Source - RNS
RNS Number : 3570I
PJSC LukOil
29 August 2016
 

PJSC LUKOIL

 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

for the three and six-month periods ended

30 June 2016 and 2015

 

 

The following report contains a discussion and analysis of the financial position of PJSC LUKOIL at 30 June 2016 and the results of its operations for the three and six month periods ended 30 June 2016 and 2015, as well as significant factors that may affect its future performance. It should be read in conjunction with our International Financial Reporting Standards ("IFRS") condensed interim consolidated financial statements and notes thereto for the respective periods.

References to "LUKOIL," "the Company," "the Group," "we" or "us" are references to PJSC LUKOIL and its subsidiaries and equity affiliates. All ruble amounts are in millions of Russian rubles ("RUB"), unless otherwise indicated. Income and expenses of our foreign subsidiaries were translated to rubles at rates which approximate actual rates at the date of the transaction. Tonnes of crude oil and natural gas liquids produced were translated into barrels using conversion rates characterizing the density of crude oil from each of our oilfields and the actual density of liquids produced at our gas processing plants. Tonnes of crude oil purchased as well as other operational indicators expressed in barrels were translated into barrels using an average conversion rate of 7.33 barrels per tonne. Translations of cubic meters to cubic feet were made at the rate of 35.31 cubic feet per cubic meter. Translations of barrels of crude oil into barrels of oil equivalent ("BOE") were made at the rate of 1 barrel per BOE and of cubic feet - at the rate of 6 thousand cubic feet per BOE.

This report includes forward-looking statements - words such as "believes," "anticipates," "expects," "estimates," "intends," "plans," etc. - that reflect management's current estimates and beliefs, but are not guarantees of future results. 

 

Key financial and operational results

 

2nd quarter of

Change, %

1st half of

Change, %

 

2016

2015

2016

2015

 

(millions of rubles)

Sales

1,338,959

1,476,966

(9.3)

2,516,633

2,917,271

(13.7)

EBITDA (operating)(1)

189,571

206,679

(8.3)

381,563

417,387

(8.6)

EBITDA (operating)(1) net of West Qurna-2 project

182,681

171,085

6.8

353,179

354,553

(0,4)

Profit for the period attributable to LUKOIL shareholders

62,567

63,748

(1.9)

105,392

167,779

(37.2)

Capital expenditures, including non-cash transactions

118,886

150,773

(21.1)

241,447

304,844

(20.8)

Free cash flow(2)

56,991

16,968

235.9

93,406

79,879

16.9

Production, including our share in equity affiliates:

 

 

 

 

 

 

Hydrocarbons, thousand BOE per day

2,164

2,377

(9.0)

2,259

2,373

(4.8)

Hydrocarbons, thousand BOE

196,901

216,342

(9.0)

411,110

429,529

(4.3)

Crude oil and natural gas liquids,
thousand barrels

167,046

187,041

(10.7)

349,629

370,009

(5.5)

Gas available for sale, million cubic meters

5,073

4,979

1.9

10,447

10,114

3.3

Production of refined products, thousand tonnes

15,460

14,713

5.1

30,327

28,793

5.3

(1) Profit from operating activities before depreciation, depletion and amortization.

(2) Cash flow from operating activities less capital expenditures and acquisition of licenses.

Our results for the first half of 2016 were affected by a decrease in average hydrocarbon prices and fluctuations of ruble exchange rates to the US dollar and euro. This was partially offset by lower mineral extraction tax and export duty rates. As far as we compensated most of the costs incurred within the West Qurna-2 project, we were eligible for significantly lower volumes of compensation crude oil, compared to the respective periods of 2015 that affected our EBITDA (operating) and production volumes (see p. 6 for details). Timely upgrade of our Russian refineries allowed to enhance our product slate and supported our financial results in unfavorable macroeconomic environment.

In the first half of 2016, our profit amounted to 105 billion RUB and our EBITDA (operating) amounted to 382 billion RUB, representing a decrease of 37.2% and 8.6%, respectively, compared to the first half of 2015. Despite lower hydrocarbon prices, our net profit for the second quarter of 2016 remained practically unchanged compared to the second quarter of 2015. Net of the West Qurna-2 project, the Group's EBITDA (operating) increased by 6.8% in the second quarter of 2016 and remained flat in the first half of 2016 compared to respective periods of 2015.

