STRATEGY OF BALANCED DEVELOPMENT UNLOCKING POTENTIAL. Investor day March 23, 2018 London

Transcription

1 STRATEGY OF BALANCED DEVELOPMENT UNLOCKING POTENTIAL Investor day March 23, 2018 London

2 Forward-Looking Statements Certain statements in this presentation are not historical facts but are forward-looking. Examples of such forward-looking statements include, but are not limited to: projections or forecasts 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 and services statements of future economic performance and statements of assumptions underlying such statements. Words such as believes, expects, assumes, projects, intends and plans and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements By nature, forward-looking statements imply certain inherent risks and unclear points, both general and specific, and there is a risk that plans, expectations, forecasts and other forward-looking statements will not be realized. You should be aware that a number of important factors could cause actual results to differ significantly from the plans, objectives, expectations, estimates and intentions expressed in such forwardlooking statements. 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 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. 2

3 Our achievements Industry view Vagit Alekperov Chief Executive Officer Strategy Upstream Refining Marketing and power generation Azat Shamsuarov Senior Vice President, Upstream Vadim Vorobyev, Senior Vice President, Downstream Finance Alexander Matytsyn, Chief Financial Officer Q&А 3

4 Efficient and sustainable business model with significant potential Vertically integrated business >30 countries 16 bln boe proved reserves 39 bln boe reserves and resources (3P+3C) 2.2 Mboepd production 1.4 Mboepd refinery throughput 2017 financial results: EBITDA $14.2 bln FCF $4.2 bln Exploration Production Oil refining Gas processing Petrochemistry Power generation Filling stations Shipping terminals 4

5 OUR ACHIEVEMENTS: Stable development under high oil price volatility Despite a drop in oil prices and high oil price volatility, LUKOIL has: Delivered ambitious projects Improved operational indicators Reached a new technological level Improved HSE indicators Delivered steady growth of free cash flow and dividends 5

6 Launch of large fields: Developing advanced competencies and expertize in delivering megaprojects WEST QURNA-2 (IRAQ) Record delivery time 24 months 400 Kbpd (Phase 1) 2017 FILANOVSKY PYAKYAKHINSKOE GISSAR AND KANDYM (UZBEKISTAN) Developing competencies in offshore projects Unique development technologies GPP construction lead time reduced by 25% 145 Kboepd 105 Kboepd 265 Kboepd (100% share) Cumulative CAPEX $6 bln Cumulative CAPEX $4 bln Cumulative CAPEX $2 bln Cumulative CAPEX $8 bln 6

7 Change in production structure: Growing share of highmargin barrels Share of high-margin barrels in hydrocarbon production Share of high-margin barrels in Upstream EBITDA 39 % High-margin barrels: Above-average EBITDA per barrel Highly sensitive to oil price upside 13 % 21 % 17 %

8 Implementing leading edge production technologies: New technological level OFFSHORE FIELDS Drilling multilateral horizontal wells TAML-5 State-of-the-art new HSE technologies HIGH VISCOSITY OIL The first company in the world to use counterand cross-steamassisted gravity drainage (new approach to SAGD) Own R&D center HYDRAULIC FRACTURING The first company in Russia to use Alternating sequence multistage fracturing technology on a sidetrack horizontal borehole 16 records +40 % х 3 both world and Russian for drilling in the Caspian Sea increased production of high viscosity oil since 2012 increased number of fracturing ports per horizontal well since

9 Refineries upgrade: New technological level REFINERIES IN RUSSIA An ambitious fundamental refinery upgrade program has been completed $10 bln of investments REFINERIES IN EUROPE Burgas upgrade and selective improvements at other refineries $2 bln of investments % >10 cutting edge secondary units shifting to production of Euro-5 motor fuel Nelson complexity index (12% growth since 2012) 9

10 Refineries upgrade in Russia: Becoming a leader in refining efficiency Light products yield Fuel oil and vacuum gasoil yield Effect of more than $2 bln on EBITDA from upgrades Effect of more than $300 mln on EBITDA from operational improvements 54 % 69 % 34 % Russian leader in refining efficiency 14 %

11 Developing premium sales channels: Greater vertical integration, higher margins to 73% increased the share of premium branded motor fuel at our retail stations in Russia 10% branded lubricants sales volumes CAGR since 2012 to 76 % increased the share of highmargin into-plane refueling 11% average increase in sales volumes of bunker fuel since

12 HSE: Improving key indicators LUKOIL is committed to the principles of sustainable development in its operations Corporate standards based on ISO and OHSAS Regular external audit for compliance with standards Delivery of targeted functional programs -42% 95% 100% reduction in the lost time injury frequency rate for associated petroleum gas utilization rate in Russia (increased from 88% in 2013) industrial waste utilization rate 12

13 Portfolio optimization: Mitigating risk, improving efficiency Divesting and withdrawing from Upstream assets: High-risk Inefficient Sale of poorly integrated, inefficient and risky Downstream assets Sale of non-core assets Major restructuring of international Upstream and reduction in SG&A >$3 bln of additional cash flow in the last 5 years Arkhangelskgeoldobycha (Diamonds) Filling station networks in 9 European countries Karpatneftekhim (Petrochemical plant) Odessa refinery Caspian Investment resources (Production) Exploration in West Africa 13

14 Positive free cash flow in any price environment: Continuous growth Free cash flow per barrel $/boe, excluding cash flow from divestments International peers Russian peers International peers: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total Russian peers: Gazpromneft, Novatek, Rosneft 14

15 Dividend growth: Progressive dividend policy 195 Rubles per share Dividend yield years of sustainable dividend per share growth Interantional peers 4.9% 7.0% Russian peers 0,1 0, % International peers: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total Russian peers: Gazpromneft, Novatek, Rosneft 15

16 Key 2017 results Production Hydrocarbon production increased by 2.5% Development of Caspian Sea projects Development of gas projects in Uzbekistan Oil refining Average daily refinery throughput volumes grew by 2.0% Light products yield increased to 71% FID for construction of a delayed coker unit at the Nizhny Novgorod Refinery Marketing Retail sales volumes in Russia exceeded 10 mln tons Gross profit from sales of non-fuel goods in Russia increased by 11% Rapid growth of sales volumes in premium segments (bunkering, lubricants) Finance Record annual financial results (EBITDA and Free Cash Flow) Net Debt/EBITDA reduced to 0.3, credit ratings increased Decision on cancelling treasury shares and announcing a buyback program 16

17 INDUSTRY VIEW Fundamental factors will support the oil price growth Instability could persist 17

18 Global energy demand will continue to increase in the long term Energy demand by source mln TJ Renewables and nuclear Expected CAGR % Coal -0.3 % Gas 0.6 % Oil 0.3 %

