LUKOIL: Development Strategy Focus on Value Growth December 29
Forward-Looking Statements Certain statements in this presentation are not historical facts and are forward-looking. Examples of such forward-looking statements include, but are not limited to: projections or expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; statements of our plans, objectives or goals, including those related to products or services; statements of future economic performance; and statements of assumptions underlying such statements. Words such as believes, anticipates, expects, estimates, intends and plans and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. You should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, including our ability to execute our restructuring and cost reduction program. When relying on forward-looking statements, you should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which we operate. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. 1
Reasons for Revision of the Program s Key Parameters Global financial crisis, volatility and risks growth High level of uncertainty on world hydrocarbon markets Lack of clear demand and supply view under current market conditions Significant change in gas (dynamic development of unconventional gas segment) and oil market development prospects 2 Transition to production growth model with best rates of return
Executive Summary New strategy focuses on: Company value growth and financial stability Optimization of hydrocarbon production level due to market conditions change Decrease of planned capital expenditures Dynamic growth of free cash flow Higher shareholders returns 3
LUKOIL Free Cash Flow: Substantial Growth under Conservative Oil Price Scenario 5 4 1 4% 75 3% LUKOIL's accumulated free cash flow, $ bln Brent oil price $/barrel LUKOIL's dividend payout ratio, % over 3% by 4 times 2% 5 min - 15% 3 2 1% 25 % 2 23 26 29А 212F 215F 218F 2 21 22 23 24 25 26 27 28 219F 1 4 2 29А 27 216F (previous program) 21 219F (new program) As a result of the new strategic development program implementation the accumulated free cash flow will grow by 4 times under a moderate oil price growth scenario thanks to: - Controlling capex - Tax burden decrease - Increasing efficiency and scale of operations
LUKOIL Will Secure Growth of Production with Best Rates of Return 3. LUKOIL Group production of marketable hydrocarbons, mln boe per day 2.5 CAGR 2% 2. CAGR 5% 1.5 23 24 25 26 27 28 9M 9 217-219F 5 In 217-219 planned hydrocarbon production will reach 2.7 mln boe per day as compared to current 2.2 mln boe per day. Efficient future levels of production are determined by: - resource base -tax burden - oil price
Strong Reserve Base Guarantees Stable Future Growth 5 3Р Group reserves, bln boe 4 Possible Probable Proved Bazhenov formation 3 +62% 2 1 2 28 6 The Company begins to calculate its reserves in accordance with SEC standards from 21
High Geological Exploration Efficiency 72 Exploration expenses, $ mln 14 Extensions and discoveries, mboe, and Exploration efficiency, tons of reference fuel per meter 16 63 54 45 36 27 18 9 1999 2 21 22 23 24 25 26 27 28 mln boe 12 1 8 6 4 2 Extensions and discoveries Efficiency 1999 2 21 22 23 24 25 26 27 28 14 12 1 8 6 4 2 tons of reference fuel per meter Due to the investments in exploration LUKOIL managed to reach a stable rate of reserves increase and high drilling efficiency, in spite of the high level of exploration maturity. 7
LUKOIL Has Extensive Access to Resource Base in Russia Every year LUKOIL discovers new fields and deposits at existing fields. In addition, the Company acquires new development licenses and extends existing licenses up to complete field depletion. 25 Number of newly discovered fields and deposits at existing fields 43 Number of existing licenses and new licenses obtained during the year 18 16 2 14 15 39 12 1 1 35 8 6 5 Existing licenses 4 8 Fields Deposits 1999 2 21 22 23 24 25 26 27 28 31 New licenses 23 24 25 26 27 28 2
Production in 217: New Program vs. Previous Program 3.5 Hydrocarbon production in 217: new program vs. the previous one mln boe per day 3. 2.5 2. Previous program Yamal Tsentralno- Caspian Other New program (28-217) Astrakhanskoye (21-219) Dynamic development of unconventional gas production (up to 3 bcm per year in the USA to 22 and 1 bcm per year in Europe) Sharp decrease in gas consumption in Europe, Gazprom production decrease by 2% 58 56 54 Forecast of gas consumption in Europe (CERA), bcm 28 consumption volume will be reached only in 213 9 A number of LUKOIL s gas projects are put off to later periods 52 5 27 28 29 21 211 212 213