In the first half of 2016, we continued generating strong free cash flow that amounted to 93 billion RUB, compared to 80 billion RUB in the first half of 2015.

 

Business overview

LUKOIL is one of the world's largest publicly traded vertically integrated energy companies in terms of hydrocarbon reserves that amounted under SEC standards to 16.6 billion BOE at 1 January 2016 and comprised of 12.6 billion barrels of crude oil and 23.8 trillion cubic feet of gas. Most of our reserves are conventional. Our daily hydrocarbon production in the first half of 2016 amounted to 2.2 million BOE with liquid hydrocarbons representing approximately 85% of our overall production volumes.

The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution.

Our operations are divided into three main business segments:

·     Exploration and Production - which includes our exploration, development and production operations related to crude oil and gas. These activities are primarily located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico.

·      Refining, Marketing and Distribution - which includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services.

·      Corporate and other.

Each of our segments is dependent on the other, with a portion of the revenues of one segment being a part of the costs of the other. In particular, our Refining, Marketing and Distribution segment purchases crude oil from our Exploration and Production segment. As a result of certain factors considered in the "Domestic crude oil and refined products prices" section on page 12, benchmarking crude oil market prices in Russia cannot be determined with certainty. Therefore, the prices set for inter-segment purchases of crude oil reflect a combination of market factors, primarily international crude oil market prices, transportation costs, regional market conditions, the cost of crude oil refining and other factors. Accordingly, an analysis of either of these segments on a stand-alone basis could give a misleading impression of those segments' underlying financial position and results of operations. For this reason, we do not analyze either of our main segments separately in the discussion that follows. However, we present the financial data for each in Note 28 "Segment information" to our condensed interim consolidated financial statements.

Changes in Group structure

In line with the Company's strategy of optimization its downstream operations in Europe, we sold petrol station networks in Poland, Latvia and Lithuania in the first quarter of 2016 and petrol stations networks in Ukraine and Estonia in the second quarter of 2015.

In August 2015, a Group company closed the transaction to sell its 50% interest in Caspian Investment Resources Ltd, an exploration and production company operating in Kazakhstan, to a Sinopec group company for $1,067 million (70.1 billion RUB). Related structural decrease in the Group's crude oil production amounted to approximately 20 thousand barrels per day.

Sectorial sanctions against the Russian companies

In July-September 2014, the United States ("US"), the European Union ("EU") and other countries imposed a set of economic sanctions on Russia, including certain sectoral sanctions which affect Russian oil and gas companies. Such sectoral sanctions prohibit US and the EU companies and individuals from providing, exporting, or re-exporting directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects on the territory of the Russian Federation.

The Company is not subject to any financial restrictions and is not currently involved in deepwater, Arctic offshore or shale projects in Russia. That is why we assess the impact of the sanctions on the Company's activities as immaterial.

 

Operational highlights

Hydrocarbon production

The table below summarizes the results of our exploration and production activities.

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

Crude oil and natural gas liquids production(1)

(thousand BOE per day)

Consolidated subsidiaries

 

 

 

 

Western Siberia

845

926

855

934

Timan-Pechora

341

339

343

332

Ural region

323

320

323

316

Volga region

126

140

130

140

Other in Russia

36

37

36

37

Total in Russia

1,671

1,762

1,687

1,759

Iraq(2)

69

177

132

167

Other outside Russia

37

41

43

41

Total outside Russia

106

218

175

208

Total consolidated subsidiaries

1,777

1,980

1,862

1,967

Our share in equity affiliates

 

 

 

 

in Russia

21

15

20

15

outside Russia

38

60

39

62

Total share in equity affiliates

59

75

59

77

Total crude oil and natural gas liquids

1,836

2,055

1,921

2,044

 

 

 

 

 

Natural and petroleum gas available for sale production

 

 

 

 

Consolidated subsidiaries

 

 

 

 