19 Peak oil is unlikely before 2040 Demand for liquids Mbpd Possible peak oil in transportation after Possible peak oil after 2040 Petrochemistry key demand growth factor Industry, power and other Transportation key uncertainty factor

20 Transportation - key uncertainty factor for oil demand Peak oil demand from the transportation sector is expected after 2030, even under the pessimistic scenario for combustion engines The increasing share of electric car sales causes a delayed reduction in oil demand as full fleet replacement takes over 10 years Additional pressure on demand is exercised by growing efficiency of combustion engines Optimistic scenario for combustion engines New car sales structure in :80 40:60 50:50 Baseline scenario Pessimistic scenario for combustion engines Share of electric cars (including hybrids) in new sales Share of cars with combustion engines in new sales 20

21 Growth in demand and natural decline in production will require more than 35 Mbpd of new capacity by 2030 World liquids market balance Mbpd 98 (30) 70 Technologically challenging and high-cost projects >25 >10 Conventional production >60% of new capacity are technologically challenging and high-cost projects: Deepwater offshore Oil sands Low permeability reservoirs Supply in 2017 Production decrease in existing projects Supply in 2030 Required additional supply Demand in

22 Marginal barrel cost is expected to grow Oil production cost curve 2030 $/bbl. $60-70 per bbl in 2017 prices >10 Imminent production of highercost reserves will lead to marginal barrel cost growth even if current pace of technological evolution persists Current projects 70 New conventional capacity New technologically challenging and high-cost projects 2030 demand Mbbl/day New subeconomic projects 22

23 STRATEGY OF BALANCED DEVELOPMENT UNLOCKING POTENTIAL 23

24 Balanced positioning in a volatile macro environment Strategy objectives: Strategic goals are feasible under a $50/bbl oil price scenario Cash flow from oil prices above $50/bbl is efficiently reinvested and distributed to shareholders Brent oil price $/bbl in 2017 prices Technological, regulatory and geopolitical factors cause uncertainty and will promote oil price volatility Forecasts range $50/bbl in 2017 prices conservative oil price benchmark of LUKOIL

25 The basis of our strategy: Unique competitive advantages and efficient tools Competitive advantages Vast reserves and resources Low cost of conventional barrels Expertise in delivering large projects Technological expertise Leadership in refining efficiency Strong financial position Strategic goals Tools Sustainable organic production growth with a focus on creating value and unlocking the potential of the existing resource base Continuous improvement of refineries with maximizing free cash flow; expanding the petrochemical segment and entering gas chemistry Improving efficiency of the sales network and developing premium sales channels with maximizing free cash flow Progressive dividend policy and balanced distribution of additional free cash flow to shareholders Efficiency improvement Technology development Flexible reinvestment policy High ESG standards 25

26 Upstream strategy Minimum hydrocarbon production targets on the existing reserve base at $50/bbl oil price Mboepd Potential upside from favorable macro environment, improved technology, cost cutting, incremental gas monetization Upstream EBITDA on the existing resource base at $50/bbl oil price $ bln % p.a. +1% p.a % p.a. +2-3% p.a Sustainable organic production growth with a focus on creating value 26

27 Upstream strategy FCF sources: mature fields Organic growth projects: mature fields Organic growth projects: new fields Improving efficiency, maximizing FCF Unit cost reduction (CAPEX and OPEX) Technology scale-up and development Accelerated involvement of reserves into production, recovery factor improvement Accelerated involvement of hard-to-recover reserves into production Technology scale-up and development, unit cost reduction High viscosity oil Low permeability reservoirs Tyumen formation Efficient delivery of new projects West Siberia, Caspian, Baltics, Timan-Pechora, International Projects Profitable involvement into production of existing gas reserves in Russia High-margin barrels Base for long-term growth: resource base replenishing 100% replacement of proven reserves Cost-efficient exploration focusing on appraisal near existing fields Reserve conversion to proven through development drilling and other wellworks, and conversion from contingent resources by improving efficiency, technology scale-up and development Low-risk M&A of discovered reserves with a focus on regions of operations 27

28 Refining strategy Light products yield +1p.p. 71% 72% +4 p.p. 76% FCF of Refining segment $, with no MARPOL effect Selective refinery projects Investments optimization Petrochemistry, gas chemistry Operational improvements x Continuous improvement of refineries......with maximizing free cash flow 28

29 Refining strategy FCF sources: existing assets post major upgrades Continuous enhancement of operating efficiency of refineries and optimization of maintenance CAPEX (maximizing FCF) Feedstock and product slate optimization Inter-plant feedstock optimization Improving operational availability and energy efficiency Selective projects at Russian refineries to improve product slate Organic growth projects Development of petrochemistry at existing sites with monetization of available feedstock Potential development of gas chemistry with monetization of available feedstock and integration with existing plants 29

30 Marketing strategy Coverage of fixed costs of filling stations by gross income from non-fuel goods and services +30 p.p. 80% FCF of the filling stations network and premium sales channels (aircraft refueling, bunkering, lubricants, bitumen) $ +3% p.a. 33% +17 p.p. 50% Normalization of margin after excise tax increase in Improving network performance......with maximizing free cash flow 30

31 Marketing strategy FCF sources: filling stations network, aviation refuelling, bunkering Improving efficiency of the filling stations network and sales growth in a competitive market (maximizing FCF) Upgrading and standardizing the Russian network Growth in non-fuel sales Expanding filling stations network in priority regions of Russia in order to balance gasoline output growth at refineries in Russia Improving efficiency of international filling stations networks with optimal investments Maintaining a high market share of aviation refueling and bunkering Organic growth projects: lubricants and bitumen Focused sales growth and launch of new products in lubricants and bitumen 31

32 Strategic positioning and investment priorities Russia 80% CAPEX Upstream 85% CAPEX Low-risk projects in regions of operation with available infrastructure and a huge resource base Ramping up high-margin production volumes Downstream 15% CAPEX Efficient maintenance CAPEX Increasing the share of valueadded products (including petro- and gas chemicals) Increasing vertical integration LUKOIL is a vertically integrated oil and gas company with a strategic focus on organic growth and highefficiency oil production in Russia International 20% CAPEX Selective increase in highmargin production volumes Maximizing FCF by improving efficiency and through maintenance CAPEX M&A Replenishing the resource base Greater sensitivity to oil price upside Gaining new leading edge technological competencies 32

