oil company lukoil 2002 · page 003 oil companylukoil annual report lukoil — russia's...

ANNUAL REPORT2002

C O N T E N T S

LUKOIL Today3

Letter to Shareholders4

Events in 20028

Oil & Gas Exploration & Production10

Supply & Transportation22

Refining, Petrochemicals & Marketing26

Energy Efficiency in Production & Refining Sectors 32

Caring for the Environment, Health & Safety34

Development Opportunities for Personnel38

Charity & Sponsorship Activities42

Corporate Governance48

The Komi Republic — A Promising Oil & Gas Production Region for LUKOIL57

Management's Discussion and Analysis of Financial Condition and Results of Operations 63

Consolidated Financial Statements prepared in accordance with US GAAP Standards83

Reference Information116

OIL COMPANYLUKOIL

2 0 0 2

Operating revenues (mln dollars)

Income from operating activities (mln dollars)

Income before income taxes (mln dollars)

Net profit (mln dollars)

Capital expenditures (monetary and non�monetary, mln dollars)

Investment (mln dollars)

Dividends to shareholders (recommended, mln dollars)

O I L C O M P A N Y L U K O I L A N N U A L R E P O R T

page 002

15 334

2 662

2 582

1 843

2 072

302

532

Basic Financial Indicators

Basic Operating Indicators

Oil and gas reserves as of 1 January, 2003 (proven, bln boe)

Oil production (subsidiaries and affiliates, mln tons)

Gas production (subsidiaries and affiliates, bcm)

Refinery throughput (LUKOIL refineries in Russia and abroad, mln tons)

Oil exports from Russia (subsidiaries and affiliates, mln tons)

Petroleum products exports from Russia (mln tons)

Petrochemical production (mln tons)

Number of retail sales outlets (proprietary and rented)

19.3

79.8

5.1

41.7

34.2

14.2

1.6

4,076


LUKOIL — RUSSIA'S LEADING OIL COMPANY

LUKOIL today is:

¤ 1.3% of global oil reserves and 2% of global oilproduction.

¤ 20% of total Russian oil production and 18% oftotal Russian oil refining.

¤ 13th by net profit among the world's top�100 pri�vate and national oil companies.

¤ 30th by sales among the world's top�100 privateand national oil companies.

¤ 25th by assets among the world's top�100 privateand national oil companies.

¤ The only private Russian oil companywhose share capital is dominatedby minority stakeholders

¤ The 2nd largest private oil company worldwide byproven reserves.

¤ The 6th largest private oil company worldwide byproduction.

¤ The leading Russian oil business group with annualturnover of $15 bln.

¤ The most liquid among Central and EasternEuropean stocks on the London Stock Exchange(LSE).

¤ The most liquid oil stock and second most liquidstock overall on the Russian Trading System (RTS).

¤ A leader among Russian oil companies for open�ness and transparency. The first Russian company tobe listed on the London Stock Exchange.

Sources: Energy Intelligence Group, Petroleum Intelligence Weekly, International

Energy Agency, OPEC, US Energy Department, Russian Ministry ofEnergy, RTS, LSE, LUKOIL.


page 004

LETTER TO SHAREHOLDERS

LUKOIL continued its growth in2002, remaining the largestRussian oil company in terms ofboth production and reserves.Expansion through explorationand acquisitions made LUKOILthe 2nd largest public oil compa�ny in the world in terms ofreserves, and the 6th largest interms of oil and gas productionvolumes. We have continuedexploration and development inour new production regions —Timan�Pechora, the Yamalo�Nenetsk Autonomous Okrug andthe Northern Caspian — layingthe foundations for furthergrowth. We were able to maintainprevious year levels of profitabili�ty despite a tightening of theRussian tax regime. Our internalrestructuring program had posi�tive impact on efficiency in 2002,increasing company value.Profitable operations and hugefuture potential have earnedLUKOIL a place among the inter�national energy sector elite.

Last year was a break�through yearfor LUKOIL, seeing the beginning ofour deep restructuring programaimed at efficiency and share priceincreases. The key aspects of theprogram are improvement of operat�ing and investment efficiency, stream�lining of corporate structure, and saleof none�core assets.

The program has already boostedcompany earnings thanks to increasein the export share of production,rationalization of production expens�es, and closure of wells with low prof�itability. The relevant figures for 2002show:

¤ Growth of 6% in exports of oil andpetroleum products to 57% of totalsales.

¤ Reduction of production expensesby 5% to $2.60/barrel.

¤ Closure of about 4% of the compa�ny's operational wells, representingthe least productive and least prof�itable wells.

The company has made significantprogress in consolidating its assetsboth in the exploration and produc�tion sector and in the refining andmarketing sector. Efforts have beenfocused on streamlining group struc�tures whilst rationalizing selling, gen�eral and administrative expenses.

In 2002 LUKOIL defined three blocksof activity for improving managementand streamlining corporate structure.These three blocks are: Finance, OilExploration and Production, andRefining and Marketing. Investmentand Budget Committees were alsoset up with remits to improve the qual�ity of decision making in these areas.

The restructuring program representsan unprecedented effort by LUKOILmanagement to increase companyefficiency and raise the share price.The market has responded well, andthere has been strong growth of theLUKOIL share price since the pro�gram's announcement in April 2002.

In 2002 serious attention was alsopaid to improvement of corporategovernance and informational open�ness. Key steps were as follows:

¤ The Board of Directors welcomedthree independent representatives ofminority shareholders (Mark Mobius,Richard Matzke and Oleg Kutafin).


¤ A Main Department for Control andInternal Audit was created.

¤ LUKOIL shares underwent the fullprocedure of listing on the LondonStock Exchange, which led to signifi�cantly increased liquidity andimproved company transparency.

LUKOIL commands an impressiveportfolio of production assets. We arethe only Russian oil company with sig�nificant reserves in two new hydrocar�bon provinces: Timan�Pechora andthe northern Caspian. It is anticipatedthat these fields will be operationalwithin a couple years, providing abasis for the company's successful,long�term growth.

Our key operating regions — WesternSiberia and Perm Oblast ('oblasts' arethe main regional sub�divisions withinthe Russian Federation) — continueto provide stable output. LUKOILintends to maintain its significantpresence in these regions, improvingoperational efficiency and optimizingits production portfolio.

Our natural gas assets on the Tazovskpeninsula (Yamalo�Nenetsk region)and newly discovered natural gasfields in the northern Caspian providea solid foundation for development ofthe company's natural gas business.We have set a goal of developing ourgas business to a comparable sizewith our oil business: natural gas pro�duction should be in the range of 50bcm by 2010. We are currently devel�oping a marketing strategy for our gasreserves, discussing partnershipoptions with Russian and foreign play�ers in the gas and energy sector.

In December 2002, LUKOIL signedan agreement to sell its share in theAzeri�Chirag�Gyuneshli project. Thatdeal, which has been closed and willbe reflected in 2003 financial results,

is the first major step in optimization ofour portfolio, and underscores ourability to reshape the companyreserve portfolio via asset sales. Weintend to continue this optimizationprocess, but we feel that the marketvalue of the majority of our reserveshas not yet reached its fair level.

LUKOIL remains a leader in oil refin�ing, owning seven refineries with totalcapacity of 58.5 mln tons/year.Significant increase in production atthe Nizhegorodnefteorgsintez Refi�nery, acquired in 2001, brought over�all production by LUKOIL refineries inRussia to 33.9 mln tons in 2002. Ourpetroleum products are sold through

4,076 retail outlets1 as well as throughwholesale channels.

LUKOIL retained its level of profitabili�ty in 2002. This was a considerableachievement in view of continued highinflation in Russia, strengthening ofthe Russian rouble against the USdollar and tightening of the tax regime.

1 As of 1 January, 2003 including proprietary, leased and franchised.

Volume of Dividend Payments (mln USD)*

Dividend Payments, mln USDPercentage of Net Profit


page 006

Inflation

In 2002, inflation in the Russian Federation was 15.1%, compared with18.8% in 2001.

Strengthening of the rouble against the US dollar

During 2002, the Central Bank of Russia pursued a policy of currencyintervention aimed at suppressing growth of the US dollar exchangerate. As a result, the rouble strengthened by 9% against the US dollarforcing extra efforts by LUKOIL to reduce its expenses in dollar terms,as 80% of overall expenditures are in roubles.

Prices on Russian and international markets

Export prices for crude oil

The average sales price for Urals crude oil rose from $21.13/barrel in2001 to $21.95/barrel in 2002 (growth of 3.9%)

Domestic prices for crude oil

During the accounting period, the average domestic sales price fell by$2.55/barrel (23.5%) to $8.28/barrel.

Prices for petroleum products on international markets

The average price of petroleum products increased by $10.55/ton(4.7%) to $236.85/ton

Prices for petroleum products on the domestic market

The average price of petroleum products inside Russia increased by$4.19/ton (2.9%) to $146.14/ton.

Changes to the tax regime

Several taxes were repealed with effect from 1 January 2002, includingthe tax on sub�soil resources, the tax on replacement of the mineralresource base, and the excise tax on oil production. These taxes werereplaced by a unified production tax. Introduction of the new unifiedextraction tax led to increase of tax liabilities other than income tax ofLUKOIL by $737 mln (including the influence of increase in crude oilexcise), or by 100% compared to 2001.

LUKOIL achieved the following production results in 2002:

¤ Oil production (including all LUKOIL's subsidiaries and affil�iated companies) grew by 2% to 79.8 mln tons.

¤ The company's reserve replacement ratio was 246%.LUKOIL remains the unchallenged leader for geologicalexploration in Russia and consistently augments existingreserves at low cost.

¤ The company recorded a 15% increase in oil refined at itsRussian refineries, allowing reduction of crude sales on thedomestic market.

Maintenance of profitability levels makes it possible forLUKOIL to fulfill its obligations to increase payments to share�holders. Based on year�end results, dividend payments will be19.5 roubles per share, which is 30% higher than in 2001.

* In calculation of dividend payment amounts in US dollars,exchange rates on the date of announcement were used.

* Total Shareholder Return (TSR) — the ratio of the sumof the difference between price of a share at the end ofthe period, and at the beginning of the period, and thedividends paid for that period, to the price of a share atthe beginning of the period.

600

500

400

300

200

30%

20%

10%

0%

30%

25%

20%

15%

10%

5%

0%

2000 2001 2002

2002 Average 2000�2002

Total Shareholder Return (TSR)* in 2002 and average over 3 years

LUKOIL intends to pay $532 mln (or 29% of net profit) in divi�dends.

Dividend income plus share price growth gave total yield pershare (total shareholder return) of 24% in 2002.

LUKOIL's concerns are not limited to production. The compa�ny is also aware of the importance of ecological and socialissues. In 2002, KPMG completed a full�scale external eco�

logical audit of LUKOIL, confirming the company's high stan�dards on issues of ecological safety. LUKOIL's Social Code,adopted in 2002, has helped the company to provide bettersocial welfare standards for employees. LUKOIL has also con�tinued to create and sponsor other social and charitable pro�grams.

LUKOIL has shown itself to be a worthy leader of the Russianoil industry by constant strategy reviews and more ambitiousoperational goals. We continue to set standards of stability

and success in today's harsh marketconditions in order to secure growthfor shareholders in 2003 and beyond.

In 2003 LUKOIL is continuing its pro�gram of restructuring to increaseoverall efficiency of activities. Thecompany intends to work toward itsgoal of minimum 4% annual growth ofoil production. Consolidation ofassets across various sectors willcontinue, as will rationalization of pro�duction expenditures, streamlining ofLUKOIL's corporate structure andsale of assets in the construction,finance and transport sectors, whichdo not fit the company's profile.Through this efforts, transparency willbe increased and corporate gover�nance improved. Management effortswill be focused on increasing theshare price and providing sharehold�ers with a high yield on their investedcapital.

Long�term development efforts areconcentrated on oil production(which provides stable, long�termgrowth) and on carving a place for

page 007


LUKOIL in the natural gas and energysector. Refining, petrochemical andmarketing sectors will also be devel�oped to assure adequate productionof high value�added products anddistribution channels for them.Maintenance of balance betweenvarious activities should ensure sta�bility of the company's future devel�opment under any conditions. Wealso have ambitious goals for pro�duction of oil and gas abroad, and forinternational marketing of our petro�leum products.

The internal changes currently under�way at LUKOIL are designed to trans�form the company's production suc�cesses into steady, strong growth in

share price and capitalization. A high�er, more intensive production growthrate over the next decade will boostthe share price to a new level, andincrease the attractiveness of LUKOILstock. All of our company's manage�ment and employees are working tostrengthen LUKOIL's position as theleading domestic oil company, whilepursuing the medium�term goal of amore prominent position in the globaloil and gas industry.

Chairman of the Board ofDirectors, OAO LUKOIL

Valery Graifer

President of OAO LUKOIL

Vagit Alekperov

January

Company shareholders proposedRichard Matzke, ex�Vice�Chairman ofChevron, and Mark Mobius,Managing Director of Templeton AssetManagement Ltd., as candidates forLUKOIL's Board of Directors.

February

LUKOIL opened Russia's first private�ly owned trunk oil pipeline, runningfrom Perm to Andreyevka. Thepipeline links LUKOIL's Perm OilRefinery to the state�owned Transnef�teprodukt system for transportation ofrefined products.

March

A Department for Internal Audit wasestablished to help refine manage�ment systems, and to increase theefficiency of risk management andinternal control systems.

