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December 11, 2007
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Home / Issue Archive / 2006 / November #11 / Always in Progress For 15 years, "LUKOIL" has been consistently building to its growth and success

№ 11 (November 2006)

Always in Progress For 15 years, "LUKOIL" has been consistently building to its growth and success

That day the company was founded by three West-Siberian oil and gas plants: "Langepasneftegaz", "Urayneftegaz" and "Kogalimneftegaz".

By Vagit ALEKPEROV, President of LUKOIL

The initial letters of these names formed the first part of the new presence in the Russian oil and gas industry - LUKOIL.

Sustainable Growth

The next important milestone in the company's history was April 05, 1993. That day the government of the Russian Federation adopted resolution No. 299 "On the Establishment of the Open Joint Stock Company 'Oil company LUKOIL'". By that time the company already comprised a number of large enterprises and organizations, including the Volgograd petroleum refinery, the Permnefteorgsyntez association, and others.

Over the last 15 years LUKOIL has come a long way to becoming Russia's first transnational oil and gas corporation. Throughout its history the company increased oil production, and developed refinery and distribution sectors, thus diversifying its business in the best possible way. Today the company owns production assets in more than 30 countries and ranks among the world's leaders in terms of capitalization and the volume of oil and gas deposits.

On the eve of the anniversary I'm especially pleased to mention LUKOIL's achievements in 2005. This last year has been the best in the company's history. Good financial results are of particular value, as tax burdens on oil companies in Russia grow faster than the cost of their products, even with a favorable price trend.

Last year we earned a record profit of over $6.4 bln. In accordance with the company's policy, we paid more than 15 percent of the net profit as dividends. During the whole year 2005, LUKOIL's shares were in great demand on the global stock markets, and the total income of each shareholder in the reported period doubled.

LUKOIL is always in search of new growth opportunities and increases its deposits. Thanks to years of efforts the company possesses the largest oil reserves among private companies. Last year alone, as a result of geological exploration, we discovered four oil fields and one oil and gas condensate field, as well as eleven oil deposits in existing oil fields. Current oil production is supplied by proven reserves for 24 years, and gas production - for 95 years.

Alongside oil and gas production growth, the company expands its refinery activities and increases the turnout of high-quality oil products. LUKOIL was the first in Russia to launch the production of EURO-4 diesel fuel. It also introduced the EURO-3 gasoline under a new brand - ECTO (environment-friendly fuel) to the Russian market.

After LUKOIL started production at the Nakhodka gas field, it turned from an oil producer into a true oil-and-gas company, almost doubling its gas production.

LUKOIL continues sustaining its highly dynamic development this year. In the 1st Quarter of 2006, our average daily oil production grew by 4.6 percent, as compared to the same period in the previous year (this includes our share in the daughter companies' production) and amounted to 169.4 mln bbl or 23 mln t. Tank gas production amounted to 3,139 mln m3, exceeding the result of the same period in 2005 by 137,6 percent.

Although LUKOIL was formed in the complicated political and economic environment of the ealy 1990s, the company managed to achieve an internationally competitive level over a rather short period of time.

New Horizons

LUKOIL's management is striving to maintain a balance between shareholders' short-term and long-term interests. The former account for thetarget return on investment, and the latter - for the company's sustainable development in the long run. That is why we pay more attention to stability of production growth and not to absolute rates. Annual production has grown by an average of 5 percent in the recent years. Nevertheless, considering our vast resources, we can predict an annual production growth of at least 7 percent in the next decade.

These dynamics can be maintained, first of all, thanks to the company's operations in new oil and gas regions, both in Russia and abroad. At present, the company is actively developing the Timano-Pechora region. In cooperation with ConocoPhillips (USA), LUKOIL established a joint venture called Naryanmarneftegaz. Expansion of the Varandey shipping terminal began. In the Komi Republic, the company established a unique production base for heavy and viscous crude oil. The year 2007 will be crucial for our projects in the north of the Timano-Pechora region. The commissioning of the South Hilchuyusky field and the Varandey terminal will enable LUKOIL to start supplying Timano-Pechora resources directly to the global market. Over the next decade the company will extract more than 20 mln tons of oil in this region annually.

Our great hopes lie in the development of the gas segment of our business. The launch of the Nakhodka field allowed LUKOIL to enter this promising market. By 2014 the company plans to produce over 50 bln cu. m of gas, half of which will be produced in the Yamalo-Nenetsky Autonomous District.