33 Fundamental changes in the strategy Previous strategies EXTENSIVE GROWTH Optimistic price scenario Quantitative growth targets Focus on increasing volumes and revenue Active international expansion and M&A High risk appetite, investments in high-risk exploration projects Strategy ORGANIC DEVELOPMENT Conservative price scenario Qualitative growth targets Focus on efficiency, cutting unit costs, increasing free cash flow, increasing ROACE Focus on Russia, selective international expansion, selective M&A Moderate risk appetite, primary focus on low-risk projects, limited budget for high-risk exploration Limited strategic flexibility due to overly optimistic targets High strategic flexibility Reliable base in the conservative scenario with full coverage of progressive dividend policy by free cash flow Opportunities for efficient reinvestment of additional cash flows from higher oil prices in growth projects and distribution to shareholders 33

34 Progressive dividend policy and balanced distribution of additional free cash flow to shareholders $80 bln for 10 years Progressive dividend policy: guaranteed annual dividend growth at least at Ruble inflation rate Policy of balanced distribution of additional cash flow (for example, at >$50/bbl oil price) Distribution to shareholders Share buyback 50:50 (on strategy horizon) Operating cash flow Investments at $50/bbl Free cash flow Guaranteed dividend Undistributed cash flow Reinvestment Organic growth projects - priority Carefully selected M&A with a conservative approach to risks 34

35 a unique investment proposition in Oil&Gas Focus on delivering long-term shareholder value through growing FCF and distributions Highly competitive industry positions Solid financial standing Disciplined investment approach Clear focus on efficiencies and increasing returns Embedded oil price downside protection Well-positioned for higher oil price scenario Combination of business and free cash flow growth even in conservative macro scenario Guaranteed progressive dividends at any oil price Incremental distributions to shareholders from higher oil price Adhering to sustainability principles Excellence in corporate governance 35

36 UPSTREAM Sustainable organic production growth with focus on creating value and unlocking the potential of the existing resource base Azat Shamsuarov Senior Vice President, Upstream 36

37 2017 Results Complying with OPEC+ production limitations by cutting output at low-margin fields Increasing drilling by ~20% to decelerate production decline rates in West Siberia Development of Caspian Sea projects Drilling started at Phase 2 of the Filanovsky field Substantial work progress at Phase 2 of the Korchagin field Development of gas projects in Uzbekistan The Gissar project reached full capacity Phase 1 of the Kandym gas processing plant launched Hydrocarbon production Mboepd, excluding West Qurna-2 Gas Oil % growth

38 International peers Leadership in proven hydrocarbon reserve life and proven crude oil reserves Hydrocarbon reserve life years Proven reserves bln boe Oil Gas Hydrocarbon production Mboepd International peers: BP, Eni, ExxonMobil, Chevron, ConocoPhillips, Shell, Total 38

39 Factors of efficient reserve development Development of conventional barrels is efficient due to low development and lifting costs Development and lifting costs per barrel $/boe up to 25 Development of hard-to-recover reserves is efficient due to high level of technological competencies and special tax rates 9 13 Conventional barrels Average Hard-torecover barrels International peers International peers: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total 39

40 Contingent resources potential for growth Resource base bln boe Timan-Pechora 3.5 Reserves (3P) 2.3 Contingent resources (3C) West Siberia 14.2 Reserves (3P) Ural region 3.7 Contingent resources (3C) Volga region International and other Reserves (3P) Contingent resources (3C) Reserves (3P) Contingent resources (3C) Reserves (3P) Contingent resources (3C) Reserves (3P) Contingent resources (3C) Costs reduction, technology advancement and state support are key factors for involving contingent resources into production 40

41 Accumulated expertise and competencies: Strategy basis Expertise and competencies Operations at conventional fields Large project delivery in Russia and internationally Examples West Siberia, Perm, Timan-Pechora High success rate of exploration drilling in Russia Offshore fields in Russia (Korchagin and Filanovsky) International projects (gas fields in Uzbekistan, West Qurna-2 in Iraq) Scientific and technical expertise for complex projects delivery Own R&D institutes Cutting-edge exploration, drilling and well completion methods Offshore projects Hard-to-recover oil projects, including high viscosity oil International expertise Implementing projects in more than 10 countries Best practice rollout for projects in Russia 41

42 Upstream strategy FCF sources: mature fields 1 Improving efficiency, maximizing FCF Unit cost reduction (CAPEX and OPEX) Technology scale-up and development Accelerated involvement of reserves into production, recovery factor improvement Organic growth projects: mature fields Organic growth projects: new fields Accelerated involvement of hard-to-recover reserves into production Technology scale-up and development, unit cost reduction High viscosity oil Low permeability reservoirs Tyumen formation Efficient delivery of new projects West Siberia, Caspian, Baltics, Timan-Pechora, International Projects Profitable involvement into production of existing gas reserves in Russia High-margin barrels Base for long-term growth: resource base replacement 5 100% replacement of proven reserves Cost-efficient exploration focusing on appraisal near existing fields Reserve conversion to proven through development drilling and other wellworks, and conversion from contingent resources by improving efficiency, technology scale-up and development Low-risk M&A of discovered reserves with a focus on regions of operations 42

43 Upstream strategy: Sustainable organic production growth with focus on creating value and unlocking the potential of the existing resource base Minimum hydrocarbon production targets on the existing reserve base at $50/bbl oil price Mboepd 2.2 Potential upside from favorable macro environment, improved technology, cost cutting, incremental gas monetization +1% p.a. +1% p.a. Strategic objectives Profitable involvement into production of existing gas reserves in Russia Efficient delivery of new projects (at minimum cost, in minimum time) Accelerated involvement of hard-torecover reserves into production (technology scale-up and development, unit cost reduction) Improving efficiency at mature fields in order to accelerate involvement of reserves into production, improve recovery factor, maximize FCF % ~30% ~35% Share of high-margin barrels 43

44 Improving efficiency at mature fields West Siberia considerable optimization potential Oil production at mature fields in West Siberia Mbpd (excluding Pyakyakhinskoe, Imilorskoe and Vinogradov fields) 1.0-2% p.a % p.a External constraints on production in Reduced investments due to lower oil prices ( ) in order to remain free cash flow positive at the Group level Production reduction due to external limitations in 2017 Targets for mature fields: By 2020 reduce production decline rates to 2-3% further reduction in production decline rates and possible stabilization of production Tools Reducing per barrel costs (capex and opex) Optimizing field development plans with bigger share of complex wells: horizontal, multibore, multilateral, small diameter Rolling out an integrated approach to developing mature fields Optimizing R&D solutions Efficient reinvestment of additional cash flow from higher oil prices