April

LUKOIL management announced aprogram of restructuring up to 2010.The main goals are to increase prof�itability and the company share price.In the short term, these goals will besupported by growth in the compa�ny's export ratio, increased earnings,optimization of LUKOIL's well stock,cost�cutting, increased productionefficiency, and streamlining of com�pany structure.

A contract was signed with theColumbian state oil and gas compa�ny, Ecopetrol, for joint geologicalexploration of the promising CondorBlock in Columbia's Llanos Basin.


page 008

May

Lukinter Finance B.V., part of LUKOILGroup, fully retired $230 mln of con�vertible bonds issued in April 1997(including interest and premium).

A coupon payment was made on$350 mln of convertible bonds issuedin November 1997 and due forredemption in 2003.

LUKOIL and Miller & Lents (USA)completed a review of companyreserves as of 1 January, 2002. Thereview was carried out to the stan�dards of the US Society of PetroleumEngineers (US SPE). Proven oil andgas reserves were 16.6 bln barrels oilequivalent (2.3 bln tons). Year�on�year reserve growth was 11%.

EVENTS IN 2002

June

LUKOIL began construction of a ter�minal for transportation of petroleumproducts on Vysotsk Island(Leningrad Oblast). The terminal willhave capacity of 10.7 mln tons andopening of the first loading complex atthe terminal is planned for Q4 2003.

LUKOIL Overseas Holding Ltd., a fullyowned subsidiary of LUKOIL,acquired a share in the WEEMConcession (Hurgada, Egypt) fromCanada's Naftex Energy Corporationand became the sole contractor,investor and project operator underterms of the concession agreementfor exploration and production of oil.Other parties to the concessionagreement are the Egyptian State OilCompany (EGPC) and the govern�ment of the Arab Republic of Egypt.

Richard Matzke, ex�Vice�Chairman ofChevron Group, Mark Mobius,Managing Director of TempletonAsset Management Ltd., and OlegKutafin, Rector of the Moscow StateAcademy of Law, joined the Board ofDirectors of LUKOIL as independentdirectors.


August

LUKOIL became the first Russiancompany to receive a full secondarylisting on the London Stock Exchange(LSE), after securing inclusion in theOfficial List of the UK Listing Authority(UKLA). All of LUKOIL's ordinaryshares and first�level ADRs have beenlisted, yet only ADRs are traded atLSE.

October

As part of the second stage of itsrestructuring program, LUKOIL initiat�ed a deal to sell its service company,LUKOIL�Drilling, and presented thecompany's assets to potential buyersin Houston (USA).

November

A General Agreement on StrategicPartnership for the period 2002�2005was signed between LUKOIL and theRussian gas monopolist, Gazprom.The agreement envisages mutuallybeneficial partnership in exploration,production, transport, oil and gasrefining, sales of oil, gas, petroleumand gas refined products, chemicalsand petrochemicals, and in produc�tion of electrical and thermal energy.

LUKOIL issued $350 mln of convert�ible bonds, which are convertible intoGDRs issued on LUKOIL shares.

LUKOIL, Sibneft, TNK and YUKOSsigned a Memorandum of MutualUnderstanding on construction of thepipeline from Western Siberia throughTiman�Pechora to Murmansk. This willbe the first�ever joint project by majorRussian oil companies for domesticpipeline transportation of crude oil.

December

LUKOIL reached agreement withInpex Corporation on sale ofLUKOIL's share in the Azeri�Chirag�Gyuneshli project.

LUKOIL common shares owned bythe Russian state and equivalent to5.9% of authorized share capital wereplaced on the London StockExchange (LSE) for a total of $775mln at $15.5 per share. After the saleof this share stake, government par�ticipation in LUKOIL's authorizedshare capital decreased to 7.6%.

LUKOIL management decided to cre�ate a Main Department for Controland Internal Audit based on the com�pany's Department for Internal Audit.The new division is dedicated toanalysis and evaluation of LUKOIL'sproduction and financial activitiesfrom the standpoint of efficiency,observance of shareholder andinvestor rights, and Russian and inter�national law.


page 010

OIL & GAS EXPLORATION & PRODUCTION


Reserves

Reserves measured by Russianclassification — LUKOIL's remainingrecoverable hydrocarbon reserves(category ABC1) as of 1 January2003, without counting foreignassets, were 2.416 bln tons of oil,37.1 mln tons of gas condensate, and855.9 bcm of natural gas.

Reserves measured by interna�tional classification — In 2002,LUKOIL completed its eighth annualtechnical and economic audit ofreserves by US firm, Miller & Lents.Reserves were audited as of 1January, 2003. In connection with

Oil and Gas Reserves& Exploration

LUKOIL has always been attentive torenewal of its mineral resource base,which is one of the most importantindicators of the company's potentialfor growth and increase in shareprice. LUKOIL invests consistently toimprove its exploration performance.

LUKOIL is currently the secondlargest private oil company in theworld by proven hydrocarbonreserves.

ExxonMobil

LUKOIL**

Shell

BP

Yukos

ChevronTexaco

TotalFinaElf

ConocoPhillips

RepsoIYPF

Western Siberia

Distribution of LUKOIL's Proven Reserves by Region

Timan�PechoraUrals

Volga Region

Yamal

Caspian

Abroad

Other Regions

Western Siberia

Timan�Pechora

Urals

Volga RegionYamalCaspianAbroadOther Regions

bln boe0 5 10 15 20 25

21.0

Oil

Gas

19.7

19.0

17.3

12.7

11.9

11.2

7.7

5.1

Hydrocarbon Reserves*

Proven Oil and Gas Reserves (bln boe)

25

20

15

10

5

02000 2001 2002

Reserves as measured before the recounting / reclassification

Reserves as measured after the recounting / reclassification

Oil, mln bbl

15,258

15,622

Natural Gas, bcm

24,164

24,253

Oil and Gas, mln boe

19,293

19,664

* Source: Company reports for 2002.

** Taking into account consolidation ofassets in the Republic of Komi at the begin�ning of 2003 and change of share stakes inseveral affiliated companies.

Proven Oil and Gas Reserves using methods and requiremants of US SPE

consolidation of assets in the KomiRepublic at the beginning of 2003(involving TEBUKneft, Ukhtaneft,RKM�oil and YNTK), and reclassifica�tion of LUKOIL share in several affiliat�ed companies (owing to an increaseof stakes after the Miller & Lentsaudit), reserves were subsequentlyrecounted.

Oil Gas

OilGas


page 012

LUKOIL's reserve base grew by 16% in 2002, according to theinternational classification system (5% growth in oil reserves and83% growth in gas reserves). The growth was due to discoveryof new reserves and increased estimates as a result of explo�ration work, as well as acquisition of several new assets.

Additions to LUKOIL Proven Reserves in 2002

Proven reserves on 1 January, 2002

Revisions of previous estimates

Extensions and discoveries

Purchase of hydrocarbons in place

Sales of reserves

Production

Proven reserves on 1 January, 2003

Oil, mln barrels.

14,612

873

308

36

(7)

(564)

15 258

Natural Gas, bcm

13,210

712

5,401

4,967

—

(126)

,24,164

Total, mln barrelsoil equivalent

16,818

992

1,210

865

(7)

(585)

19,293

In 2002, four new Caspian fields (Kvalynskoye,Rakushechnaya, Sarmatskoye, and the 170th km field) under�went audits by state and independent experts. Medium�sizeddiscoveries were made in the Komi Republic and the NenetskAutonomous Okrug (an "okrug" is a regional sub�division inRussia's federal structure).

As of January 2003, a total 47 affiliates of LUKOIL held licens�es for development of sub�soil resources.


¤ Use of new technologies at allstages of geological exploration work,resulting in better information andlower costs.

LUKOIL's push for efficiency in explo�ration and focus on the most promis�ing regions brought positive results in2002 despite reduction in the volumeof exploration work (meters of explo�ration drilling were down by 58%compared with 2001 to 181,000meters, of which 168,000 meters inRussia). Reserve replacement ratiofrom exploration in 2002 was 246%,which is the highest level of this indi�cator in company history. Reserves

Exploration

Until the tax for renewal of the miner�al�resource base was repealed in2001, geological exploration work inRussia was primarily financed by thistax. The methods used in administrat�ing receipts from this tax meant thatmost prospecting for new reservestook place in regions where oil pro�duction was already developed, whilepromising new regions tended to beignored.

In order to compensate this tendencyLUKOIL has, since 1997, increasedthe share of its own expenditure usedfor geological exploration, and hasdirected this spending exclusively tothe most promising new regions,which are Timan�Pechora and theCaspian Sea. Meanwhile, changes ineconomic aspects of the explorationbusiness have enabled the companyto regroup its exploration resourcesand concentrate efforts in theseregions.

LUKOIL's geological exploration workin 2002 was all internally funded andbased on strict guidelines aimed atmaximizing efficiency. Key principleswere as follows:

¤ A more thorough decision processin selecting sites for exploration.

¤ Curtailment of geological explorationwork in regions, which have alreadybeen well�explored (regions developedby LUKOIL�Western Siberia, andLUKOIL�Permneft) and concentrationon new, highly promising regions suchas the Timan�Pechora oil and gasprovince, the Caspian Sea, and theBolshekhetsk Depression in Yamalo�Nenetsk Autonomous Okrug.

Exploration Drilling (thousand m)

500

400

300

200

100

02000 2001 2002

Production and Growth of Hydrocarbon Reserves(mln tons of fuel equivalent)

250

200

150

100

50

02000 2001 2002

LUKOIL's average efficiency in GeologicalExploration (tons of fuel equivalent/m)

1.41.21.00.80.60.40.2

02000 2001 2002

grew by 197 mln tons of fuel equiva�lent (including 55 mln tons of liquidhydrocarbons), which is 53% morethan in 2001.

Production Reserves Growth

LUKOIL's Finding Costs of 1 ton of fuel equivalent of Hydrocarbon Reserves (USD)

8

6

4

2

02000

Traditional Regions New Regions2001 2002

5

4

3

2

1

02000 2001 2002

LUKOIL's Average Finding Cost of 1 ton of fuel equivalent of Hydrocarbon Reserves (USD)


page 014

LUKOIL discovered 16 new hydrocar�bon fields in 2003 as well as 15 newdeposits of oil, gas and condensateat previously�known fields. Efficiencyof geological exploration work was1,280 tons of fuel equivalent permeter drilled, including 399 tons of oiland condensate.

The average cost of geological explo�ration per ton of hydrocarbonreserves in 2002 was $1.5/ton of fuelequivalent, which is down by 57%times from the same indicator in 2001and one of the best results amongstleading oil companies worldwide.

In 2002 LUKOIL prospected 10,900kilometers using 2D seismic testingand 2,100 square kilometers using3D seismic testing.

Western Siberia

Timan�Pechora

Urals

Volga RegionCaspian

Other Regions

Structure of Exploration Drilling

Russia

The company's exploration work in2002 was focused in Western Siberia,Timan�Pechora, and Yamal. Most ofthe important hydrocarbon discover�ies in Russia in recent years havebeen in LUKOIL's new regions ofactivity, particularly Timan�Pechoraand the Caspian, confirming efficienttargeting of exploration efforts by thecompany.

In Timan�Pechora seismic explo�ration work and drilling of deep wellsled to total growth in C1 categoryreserves by more than 13 mln tons offuel equivalent. Work was carried outat the Osvanyursk Structure, theYuzhno�Usinsk, Centralno�Vozeisk,Mamylskaya and Kostykskaya sitesand at the Yu. Rossokhin field.

In Western Siberia growth of C1hydrocarbon reserves in 2002 was72 mln tons of fuel equivalent, ofwhich 58 mln tons was added toreserves of LUKOIL subsidiaryYamalneftegazdobycha at theKhalmerpayutinsk field.

In Perm Oblast recoverable C1reserves of LUKOIL�Permneft grew by1.6 mln tons, and recoverable C1 cat�egory reserves of LUKOIL�Perm grewby 7.3 mln tons thanks to exploratorydrilling and seismic testing.

On the Caspian Sea Shelf, a fourthtest well was drilled at the Khvalynskfield resulting in discovery of new gascondensate and oil deposits. A firstexploration well at the Sarmatsk ele�vation discovered the fifth multi�layeroil and gas condensate field since thebeginning of deep drilling on theShelf. Growth of C1 hydrocarbonreserves at the Severny licensing sec�tor was 91.5 mln tons fuel equivalent,including 82 bcm of natural gas.

Left to right: D. Cheloyants, R. Maganov, S. Rakhmetov, A. Novikov


International Projects

On January 1, 2003 total ABC1 andC2 recoverable hydrocarbon reser�ves of LUKOIL's foreign projects were153 mln tons of oil, 36.8 mln tons ofcondensate and 157.5 bcm of naturalgas. Potential reserves from new proj�ects were approximately 400 mlntons.

Future reserve additions abroad willcome from projects that are already atthe development stage and from newprojects located primarily in theCaspian region, the Middle East andNorthern Africa.

Spending on international explorationwork in 2002 was $7.4 mln. Maininternational projects were as follows:

WEEM (West Esh el�Malahha) andMeleiha, Egypt. 12,754 meters ofexploration wells were drilled in 2002in Egypt (4,609 for the WEEM projectand 8,145 for the Meleiha project).Three wells, two of which were pro�ductive, were drilled as part of theWEEM project. Additional analysis ofseismic testing data and an estimateof reserves were also completed.Exploration drilling gave reservegrowth of 3.1 mln tons.

D�222 (Yalama), Azerbaijan. Fieldwork for analysis of the region wherethe first exploration well is to be drilledhas been completed, and data arenow being processed. A reinterpreta�tion of previous 2D and 3D seismictest results has been completed. Amore accurate structural map of thedeposit has increased current esti�mates of potential reserves from 35 to153 mln tons.