We continue to work hard in the Russian sector of the Caspian Sea. The sixth field in this region was discovered in 2005, and named after the distinguished oil specialist Vladimir Filanovsky. This was the most remarkable discovery in our country over the last 20 years. It demonstrated that the northern part of the Caspian is rich not only in gas deposits, but also in oil.

The abovementioned projects have no equals in the Russian oil industry. They can be rightly called innovative, both from the technological and management viewpoints. They secure LUKOIL's future as one of the leading energy corporations in the world.

Fulfilling our commitments to the shareholders' interests, we have been constantly developing hydrocarbons exploration and production internationally. Thus, the biggest deal in LUKOIL's history was the acquisition of the Nelson Resources company, located in Kazakhstan. This allowed us to become the fourth biggest producer of raw materials in Kazakhstan, and to raise the share of foreign projects to 7 percent of total production. According to our strategic plans, this figure is to be increased to at least 20 percent.

Stable production growth demands that the company focuses on the creation of an effective distribution system for crude resources and oil and gas products. All of the abovementioned facts are an "underwater part of the iceberg", that the general public is often unaware of. Most ordinary Russians, as well as people in other countries, assess LUKOIL's work not by its production volume or refining rate, but by the price of motor fuel, its quality, and the quality of gas station service. It is the retail business that forms public opinion on a company's brand.

LUKOIL's retail chain develops rapidly, spanning 16 countries in the world today. The company is quickly reacting to changes in the market situation. When export duties on oil rose and the demand for light oil products in Russia increased, we immediately re-directed part of crude oil to Russian refineries. We continue upgrading our oil refineries. Next on the agenda is complex reconstruction of refineries in Nizhny Novgorod, and construction of deep oil refining plants in Volgograd.

At the same time we are developing the sector of oil lubricants production and distribution. For this purpose in 2005 we established a specialized "lubricants" company LLK-International. According to our estimations, this will allow us to use LUKOIL's unique production base more efficiently.

Becoming a Market Leader

LUKOIL faces challenges that can not be overcome overnight. They require both sizeable investments and considerable organizational work. Nevertheless, there is no other way. That is why the company is constantly increasing the volume of capital investments. In 2005, more than $4 bln were invested in new facilities, and about $3 bln were paid in acquisition of industrial assets. While expanding our production base, we are undertaking additional responsibility for the effective management of existing business. That is why one of our primary objectives is to develop unified standards of corporate management, aimed at protecting shareholders' interests.

We continue improving LUKOIL's organizational structure. In 2005, the number of Russian organizations within the Group decreased by 30 percent, the total number of employees - by 11 percent. Suppliers are chosen exclusively through tenders, which allows us to reduce costs.

High personnel qualification is crucial for effective management. Our training and re-training programs not only provide our employees with specific skills and knowledge, but also expand their horizons. This stimulates active participation in meeting the company's needs.

LUKOIL's sustainable development depends directly on the company's relations with society and the government. We want these relations to be based on the mutual trust. The company is leading an open and fruitful dialogue with all interested parties. Last year our "Report on Sustainable Development" was published for the first time. This document was met with public approval.

The company's social responsibility is demonstrated by its commitment to environmental values. According to the ecological rating performed by the International Social and Ecological Union and the Independent Environmental Rating Agency, LUKOIL is ranked among the top three, out of 75 largest Russian companies, in terms of reducing environmental risks.

On the whole, it is notable that in the recent years LUKOIL has achieved an enormous qualitative break-through. We look into the future with confidence. Our production base is rapidly expanding. The mechanisms of corporate management are constantly improved. We are training the next generation of leaders, capable of bringing the company to a higher level. By the chief characteristics of our work, we are approaching the group of the world's leading private oil and gas corporations, including ExxonMobil, BP, Shell, Chevron, Total and ConocoPhillips. In the future, LUKOIL intends to reach similar production and financial results as these companies. At the beginning of September, in St.Petersburg, LUKOIL's board of directors discussed the principles of the Intensive Growth Strategy for 2007-2016.

Our company owes its success and achievements of the past 15 years primarily to its employees, who work as one team. While strengthening its position in the international arena, LUKOIL contributes to the global competitiveness of the Russian economy and to the world's energy security. We all have one big goal - to make LUKOIL a symbol of the open, efficient, and rapidly developing Russian economy.


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