Gas Business: Considerable Factor of LUKOIL Value Growth 7 Group's marketable gas production, th. boe per day 6 5 4 International projects Russia CAGR 11% 42% 3 2 1 31% 58% 69% 23 24 25 26 27 28 9M 9 217-219F Group gas program s competitive advantages are low production and infrastructural expenditures Total free cash flow from gas projects in 21-219 over $6 bln LNG-projects Unconventional gas Group s gas projects Capex+OPEX, $ per th. cm 1 12-18 25 1
E&P Capex Optimization 9 Previous program: E&P Capex 9 New program: E&P Capex Average 6 6 Average $ bln 3 3 1-year total: $75.3 bln 1 2 3 4 5 6 7 8 9 1 years 1-year total: $6 bln 1 2 3 4 5 6 7 8 9 1 years The new program significantly optimizes capital expenditures in Exploration & Production. Compared to the previous program total 1-year E&P capex is reduced by 2%. 11
E&P Capex is Aimed at Quality and Value Growth mln boe per day 3 2 1 8 Hydrocarbon production forecast 23% 77% 21F +91% -4% International projects Green fields in Russia Brown fields Capital expenditures forecast 37% 63% 219F Green fields share in total LUKOIL production will increase by 1.6 times. Share of capex made in new regions will increase from 39% to 57% during 21-219. Capex in traditional regions will be reduced by over 3%. $ bln 6 4 2 39% 61% -35% +34% 57% 43% As a result the accumulated free cash flow from the segment will increase by over $2 bln as compared to the previous program. 12 21F 219F
Summary of Strategy in R&M Segment New strategy provides for: Modernization of existing capacities to average European level (+$8 bln of free cash flow) Light oil product output growth by 6% Group refineries average Nelson index will reach 9 Group s refining capacity increase from current 7.1 to 72.6 mln tons per year. Refining capacity to production ratio is planned to be 75% Development of petrochemicals and power generation (accumulated free cash flow of $4.1 bln) and their integration with gas production projects Total capex of $25 bln 13
Capex Priority Modernization of Refining Assets in Russia Major share of capital expenditures into refining sector - 78% - will be made into modernization of Group s refineries in Russia. Light vs. heavy oil product balance, mln t Light Dark 21.9 12.4 3.5 1.6 Eurostandards +39% Fuel oil -14% Due to the modernization of Group s refineries in Russia in 21-219 free cash flow will exceed $8 bln 14-4 21 214 219 Implementation of the new strategy will result in 39% increase in output of products to Euro-standards and 14% decrease in fuel oil production 9.5 9. 8.5 8. 7.5 7. 6.5 6. Group refineries average Nelson complexity index 21 211 212 213 214 215 216 217 218 219
Synergy of Gas Business with Petrochemicals 1,4 7 112 Polymers production, th. tons 22 12 6 283 317 21 219 Polypropylene at Caspian GPC Polypropylene Polyethylene at Caspian GPC Polyethylene 219 Stavrolen 437 Caspian Gas & Petrochemical Complex 82 The production of petrochemicals is how we plan to gain the highest possible margin on our output of natural gas, especially from Caspian projects. Focus on polymers production (1% of capex) Total capital spending is expected to be $4.3 bln Guaranteed marketing channel for gas produced by the Group 2 bcm per year 15 21-219 free cash flow of $1.8 bln
Synergy of Gas Business with Power Generation Power generation assets 5 4 3 2 1.2 1.1 3.5 3.2 21 219 Combined cycle/gas turbine Power Plant, GW Hydro Power Plant, GW Steam Power Plant, GW Synergy with the Company s gas business segment: the Group supply share in the total amount of consumed fuel will rise from 13% in 21 to 23% in 219 Guaranteed marketing channel for gas produced by the Group 7-8 bcm per year 21-219 free cash flow of $2.3 bln 16
Conclusion Our main objective is to maintain the proper balance between the growth rate of the Company business and high financial efficiency amid volatility and financial crisis The transition from the extensive production growth model to the efficient one Increase of accumulated free cash flow by 3 times compared to the previous strategic program Increase in shareholders returns 17