45 Improving efficiency at mature fields 1 Reducing unit costs to accelerate reserves involvement Drilling costs Construction costs Lifting costs Key objectives Technology scale-up and improvement, optimizing wells design Customized approach to each well Increasing the share of non-turnkey contracts for complex wells Optimizing design solutions Optimizing procurement Implementing new construction standards Improving energy efficiency Optimizing routine repairs and overhauls Optimizing operating wellworks Optimizing reservoir pressure maintenance systems Tools Targeted cost reduction programs Intelligent Field project (LIFE-Field) Integrating key process models Planning production from potential (debottlenecking) Project-based approach Multidisciplinary teams Dividing a project into investment modules Developing target technologies at in-house R&D institutes 45

46 Improving efficiency at mature fields Drilling leading area in cost optimization 1 Achievements in Implementing new drilling technologies High-speed telemetry and LWD for geosteering Placing infill wells based on an updated reservoir model Using surface magnetic ranging technologies Small diameter multibore wells Streamlining drilling processes Standardizing well designs Increasing share of non-turnkey contracts Developing engineering service and own supervising +7 p.p. -31 % +22 % Increased share of horizontal wells to 26% Reduced unit costs for horizontal well drilling Increased commercial drilling speed (all well types) 46

47 Improving efficiency at mature fields Small diameter wells (SDW) comprise significant potential Impact and potential of rolling out SDWs 25% cost reduction per well 2,200 potential well stock for further rollout at sites with depth up to 1,500 m 700 mln bbl potential of accelerated involvement of reserves and contingent resources 1 History of deploying the technology and number of SDWs drilled per year units Research, appraisal and pilot projects in Ural region Appraisal and rollout in Volga region Roll-out in West Siberia and Timan- Pechora regions, further technology improvement

48 Improving efficiency at mature fields Current OPEX reduction programs 1 Converting to downhole permanent magnet engines Introducing energy-efficient pumps In 2015, a permanent magnet engine plant was built in Kogalym In 2017, a strategy was adopted for replacing all asynchronous engines with permanent magnet engines by 2022 Rolling out energy-efficient pumps for reservoir pressure maintenance systems >10 % decline in energy >15 decline in energy costs % costs target share of permanent magnet engines (growth from 28%) 100 % х2 target growth of energy-efficient pumps fleet 48

49 Improving efficiency at mature fields Medium-term cost reduction targets 1 Unit cost targets across the Group for Drilling costs Construction costs Lifting costs Growth below inflation (reduction in real terms) Growth below inflation (reduction in real terms) Growth below inflation (reduction in real terms) LUKOIL is developing integrated CAPEX (drilling, construction) and OPEX optimization programs More ambitious targets are expected after development of the programs Accelerating the involvement of reserves and contingent resources into production is a key cost reduction target 49

50 Improving efficiency at mature fields Example of unlocking potential: steady production growth in the Ural region 1 Oil production in the Ural region Kbpd % p.a. 326 Key production growth drivers: Continuous technology improvement (optimizing development systems, new types of wellworks) A proactive exploration program (follow-up and appraisal) Developing prospective hydrocarbon reservoirs Strict cost control Customized approach to each well Efficient operations on small fields and reservoirs

51 Improving efficiency at mature fields Profit based tax (PBT) is an example of an efficient way to unlock potential 1 Estimated effect of PBT on oil production at the proposed licensed areas production, Kbpd PBT PBT should allow to increase production at mature fields with high production costs mln bbl of oil in x2 Pilot implementation of PBT is expected to start in 2019 LUKOIL has proposed nine licensed areas for inclusion in the PBT pilot run 25 Standard tax regime

52 Accelerated involvement of hard-to-recover reserves Significant potential of existing hard-torecover resource base 2 Structure of recoverable hard-to-recover oil reserves in key regions (АВС1+С2 classification) bln bbl Timan- Pechora High viscosity oil 2.1 Production in 2017 Kbpd 62 More than 5.5 bln bbl of hard-torecover reserves according to the Russian classification (17% of all LUKOIL reserves in Russia) High viscosity oil Low permeability reservoirs Tyumen formation West Siberia Tyumen formation Tax incentives Deposits in regions with welldeveloped infrastructure Low permeability reservoirs

53 Accelerated involvement of hard-to-recover reserves Accelerated involvement of hard-to-recover reserves: Important production growth driver 2 Hard-to-recover oil production Kbpd Potential upside from better macro environment, technology level, cost cutting and transferring to tax beneficial categories 87 х2 х1.5 Targets to 2027 Low permeability reservoirs Start of commercial operations at the Imilorskoe field Start of commercial operations at the Vinogradov field Selecting the optimum multistage fracturing technologies Transferring reserves to tax beneficial categories Tyumen formation Ramping up production at the Tevlinsko- Russkinskoe, Sredne-Nazymskoe and Paytykhskoe fields High and ultra-high viscosity oil Intensified drilling at the Yaregskoe and Usinskoe fields Building up new steam generation capacity

54 Accelerated involvement of hard-to-recover reserves Yaregskoe field: a revival of one of the oldest fields Production profile Kbpd Production plateau 2 Achievements 630 mln boe 3Р+3С reserves and resources Put in production by mining method in 1939 New technologies improved the oil recovery factor: Modification of subsurface well designs and application of thermal steam formation treatment methods Application of counter SAGD (Steam-Assisted Gravity Drainage) technology Development plans Construction of main infrastructure facilities and reaching production plateau Further technology development and pilot projects related to: Underground wells construction technologies Testing of SAGD and Steam-flood technologies in thinner net oil pay zones 54

55 Accelerated involvement of hard-to-recover reserves Usinskoe field: scaling up the technological edge Permian layer production profile Kbpd Production plateau 2 Achievements 812 mln bbl 3Р+3С reserves and resources Put in production in 1977 New technologies improved oil recovery factor and resulted in growing production: Thermal steam formation treatment Injection of cold water with viscous additive An in-house R&D center for high viscosity oil has been founded Development plans Development of thermal steam formation treatment program Reservoir pressure maintenance system development Further technology development and pilot projects related to: surfactant-treated hot water injection combined injection of heat-transfer agent cross SAGD technology 55

56 Accelerated involvement of hard-to-recover reserves Continuous improvement of horizontal drilling and multistage hydraulic fracturing Our achievements in From 5 to 13 MHF zones From 800 to 2,000 m horizonal wellbore length Leading edge technology in use, for example: ASMF (Alternating sequence multistage fracturing) LWD (Logging while drilling) 2 KRASNOLENINSKOE 800 m horizontal wellbores Performing 5-zones hydrofracturing NIVAGALSKOE First horizontal well with 4 boreholes Construction of branched horizontal wells VINOGRADOV 2,000 m horizontal boreholes Hydrofracturing on linear fracking fluid Formation of artificial fractured reservoirs 56