Western Siberia

158

173

163

177

Timan-Pechora

15

13

15

12

Ural region

11

18

13

22

Volga region

24

6

22

6

Total in Russia

208

210

213

217

Total outside Russia

110

101

115

101

Total consolidated subsidiaries

318

311

328

318

Share in equity affiliates

 

 

 

 

in Russia

1

1

1

1

outside Russia

9

10

9

10

Total share in production of equity affiliates

10

11

10

11

Total natural and petroleum gas available for sale

328

322

338

329

 

 

 

 

 

Total daily hydrocarbon production

2,164

2,377

2,259

2,373

 

(millions of rubles)

Hydrocarbon extraction expenses

53,594

52,144

107,671

103,978

- in Russia

41,107

37,934

80,818

74,015

- outside Russia(3)

4,080

2,837

8,243

6,027

- in Iraq

8,407

11,373

18,610

23,936

Mineral extraction tax in Russia

105,073

128,720

174,811

245,369

 

(ruble per BOE)

Hydrocarbon extraction expenses(3)

246

213

238

209

- in Russia

241

212

234

207

- outside Russia(3)

309

224

291

239

 

 

(US dollar per BOE)

Hydrocarbon extraction expenses(3)

3.73

4.04

3.41

3.68

- in Russia

3.65

4.02

3.35

3.64

- outside Russia(3)

4.69

4.25

4.15

4.17

(1) Natural gas liquids produced at the Group gas processing plants.

(2) Compensation oil that represented approximately 32% of production from the West Qurna-2 field in the first half of 2016 and 52% in the first half of 2015.

(3) Excluding expenses at the West Qurna-2 field. 

We undertake exploration for, and production of, crude oil and natural gas in Russia and internationally. In Russia, our major oil producing subsidiaries are LUKOIL-Western Siberia, LUKOIL-Komi and LUKOIL-PERM. Our international upstream segment includes stakes in PSA's and other projects in Kazakhstan, Azerbaijan, Uzbekistan, Romania, Iraq, Egypt, Ghana, Cote d'Ivoire, Norway, Cameroon, Nigeria and Mexico.

Crude oil and natural gas liquids production. In the first half of 2016, we produced (including the Company's share in equity affiliates) 46.8 million tonnes, or 342.8 million barrels, of crude oil, compared to 49.6 million tonnes, or 363.4 million barrels, of crude oil in the first half of 2015.

In the first half of 2016, the output of natural gas liquids at the Group gas processing plants in Western Siberia, Ural and Volgograd regions of Russia was 6.8 million BOE, compared to 6.6 million BOE in the first half of 2015.

The following table presents our crude oil production in the first half of 2016 and 2015 by major regions.

 

 

Change to 2015

 

(thousands of tonnes)

1st half of 2016

Total, %

Change in structure

Organic change

1st half of 2015

Western Siberia

20,629

(7.9)

-

 (1,773)

22,402

Timan-Pechora

8,644

3.9

-

 328

8,316

Ural region

7,548

1.7

 

 123

7,425

Volga region

3,160

(6.6)

 

(223)

3,383

Other in Russia

922

(1.4)

-

(13)

935

Crude oil produced in Russia

40,903

(3.7)

-

 (1,558)

42,461

Iraq(1)

3,510

(20.4)

-

(902)

4,412

Other outside Russia

1,000

5.3

-

50

950

Crude oil produced outside Russia

4,510

(15.9)

-

(852)

5,362

Total crude oil produced by consolidated subsidiaries

45,413

(5.0)

-

(2,410)

47,823

Our share in crude oil produced by equity affiliates:

 

 

 

 

 

in Russia

468

33.7

-

118

350

outside Russia

893

(39.0)

(523)

(49)

1,465

Total crude oil produced

46,774

(5.8)

(523)

(2,341)

49,638

(1) Compensation oil that represented approximately 32% of production from the West Qurna-2 field in the first half of 2016 and 52% in the first half of 2015.

The main oil producing region for the Company is Western Siberia where we produced 45.4% of our crude oil in the first half of 2016 (46.8% in the first half of 2015).