Condor, Columbia. In July 2002,LUKOIL signed a contract with theColumbian company Ecopetrol,specifying that LUKOIL would carry

Restructuring the Explorationand Production Sector

LUKOIL's strategic goals in restructur�ing of its production business are thecreation of five or six major productioncenters and reduction of production�related operating expenses and capi�tal expenditure.

Oil

Gas

Acquisition of Reserves (mln tons of fuel equivalent)

200

150

100

50

0АВС1 С2

out geological exploration work.Geological and geophysical materialshave been collected and a programof geological exploration has beendevised. LUKOIL has sub�contracted3D seismic exploration work on a ter�ritory of 100 square kilometers. Earlyestimates suggest that potential oilreserves are around 73 mln tons.

Kungradsky Block, Uzbekistan. This3,700 square kilometer block is locat�ed in the southern Aral region. Fourtest wells were drilled and two localelevations were revealed(Kungradskoye and Shege) with totalestimated potential hydrocarbon

reserves of 78 bcm of natural gas and3 mln tons of gas condensate. Thisexploratory work by LUKOIL wasenvisaged by its commitment to the'Uzbekistan' project, which includesstarting development of the Khauzak,Shady field, and Kandymskaya groupof fields.

Principles of consolidation:

¤ Control of production assets

¤ Consolidation of production assetsunder one holding company with man�agement functions

¤ Optimizing expenditures,reduction of selling, generaland administrative costs

¤ Acquisition of assets with a rapid rateof production growth

¤ Divestiture of non�core assets

Addition to LUKOIL of three Russianproduction companies (Nakhodka�neftegaz, Tugra�Neft and UralOil) in2002 increased the company's ABC1recoverable reserves by 194.6 mlntons of fuel equivalent, and by 106.7mln tons of fuel equivalent of provi�sionally estimated C1 reserves.

Consolidation of LUKOIL's explorationand hydrocarbon production facilitiescontinued in 2002.


page 016

Restructuring the Exploration andProduction Sector in Russia

In Perm Oblast, a number of produc�tion companies (Kama�Neft, RussianFuel Company, Vishersk Oil and GasProduction Company, andMaikorskoye) were annexed toLUKOIL�Perm. The share of LUKOIL�Perm in Permteks was increased to100%.

LUKOIL�Perm divested all of its serv�ice enterprises including TechnicalService Centre, Technical TransportManagement, SMU�1 ConstructionCompany, Permglavneftesnab,Permtorgservis, Permlessvyaz, Flek,and the Chaika and Vita sanatoria (alllocated in Perm Oblast).

In the Komi Republic, the number oflegal entities and other organizationsincluded in LUKOIL�Komi wasreduced from 87 to 35 through merg�ers, acquisitions and sales. Of the 52legal entities eliminated, 43 werenon�core businesses of LUKOIL�Komi in transport, financial, service,trade and other sectors. In addition,15 licenses belonging to Nobel Oiland Komi�TEK were transferred toLUKOIL�Komi.

In the Volga Region, the core oilproduction business of LUKOIL�Nizhnevolzhkneft was strengthenedby annexation of several companieswith production licenses: LUKOIL�Astrakhanmorneft, LUKOIL�Saratov�neftedobycha, Geo�As, and LUKOIL�Astrakhanmorneftegaz.

LUKOIL began restructuring of itsdrilling assets in 2002. The programfor restructuring of LUKOIL's largestdrilling assets, LUKOIL�Drilling, envis�ages:

¤ Divestiture of non�core divisions.

¤ The sale of a stake in LUKOIL�Drilling to a foreign investor.

Sale of a stake in LUKOIL�Drillingshould increase its value by:

¤ Increasing efficiency and prof�itability of oil production.

¤ Cutting costs.

¤ Creating a competitive environ�ment in the drilling and service sec�tors.

¤ Integration of new technologiesand attraction of top�quality special�ists.

¤ Long�term cooperation with inter�national drilling and service compa�nies, which will help to meet LUKOIL'sneeds in both of these areas.

¤ An injection of financial resourcesfrom sale of the stake.

Lifting Costs (USD/bbl)3.0

2.9

2.8

2.7

2.6

2.5

2.4

Share of Idle Wells

20%

15%

10% 1.01.02 1.04.02

16.1% 16.5%17.5% 18.0%

19.2%

1.07.02 1.10.02 1.01.03

Gains from Cost Reduction in 2002 (mln USD)

50

40

30

20

10

0Q 1 Q 2 Q 3 Q 4

Q 12001

Q 22001

Q 32001

Q 42001

Q 12002

Q 22002

Q 32002

Q 42002

A total 1,138 low�production andhigh�cost wells (approximately 4% ofall operating wells) were decommis�sioned in 2002, reducing productioncosts from $2.74/barrel in 2001 to$2.60/barrel in 2002.


Restructuring the Exploration and ProductionSector in International Projects

In December 2002, LUKOIL agreed to sell its10% stake in the Azeri�Chirag�Gyuneshli projectto Japan's Inpex Corporation for $1.375 bln aspart of the company's asset optimization pro�gram. LUKOIL is also considering reduction of itsshare in other projects, in which the companydoes not have the role of project operator.Resources from sale of these assets will bedirected to high�efficiency projects that repre�sent LUKOIL's core business profile both athome and abroad, including privatization proj�ects.

Field Development and Production

Russia

Capital expenditures in oil production in 2002was $1,411 mln, of which $384 mln was spent inTiman�Pechora and Caspian regions.

LUKOIL produced 79.8 mln tons of oil1 in 2002,up 2% from 2001. Company subsidiaries pro�duced 71.3 mln tons (against 68.2 mln tons in2001) and LUKOIL's share in the oil produced byaffiliated companies was 5.7 mln tons.

LUKOIL produced 76.9 mln tons of oil insideRussia, accounting for 20.3% of total Russianproduction for the year.

On 1 January, 2002 LUKOIL had 368 fields on its

Sales Price of Reserves (USD/bbl)

8

6

4

2

0

6.16

3.7 3.62.4

LUKOIL's saleof its 10%

share in Azeri�Chirag�

Gyuneshli toInpex (2002)

Ramco's saleof a 2.08%


Gyuneshli toAmerada

Hess (2001)

Ramco's saleof a 0.8%


Gyuneshli toDevon

Energy (2000)

Kazakhstan'ssale of a 5%share in the

Tengiz project toChevron (2000)

The Azeri�Chirag�Gyuneshli Project

Project Participants: BP (project operator, 34.14%),Unocal (10.28%), SOCAR (10%), LUKOIL (10%), Statoil(8.56%), Exxon Mobil (8%), Turkish Petroleum (6.75%),Devon Energy (5.63%), Itochu (3.92%), Delta HessKhazar (2.72%).

The project operator, the Azerbaijan InternationalOperating Company (AIOC), estimated in 2002 that theproject's recoverable oil reserves had increased bymore than 700 mln barrels (from 4,645 mln to 5,410 mlnbarrels) during the agreement period.

On 1 January, 2003 Miller and Lents estimated the Azeri�Chirag�Gyuneshli project PSA proven reserves at 785mln barrels of oil.

LUKOIL's share of oil reserves in the Azeri�Chirag�Gyuneshli project was 78.5 mln barrels of provenreserves, 32.0 mln barrels of possible reserves, and35.4 mln barrels of probable reserves.

80

60

40

20

02000

Russian Production Production Abroad2001 2002

Oil Production (mln tons)

balance sheet, including 269 under develop�ment, 67 under exploration, 31 prepared forproduction activities and 1 temporarily closed.By 1 January, 2003 the number of fields underdevelopment had risen to 291, including newacquisitions. Production was launched at 10new fields in 2002.

1 Production in Russia and abroad, including all subsidiariesand affiliated companies.


page 018

The company completed 1.358 mlnmeters of production drilling and built640 new wells in 2002. The companyhad 28,100 operational wells as of 1January, 2003, of which 5,400(19.2%) were idle.

Improved production techniques in2002 reversed the decline in averagewell production rate for the first time inseveral years, increasing this indicatorto 9.0 tons/day from 8.6 tons/day in2001.

Production Drilling (thousand m)

2,500

2,000

1,500

1,000

500

02000 2001 2002 AAverage Well Production Rate (tons/day)

10.0

9.5

9.0

8.5

8.0 2000 200220011999

Watercut at LUKOIL fields in Western Siberia

81

80

79 01.02 04.02 08.02 12.02

Western Siberia 65%

Timan�Pechora 15%

Urals 12%Volga Region 1%

Caspian 0%Other Regions 7%

New Wells by Region

Measures taken in 2002 made it pos�sible to curb growth in watercut andreduce pumping of water. LUKOIL�Western Siberia, which accounted for62% of company production in 2002,reduced pumping and production ofwater by more than 50,000 tons perday by closure of water�bearing,unprofitable wells and other meas�ures. In addition, LUKOIL carried out5,614 operations on wells to enhanceproduction rates.


International Projects

In 2002 LUKOIL was involved in 11international projects for explorationand production of hydrocarbons inAzerbaijan, Kazakhstan and Egypt.Six of these projects produced oil andgas condensate (Azeri�Chirag�Gyuneshli, Karachaganak, Tengiz,Kumkol, Meleiha and WEEM) andthree of the projects produced naturalgas (Karachaganak, Tengiz andKumkol). LUKOIL's share of oil andgas condensate from these projectswas 2.9 mln tons (around 3.6% oftotal company production in 2002),up 31% from the 2001 figure.LUKOIL's share of the natural gas pro�duced by these projects was 0.84bcm, up 25% from 2001. 55 new wellswere drilled in foreign oil and gasdevelopments involving LUKOILthrough 176,600 meters of rock in2002.

Average production cost of LUKOIL'sinternational projects in 2002 was$1.43 per barrel of oil equivalent.

Project

Azerbaijan

Zykh�Govsany

Azeri�Chirag�Gyuneshli

LUKOIL project share

50.0%

10.0%

Events in 2002

LUKOIL is the operator of this project, and carried out work in 2002 to prepare pro�duction wells for rehabilitation.

LUKOIL's share in oil production was 551,400 tons. As of 1 January, 2003, the projecthad 28 oil wells and 74 gas wells, 17 and 40 of which were idle, respectively.

In December 2002, LUKOIL agreed to sell its share in the Azeri�Chirag�Gyuneshli proj�ect to Japan's Inpex Corporation. The sale price (subject to particular conditions) was$1.375 bln.


page 020

Project

Shakh�Deniz

D�222 (Yalama)

Kazakhstan

Karachaganak

Kumkol

Tengiz

Egypt

Meleiha

WEEM

Columbia

Condor Block

Iraq

Western Kurnah

LUKOIL project share

5.0%

60.0% %(increased to 80%at the beginning of 2003)

15.0%

50.0%

2.7%

12.0%

50.0%

70.0%

68.5%

2002 events

A pilot well was drilled and detailed project�planning work completed for the first wellon the TPG 500 installation platform. Tender participants for the contract to build theTPG 500 platform was evaluated, and tenders for the laying of pipeline and equipmentinstallation carried out. In Azerbaijan, the first stage of the pipeline land allocation pro�gram was officially completed.

A tender for drilling of the first exploration well was announced. Tender materials weresent out to interested parties on 3 December, 2002.

LUKOIL's share of oil and gas condensate at the field was 720,000 tons; its share ofnatural gas was 676 mcm. The project had 130 wells as of 1 January, 2003, of which56 were active. Workovers was completed on 41 wells and seven wells were deepened(two injection wells and five production wells).

LUKOIL's share of production was 1.1 mln tons of oil and 7.5 mcm of associated gas.The project has 189 oil wells, of which 176 are active, 1 idle and 13 under develop�ment. Average production rate of a new well was 47 tons/day, 26 wells were transferredto a mechanized work regime, 63,400 meters of production drilling were completed in2002.

LUKOIL's share of production at the Tengiz and Korolevsk fields in 2002 was 355,000tons oil and 155 mcm of associated gas. A total 44,300 meters of production drillingwere completed. As of 1 January, 2003 the project had 61 wells including 12 idle wells.

LUKOIL's share of production was 45,000 tons, and 8,150 meters of production drillingwere completed in 2002. The project has 81 wells including 26 idle wells.

LUKOIL's share of production was 170,200 tons, and 5,280 meters of productiondrilling were completed in 2002. The project has 16 wells, including one idle well.Average production rate of a new well was 223 tons/day.

Geological and geophysical data were collected.

The project was frozen due to UN sanctions against Iraq.


6

5

4

3

2

1

02000

in Russia Abroad2001 2002

Gas Production (bcm)

Gas Field Development and Production

Development of gas business is animportant part of LUKOIL's strategy,as demonstrated by two reports pro�duced by the company in 2002: TheConcept of Development of LUKOIL'sGas�Energy Business, andInvestment Program for Constructionof Gas Collection Facilities in 2002�2005.

The company produced 5.14 bcm ofgas in 2002, including 3.95 bcm ofassociated gas and 1.19 bcm of nat�ural gas. The overall output figure rep�resents a rise of 72.9 mcm (6.6%)from 2001. LUKOIL delivered 3.14bcm of gas to users in 2002, and thelargest part of gas deliveries weresupplied to oil and gas productionassociations in the Western Siberianregion (42.5% of total supply).

In Russia LUKOIL produced 4.3 bcmof gas in 2002, including 3.79 bcm ofassociated gas and 0.51 bcm of nat�ural gas. International gas productionwas 0.84 bcm, including 0.16 bcm ofassociated gas and 0.68 bcm ofnatural gas. The company has 253gas wells, of which 76 are idle.

