 4 LUKOIL on a global scale THE COMPANY 5 Key highlights COPING WITH 6 Business model CHALLENGES 8 Our history 10 Key events of 2014 12 Strategy and progress 13 Measuring success: key performance indicators (KPIs) 15 Risk management framework 17 Global oil & gas fundamentals и добыча Геологоразведка 18 Operating Results 22 Reserves UPSTREAM 24 Exploration ACHIEVING 27 Development and Production STATED 29 High-Priority Projects OBJECTIVES 34 West Qurna-2 36 Technology 42 Oil Refining DOWNSTREAM и сбыт Переработка 44 Production of Lubricants ADDING VALUE 45 Gas Processing 45 Petrochemicals 46 Power Generation 47 Oil & Gas Sales 51 Sales of Petroleum Products 54 Financial Performance 60 Environmental protection CORPORATE ответственность Корпоративная RESPONSIBILITY 64 Fuel and energy consumption 65 Health and Safety RESPONSIBLE 66 Personnel USAGE OF NATURAL AND 69 Interaction with communities HUMAN CAPITAL 71 Stakeholder relations 73 Management structure CORPORATE 73 General Shareholders Meeting GOVERNANCE управление Корпоративное 74 Board of Directors HIGH STANDARDS 82 Executive bodies 87 Top management remuneration system 88 Control bodies 89 Independent auditor 90 Business ethics 90 Information for shareholders and investors 95 Risks APPENDICES 101 Consolidated Financial Statements Приложения 143 Analysis of Financial Position and Results of Operations 179 Corporate Governance Code Compliance Report 197 Major and related/interested party transactions 239 Information on transactions with OAO LUKOIL shares / ADRs performed by management bodies members 241 Reference information About the Report OAO LUKOIL’s annual report presents key information on the Company’s and Group’s overall To view these reports, please visit the Company’s website at: http://www.lukoil.com/realms/ performance in 2014 by business area, as well as growth strategy and corporate governance. investor/default_6_.html. The report complies with the requirements of the Russian securities market regulations and To order free printed versions of the reports, please fill in the relevant form on the Company’s recommendations of the Corporate Governance Code based on the Group’s consolidated financial website. statements under US GAAP. For more information on the Group’s production assets and operating results for the past 5 years, FEEDBACK please see our Fact Book. You are welcome to send any comments and/or suggestions as regards the Group’s reports to our Figures related to the Group’s business activities are presented in our Analyst Databook. e-mail: [email protected]. Feedback from the shareholders and other stakeholders helps us improve information transparency and enhance the reporting quality. Extended information on the Company’s sustainable development in Russia can be found in our Sustainability Report. Contact information is presented at the end of the report. Letter to shareholders COPING with challenges DEAR FELLOW SHAREHOLDERS! We reiterate our commitment to disciplined long-term investments with all our efforts aiming to enhance operational excellence and The past year’s results once again highlighted both the strengths of the increase shareholder value. Reliability and skillful corporate governance Group’s business model and our ability to be successful even in the most underlie everything we do. challenging economic environment. We do our best to streamline our business structure and ensure its reliability. As shown in this report, Power is the blood of present-day economy. The global power industry our efforts made the Company even stronger, healthier and safer. is facing rapid changes (e.g., shale revolution in USA). However, the long-term supply issue is far from being solved globally. More The past year was rich and successful for LUKOIL Group in terms of energy is required to meet the needs and aspirations of the growing operating results. In addition, the entire value chain continued to prove population in the world. According to our report Key Global Trends the robustness of our vertically integrated business model. Hydrocarbon in Oil & Gas Markets to 2025, we project demand for liquid production grew 5.1%. Importantly, we had a growing crude production hydrocarbons to grow at 1.2% CAGR up to 2025 and beyond. in Russia. Our Russian refineries raised throughput, too. Last year, filling stations in the Central Europe, specifically in Slovakia, Czech Republic That is why we keep on investing in the long term assuming the and Hungary were disposed of. We optimized the distribution network economic growth will go ahead and translate into returns on our in those regions where the Group has no operating refineries, which investments. In 2014, the Group’s capex stood at $15.4 billion. will drive margins up. In 2015, we will go on investing and launching new promising projects in the Exploration and Production segment (E&P) and increasing The Board of Directors is alert to the changing global environment premium production in Downstream. and pays much attention to seeking an adequate response. Throughout 2014, the Company was specifically focused on its strategy, prudential Importantly, the Company’s commitment to the highest standards project management and rigorous investment discipline. Our revenues of social and environmental responsibility also results in LUKOIL’s rose by 1.9% to $144.2 billion, while EBITDA amounted to HSE leadership in the industry. In 2014, we continued improving our $16.0 billion. environmental performance and reducing environmental impact. As such, in 2014, associated petroleum gas (APG) utilization rate gained 4.9%, while in absolute terms APG flaring was down from 1.4