Crude oil production in Western Siberia continued to decline due to natural depletion of reserves, increase in water cut and the Company's decision to reallocate capital to higher return projects in other regions of Russia, in particular those benefiting from tax incentives. We expect production decline rates in Western Siberia to decrease as a result of our recent decision to intensify production drilling in this region. Production growth in Timano-Pechora was primarily driven by ramp-up of production at the Yaregskoye and Usinskoe fields, as well as the fields in Denisovskaya depression. Production growth in Ural region was primarily driven by successful drilling on existing brownfields and launch of new small sized fields.

The decrease in our international production was a result of lower volumes of production from the West Qurna-2 oilfield in Iraq attributable to the Company. We compensated the major part of our initial costs incurred within the project and therefore were eligible for less volumes of compensation crude oil compared to the second quarter and the first half of 2015 (for details see p. 6).

The increase in our share in crude oil produced by equity affiliates in Russia was due to an increase in production at the Trebs and Titov oilfields by Bashneft-Polus, where the Group holds a 25.1% interest.

The decrease in our share in crude oil produced by equity affiliates outside Russia resulted from the disposal of our 50% share in Caspian Investment Resources Ltd in the middle of 2015.

In the nearest future, we plan to start production at two new major fields, the V. Filanovskogo field in the Caspian Sea (Volga region) and the Pyakyakhinskoye field in the Bolshekhetskaya depression (Western Siberia). Launch of these fields will enable us to significantly increase our daily hydrocarbon production with a major positive impact on our financial results due to tax incentives and high quality reserve base.

Natural and petroleum gas production. In the first half of 2016, we produced 12,261 million cubic meters (72.2 million BOE) of gas (including our share in equity affiliates), that is 3.1% more than in the first half of 2015. Our available for sale gas production amounted to 10,447 million cubic meters (61.5 million BOE), compared to 10,114 million cubic meters (59.6 million BOE) in the first half of 2015.

The following table presents our available for sale gas production in the first half of 2016 and 2015 by major regions.

 

 

Change to 2015

 

(millions of cubic meters)

1st half

of 2016

Total, %

Change in structure

Organic change

1st half of 2015

Western Siberia

5,024

(7.4)

-

(399)

5,423

Timan-Pechora

472

25.5

-

96

376

Ural region

395

(40.8)

-

(272)

667

Volga region

680

261.7

-

492

188

Other in Russia

11

-

-

-

11

Gas produced in Russia

6,582

(1.2)

-

(83)

6,665

Gas produced outside Russia

3,572

15.0

-

466

3,106

Total available for sale gas produced by consolidated subsidiaries

10,154

3.9

-

383

9,771

Our share in gas produced by equity affiliates:

 

 

 

 

 

in Russia

28

21.7

-

5

23

outside Russia

265

(17.2)

(63)

8

320

Total available for sale gas produced

10,447

3.3

(63)

396

10,114

Our major gas production field is the Nakhodkinskoe field, which is in natural decline. Our production at the field was 3,423 million cubic meters of natural gas in the first half of 2016 (3,731 million cubic meters in the first half of 2015). This decrease was offset by commencement of gas production at the Yu. Korchagin field in the first half of 2016. Decrease in production in Ural region was largely a result of increase in own gas consumption following the launch of new power generation unit at the Perm refinery. We are planning to start gas production at the Pyakyakhinskoye field in the Bolshekhetskaya depression of Western Siberia by the end of 2016. This will enable us to substantially increase our gas production in the region. 

Our international gas production (including our share in affiliates' production) increased by 12.0%, compared to the first half of 2015, which resulted from the increase in production in Uzbekistan and Azerbaijan. Growth of gas production in Uzbekistan was due to launching new wells and a compressor booster station at the Gissar field. We are currently involved in construction of a gas treatment plant in the region, which completion together with further upstream works will enable us to significantly increase gas production in that region.

West Qurna-2 project. The West Qurna-2 field in Iraq is one of the largest crude oil fields discovered in the world, with estimated recoverable oil reserves of 12.9 billion barrels (1.8 billion tonnes). Service agreement for the West Qurna-2 field development and production was signed on 31 January 2010. Currently, the parties of the project are Iraq's state-owned South Oil Company and a consortium of contractors, consisting of a Group company (75% interest) and Iraq's state-owned North Oil Company (25% interest).