In November 2002, LUKOIL signed astrategic partnership agreement withGazprom for 2002�2005. The agree�ment envisages various forms ofcooperation for transport of LUKOIL'snatural and associated gas throughthe Gazprom system.

The strategic partnership also envis�ages joint oil and gas exploration anddevelopment projects in the Yamalo�Nenetsk Autonomous Okrug, theNenetsk Autonomous Okrug and inthe Russian sector of the Caspian,specifying joint participation in con�tests and auctions for the right to use

natural resources in these regions.Development of partnership in seatransport of oil and gas condensatefrom the Nenetsk and Yamalo�Nenetsk Autonomous Okrug is alsoanticipated.

The companies agreed to supportrelations between their subsidiaries,coordinating utilization of productionthroughput capacity, refining andsales.

The Mortymya�Teterevsk vacuumcompressor station was brought intooperation in 2002, and gas deliverieswere organized to meet the needs ofthe city of Uray. This made it possibleto end uneconomical deliveries of gasto the Krasnoleninsk Gas ProcessingPlant (the deliveries were uneconom�ical because LUKOIL could not makeuse of the processed gas).


page 022

SUPPLY & TRANSPORTATION


Oil Supply

In 2002, LUKOIL supplied 79.3 mlntons of oil to users (exclusive of inter�national projects), of which 76.9 mlntons were its own oil. The companydelivered 33.9 mln tons of oil to its ownrefineries (15% more than in 2001)and 9.5 mln tons to other refineries(39% less than in 2001). Other deliv�eries of oil within Russia were 0.2 mlntons. Export oil was 34.2 mln tons (a4% increase from 2001), and 8.7 mlntons of oil were delivered to LUKOILrefineries and other refineries abroad,

Oil Transportation

The company continued its involve�ment in pipeline projects in 2002,including development of the Timan�Pechora transportation system.Reconstruction of oil collection andprocessing systems was begun alongthe Kharyaga�Usa pipeline, whichconnects the Kharyaginsk field to theKharyaga�Usinsk pipeline. The goalof the reconstruction is an increase inthroughput capacity from 10 to 13 mlntons per year. Renovation of LUKOIL�Komi's processing and transport sys�tems is due for completion at the endof 2003.

Over 11 mln tons of export oil wasrouted through the Caspian PipelineConsortium (CPC) pipeline system in2002 by CPC project participants,and an engineering survey was com�menced with the purpose of increas�ing CPC capacity.

Plans are being developed for apipeline to connect the Korobkovskyoil treatment center, the VolgogradRefinery and the CPC in order todeliver light crude from the lowerVolga region to refineries and forexport. The project has been present�ed to administrations in Volgogradand Astrakhan Oblasts.

35

30

25

202000 2001 2002

LUKOIL Crude Oil Exports (mln tons)

LUKOIL Crude Oil Export Structure

Abroad

Ukrainian Refineries

Kazakh RefineriesBelorussian Refineries

Oil Distribution in 2002 (mln tons)

Oil Supply to Users

Supplied within Russia

To refineries

To LUKOIL refineries

Export

Non�CIS

Oil Purchased Abroad

79.3

43.6

43.4

33.9

34.2

28.8

1.5

including 7.2 mln tons of the compa�ny's own oil.

LUKOIL refineries in Bulgaria, Roma�nia and Ukraine took 5.9 mln tons oftotal crude export volumes, and the

Means of Crude Oil Supply / Delivery

Transneft System

Rail TransportSea and River Transport

company's refineries abroad pur�chased 1.4 mln tons of oil from otherproducers.

Users were mainly supplied via theTransneft trunk pipeline system (92%of oil supplied).


page 024

The company continued to developits tanker fleet. The 'Saratov' and the'Usinsk', both reinforced, ice�classtankers, were launched in 2002.Construction of a second series offive river�sea tankers is under way atthe Volgograd Shipbuilding Factoryand three such tankers — the 'Inta',the 'Tambei', and the 'Pokachi' — werelaunched in 2002.

In 2002, LUKOIL transported 0.6 mlntons of oil and 2.5 mln tons of petrole�um products using its own tankers.

Transportation of Petroleum products

The initial stage of the Perm�Andrey�evka trunk pipeline, connecting thePerm Refinery (LUKOIL�Permnefte�orgsintez) to the Transnefteproduktsystem, was brought on line in 2002.This is the first private petroleumproduct pipeline to be linked to thestate�owned system. The first sectionis 335.3 kilometers long and hasthroughput capacity of 2.4 mln tons ofpetroleum products per year. Its costwas over $95 mln with a seven�yearpayback period.

The Perm�Andreyevka petroleumproduct pipeline will facilitate suppliesfrom LUKOIL�Permnefteorgsintez tothe southern portion of Perm Oblast,the regions of Udmurtiya andBashkiria and other adjoining regions.The pipeline will also facilitate exportsand create new jobs in these mainlyrural regions.

The pipeline includes a main pumpingstation at Perm, the pipeline itself,underwater connectors, meteredjunctions (to measure passage ofpetroleum product), and automaticloading stations. Emergency recoveryposts are spaced along the pipeline

In 2002, oil shipments from theTiman�Pechora oil province contin�ued year�round from the Varandeishipping terminal to Rotterdam, usingArctic tankers. Construction of a sta�tionary shipping terminal is planned atVarandei in order to accommodateincreasing volumes, and plans for theconstruction project have been sub�mitted to required Russian govern�ment experts.

LUKOIL, YUKOS, Sibneft, TNK, andSurgutneftegaz signed a Memo�randum of Mutual Understanding inNovember 2002, stating their intent tocreate a pipeline system for transportof oil through a bulk�oil terminal inMurmansk region in order to accom�modate growing oil export volumesfrom Western Siberia and Timan�Pechora,


with special equipment for localizingand liquidating spills. The pipeline isfitted with Honeywell automated tele�mechanical systems, providing maxi�mum levels of ecological security.

Construction work on the VysotskExport Terminal began in June2002. The terminal will receive petro�leum products shipped in by rail(heavy fuel oil, ecologically friendlydiesel fuel, gasoline and motor oils)with capacity for 10.7 mln tons ofpetroleum products per year. TheVysotsk Terminal will enable LUKOILto significantly increase product deliv�eries to Europe and the USA, as wellas improving its system of transportand storage for petroleum products.The first loading complex, with capac�ity of 2.5 mln tons, should start tooperate in Q4 2003.

LUKOIL is also building an AstrakhanTerminal, which should be able totake up to 8 mln tons of petroleumproducts per year. The AstrakhanTerminal may also be used for trans�port of crude oil. In its initial stages theTerminal will be able to take through�put volumes of around 1.1 mln tons oflight petroleum products, with poten�tial to increase capacity to 5.2 mlntons and later to 8 mln tons.

Petroleum products will be deliveredto the Terminal year round by ship. Oilwill be delivered using river�seatankers and rail transport.

Construction of the bulk�oil complexat Astrakhan will be completedbetween 2003 and 2005. Two oilloading racks, a pumping station anda boiler installation will be built. Atpresent work is being completed on a17�kilometer railway line betweenTrusovo and the oil storage facilities,linking them to the Volga region railsystem.


page 026

REFINING, PETROCHEMICALS & MARKETING

Production of high�octane gasoline atLUKOIL refineries rose by 16.9% in2002 thanks to modernization, andthe share of high�octane gasoline intotal automotive fuel produced was50.6% (2% higher than in 2001). Theshare of high�octane gasoline in totalautomotive fuel produced at LUKOIL'sforeign refineries rose from 88.6% to94.1%. Production of packagedmotor oils grew by 5.3% comparedwith 2001.

LUKOIL refined 41.6 mln tons of oil atits own refineries, including 33.9 mlntons at its Russian refineries (18% oftotal oil refined in Russia). Increasedshare of processing by Russian plantscontributed to capacity optimization.

page 027


Oil Refining

LUKOIL owns significant oil refiningcapacity both in Russia and abroad.The company's Russian refineries(Volgograd Refinery, Permnefteorg�sintez, Nizhegorodnefteorgsintez,and the Ukhta Refinery) can refine40.4 mln tons of oil per year, repre�senting 16% of total Russian refiningcapacity. LUKOIL's refineries abroadhave combined capacity of 17.8 mlntons per year. The company's foreignrefineries are LUKOIL�Odessa Refinery(Odessa, Ukraine), LUKOIL�NeftokhimBurgas (Burgas, Bulgaria), andPetrotel�LUKOIL (Ploesti, Romania).

In 2002, LUKOIL refined 44.9 mlntons of oil at its own and third�partyrefineries. Capacity utilization rate atLUKOIL's Russian refineries wasincreased as part of the company'srestructuring program, and 33.9 mlntons of oil (15% more than in 2001)

were refined. This created $355 mlnextra income from sale of petroleumproducts, and made it possible forLUKOIL to reduce the amount ofcrude oil sold on the domestic market.

The company's refineries abroadprocessed 7.7 mln tons of crude,which is 10% less than in 2001. Thelower volumes are mainly due to tem�porary closure of LUKOIL's Romanianrefinery (Petrotel�LUKOIL) for mod�ernization as part of the company'srestructuring program. The modern�ization will equip the refinery for pro�duction of Euro�3 and Euro�4 stan�dard petroleum products.

50

40

30

20

10

0

Domestic refineries

Refineries abroad

2001 2002

LUKOIL Refineries Throughput (mln tons)

Volgograd Refinery

Permnefteorgsintez

Ukhta Refinery

Nizhegorodnefteorgsintez0 20 6040 80 100

Refinery Utilisation Rate (%)

Left to right: A. Smirnov, Y. Storozhev, D. Tarasov, V. Zhuravleva, V. Rakitsky


page 028

Petroleum product name

Gasoline

Jet fuel

Diesel fuel

Fuel and heating oil

Bitumen

Coke

Oil

Capacity(mln tons/year)

12.1

9.9

3.7

15.0

40.7

3.6

3.5

10.7

17.8

58.5

LUKOIL's RussianRefineries

4.4

1.6

9.8

9.2

1.2

0.5

1.1

NelsonComplexity

Facor

5.4

3.9

1.8

3.6

3.7

3.0

5.7

7.1

5.3

All Russian Refineries

27.3

6.7

49.6

46.9

4.1

1.0

2.5

Refinerythroughput in 2002

(mln tons)

11.1

8.4

3.6

10.6

0.2

33.9

2.5

—

5.2

7.7*

41.6

LUKOIL's share inoverall Russian

production

15.9

23.9

19.8

19.6

28.4

43.6

42.0

Production of petroleum product (mln tons)

LUKOIL carried out $260 mln capitalinvestment in 2002 for integration ofnew technologies, modernization andproduction expansion at its refineries.

Licensed hydrode�waxing technolo�gy, developed by Chevron, wasinstalled at the Volgograd Refinery,enabling the first production in Russiaof high�index isoparaffin�based(group III) oils, which are the basiccomponent of high�grade motor oils.

The atmospheric distillation unit AVT�5 at the NizhegorodnefteorgsintezRefinery was repaired, increasingcrude oil refining capacity. Construc�tion of a T�star hydrocracking com�plex continued at the Perm refinery.

The company's refineries outsideRussia pursued a process of integra�tion: the Odessa Refinery and theBurgas Refinery are increasigly run asan integrated operation.

LUKOIL is continuing efforts to raisequality and competitiveness of itsproducts. The international standardsbody BVQI (Bureau Veritas QualityInternational) has certified LUKOIL'sforeign refineries as meeting ISO9001:2000 standards for quality man�agement.

* Including 400 thousand tons of fuel oil from the Odessa Refinery refined in Burgas.

LUKOIL Refining Capacity

Refinery

Permnefteorgsintez

Volgograd Refinery

Ukhta Refinery

Nizhegorodnefteorgsintez

Mini�Refineries in Uray and Kogalym

Subtotal for Russian Refineries

Odessa Refinery (Ukraine)

Petrotel�LUKoil (Romania)

LUKoil�Neftokhim Burgas (Bulgaria)

Subtotal for Refineries Abroad

Total

Production of Basic Petroleum Products at LUKOIL's Russian Refineries


Natural Gas Processing

Refining of gas is a vital step towardincreasing the utilization of gas pro�duced. In 2002, the company acquiredthe Lokosovsk Gas Processing Plant,enabling increase of gas refining from2.3 bcm in 2001 to 2.7 bcm in 2002.LUKOIL delivered 2.7 bcm of gas to in2002, of which 2.1 bcm went to thecompany's own processing plants.

Lokosovsk Processing Plant

Permneftegazpererabotka

Korobkovsk Processing Plant

Usinsk Processing Plant

0 200 400 600 800 1000

Refining of Associated Gas at LUKOIL's Gas Processing Plants (mcm)

LUKOIL produced 400,400 tons ofliquid natural gas via processing, andthe Lokosovsk Processing Plant pro�duced 292,900 tons of natural gasplant liquids in 2002. A portion of gasproduction also goes to Permnefe�gazpererabotka, a processing facilityin Perm, increasing capacity usage ofthis business unit and providing addi�tional output of liquid production.

Production of liquid hydrocarbons(stable gasoline and isopentane) was126,400 tons and refinery gas outputwas 1.3 bcm.

Lokosovsk Processing Plant

Permneftegazpererabotka

Korobkovsk Processing Plant

Usinsk Processing Plant

0 20 40 60 80 100

Utilisation Rate of LUKOIL’s Gas Processing Plants (%)

Petrochemicals

LUKOIL petrochemical plants (Stavro�len, Saratovorgsintez and LUKOR)refined 1.99 mln tons of crude oil in2002 (24% more than in 2001), work�ing at 74.3% of capacity (57% in2001).