57 Accelerated involvement of hard-to-recover reserves Imilorskoe field: an example of efficient hard-to-recover project Production profile Kboepd 48 2 Achievements 783 mln boe 3Р+3С reserves and resources Early Oil Stage delivery in 2014 in less than 2 years Transferring reserves to tax beneficial category Successful application of new technologies: drilling of multilateral horizontal wells multistage hydrofracturing Implemented model of integrated asset management controlled by a multidisciplinary team now serves as a basis of the Company s standard Development plans Full-scale field development to achieve plateau Continuous perfection of technologies Production plateau 57

58 Accelerated involvement of hard-to-recover reserves Vinogradov field: right technology choice Production profile Kboepd 40 2 Achievements 249 mln boe 3Р+3С reserves and resources Pilot production mode Testing of new technologies: first in Russia to successfully test horizontal wells completion with linear fracturing fluids for multistage hydrofracturing wells with extended horizontal borehole up to 2,000 m horizontal injection wells with multistage hydrofracturing 6 16 Development plans Creation of unique system of low-permeability reservoirs development in Russia with horizontal wells used both for oil production and for reservoir pressure maintenance Transition of the field to commercial production Production plateau 58

59 Efficient delivery of new projects Projects portfolio 3 New projects Post-FID New projects Pre-FID Advanced competencies in megaprojects Standardisation and scaling Using existing infrastructure D33 D41 Vostochno- Lambeyshorskoe Usinskoe Yaregskoe R. Trebs and A. Titov Nakhodinskoe phase 2 Yuzhno-Messoyakhskoe Khalmerpayutinskoe Pyakyakhinskoe Small fields V. Vinogradov Imilorskoe Tengiz Yu. Korchagin V. Filanovsky Shah-Deniz Block 10 West Qurna 2 Yu. Kuvykin Khvalynskoe Rakushechnoe Gissar Kandym Other international projects: OML 140 (Nigeria) Tano (Ghana) 59

60 Efficient delivery of new projects 3 North Caspian Production profile Kboepd Achievements 3.8 bln boe 3Р+3С reserves and resources 10 fields discovered; 93% success rate in exploration drilling Two fields launched (Korchagin and Filanovsky) with total production over 130 Kboepd in prospective structures in the portfolio Development plans Development of new phases of the Filanovsky and Korchagin fields FID on Rakushechnoe and Kuvykin fields Drilling exploration wells to study 6 prospective structures Production plateau Korchagin Filanovsky Rakushechnoe Kuvykin 170 km Khvalynskoe 60

61 Efficient delivery of new projects Filanovsky North Caspian flagship field Production profile Kboepd Achievements 1.1 bln boe 3Р+3С reserves and resources Infrastructure center for development of the North Caspian 6 offshore structures (including production platforms) Leading edge drilling technologies multilateral horizontal wells with TAML-5 completion level; horizontal sections up to 1,600 m long Drilling speed has doubled as a result of experience gained while developing the Korchagin field Development plans Launch of Phase 2 in 2018; Phase 3 completion of construction works in 2019 Drilling 12 production wells in Pilot operations on the Apt deposit (Lower Cretaceous sediments) Production plateau 61

62 Efficient delivery of new projects 3 Baltic Sea a new growth region Production profile Kboepd Achievements 261 mln boe 3Р+3С reserves and resources 3 new fields were discovered in 2015, ensuring future production increase potential A base concept of further development of the region was developed in Production plateau Development plans D41 field Start of development drilling in 2018 Offshore ERD wells drilled from the onshore drilling rig D33 field FID planned in 2019 Launch in 2023 D6-Yuzhnaya field Completion of exploration works in

63 Efficient delivery of new projects Gas fields in Uzbekistan Production profile Kboepd (LUKOIL share) Achievements Long history of successful operations in the region Ramp-up of the Gissar project to design capacity in 2017 Launch of Phase 1 of the Kandym GPP ahead of schedule in Development plans Kandym: launch of Phase 2 of the GPP in 2018 (total capacity of the two phases 8.1 bcm) Gissar: maintaining the production plateau Production plateau 4 bcm 8 bcm 15 bcm 63

64 Efficient delivery of new projects Speeding up operations on small fields in West Siberia 3 Achievements More than 30 small fields in West Siberia with total proven oil reserves of over 600 mln bbl Speeded up operations at small fields, including due to special MET rates Production profile Kbpd Development plans Maximizing synergies with the region s existing infrastructure Customized approach to each field Use of new drilling and production technologies to enhance recovery rates Stringent cost control and increased automation Production plateau 64

65 Profitable involvement into production of existing gas reserves in Russia Gas production growth and monetization in Russia 4 Key gas production regions LUKOIL s 3P+3С gas reserves and resources in Russia amount to 12 bln boe (>2,000 bcm) Gas production in Russia Kboepd Incremental potential above base target Caspian Sea West Siberia % p.a % p.a bcm 19 bcm 22 bcm Monetization strategy Optimizing technical solutions and development costs Maximum use of existing infrastructure Long-term sales contract with Gazprom and increased sales to end users Integration with gas chemicals and power projects 65

66 Repleneshing the reserve base Strategic goal 100% replacement of proven reserves Exploration results : 71 fields and 292 new deposits with total reserves of more than 1.7 bln boe were discovered in Russia 6 fields were discovered internationally, including the Eridu field on Block 10 (Iraq), the region s largest discovery in 20 years 85% success rate of exploration drilling 5 Cost-efficient exploration Conversion of reserves and contingent resources M&A of discovered reserves Focus on near-field exploration and appraisal The maximum share of high-risk projects is set at 20% of the exploration budget on the strategy horizon Converting reserves by development drilling and wellworks Converting contingent resources to reserves through improved efficiency, technologies and state support Carefully selected M&A with a conservative approach to risk assessment 66

67 Upstream strategy Minimum hydrocarbon production targets on the existing reserve base at $50/bbl oil price Mboepd Potential upside from favorable macro environment, improved technology, cost cutting, incremental gas monetization Upstream EBITDA on the existing resource base at $50/bbl oil price $ bln % p.a. +1% p.a. +5% 9.8 p.a. +2-3% p.a Sustainable organic production growth with a focus on creating value 67

68 STRATEGY OF BALANCED DEVELOPMENT UNLOCKING POTENTIAL

69 REFINING Continuous improvement of refineries with maximizing free cash flow Expanding the petrochemical segment and entering gas chemistry Vadim Vorobyev Senior Vice President Downstream 69