The Group launched the "Mishrif Early Oil" stage on the West Qurna-2 field and reached the production of 120 thousand barrels per day in March 2014. According to the service agreement, costs compensation begins after this level of production is achieved and maintained during any 90 days within a 120-day period. In June 2014, we met this requirement and from the second quarter of 2014 started to receive cost compensation. The project's target production level is 1.2 million barrels per day and the total term of the contract is 25 years.

Accounting for the cost compensation within the West Qurna-2 project in our consolidated statement of financial position and consolidated statement of profit or loss and other comprehensive income is as follows.

Capital expenditures are recognized in Property, plant and equipment. Extraction expenses are recognized in Operating expenses in respect of all the volume of crude oil production at the field regardless of the volume of compensation crude oil the Group is eligible for. As the compensation revenue is recognized, capitalized costs are amortized.

There are two steps of revenue recognition:

·      The Iraqi party, on a quarterly basis, approves invoice for cost recovery and remuneration fee for which the Group is eligible in the reporting period. Amount of the invoice depends on crude oil production volumes during the period and current crude oil market prices. Approved invoice amount and the remuneration fee for the reporting quarter are recognized in crude oil sales revenue.

·      Based on the approved invoices, the Iraqi party arranges schedule of crude oil shipments against its debt for cost compensation and remuneration. As this crude oil is actually shipped, its cost is recognized at current market price in Cost of purchased crude oil, gas and products. Further, revenue from sales of this crude oil, or products from its refining, is recognized in Sales (including excise and export tariffs). Unsold crude oil and refined products are recognized in Inventories.

The following table summarizes data on capital and operating cost incurred, compensation crude oil received, costs yet unrecovered and remuneration fee.

 

 

Сosts incurred (1)

Crude oil received

Unrecovered costs

Remuneration fee

 

(millions of US dollars)

Cumulative at 31 December 2015

6,801

5,169

1,632

198

Change during the first half of 2016

429

1,071

(642)

64

Income tax

-

-

-

(54)

Cumulative at 30 June 2016

7,230

6,240

990

208

(1) Including prepayments.

The West Qurna-2 project's summary is presented below:

 

2nd quarter

 

2016

2015

 

(thousand barrels)

(thousand tonnes)

(thousand barrels)

(thousand tonnes)

Total production(1)

37,044

5,400

31,013

4,521

Production related to cost compensation and remuneration(1)

6,241

909

16,139

2,353

Shipment of compensation crude oil(1) (2)

17,755

2,588

17,127

2,497

 

(millions of rubles)

(millions of US dollars)

(millions of rubles)

(millions of US dollars)

Cost compensation

13,381

203

45,440

863

Remuneration fee

2,097

32

1,580

30

 

 

 

 

 

Cost of compensation crude oil, received as debt settlement (included in Cost of purchased crude oil, gas and products)(2)

44,518

676

53,023

1,007

 

 

 

 

 

Extraction expenses

8,407

127

11,373

216

Depreciation, depletion and amortization

4,968

73

34,173

649

 

 

 

 

 

EBITDA (operating)

6,890

105

35,594

676

           

(1) Translated into barrels using conversion rate characterizing the density of the field.

(2) This crude oil is sold to third party customers or delivered to our refineries. After realization of these products, respective sales revenues are recognized.

 

 

         1st half of

 

2016

2015

 

(thousand barrels)

(thousand tonnes)

(thousand barrels)

(thousand tonnes)

Total production(1)

75,062

10,942

57,686

8,410

Production related to cost compensation and remuneration(1)

24,081

3,510

30,260

4,412

Shipment of compensation crude oil(1) (2)

35,282

5,143

32,708

4,769

 

(millions of rubles)

(millions of US dollars)

(millions of rubles)

(millions of US dollars)

Cost compensation

42,860

598

83,501

1,475

Remuneration fee

4,536

65

3,446

60

 

 

 

 

 

Cost of compensation crude oil, received as debt settlement (included in Cost of purchased crude oil, gas and products)(2)

73,994

1,071

95,065

1,683

 

 

 

 

 

Extraction expenses

18,610

264

23,936

418

Depreciation, depletion and amortization

24,345

330

57,060

1,017

 

 

 

 

 

EBITDA (operating)

28,384

393

62,834

1,114

           

(1) Translated into barrels using conversion rate characterizing the density of the field.