Output of polyethelene, the principleproduct in the petrochemical andrefining sector, was 431,600 tons,representing 17% increase from 2001levels. Exports of petrochemicalswere 70.5% of total production.

Petrochemical units increased theirintegration with the rest of the compa�ny: 78.4% of raw materials for petro�chemical production were producedby LUKOIL itself, compared with70.7% in 2001, enabling reduction ofpurchase costs.

LUKOIL invested $15 mln in re�equip�ment and modernization of its petro�chemical business in 2002.

Petroleum Products Supply

LUKOIL delivered 35.5 mln tons ofpetroleum products in 2002, or 99%of the volume in 2001. Of this amount,21.3 mln tons were supplied toRussian users (down 15% from 2001levels) while export was 14.2 mlntons. Supply by refineries abroad was6.9 mln tons.

The structure of oil product sales onthe domestic market changed in2002, with an increase in automotivegasoline sales and a significantdecrease in heating oil sales.

Change in the Structure of Oil Product Supply

Gasoline

Diesel Fuel

Heating Oil

Other

2001 2002

In domestic supplies there was a sig�nificant increase in the share of prod�ucts supplied to the company's owndistributors. This share rose by 50%compared with 2001, to 9.1 mln tons.

Petroleum products are delivered byrail, river and pipeline. LUKOIL's sub�sidiary, LUKOIL�Trans, carried 12.3mln tons of petroleum products by railin 2002 (41% more than in 2001)using its own rolling stock


page 030

Petroleum Products Exports

LUKOIL exported 14.2 mln tons ofpetroleum products from Russia in2002, representing a 32% increasefrom 2001.

15

13

11

9

7

52000 2001 2002

Export of Petroleum Products (mln tons)

Increased exports of petroleum prod�ucts are largely due to production atthe Nizhegorodnefteorgsintez Refi�nery, which has made it possible toreduce specific commercial costsacross the entire company.Construction of a petroleum productterminal at Vysotsk on the Gulf ofFinland, which began last year, is

Export of Petroleum Products by Transport Type

Pipeline

Railway

Sea and river

intended to redirect export deliveriesfrom high�cost routes through theBaltic republics to more cost�efficientroutes via Russian ports. Capacity ofthe first loading complex at Vysotskwill be 2.5 mln tons per year, and ulti�mate capacity of the complex will be4.3 mln tons/year. Construction of theterminal will facilitate maximum prof�itability whilst allowing for fluctuationsin the volume of oil refined at Russianrefineries, exported by rail, and soldon the domestic market

Export supplies of motor oilsincreased in 2002 to 388,200 tons,representing 41% growth from 2001.

Export of Motor Oils (thousand tons)

500

400

300

200

100

02000 200220011999

Export of packaged motor oils rose to8,980 tons in 2002, up 6.5 times from2001.

Petroleum ProductsMarketing

LUKOIL's sales network covers 58regions in Russia, the CIS, the Balticcountries, Europe and the USA. It con�sists of 263 tank farms and 4,076 fillingstations, including 215 tank farms and1,691 filling stations in Russia (includ�ing franchises), and 48 tank farms and2,385 filling stations (including leases)in Europe and the USA.

Distribution of LUKOIL filling stations by region

Baltic Countries

Russia

Europe

USA

Sales of petroleum products throughthe retail network in 2002 were 5.8mln tons (2% more than in 2001), ofwhich 2.4 mln tons in Russia, 0.9 mlntons in Europe, and 2.4 mln tons inthe USA.

Russian petroleum product distribu�tors showed 20% growth in salesthrough the LUKOIL retail/filling sta�tion network compared with 2001.

CIS


Work is continuing on development ofthe LICard purchase system, andintroduction of internationally recog�nized payment (credit and debit)cards. The number of filling stationsequipped with LICard rose to 1096 in2002 (39% growth from 2001). Thenumber of LICards in circulation was105,900, up 40% from 2001. Cardsales of petroleum products rose to247,000 tons, representing a 45%increase from 2001.

All told, the company's sales struc�tures sold 25.8 mln tons of petroleumproducts including 13.6 mln tons inRussia, 9.2 mln tons in Europe, and3.0 mln tons in the USA.

Restructuring of the company'sdomestic petroleum product salessector was completed in 2002. Thisinvolved creation of 13 regional petro�leum product distributors in 50Russian regions. LUKOIL incorporat�ed 16 of its previous regional salescompanies into the new structure,while the remaining 15 were closed orsold. Capital expenditures to the mar�keting sector amounted to $553 mlnin 2002.

Closure of tank farms was continued(18 were eliminated inside Russia).Organizational structure of remainingfacilities was streamlined, and cost ofinternal transport was reduced.


page 032

ENERGY EFFICIENCY IN THE PRODUCTION

& REFINING SECTORS


Energy saving and increased energyefficiency is a key aspect of LUKOIL'sdrive to reduce costs and boost over�all efficiency of the company. Energyuse reviews at subsidiary companiesare an important way of locatingpotential for savings, and LUKOIL hasdeveloped and adapted norms andmethodology for energy auditing thatare specially designed for the compa�ny's business structure. Technicalequipment, and optimal analysis andinspection techniques allow locationand explanation of inefficientfuel/energy use so that energy�savingsolutions can be implemented.

Such energy reviews, along with strictregulation of fuel and energy use, andsetting of targets for increased effi�ciency, have helped LUKOIL to breaka trend toward increasing energy con�sumption. Since Q3 2002, a systemfor regulating fuel and energy use hasbeen in place at the company's sub�sidiary enterprises, allowing reductionof energy use in oil refining by 9.3% in2002 compared with 2001. Reducedexpenditure of thermal energy (themost expensive type of energy) in oil�refining was particularly important.The absolute amount of thermal ener�gy used in the refining processdecreased by 6.3% in 2002 despiteincrease in volumes of oil refined.LUKOIL also began to generate moreof its own thermal energy, mainly byharnessing heat created by opera�tions at its installations. Thermal ener�gy purchases were reduced by 8.3%.

Energy usage in oil production wasreduced to 58.0 kg of fuel equiva�lent/ton (down from 59.1 in 2001),mainly through intensification of oilproduction at wells and implementa�tion of strict controls over systems forflooding reservoirs to maintain pres�sure levels.

Efficiency of LUKOIL's energy�savingpolicies is supported by a unique sys�tem of regulations and methods foranalysis of energy use. The companyhas developed a method for measur�ing specific regulated fuel and energyusages, including an automated pro�gram/technical package for monitor�ing of the oil�production and (primary)refining sectors. This work will beintensified, and development of prin�ciples and program support for regu�lation of fuel/energy resources at thecompany's petroleum product distrib�utors will also be extremely important.

Overall energy savings in 2002thanks to LUKOIL's program were220.7 mln kilowatt hours (electricity),256.4/Gcal (thermal energy), and9,477.5 tons of fuel equivalent (heat�ing fuel). Resulting financial savingsin 2002 were $7 mln.


page 034

CARING FOR THE ENVIRONMENT, HEALTH & SAFETY

LUKOIL acknowledges its responsi�bility to ensure safety, protect theenvironment and make wise use ofnatural resources. The companygives priority to safe working condi�tions for employees, health of per�sonnel and local populations livingnear LUKOIL projects, and environ�mental conservation.

In 2002, the LUKOIL Board approvedcompany policy on industrial safety,employee welfare and the environ�ment. The following goals were set:

¤ Constant improvement of industrialsafety and employee welfare condi�tions, and efforts to preserve the envi�ronment, along with company con�trols to measure progress in theseareas.

¤ Rational use of natural resourcesinvolved in production or adjacent toareas where the company is pursuingactivities.

¤ Achievement of industrial andecological safety levels appropriateto contemporary standards of devel�opment in science, technology andsociety.

¤ Increased industrial and ecologicalsafety at company production sites,reduction of damage to the environ�ment through increased equipmentreliability, and support of a safe andemergency�free working environ�ment.

¤ Reduction of impact on the envi�ronment at new sites throughimproved pre�project and projectdocumentation, including improvedexpertise on questions relating to theenvironment and industrial safety.

¤ Reduction of impact on the envi�ronment at new sites throughimproved pre�project and projectdocumentation, including improvedexpertise on questions relating to theenvironment and industrial safety.

LUKOIL activities and the activities ofits subsidiaries in 2002 fully compliedwith requirements of Russian law onindustrial safety, employee welfareand environmental protection.

page 035


¤ Creation of an effective companyprocedure for preparation and imple�mentation of safety, employee welfareand environmental programs, assist�ing rapid discovery and solution of keyissues facing LUKOIL in the spheresof industrial and environmental safety.

¤ Stabilization and eventual reduc�tion of outputs of toxins, pollutants,and other waste accompanyingincrease of production volumes, byuse of the latest technologies, equip�ment and materials and by increase inthe level of automated managementcontrol.


page 036

LUKOIL has traditionally been aleader amongst Russian companiesin terms of industrial safety and envi�ronmental protection. In December2002 LUKOIL was named winner ofthe 'Best Russian Businesses' com�petition, organized by the RussianChamber of Commerce and Industryand the Russian Union of Industrialistsand Entrepreneurs. LUKOIL was alsoawarded a special prize 'For highestachievement in ecological policy andquality of operations.'

The company's environmental pro�tection and industrial safety policiesare laid out in its 'EnvironmentalProtection Management System' and'System for the Management of

Industrial Safety and EmployeeWelfare.' The first audit of these sys�tems was performed in January 2002,and results confirm that LUKOIL isindeed working according to the stan�dards, at which it has been certified(ISO 14001 and OHSAS 18001).

In 2002, the company began a pro�gram to certify its subsidiaries accord�ing to international standards for:quality control (ISO�9000 series),

environmental protection (ISO�14000series) and industrial safety andemployee welfare (OHSAS 18000).This certification is due to be com�pleted by 2007. LUKOIL�Permneftand LUKOIL�Permnefteorgsintezwere certified in December 2002


Many of the environmental measures,carried out by LUKOIL subsidiarieslast year, were connected with thecompany's environmental programfor 2000�2003. Action was also takenas part of Komineft's five�year pro�gram to clean up polluted land�blocks and avoid crude oil leakages,and as part of an ongoing environ�mental program in Timan�Pechora

LUKOIL spent $170 mln for environ�mental purposes in 2002, of which$40 mln on construction of installa�tions.

LUKOIL's project to develop theKravtsovskoye offshore field (D�6) inthe Baltic won environmental approvalin 2002. The company is also carryingout successful environmental mainte�nance of the project to construct anexport terminal at Vysotsk inLeningrad Oblast.

In the first half of 2002 KPMG com�pleted a full�scale external ecologicalaudit of LUKOIL to prepare the com�pany for listing on the London StockExchange. The result of the audit waspositive, contributing to full secondarylisting of LUKOIL shares on the LSE.

LUKOIL spent $160 mln last year aspart of its 2002�2005 program forindustrial safety, employee welfareand avoidance of accidents.


page 038

DEVELOPMENT OPPORTUNITIES FOR PERSONNEL

39


The company pays special attentionto professional training for its employ�ees. Employee qualification is one ofthe most important factors influencingthe company share price, so invest�ment in employee training is asimportant as investment in otherareas.

LUKOIL's HR policy aims to maintainthe high professional level of its topmanagement team and to integrateinternational experience into thecompany's corporate culture. Thesegoals are met through a system ofprofessional training for companyemployees at all levels, since lower�ranking employees are candidates forthe company's top positions in thefuture.

By allocating significant resources tosocial programs and personnel pro�grams, LUKOIL can support a highlevel of employee ability, strengthenits professional team and maintain itsreputation as an employer of excel�lence on the external job market.

The key to development of staffpotential is work with youngeremployees. The company hired morethan 700 young specialists in 2002and special attention was paid to workwith educational institutions, includingsigning of a number of training agree�ments. A total 530 students andLUKOIL employees are currentlystudying at the Gubkin Russian StateOil and Gas University and at Perm,Ukhta and Tyumen Universities,assisted by commercial contractswith the company. LUKOIL has coop�erated with the universities to selectthe best students, with whom intern�ship and preliminary employmentagreements have been signed.

Social Policy

The company's social policy seeks toincrease work efficiency, promote thesocial welfare of employees and cre�ate stability in the company's workforce. Good social policies attractqualified specialists, reduce staffturnover rates, strengthen team spiritand form the basis of a well�run busi�ness.

The basic tenets of LUKOIL's socialpolicy, in use across all company sub�sidiaries, are laid out in LUKOIL'sSocial Code, which was approved in2002. The Code supports basic laborrights and principles, internationalnorms, and acting laws in Russia andother countries where LUKOIL hasactivities.


page 040

The Basic Provisions of LUKOIL'sSocial Policy are:

¤ Corporate insurance and socialsecurity.

¤ Voluntary medical insurance.

¤ Insurance for accidents in theworkplace.

¤ Private pension provisions.

An agreement between the compa�ny and its employee union for theyears 2003�2005 was approved inDecember 2002 on the basis ofLUKOIL's Social Code.

This agreement represents signifi�cant improvements in guaranteedsocial and economic welfare ofemployees as compared to provi�sions in Russian legislation. In par�ticular, it contains the followingpoints:

¤ Benefits and other paymentsmade, as per the 'Benefits, guaran�tees and compensation' section, willbe determined based on the wagerate, and will be indexed together withwage rates and should reflect favor�ably on the social stability of theemployee team.