70 Итоги 2017 г. Light products yield Refinery throughput increased by 1.8% (to 67 million tons), including by 3.2% in Russia 67 % +4 p.p. 71 % Product slate improved: light products yield reached 69% (+6 p.p.) in Russia and 75% in Europe (+2 p.p.) Design capacity reached at the largest in Russia vacuum gasoil deep conversion complex at the Volgograd Refinery (3.5 million tons capacity) FID made on construction of a delayed coker at the Nizhny Novgorod refinery A number of projects completed to optimize refined products logistics from refineries

71 Existing assets - leadership in efficiency, basis for strategy Nelson index >7.0 Light products yield >65% Refineries in Russia Refineries in Europe Petrochemistry, gas processing Capacity >10mt Usinsky GPP % Refineries in Russia and Europe Petrochemical and gas processing facilities mln tons refinery throughput Refinery throughput to oil production ratio Zeeland Burgas Nizhny Novgorod Petrotel Ukhta Perm Saratovorgsyntez Korobkovsky GPP Stavrolen Volgograd Lokosovsky GPP 8.8 Nelson index ISAB 71

72 Completion of the major refinery upgrade program in Russia Light products yield 54% Nelson index +15 p.p. 69% Nelson index 100% of Euro-5 motor fuel >$2 bln annual impact on EBITDA from $10 bln CAPEX 11 state-of-the-art refinery units built as part of the program Nizhny Novgorod Volgograd Perm Conversion units Catalytic Кат. крекинг cracking Hydrotreatment Hydrocracking 10.6 mln t/year Coking Coking Treatment units Алкилирование Alkylation Гидроочистка Hydrotreatment Hydrotreatment 7.5 mln t/year 72

73 Enhancing refinery operating efficiency in Russia $300 mln Increase in light products yield through inter-plant optimization of feedstock: Optimization of balances and refining processes Logistics infrastructure upgrade >3-fold growth of cross-supplies since 2015 Increase in the energy efficiency index in rising energy prices environment Labor productivity growth under increasing complexity of production +1.4 p.p. +10% % +15 % annual impact on EBITDA Employees were trained in Lean 6 Sigma methodology Staff motivated to enhance operating efficiency >300 73

74 Refineries in Europe: selective upgrades completed Refinery upgrades New units - heavy residues conversion complex at the Burgas refinery Reconstruction - catalytic cracking at Burgas and ISAB >$350 mln Nelson index % 10.2 Enhancement of operating efficiency More efficient running modes of units Lower process losses annual impact on EBITDA from $2 bln CAPEX % light products yield 75 % light products yield 74

75 Refining strategy FCF sources: existing assets post major upgrade 1 Continuous enhancement of operating efficiency of refineries and optimization of maintenance CAPEX (maximizing FCF) Feedstock and product slate optimization Inter-plant feedstock optimization Improving operational availability and energy efficiency 2 Selective projects at Russian refineries to improve products slate Organic growth projects 3 4 Development of petrochemistry at existing sites with monetization of available feedstock Potential development of gas chemistry with monetization of available feedstock and integration with existing plants 75

76 Enhancement of operating efficiency at refineries Efficiency improvement program at Russian refineries for year roadmap with >250 initiatives 1 +$200 mln/year estimated annual impact on EBITDA from the program execution Capacity optimization Optimization of units running mode Higher flexibility of feedstock usage Lower irrecoverable losses Reliability and availability Reduction of unscheduled shutdowns Reduction of repair time and increase of timespan between repairs Operation risk-based planning of repairs Distributed unit maintenance Energy efficiency Heat integration Furnace efficiency upgrade Maximization of gas utilization Cost reduction, labor productivity improvement Additives norming Tender procedures improvement Logistics optimization Staff training and rotation, headcount control 76

77 Selective projects at Russian refineries Nizhny Novgorod 2 Projects Delayed coker Isomerization unit FID Light products yield 69% +2 p.p. 71% +5 p.p. from % Bitumen production Volgograd Deasphaltizing unit

78 Selective projects at Russian refineries 2 Delayed coker at Nizhny Novgorod refinery 2.1mln tons feedstock capacity $1 bln CAPEX 2021 Launch Scaling the successful project of delayed coker construction at Perm refinery Load optimization through synergy with existing secondary conversion processes Refining efficiency 64% 76% Before 21% 4% After Balance of the unit Asphalt 5% Tar 95% Gas 8% Naphtha12% Diesel 30% VGO 23% Coke 27% 42% light products yield Feedstock for FCC (synergy with existing units) Light products yield Share of VGO and fuel oil Feedstock Product slate 78

79 Development of petrochemistry 3 Potential growth projects in petrochemistry Projects Potential locations FID Petrochemicals is a high-potential market with growing demand 3 % expected demand CAGR >3x EBITDA Pyrolysis of LPG and naphtha Budyonnovsk, Perm, Nizhny Novgorod LUKOIL has a competitive advantage of available petrochemical feedstock and technological competencies Growth potential in petrochemistry Propylene processing Nizhny Novgorod 4 petrochemical plants in Russia and Europe 1.2 mln tons of products produced in 2017 >2.6 mln tons of available feedstock Aromatics processing Nizhny Novgorod, Volgograd, Perm 79

80 Potential entry into gas chemistry Gas chemical complex at Stavrolen 4 Carbamide production is an efficient way to monetize gas Carbamide is an attractive market with growing demand 1.2 % expected demand CAGR ~2 mln tons p.a. Potential project output capacity Potential project parameters 1 bcm p.a. of gas feedstock capacity 5 years expected construction time ~$2 bln CAPEX estimate Competitive advantages Own low-cost feedstock (associated gas from Caspian Sea projects) Favorable geographic location Economy of scale (design solution single large-capacity line) Construction at Stavrolen plant with developed infrastructure 80

81 MARKETING AND POWER GENERATION Improving efficiency of the sales network and developing premium sales channels with maximizing free cash flow Improving efficiency of power generation, potential participation in CSA-2 Vadim Vorobyev Senior Vice President Downstream 81

82 2017 results Filling stations network Sales volumes of motor fuels in Russia exceeded 10 mln tons per year 14% sales volumes growth of the premium EKTO branded fuels 11% gross profit growth from non-fuel sales in Russia Premium channels 18% aircraft fuel sales volumes growth (including +6% into-plane refueling) 36% bunkering fuel sales volumes growth (including +25% end user sales) 14% branded lubricants sales volumes growth 13% bitumen sales volumes growth 82