(2) This crude oil is sold to third party customers or delivered to our refineries. After realization of these products, respective sales revenues are recognized.

The Group is exposed to various risks due to its operations in Iraq. Management monitors the risks associated with the projects in Iraq and believes that there is no adverse effect on the Group's financial position that can be reasonably estimated at present.

Refining, marketing and trading

Refining. We own and operate four refineries located in European Russia and three refineries located outside Russia - in Bulgaria, Romania, and Italy. Moreover, we have a 45% interest in the Zeeland refinery in the Netherlands.

We own two petrochemical plants in Russia, one in Ukraine and petrochemical capacity at our refinery in Bulgaria. Currently, production at our petrochemical plant in Ukraine is suspended due to adverse economic and political environment in this country.

Compared to the first half of 2015, the total volume of refined products produced by the Group increased by 5.3%.

In Russia, our production volumes decreased by 2.0% due to throughput optimization as a result of general weakening of refining margins in Russia driven by excise tax increases in January and April 2016. Due to completed upgrade program and throughput optimization, our Russian refineries remained profitable in the first half of 2016 despite unfavorable macroeconomic environment. Timely launch of new secondary processing units in 2015 and 2016 enabled us to substantially enhance our refined product slate by reducing production of fuel oil and vacuum gasoil in favor of light products. In order to optimize dark products yield, in the first half of 2016, we also decreased throughput volumes and redirected vacuum gas oil produced at our Perm and Ukhta refineries from export deliveries to supply catalytic cracking unit at our refinery in Nizhny Novgorod.  We expect our refined product slate to further enhance via achieving full utilization of the hydrocracking unit at our Volgograd refinery launched in the second quarter of 2016. Maintenance works at our refineries in Nizhny Novgorod and Ukhta also affected our refining volumes in the second quarter and the first half of 2016.

Internationally, the production increase amounted to 19.9% against the background of low output in the first quarter of 2015 due to overhauls at our Italian refinery as well as strong refining margins.

Along with our own production of refined products we refine crude oil at third party refineries depending on market conditions and other factors. In the periods considered, we processed our crude oil at third party refineries in Belarus and Kazakhstan.

 

The following table summarizes key figures for our refining activities.

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(thousand barrels per day)

Refinery throughput at the Group refineries

1,322

1,254

1,298

1,237

- in Russia

797

827

803

818

- outside Russia(1)

525

427

495

419

Refinery throughput at third party refineries

6

17

6

17

Total refinery throughput

1,328

1,271

1,304

1,254

 

(thousands of tonnes)

Production of the Group refineries in Russia

9,365

9,758

18,818

19,194

- diesel fuel

3,142

2,993

6,389

6,135

- gasoline

1,837

1,589

3,643

3,219

- fuel oil

1,116

1,993

2,672

4,080

- jet fuel

469

639

910

1,076

- motor oils

263

250

502

447

- other products

2,538

2,294

4,702

4,237

Production of the Group refineries outside Russia

6,095

4,955

11,509

9,599

- diesel fuel

2,601

1,961

4,895

3,903

- gasoline

1,301

1,109

2,468

2,214

- fuel oil

925

821

1,786

1,472

- jet fuel

236

221

420

409

- motor oils

52

42

100

98

- other products

980

801

1,840

1,503

Refined products produced by the Group

15,460

14,713

30,327

28,793

Refined products produced at third party refineries

71

206

159

406

Total refined products produced

15,531

14,919

30,486

29,199

Products produced at petrochemical plants

322

264

646

433

- in Russia

225

178

458

255

- outside Russia

97

86

188

178

 

(millions of RUB)

Refining expenses at the Group refineries

22,804

21,004

45,254

43,172

- in Russia

11,076

10,403

21,211

18,925

- outside Russia

11,728

10,601

24,043

24,247

 

 

(ruble per tonne)

Refining expenses

190

184

192

193

- in Russia

153

138

145

128

- outside Russia

245

273

267

320

 

 

(US dollar per tonne)

Refining expenses

2.88

3.50

2.74

3.37

- in Russia

2.32

2.63

2.08

2.26

- outside Russia

3.73

5.18

3.81

5.55

 

 

(millions of RUB)

Capital expenditures

10,255

18,247

22,539

42,783

- in Russia

8,506

12,685

18,447

30,131

- outside Russia

1,749

5,562

4,092

12,652

(1) Including refined product processed.