¤ The percentage of relief paid isincreased compared to the previousagreement (the increase is between20% and 55 % for various cases).

¤ A housing program for employeesof LUKOIL and organizations con�trolled by LUKOIL was announced.The program will help employees tosolve their housing difficulties takingaccount of the financial resources ofthe organizations involved andspecifics of the housing market in dif�ferent regions.

LUKOIL also provides significant fundsto supplement social payments fromthe government's Social InsuranceFund, as per the following articles:

¤ Employee refunds toward holiday,rest and recuperation expenses.

¤ Payments to support sport andhealth pursuits of employees.

¤ Social support for women and fam�ilies with children.

Left to right: A. Yashchenko, A. Barkov, A. Moskalenko


The company spent $14 mln onsocial payments in 2002.

LUKOIL spent $24.5 mln on medicaland health care in 2002, and made$13.8 mln worth of contributions tovoluntary employee medical plans

(1.6 times more than in 2001). In total,65,263 company and subsidiaryemployees were taking advantage ofLUKOIL's voluntary health coverageas of 31 December, 2002.

Pension Provisions

An integral portion of the company'ssocial policy is its commitment to pri�vate pensions for employees.

LUKOIL and its subsidiaries granted1,330 private pensions in 2002 andhas granted a total of 5,226 pensionsto date. Pensions were indexed to therate of inflation during the accountingperiod.

PricewaterhouseCoopers completedan independent actuarial audit of thecompany's pension obligations in2002.


page 042

CHARITY & SPONSORSHIP ACTIVITIES


Charity and sponsorship activitieshave become a significant part of cor�porate strategy for major companies,which have understood that opera�tions for the benefit of shareholderscannot neglect the good of society asa whole. By helping to create the con�ditions for a flourishing society, acompany is also laying the founda�tions for its own long�term success.Charitable activity is therefore a pillarof LUKOIL's social policy.

LUKOIL organizes and implementsnumerous charitable events and activ�ities, based on the following principles:

¤ Provision of direct support toorganizations and individuals.

¤ Systematization of long�term pro�grams, in order to maximize theireffectiveness.

¤ Openness and publicity, includinginformation on every program.

LUKOIL's main charity programs arethe following:

Support for Children's Homes andSchools. For many years, LUKOILand its subsidiaries, together with theLUKOIL Charity Fund, have spon�sored a number of orphanages inWestern Siberia, in the cities of Kirov,Usinsk, Saratov, Syktyvkar, Arkhan�gelsk, St. Petersburg, Velikiy Ustyug,and Perm, and in Astrakhan,Volgograd, Kaliningrad and NizhnyNovgorod Oblasts. The objective ofthese programs is to give parentlesschildren a place to live, help them tofind professions and enable them togrow up with a sense of being impor�tant members of society.

As part of this program, LUKOIL sup�ports the Katolikov AgriculturalInternat (Orphanage) in Syktyvkar,and in the Volgograd Oblast the com�pany has rebuilt orphanages inZhirinovsk and Frolovo, as well as pro�viding a a new building for the orphan�age in Kotovo.

Every year children from orphanagesin Uray, Ishim, Langepas, Kirov andUsinsk take a holiday on the BlackSea paid for by LUKOIL.

In Langepas, LUKOIL has providedthe only rehabilitation center for hand�icapped children in Western Siberia,supplying the center with wheel chairs

and medicine, and installing a com�puter�learning facility.

In 2002, LUKOIL gave 10 buses toschools in Leningrad Oblast, mostlyas part of a program to support trans�port for educational institutions, whichare far from urban centers.

For a number of years LUKOIL and aUNESCO have run a joint programcalled 'Every blind child gets a bookas a gift', providing 'illustrated' booksfor blind children.

Keeping Cultural Heritage. The goalof this program is development ofRussian culture, renewal of spiritualityand preservation of national tradi�


page 044

tions. LUKOIL supports a number ofleading museums including thePushkin Museum of Fine Art, theMoscow Kremlin Museum, theRussian State Museum, theVasnetskov Museum of Art (KirovOblast), the 'Maliye Korely'Arkhangelsk State Museum ofWooden Architecture and Folk Art, theUkhta Regional Museum (of folklore,history and culture), and theAstrakhan Kremlin. LUKOIL is partici�pating in a project to restore theatomic icebreaker 'Lenin' as a muse�um of the history and development ofatomic�powered shipping in Russia.

LUKOIL has helped to finance theTchaikovsky State AcademicSymphony Orchestra, the Perm StateTheatre of Opera and Ballet, the

Berezka State Academic BalletEnsemble, the Academic Choir ofRussian Song, and the KalinkaNational Dance Ensemble. LUKOILhas places on the Trustee Board ofthe Bolshoi Theater and theTchaikovsky Conservatory of Music inMoscow.

LUKOIL's initiative to support revival ofthe Church and spiritual life in Russiaincludes major projects in large citiesand throughout Russia's regions.Churches and monasteries, whichhave benefited from LUKOIL support,include: the Antonievo�SiyskiyMonastery of the Holy Trinity inArkhangelsk Oblast, the Church ofMichael the Archangel and theConstantino�Eleninsk Church inVolgograd Oblast, the FerapontovMonastery in Vologda Oblast, theChurch of Faith, Hope, Love and theirmother Sophia in Kaliningrad Oblast,the Monastery of St. Nicholas inBelogorsk, the Stefanov Monastery ofthe Holy Trinity in Perm, the Monastery

of the Assumption in Obninsk, and theChurch of St. Nicholas in PermOblast.

Educational Programs. LUKOIL'seducational programs help to preparea new generation of oil and gas pro�fessionals. The company has set up aLUKOIL Scholarship to support themost promising students at Russia'sleading oil institutes, including: theGubkin Russian State University of Oiland Gas, St. Petersburg State MiningInstitute, Perm State Technical Univer�sity, Ukhta State Technical University,Tyumen State Oil and Gas University,Ufa State Oil and Technical University,Volgograd State Technical University,Samara State Technical University,and Arkhangelsk State TechnicalUniversity. LUKOIL also purchasesequipment for these institutions,ensuring that courses are up�to�date.LUKOIL has allocated funds for cre�


ation of a geo�physical computermodeling laboratory at the GubkinUniversity, equipped a computer lab�oratory at Tyumen University, donateda well�repair simulator to PermUniversity, and has donated modernprinting equipment and a trial standfor training of deep�well drilling spe�cialists to Ukta University.

Support of Medical Institutions.LUKOIL helps to fund major centersfor specialist medical research inMoscow and St. Petersburg. Theseinclude the Centre for Obstetrics andGynecology, the Blood ResearchCentre, the Vishnyevsk CentralMilitary Clinical Hospital, theBurdenko Military Hospital, theCentral Institute for RadiologicalResearch, and the Leningrad OblastClinical Hospital. LUKOIL also helpsto fund hospitals in regions where ithas activities. Modern diagnosticequipment was provided for theVologda Oblast Children's Hospital,

Volgograd Municipal Hospital No.16,and the Kaliningrad Port Hospital.LUKOIL also paid for a special mobileincubator for transport of newbornbabies at the Vologda OblastChildren's Hospital and a resuscita�tion unit at Ukhta City Hospital wasrenovated using funds provided byLUKOIL.

In Kstovo, where the LUKOIL�Nizhegorodnefteorgsintez Refinery islocated, LUKOIL sponsors a healthprogram for company employees andthe local population. The factory hasopened a modern health care centerfor women, a state�of�the�art modern

dentistry facility, a modern clinic withx�ray equipment and workstations fordoctors. LUKOIL also funded renova�tion of the children's wing at KstovoRegional Hospital.

Aid to servicemen, veterans, andvictims of natural disasters. Workingthrough the military commissariats ofMoscow, Vologda, Astrakhan,Kaliningrad, Tyumen, and otheroblasts, LUKOIL provides aid to fami�lies of servicemen who have beenkilled on active service or disabled inthe Chechen War. Every year on theeve of WWII Victory Day, LUKOILmakes payments to WWII veterans,particularly those who have alsoworked in the oil ad gas industry.

After the Kursk submarine tragedy,the company provided financial assis�tance to families of the sailors who


page 046

died and financed construction of ahealth and sport camp for sailors ofthe Northern fleet in the village ofVidyaevo at the request of theRussian Navy.

Tens of thousands of villages andtowns suffered as a result of floodingin the south of Russia in 2002. Thecompany provided aid to regionalgovernment administrations in theaffected areas and financed thebuilding of new homes.

Aid to Peoples of the Far North.LUKOIL is active part in sponsoringsocial support programs for indige�nous peoples of regions in theRussian Far North, where the compa�ny has production activities.

LUKOIL�Western Siberia, the compa�ny's main production unit, has takenresponsibility for well�being of thelocal population in the Khanti�Mansiysk Autonomous Okrug throughthe agreement 'For Partnership in thesocio�economic development ofsites populated by indigenous peo�ples' and through agreements withcommunity leaders. Communities are

given financial compensation for landuse by LUKOIL and are also providedwith snow�mobiles, boats, gas�pow�ered saws, hunting equipment, com�bustible lubricants and fishing rigs.Well�built housing is also constructedfor indigenous peoples.

Arkhangelskgeoldobycha, the com�pany's main holding in the NenetskAutonomous Okrug, is implementinga number of programs in the region inassociation with Yasavei (theAssociation of Nenet Peoples).Programs concentrate on the devel�opment of this sparsely populatedregion, protection of the environment

and the natives' traditional way of life.Major projects in the region includemedical aid to deer�herders in theKaninsk Tundra. LUKOIL organizes a'Day of the Deer', and helps with pub�lication projects.

Sporting Projects. LUKOIL is thegeneral sponsor of Spartak football


team (nine�times Russian footballchampion), and an official partner ofthe Russian Olympic Committee.

Other teams that play under theLUKOIL flag are also serious con�tenders in Russian sport: the LUKOILRacing Team has achieved numerouschampionship successes in motorracing, LUKOIL�Spartak (Volgograd)won the Russian water�polo cup in2002, Vodnik (Arkhangelsk) wereRussian hockey champions for theseventh time and became Europeancup holders, and LUKOIL�Dynamo(Astrakhan) came second in theRussian handball championships.Baltica (Kaliningrad) football team isthe leading team in their region. In

2002, LUKOIL was an official sponsorof the European Boxing Champion�ships, which were held in Perm. Thecompany is active in developing childsports in Russia, cooperating with theChild Football League on a regionallevel.

Charity and Sponsorship ActivitiesAbroad:

¤ Co�founder of charity activities torestore and protect bio�resources ofthe Caspian, and protect the AralSea.

¤ Aid to medical institutions inregions of the company's activity inColumbia.

¤ Organized a parish of the RussianOrthodox Church in Bogota,Columbia.

¤ Participant of environmental pro�tection projects in the Arab Republicof Egypt.


page 048

CORPORATE GOVERNANCE

Dividends

The company acknowledges divi�dend levels as one of the key indica�tors of its attractiveness to investorsand is committed to increasing divi�dend payments through consistentgrowth in profit and/or growth in theshare of retained earnings used fordividends.

Dividends for 2002 increased both inabsolute terms and as a share of netprofit. Dividends announced for 2002were $532 mln, 30% more than for2001. The share of dividends in netprofit was 29% (up from 19% in2001).

LUKOIL Management Committee


page 049

Vagit Alekperov 52 years of ageGraduated in 1974 from the Azizbekov Institute of Oiland Chemistry in Azerbaijan. Doctor of Economics.Awarded three honors and a medal. Worked from 1968in the oil industry in Azerbaijan and Western Siberia.From 1990 to 1992, Deputy, then First Deputy to theUSSR Oil Industry Minister. Chairman of the Board ofDirectors of LUKOIL from 1993 to 2000. President ofLUKOIL from 1992.

Mikhail Berezhnoi57 years of ageGraduated in 1974 from the Saratov Institute of Law.General Director of the Non�state pension fund LUKOIL�Garant from 1995. President of the Board of Directorsof New Wave Radio.

Valery Graifer (Chairman)73 years of ageGraduated in 1952 from Moscow's Gubkin Oil Institute.Doctoral candidate in Technical Sciences. Awardedthree honors and two medals. Honored Scientist of theTatar ASSR, Honored Oil and Gas Industrialist of theRussian SSR. Deputy to the USSR Oil Industry Ministerfrom 1985, Head of the Tyumen Main Office for the Oiland Gas Industry. From 1992, General Director of theRussian Innovative Fuel and Energy Company.Chairman of the Board of Directors of LUKOIL from 2001.

Board of Directors and Management Committee

Board of Directors

Oleg Kutafin 66 years of ageGraduated in 1959 from Moscow State University.Professor and Doctor of Law. Associate of the RussianAcademy of Science. Rector of Moscow State Academyof Law from 1987. Chairman of the Russian PresidentialCommission on Nationality.

Ravil Maganov 48 years of ageGraduated in 1977 from Moscow's Gubkin Oil Institute.Honored Employee of the Oil and Gas Industry of theRussian Federation. Awarded two honors and a medal.From 1988 to 1993, Deputy CEO of Langepasneftegaz.From 1993 to 1994, Vice�President of LUKOIL. From1994 First Vice�President of LUKOIL.


page 050

Vladimir Malin 43 years of ageGraduated in 1982 from Moscow State University.Doctoral candidate in Economics. From 1995 to 1996,Director of Currency Operations and FinancialManagement, First Vice�President of the Federal StockCorporation. From 1996 to 2002, Head of SecuritiesSales, Deputy Chairman, then First Deputy Chairman ofthe Russian Federal Property Fund. Chairman of theRussian Federal Property Fund from 2002.