83 Marketing strategy FCF sources: filling stations network, aviation refuelling, bunkering 1 2 Improving efficiency of the filling stations network and sales growth in a competitive market (maximizing FCF) Upgrading and standardizing the Russian network Growth in non-fuel sales Expanding filling stations network in priority regions of Russia in order to balance gasoline output growth at refineries in Russia Improving efficiency of international filling stations networks with optimal investments Maintaining a high market share of aviation refueling and bunkering Organic growth projects: lubricants and bitumen 3 Focused sales growth and launch of new products in lubricants and bitumen 83

84 Improving efficiency of the filling stations network and sales growth Filling stations network in Russia and abroad 1 Filling stations network 83 Country of presence Number of filling stations In Russia TOP-2 by number of filling stations and sales volumes Sales volume is balanced with gasoline production volume at refineries 12.8 tons average daily sales per station Internationally Diversified portfolio of filling stations in 17 countries European filling stations portfolio was optimized to increase integration with the refineries 6.7 tons average daily sales per station

85 Improving efficiency of the filling stations network and sales growth Standardizing and upgrading filling stations in Russia 1 Filling stations sales centers Express filling stations Automated filling stations Standardizing filling stations format Modernization to increase service speed and quality Optimizing costs including outsourcing of services Target share by type of station >40% Maximum range of products Non-fuel products and services sales are a priority 50% Optimal range of products High service speed <10% Remote station control Minimum costs >500 >$100m filling stations included into the retail network upgrade program for annual EBITDA impact from $500 mln of CAPEX 85

86 Improving efficiency of the filling stations network and sales growth Focus on lowering unit OPEX and increasing non-fuel sales Key tools to improve the filling stations efficiency in Russia Digitization and automation Increased service speed Expansion of retail area and range of non-fuel goods and services Partnership with retailers Loyalty programs 1 Filling stations unit OPEX and non-fuel gross profit in Russia RUB/ton of fuel Unit OPEX Gross profit from non-fuel goods and services -10% Decrease of unit OPEX by 2027 >х2 Growth of non-fuel gross profit 33 % 50 % 80 % OPEX coverage by non-fuel gross profit 86

87 Improving efficiency of the filling station network and sales growth Improving efficiency of international filling stations network with optimal investments 1 International filling stations network LUKOIL refineries Key tools to improve the filling stations efficiency outside Russia Optimization of OPEX and maintenance CAPEX Development of branded fuel sales Development of customer loyalty programs Selective construction and upgrades of stations with focus on non-fuel business 87

88 Aviation and marine bunkering 2 Maintaining a high market share in aviation and marine bunkering Aviation bunkering achievements x1.5 growth (to 76%) of high-margin into-plane refueling in total jet fuel sales volumes Market share in Russia reached 30% Annual sales volumes reached >3 mln tons Aircraft refueling complexes network expanded to 15 airports Strategy Maintaining market share in Russia and improving efficiency Launch of refueling complex in Sheremetievo (2018) the largest airport in Russia Maximizing synergy with existing oil tank facilities Marine bunkering 70% sales volumes growth (up to 4.5 mln tons/year) Market share in Russia reached 30% Over 20 ports of operation Presence in the Baltic, the Barents, the Azov and the Black seas Growth in the Baltic sea due to high quality low sulfur fuel Maintaining market share in Russia through existing advantages High-quality fuel (low sulfur) Complex service for the customer and option to tank with several types of fuel 88

89 Lubricants and bitumen Focused growth and launch of new products in lubricants and bitumen segments Lubricants Bitumen 3 Our achievements 63% sales volumes growth in (to 0.6 mln tons/year) of branded lubricants Market share in Russia reached 45% >700 items in product mix, >1,200 approvals by car and equipment manufacturers 100% of lubricants used by foreign car makers for the first fillings of the car engines manufactured in Russia are LUKOIL oils 13% sales volumes growth in (to 0.9 mln tons/year) Captured economically feasible growth potential in asphalt bitumen segment (90% of sales asphalt bitumen) Strategy Growth in branded lubricants segment Expansion of cooperation with the cars and equipment manufacturers Development of digital sales channels Investments in development of the new products Market expansion in South America and Asia Growth in high-margin polymer bitumen segment Upgrade of the existing production lines and expansion of the product range Launch of the full cycle service for the endusers R&D center setup Securing the value through export during offseason periods in Russia 89

90 Power generation: stable cash flow Consistently profitable portfolio in commercial generation: Heating plants (3.7 GW) Renewables (0.4 GW) Efficient supporting generation (>1.6 GW) Sources of FCF: heating plants Growth projects Improving efficiency with optimal CAPEX Stable cash flow from Capacity supply agreement-1 (CSA-1) Own electricity utilization in upstream and refining Improving operating efficiency Possible participation in CSA-2 and Renewables CSA Potential participation in CSA-2 with assets upgrades financed from external sources Development of Renewable generation under Renewables CSA 90

91 Downstream strategy Maximizing Free Cash Flow FCF of Refining segment $, with no MARPOL effect Operational improvements Petrochemistry, gas chemistry Selective refinery projects Investments optimization FCF of the filling stations network and premium sales channels (aircraft refueling, bunkering, lubricants, bitumen) $ +3% p.a. x2 Normalization of margin after excise tax increase in

92 FINANCE Maximizing return on capital Conservative financial policy Balanced distributions to shareholders Alexander Matytsyn Chief Financial Officer 92

93 2017 results Improved macro +27% Urals in USD +13% net price in USD -13% RUB/USD exchange rate Q Q % RUB bln % 1,662 1,483 Revenue 5, EBITDA Profit 419 5, Record financial results EBITDA Core free cash flow Adjusted profit* CAPEX (19.2) Free cash flow (FCF) (3.2) (4.6) Core FCF** Net debt * Profit before effect from impairments (and reversal of impairments), foreign exchange and sale of diamonds business. ** Free cash flow before working capital changes, West Qurna-2 project and income tax on sale of diamonds business. 93

94 EBITDA dynamics Upstream EBITDA, RUB bln Iraq International (ex. Iraq) Russia Key drivers Higher oil prices Higher share of high-margin barrels in overall production Higher production of natural gas in Russia and Uzbekistan Lower volumes of compensation crude oil from West Qurna-2 project in Iraq Downstream EBITDA, RUB bln International Improved refining margins in Russia and Europe Improved product slate Russia Increased sales volumes via premium channels

95 EBITDA per barrel: leadership in Russia EBITDA per barrel of production $/boe High-margin barrels in upstream High refining coverage High quality of refining capacities Developed retail sales network Access to the premium markets and sales channels 18 International peers Russian peers International peers: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total Russian peers: Gazpromneft, Rosneft, Novatek 95