Richard Matzke 66 years of ageGraduated with a bachelor's degree in geology fromIowa State University (1959), a master's degree ingeology from Pennsylvania State University (1961), anda master's degree in business administration from St.Mary's College of California (1977). President ofChevron Overseas Petroleum and member of the Boardof Directors of Chevron Corporation from 1989 to 1999.Vice�Chairman of Chevron Corporation from 2000 untilFebruary 2002.

Mark Mobius 67 years of ageGraduated in 1964 from MIT (Massachusetts Institute ofTechnology). Doctor of Economics and PoliticalScience. General Director of Templeton AssetManagement since 1997. Elected to the Board ofDirectors by decision of the annual general meeting ofshareholders on 27 June, 2002.

Yury Medvedev 55 years of ageGraduated in 1971 from the Tambov Institute ofMechanical Engineering. Doctoral candidate inPhilosophy. Honored Engineer of the RussianFederation. From 1991, Chairman of the VolgogradOblast Committee for the Management of StateProperty and Privatization. From 1992 to 1997, DeputyHead of the Oblast Administration, Committee for theManagement of State Property and Privatization inVolgograd Oblast. From 1997 to 1998, OfficialRepresentative of the President of the RussianFederation in Volgograd Oblast. From 1998, FirstDeputy Minister of Property Relations of the RussianFederation.

Nikolai Tsvetkov 43 years of ageGraduated in 1988 from the Zhukov Air�Force Academyand in 1996 from the Plekhanov Russian EconomicsAcademy. Doctoral candidate in Economics. From 1994to 1996, President of NIKoil, Executive Director ofLUKOIL's Department of Securities, Vice�President ofLUKOIL. President of IBG NIKoil from 1997.

Igor Sherkunov 39 years of age

Graduated in 1985 from the Moscow Finance Institute,in 1993 from the All�Union Friendship of the NationsAcademy of Foreign Trade. From 1993 to 1996, Vice�President of LUKOIL Insurance Company. GeneralDirector of LUKOIL�Reserve�Invest from 1996

LUKOIL ManagementCommittee

Vagit Alekperov President, Chairman of the Board52 years of ageGraduated in 1974 from Azerbaijan's AzizbekovPetrochemical Institute. Doctor of Economics. Awardedthree honors and a medal. Worked from 1968 in the oilindustry of Azerbaijan and Western Siberia. From 1990to 1992, Deputy, then First Deputy to the USSR OilIndustry Minister. Chairman of the Board of Directors ofLUKOIL from 1993 to 2000. President of LUKOIL from1992.

Anatoly Barkov Vice�President55 years of ageGraduated in 1992 from Ufa Oil Institute. HonoredEmployee of the Oil and Gas Industry of the RussianFederation. Awarded four medals. From 1987 to 1992,head of TzBPO, head of NGDU, Senior Engineer atKogalymneftegaz. From 1992 to 1993, ExecutiveDirector, then Director of the Department of ExternalProjects at LUKOIL. From 1993, Vice�President ofLUKOIL and Head of Administration, Transport andCommunications.

Anatoly Kozyrev Vice�President61 years of ageGraduated in 1971 from Moscow's OrdzhonikidzeEngineering�Economics Institute, and in 1982 from theAll�Union Academy of Foreign Trade. From 1991 to1998, Head of the main consolidated office, Deputy tothe Minister of Fuel and Energy of the RussianFederation. From 1998, Vice�President of LUKOIL andHead of Corporate Economic Planning and Investment.

Sergey Kukura First Vice�President49 years of ageGraduated in 1979 from the Ivano�Frankov Institute ofOil and Gas. Doctor of Economics. Honored Economistof the Russian Federation. Awarded two medals. From1992 to 1994, Vice�President, then First Vice�Presidentof Langepasuraikogalymneft. From 1994, First Vice�President of LUKOIL.

Ravil Maganov First Vice�President48 years of ageGraduated in 1977 from Moscow's Gubkin Oil Institute.Honored Employee of the Oil and Gas Industry of theRussian Federation. Awarded two honors and medals.From 1988 to 1993 Deputy General Director ofLangepasneftegaz. From 1993 to 1994, Vice�Presidentof LUKOIL. From 1994, First Vice�President of LUKOIL.

Ivan Maslyaev Head of the Main Departmentfor Legal Affairs45 years of ageGraduated in 1980 from Moscow State University.Doctoral candidate in Law. From 1992, Head of theLUKOIL Legal Department. From 2000, Head of theMain Department for Legal Affairs at LUKOIL.

Alexander Matytsyn Vice�President41 years of ageGraduated in 1984 from Moscow State University.Doctoral candidate in Economics. From 1993 to 1997,Senior Consultant on Tax, then General Director ofKPMG�Revikonsult. From 1997, Vice�President andHead of Treasury and Corporate Finance at LUKOIL.

Vladimir Nekrasov Vice�President, General Directorof LUKOIL�Western Siberia46 years of ageGraduated in 1978 from Tyumen Industrial Institute.Doctoral candidate in Technical Science, member of theAcademy of Mining Sciences. Awarded a medal. From1997 to 1999, Senior Engineer, First Deputy, GeneralDirector of Kogalymneftegaz. From 1999, Vice�President of LUKOIL and General Director of LUKOIL�Western Siberia.

Anatoly Novikov Vice�President63 years of ageGraduated in 1961 from Grozny Oil Institute, in 1981from the Academy of National Economy of the USSR.Doctoral candidate in Geological�Mineral Science. From1990 to 2001, General Director of Nizhnevolzhskneft.From 2001, Vice�President of LUKOIL and Head ofGeology and Development.

Serik Rakhmetov Vice�President54 years of ageGraduated in 1973 from the Rudny branch of theKazakh Polytechnical Institute. From 1993 to 1994,Deputy General Director for Construction at LUKOIL�Kogalymneftegaz. From 1994 to 2000, ExecutiveDirector, then Director and Head of LUKOILConstruction. From 2000, Vice�President of LUKOIL andHead of Construction, Project Planning and CorporateServices.


page 051

Alexander Smirnov Vice�President, General Directorof LUKOIL�Energogaz54 years of ageGraduated in 1976 from Moscow's Plekhanov Instituteof National Economy. Doctoral candidate in Economics.Awarded a medal. From 1992, Executive Director forInternal Market Affairs at Langepasuraikogalymneft.From 1992 to 1998, General Director of the LUKOILTrading House. From 1996 to 1998, Head of TangibleAssets, Mechanical Engineering and the Marketing ofOil Industry Equipment for LUKOIL. From 1998, Vice�President of LUKOIL and General Director of LUKOIL�Energogaz.

Yury Storozhev Vice�President56 years of ageGraduated in 1977 from Moscow's Gubkin Oil Institute.Honored Employee of the Ministry of Fuel and Energyof the Russian Federation. From 1987 to 1993, Head ofDepartment, then Deputy Senior Engineer atKogalymneftegaz. From 1993 to 1998, Director ofDepartment, Deputy Head, and Head of Oil Deliveryand Petroleum Product Export at LUKOIL. From 2000,Vice�President of LUKOIL and Head of Procurement andSales.

Dmitry Tarasov First Vice�President50 years of ageGraduated in 1973 from Moscow's MendeleevChemical�Technical Institute. From 1997 to 2002, Vice�President of LUKOIL�Romania, Vice�President ofLUKOIL�Europe Holdings Ltd, Director of LUKOIL BlackSea Ltd. From 2002, First Vice�President of LUKOIL.

Leonid Fedun Vice�President47 years of ageGraduated in 1977 from Rostov's Nedelin HigherMilitary School. Doctoral candidate in Philosophy.Awarded five medals. From 1993 to 1994, GeneralDirector of LUKOIL Consulting. From 1994, Vice�President of LUKOIL and Head of Strategic Planningand Investment Analysis.

Lyubov Khoba Senior Accountant, Vice�President46 years of ageGraduated in 1992 from the Sverdlov Institute of NationalEconomy. Honored Economist of the Russian Federation.Awarded a medal. From 1991 to 1993, Senior Accountantat Kogalymneftegaz. From 1993 to 2000, SeniorAccountant at LUKOIL. From 2000 to 2003, Vice�President of LUKOIL, Head of Financial Accounting andControl. From 2003, Senior Accountant and Vice�President of LUKOIL.

Giovan Cheloyants Vice�President43 years of ageGraduated in 1981 from Grozny Oil Institute. HonoredEmployee of the Oil and Gas Industry. From 1990 to1993, Department head, then Deputy General Directorof Internal Economic Affairs of Langepasneftegaz. From1993, Vice�President of LUKOIL; from 2001, Vice�President of LUKOIL and Head of Oil and GasProduction.

Vagit Sharifov Vice�President57 years of ageGraduated in 1968 from Azerbaijan's Azizbekov Instituteof Oil and Gas. Doctor of Economics. HonoredEmployee of the Oil and Gas Industry of the RussianFederation. Awarded two honors and two medals. From1985 to 1994, Senior Engineer, General Director ofVolgogradnefteprodukt. From 1994 to 1995, GeneralDirector of the Volgograd branch of LUKOIL Finance.From 1995 to 1996, General Director of LUKOIL region�al office in Volgograd. From 1996, Vice�President ofLUKOIL; from 2003, Vice�President of LUKOIL and Headof Control and Internal Audit.

Anatoly Yashchenko Chairman of LUKOIL's Employee Union60 years of ageGraduated in 1971 from Moscow's Gubkin Oil Institute.Honored Employee of the Russian Ministry of Fuel andEnergy. From 1987 to 1994, Chairman of the Union atLUKOIL�Langepasneftegaz. From 1994, Chairman of theEmployees' Union at LUKOIL.

Changes in the LUKOILManagement Committee during the Accounting Period

Ralif Safin was removed from theManagement Committee by a deci�sion of the Board of Directors on 17June, 2002 (Protocol No.13).

Nikolai Chumak was removed fromthe Management Committee by adecision of the Board of Directors on10 July, 2002 (Protocol No.17).

Vladislav Bazhenov and AlbertGalustov were removed from theManagement Committee by a deci�sion of the Board of Directors on 13January, 2003 (Protocol No.1).

Lili Khisyametdinova was removedfrom the Management Committee bya decision of the Board of Directorson 3 April, 2003 (Protocol No.14)


page 052

Shares in LUKOIL owned by members of the Board ofDirectors and the Management Committee are shown inaccordance with requirements of Russian legislation for dis�closure of such information, including shares held directly byBoard/Management Committee members, and those held bynominee investors in their names. Share in authorized capitalstock may be counted differently in other countries.Specifically, percentages of authorized share capital recordedhere are not shown in exactly the same fashion as they werefor purposes of listing on the London Stock Exchange.

Remuneration of Members of the Management Committeeand the Board of Directors

Remuneration packages consist of:

¤ Base pay (the sum agreed in employee contracts).

¤ Annual bonuses.

¤ Long�term bonuses.

¤ Compensation.

The sum of annual bonus payments is determined as a per�centage of annual income in accordance with an agreed for�mula and is dependent upon fulfillment of basic targets forcompany activity.

The basis for determination of long�term bonus payments isthe quantity of 'conditional shares' belonging to a member ofmanagement, on which 'conditional dividends' are paid. Incase profit targets are not met, long�term bonuses are notpaid.

Total management and Board remuneration for the account�ing period was $13.35 mln.1

Board of Directors and Management CommitteeMembers Stake in LUKOIL Authorised Share Capital

Percentage of LUKOIL authorized share capitalowned by BoD members

Name

V. Alekperov

M. Berezhnoi

V. Graifer

O. Kutafin

R. Maganov

V. Malin

R. Matzke

Yu. Medvedev

M. Mobius

N. Tsvetkov

I. Sherkunov

Stake (%)

1.36

0.005

0.002

0

0.22

0

0

0

0

0.34

0.05

Percentage of LUKOIL authorized share capital belongingto company management (as of 31 December, 2002)

Name

V. Alekperov

A. Barkov

A. Kozyrev

S. Kukura

P. Maganov

I. Maslyaev

A. Matytsyn

V. Nekrasov

A. Novikov

S. Rakhmetov

A. Smirnov

Yu. Storozhev

D. Tarasov

L. Fedun

L. Khoba

D. Cheloyants

V. Sharifov

A. Yashchenko

Stake (%)

1.36

0.06

0

0.34

0.22

0.007

0.14

0.01

0.002

0.05

0.001

0.01

0

0.90

0.19

0.06

0

0.002

Conditional stake, dependent on fulfill�ment of performance criteria (%)

0.118

0.059

0.059

0.071

0.071

0.047

0.059

0.059

0.053

0.059

0.059

0.059

0

0.059

0.059

0.059

0.059

0.047

1 The figure shown does not include remuneration or compensation of expenses paid to Board Members in 2002,as these figures will be determined at the general shareholders meeting on 26 June, 2003.


The Market for LUKOIL Shares

In 2002, LUKOIL became the first Russian com�pany to receive full secondary listing on theLondon Stock Exchange (LSE), after its shareswere included in the Official List of the UK ListingAuthority (UKLA).

LUKOIL shares are among the most liquid on theRussian market. LUKOIL accounted for 20% oftotal volume traded through the Russian TradingSystem (RTS) in 2002, representing a 4% risefrom 2001.

LUKOIL is the only Russian oil company, in whichminority shareholders own more than 50% ofshareholder equity.

LUKOIL's share price has lagged growth of theRussian stock market over recent yearsbecause of low operational efficiency. The pro�posed solution is LUKOIL's program of restruc�turing, rolled out in April 2002, and intended toincrease profitability and the share price.

LUKOIL has outperformed the RTS Index (RTSI) in the periodsince the program was begun, making company managementeven more eager to press ahead with the program implemen�tation. LUKOIL's capitalization rose by 19% to $13 bln in 2002,which top managers find unsatisfactory compared to 34%growth in the RTSI.

In 2002, LUKOIL shares traded on the RTS, MICEX, SPICEX,and the St. Petersburg Stock Exchange. ADR and GDR pro�grams on company shares continued in 2002, and thereceipts were traded on the over�the�counter market in theUSA as well as in London, Berlin, Frankfurt, Munich andStuttgart.

In November 2002, Lukinter Finance B.V., a subsidiary ofLUKOIL, issued $350 mln five�year convertible bonds, con�vertible into GDRs issued on LUKOIL shares. The bonds havea semi�annual coupon payment based on an annual rate of3.5 %.

Distribution of LUKOIL shares by category of holder in 2000�2002 (%)

Government Property

Insurance Companies

Individual Investors

Pension and Fund ManagersCommercial and InvestmentBanksManufacturers and CommercialEnterprises

2000 2001 2002

100

80

60

40

20

0

LUKOIL Stock Price in 2002 (Closing Price, USD)

16

15

14

13

12

11

10

9

8

01.2

001

02.2

001

03.2

001

04.2

001

05.2

001

06.2

001

07.2

001

08.2

001

09.2

001

10.2

001

11.2

001

12.2

001

01.2

002

02.2

002

03.2

002


page 054

LUKOIL Stock Price after the Start of Restructuring,variation from the beginning of the period (%)

130

120

110

100

90

80

04.2

002

05.2

002

06.2

002

07.2

002

08.2

002

09.2

002

10.2

002

11.2

002

12.2

002

LUKOIL

RTS

LUKOIL Stock Price before the Start of Restructuring, variation from the beginning of the period (%)

280

250

220

90

160

130

100

01.2

001

02.2

001

03.2

001

04.2

001

05.2

001

06.2

001

07.2

001

08.2

001

09.2

001

10.2

001

11.2

001

12.2

001

01.2

002

02.2

002

03.2

002

LUKOIL

RTS

LUKOIL Monthly Trade Volume (USD mln)

1,000

800

600

400

200

009.2002 10.2002 11.2002 12.2002

MICEX and RTS

LSE

Shareholder Name

ING BANK (ADR and GDR)*

Of which:

Capital Group

CDK�Garant*

Ministry of Property Relations of the Russian Federation

NIKoil Depositary Company*

National Depositary Centre*

Depositary�Clearing Company*

Brunswick UBS Warburg*

ABN Amro Bank*

ING Bank (Eurasia)*

Number of Shares

534 100 000

86 000 000

90 800 000

64 640 000

44 600 000

37 200 000

24 800 000

10 300 000

4 800 000

3 100 000

% of total voting stock

62.8%

10.1%

10.7%

7.6%

5.2%

4.3%

2.9%

1.2%

0.6%

0.4%

List of major LUKOIL shareholders (as of 1 January, 2003)

* Nominee shareholder.

At the end of 2002, more than 57% ofauthorized share capital had beenconverted into ADRs or GDRs.

Investor interest in LUKOIL is growing.In September 2002, trading volumeon the LSE was $365 mln, but this hadhad doubled to more than $700 mlnby the end of December.


Corporate Governance and Transparency

Targeting improved manageabilityand streamlining in the framework ofits restructuring program, LUKOIL wasdivided into three main parts in 2002,matching the structure used by otherlarge international oil companies:

¤ Finance (First Vice�President, S. Kukura)

¤ Exploration and Production of Oiland Gas (First Vice�President, R. Maganov)

¤ Oil Refining and Marketing (FirstVice�President, D. Tarasov)

The company also set itself the fol�lowing corporate governance objec�tives in 2002:

¤ Strict observance of time�scalesand presentation standards in pub�lished results of company activity.

¤ Quarterly publication of financialresults, prepared in accordance withinternational standards.

¤ Increase in the number of inde�pendent representatives of share�holders on the Board of Directors.

¤ Frequent meetings between top�management, shareholders andinvestors.

¤ Development of a CorporateCode.

¤ Introduction of employee share�holding schemes, with the goal ofincreasing motivation.

¤ Strict observance of internationalstandards in trading with affiliates.

¤ Increased transparency to thecompany's investment policy, clarityof criteria and efficiency indicators foracquired assets and projects.

¤ Listing on the London StockExchange.

¤ Increased transparency of share�holder equity structure.

¤ Improved quality of informationdisclosed and improvement of stan�dards of information transparency.

In its corporate activities, LUKOILobserves basic recommendations of

the Federal Securities Commission ofthe Russian Federation.

LUKOIL continues to improve its cor�porate governance. At its next gener�al shareholders meeting, LUKOILplans to make changes and additionsto its bylaws and to the documentwhich specifies how general share�holders meetings should be preparedand run. The changes and additionswill bring these documents into linewith the resolution of the FederalSecurities Commission No.17/psfrom 31 May, 2002, 'On Approval ofthe Statute on AdditionalRequirements for Preparation,

Notification and Procedures forGeneral Shareholders Meetings', andwill take account of regulations in theFederal Securities Commission'sCode of Corporate Conduct.

The following changes are planned:

¤ Mandatory publication of meetingnotification in two main newspapers('Izvestia' and 'Rossiiskaya Gazeta')no later than 30 days before the dateof the general shareholders meeting(the law 'On public companies'requires notification in one newspa�per no later than 20 days before themeeting).

¤ Preparation of accounts by theBoard of Directors in accordancewith recommendations. Suchaccounts will be presented to share�holders at the next meeting, in 2004.

¤ Proposal of three candidates tothe Board, who are independent rep�resentatives of minority shareholders.

¤ Fulfillment of the functions ofCorporate Secretary in the companyby the Office of the Board ofDirectors and the Department forShareholder Relations (the FederalSecurities Commission's Code ofCorporate Conduct recommendsintroduction by companies of theposition of Corporate Secretary).

¤ Establishment of a Staff andRewards Committee in Q3 2003, asper recommendations of the FederalSecurities Commission.


page 056

Internal Audit

In 2002, the company created a MainDepartment for Control and InternalAudit. The creation of a system ofinternal audit is a way of guaranteeingcompany efficiency and defendingthe interests of shareholders. LUKOILconsiders a system of internal audit tobe a constituent part of its total sys�tems of corporate governance, and isdedicated to international standardsfor running its business. InternalAudit's main objectives are: the inde�pendent evaluation of work efficiencyin the company's divisions, guaran�teeing the reliability of internal controland the effectiveness of risk manage�ment, and ensuring that divisionswork in accordance with companyregulations.

The Main Department for Control andInternal Audit (until December 2002the Department for Internal Audit)performed 35 internal audits in 2002(31 at company subsidiaries). In addi�tion, the Department completed:

¤ An audit of operations recordkeeping.

¤ An audit of the Main Departmentfor Geology and Development (aspart of requirements to meet licens�ing requirements for fields that havenot yet been developed).

¤ Constant audits of investmentprojects valued at more than $30mln.

The company's Management Com�mittee has developed and approved a'Policy on Internal Audit at LUKOIL',and 'Internal Audit Standards forLUKOIL'.

Information Technologies

Key business objectives, governingdevelopment of InformationTechnologies at LUKOIL in 2002,were:

¤ Supporting control and manage�ment of company activities.

¤ Developing the company's infor�mation base.

¤ Refining the decision makingprocess.

¤ Developing methods of assessingmanagement.

¤ Automating GAAP accounting.

In order to achieve these objectives,the infrastructure of LUKOIL's infor�mation management system was pre�pared for launch in 2002.

Work on creation of the LUKOIL�Permnefteorgsintez integrated man�agement system continued. The sys�tem is to be a prototype for informationmanagement systems at the company'srefining and petrochemical facilities.

A project was begun for specifyingcorporate standards in the contentand format of data presented for con�struction of geological models of oiland gas fields.

Work was continued on a system forcataloguing geological�geophysicaland trade information and anothersystem to consolidate and analyzeproduction data. Development of asystem to audit oil and gas reserveswas also continued. A methodologyfor running and regulating internalaudits is being developed.

The company's Department ofInformation Technology andDepartment for the Export Sale ofPetroleum Products have begun touse the OILSpace trading system forwork with dealers and for selling sur�plus volumes of refined products.


page 057

THE KOMI REPUBLIC — A PROMISINGOIL & GAS PRODUCTION REGION

FOR LUKOIL


page 058

Oil and gas companies in the KomiRepublic are developing 40 hydro�carbon fields located both on the ter�ritory of the Republic and in theNenetsk Autonomous Okrug. Thefields have total recoverablereserves of 468.6 mln tons. (The 28fields on the territory of the KomiRepublic alone have 194.7 mln tonsof recoverable reserves).

A total 28 oil and gas companies inthe region are already producinghydrocarbons.

LUKOIL began its activities in the KomiRepublic in September 1999, when itacquired the company KomiTEK.


10

9

8

7

6

5

Share of other shareholders within affiliated companies

LUKOIL's Share

1999 2000 2001 2002 2003�E*

Oil Production by Companies in the LUKOIL Group in the Komi Repulic (mln tons)

*Taking account of 2003 acquisitions.

On 1 January 2003, LUKOIL and itssubsidiaries in the Komi Republic andthe Nenetsk Autonomous Okrug(NAO) had a resource base of 392mln tons of recoverable ABC1reserves.

According to a Miller & Lents estimateby international standards, the com�pany's proven reserves in the KomiRepublic and the NAO increased from178 mln tons (at the time of LUKOIL'smarket entry) to 283 mln tons by 1January, 2003.

LUKOIL, its subsidiaries and affiliat�ed companies produced 9.2 mlntons of oil in the Komi Republic in2002, which is 2.7% more than in2001.

300

250

200

150

100

50

0

LUKOIL’s proven reserves in the republic of Komi (mln tons)

LUKOIL’s proved reserves in Komi republic increased from 178 to 283 mln tonsin 4 years, and the reserve replacement ratio due to exploration was 137%

1.01.2000 1.01.2003

+62%

Acquisitionof KomiTEK Revision of previous estimates

Purchase and acquisition of reserves

Acquired reserves less 2000�2002production

New discoveries178 mln tons

283 mln tons


page 060

opment of the largest explored fieldsin the region, including the Usinsk,Vozeisk and Karyaginsk fields.

Sever�TEK (a joint venture of LUKOIL�Komi and the Finnish companyFortum) has begun development ofthe Yuzhno�Shapkinsk oil and gascondensate field. Overall investmentin this project will be $370 mln.Confirmed category C1 hydrocarbonreserves at Yuzhno�Shapkinsk areestimated at 23 mln tons, while all oildeposits in the region are thought tobe 41 mln tons. Commercial oil pro�duction at this field will begin in 2003and reach a peak of 2.6 mln tons in2005.

Since 2000, LUKOIL has been exe�cuting a program to restructure itscompanies in the Komi Republic, withthe aim of consolidating assets ofseparate companies into a singleproduction company, LUKOIL�Komi.

LUKOIL�Komi was created by com�bining the assets of KomiTek,Komineft, Nobel Oil and KomiArktikoilin May 2002. The new company isdivided into three divisions:

¤ Komitermneft (Usinsk Region)

¤ Komiarktikneft (Usinsk Region)

¤ Voivozhneft (Sosnogorsk Region)

Komineft operates in the Timan�Pechora oil and gas province, whichhas the largest resource base of rawhydrocarbons in northwest Russia.The company has licenses for devel�


six times since starting its operationsthere.

LUKOIL and its subsidiaries in theregion are pursue an active socialpolicy, sponsoring educational, healthcare and cultural institutions.

Significant charitable contributionsare made to the region's leading edu�cational institution, which is UkhtaState Technical University. LUKOILpurchases modern equipment for theUniversity and helps in the training ofoil and gas specialists. LUKOIL has

In 2001 the company acquired Bitek�Silur, Parma�Oil, and AmKomi, com�panies working on the Pechoro�Kozhvinsk field group in the Pechorskand Ukhta regions in the south of theKomi Republic. These three compa�nies produced 625,800 tons of oil in2002, and their output is expected torise to 2 mln tons per year. Work on apipeline from the Severo�Kozhvinskfield to the Chikshino terminal on theTransneft trunk pipeline was begun in2002.

LUKOIL's is implementing a broad�ranging ecological program, includ�ing restoration of 350 hectares ofland, which had been polluted as aresult of oil production. The companyhas increased its spending on envi�ronmental protection in the region by

donated a trial stand for the training ofdeep�well drilling specialists, andmany of the most promising studentsparticipate in LUKOIL's scholarshipprogram.

LUKOIL�Komi divisions have signed asocial partnership agreement withUsinsk schools, according to whichLUKOIL will purchase educationalmaterials, computer and electronicequipment and ensure repair work atthe schools.

LUKOIL has renovated the emer�gency unit at Ukhta City Hospital. Thecompany also repaired the municipalswimming pool in the town of Voi�Vozh, assisted the local administra�tion in mending the town heating sys�


page 062

tem, and purchased equipment forconcerts and other activities at thelocal cultural center. Playgroundshave also been built in Usinsk andVoi�Vozh.

In accordance with an agreementbetween the government of the KomiRepublic and LUKOIL, the company is

repairing gas pipelines, which linksSeverniy Dzebol with Komsomolsk�na�Pechora and Uhkta with Voi�Vozh,and building a gas pipeline in the vil�lage of Sedyu.

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