96 Steadily growing free cash flow Core free cash flow*, RUB bln Quarterly LTM rolling sum Brent $/bbl 1Q Q Q Q Q Q Q Q * Before working capital changes, West Qurna-2 project and income tax on sale of diamond business. 96

97 Low leverage Net debt / EBITDA as of 31 December results: Net debt reduced to RUB 286 bln (-35% y-o-y) Weighted-average interest rate on long-term loans and borrowings reduced to 4.33% (by 173 bp y-o-y) Credit ratings upgraded by 3 agencies Moody s Baa3 +1 S&P BBB Fitch BBB+ +2 International peers Russian peers International peers: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total Russian peers: Gazpromneft, Rosneft, Novatek 97

98 Financial strategy Indicators Strategic targets Maximizing returns ROACE Conservative financial policy Net debt / EBITDA Higher distributions to shareholders Payment per share 10% 15% 0.6 Progressive dividend policy Progressive dividend policy + buyback Tools Control over operational efficiency improvement and cost reduction Balanced investment program and investment discipline Incentive system focused on strategy delivery Dividend coverage by free cash flow >100% for the period >100% in each year 98

99 Control over operational efficiency improvement and cost reduction Consolidated control over efficiency improvement programs 1 Targeted programs Unit CAPEX and OPEX reduction in Upstream Unit CAPEX and OPEX reduction in Refining OPEX and maintenance CAPEX reduction in Marketing SG&A reduction Tools Planning in accordance with cost reduction targets Priority capital allocation to the most profitable projects and businesses Budget execution control Incentive program and KPIs focused on cost reduction and cost cutting programs implementation 99

100 Balanced investment program and investment discipline Focus on Russian Upstream 2 CAPEX at $50/bbl oil price Downstream: 15% Investment planning Focus on low-risk projects in Russia and highmargin barrels Focus on projects with short payback period 15% minimum target return CAPEX management Large projects budget optimization Phase-gate project management approach with staged investment decisions Control over maintenance CAPEX Abroad (20%) Russia (80%) Abroad (20%) $80B Russia (80%) Upstream: 85% Excluding West Qurna

101 Balanced investment program and investment discipline 2 CAPEX structure in Focus on organic growth in Upstream Organic growth projects 50% 60% 40% 10% 90% FCF sources 50% 40% 60% LUKOIL total Upstream Refining Marketing CAPEX $ bln <1 Excluding West Qurna

102 Balanced free cash flow Free cash flow structure Marketing and other 20% Growth in premium sales channels Optimal maintenance CAPEX Efficiency improvement Free cash flow fully covers progressive dividend policy at $50/bbl oil price Refining 30% Selective upgrades to improve product slate Selective petchem investments Optimal maintenance CAPEX Efficiency improvement Upstream 50% Stable organic production growth Growing share of high-margin barrels Cost reduction for faster reserves involvement into production and conversion of resources into reserves Low-risk projects 102

103 Free cash flow and EBITDA sensitivity to oil price and RUB/$ exchange rate Oil price +$1/bbl Brent RUB/$ +1 RUB/USD Portfolio has high sensitivity to better macroeconomics EBITDA 2018 base +$210 mln +$50 mln Further sensitivity growth through larger share of high-margin barrels in overall production FCF 2018 base +$170 mln +$130 mln 103

104 Greater sensitivity to oil price increase through larger share of high-margin barrels in production Net price sensitivity to $1 oil price increase $/bbl Organic growth projects Mature fields Low permeability reservoirs Far North Baltics Caspian Ultra-high viscosity oil Net price $/bbl (Urals less MET and export duty, 2018 tax regime, $50/bbl Urals) 104

105 Incentive system 3 Incentive system focused on startegy delivery Strategy execution assurance Group goals focused on growth and value creation: Group ROACE Group free cash flow Group profit Individual goals focused on specific manager/business unit results: Segment ROACE Segment free cash flow Segment EBITDA Motivation to exceed strategy goals Share-based incentive program Shares allocation to key employees Allocation of extra shares if KPIs are exceeded Dividends paid on the allocated shares will be used to acquire LUKOIL shares Actual distribution of shares to employees in 2023 >700 Participants 40 mln Real shares with dividend distribution 105

106 Progressive dividend policy and balanced distribution of additional free cash flow to shareholders $80 bln for 10 years Progressive dividend policy: guaranteed annual dividend growth at least at Ruble inflation rate Policy of balanced distribution of additional cash flow (for example, at >$50/bbl oil price) Distribution to shareholders Share buyback 50:50 (on strategy horizon) Operating cash flow Investments at $50/bbl Free cash flow Guaranteed dividend Undistributed cash flow Reinvestment Organic growth projects - priority Carefully selected M&A with a conservative approach to risks 106

107 Selective M&A with focus on risk/return Leverage of accumulated experience from past M&A transactions Making use of competitive advantages Experience in regions of operation Delivery of complex projects in Russia and abroad Objectives Higher reserves and production Greater sensitivity to oil prices Focus on acquisition of discovered reserves......leveraging of existing expertise......with a balanced approach to project selection First tier: discovered reserves at the pre-development stage to create maximum value by using existing expertise Second tier: projects at the construction and early ramp-up stage Managerial, regional and technological expertise Key regions: Russia and the CIS, Central Asia, Middle East, West Africa, Central and Latin America, North Sea Portfolio approach based on risk/return Controlling share: self-sufficient project delivery subject to available expertise Non-controlling share: gaining expertise via partnership with experienced operators 107

108 a unique investment proposition in Oil&Gas Focus on delivering long-term shareholder value through growing FCF and distributions Highly competitive industry positions Solid financial standing Disciplined investment approach Clear focus on efficiencies and increasing returns Embedded oil price downside protection Well-positioned for higher oil price scenario Combination of business and free cash flow growth even in conservative macro scenario Guaranteed progressive dividends at any oil price Incremental distributions to shareholders from higher oil price Adhering to sustainability principles Excellence in corporate governance 108

109 2018 Outlook Upstream Production growth by 1-2% (ex. WQ-2 project) Development of growth projects in Russia: Launch of the 2 nd Phase at Korchagin field 2 nd Phase drilling program at Filanovsky field Production drilling at D41 Full development stage at Imilorskoe field FID on Rakushechnoe field Launch of the 2 nd train of Kandym gas processing plant Refining Maintaining refining volumes and light products yield at 2017 level Maintenance at Burgas, ISAB and Nizhny Novgorod refineries Completion of polyethylene line upgrade at Stavrolen Finance ~$8 bln CAPEX (ex. WQ-2 project): Upstream / Downstream: 85% / 15% Russia / International: 80% / 20% 109