Marketing and trading. Our marketing and trading activities include crude oil and refined products trading, wholesale and bunkering operations in Western Europe, South-East Asia, Central America and retail operations in the USA, Central and Eastern Europe and other regions. In Russia, we purchase refined products on occasion, primarily to manage supply chain bottlenecks.

In addition to our production, we purchase crude oil in Russia and on international markets. In Russia, we primarily purchase crude oil from affiliated producing companies and other producers. Then we either refine or export purchased crude oil. Crude oil purchased on international markets is normally used for trading activities, for supplying our international refineries or for processing at third party refineries.

 

The following tables show the volumes of crude oil purchases by the Group during the periods considered.

 

2nd quarter of

 

2016

2015

 

(thousand

of barrels)

(thousand
of tonnes)

(thousand

of barrels)

(thousand
of tonnes)

 

 

 

 

 

Purchases in Russia

1,510

206

4,618

630

Purchases for trading internationally

42,690

5,824

41,253

5,628

Purchases for refining internationally

28,961

3,951

20,897

2,851

Shipment of the West Qurna-2 compensation crude oil (1)

17,754

2,588

17,125

2,497

Total crude oil purchased

90,915

12,569

83,893

11,606

 

 

1st half of

 

2016

2015

 

(thousand

of barrels)

(thousand
of tonnes)

(thousand

of barrels)

(thousand
of tonnes)

 

 

 

 

 

Purchases in Russia

3,035

414

6,854

935

Purchases for trading internationally

88,832

12,119

79,655

10,867

Purchases for refining internationally

53,458

7,293

37,947

5,177

Shipment of the West Qurna-2 compensation crude oil (1)

35,281

5,143

32,706

4,769

Total crude oil purchased

180,606

24,969

157,162

21,748

(1) Translated into barrels using conversion rate characterizing the density of the field.

Compared to the second quarter and the first half of 2015, our purchases for refining at international refineries increased by 38.6% and 40.9%, respectively, and our purchases for trading increased by 3.5% and 11.5%, respectively. Moreover, in the second quarter and the first half of 2016, the Group received 2.6 million tonnes and 5.1 million tonnes, respectively, of compensation crude from Iraq's state-owned South Oil Company as cost compensation within the West Qurna-2 project (in the respective periods of 2015, the Group received 2.5 million tonnes and 4.8 million tonnes of compensation crude oil).

The table below summarizes figures for our refined products marketing and trading activities.

 

2nd quarter of

1st half of

 

2016

        2015

2016

       2015

 

(thousands of tonnes)

 

Retail sales

3,338

3,472

6,507

6,676

Wholesale sales

27,750

27,546

53,390

53,809

Total refined products sales

31,088

31,018

59,897

60,485

 

 

 

 

 

Refined products purchased in Russia

421

433

791

777

Refined products purchased internationally

16,992

18,165

32,089

33,771

Total refined products purchased

17,413

18,598

32,880

34,548

             

In the first half of 2016, in line with the strategy to optimize our downstream operations, a Group company sold 100% of its interest in LUKOIL Poland, LUKOIL Baltija and LUKOIL Baltija R, distribution companies operating over 270 petrol stations in Poland, Lithuania and Latvia. In July 2015, we sold 100% of interest in LUKOIL Eesti, and in April 2015 - 100% of interest in LUKOIL Ukraine.

Exports of crude oil and refined products from Russia. The volumes of crude oil and refined products exported from Russia by our subsidiaries are summarized as follows:

 

 

2nd quarter of

 

2016

2015

 

(thousands of barrels)

(thousands of tonnes)

(thousands of barrels)

(thousands of tonnes)

 

Exports of crude oil to Customs Union

7,125

972

7,029

959

Exports of crude oil beyond Customs Union

58,669

8,004

59,292

8,089

Total crude oil exports

65,794

8,976

66,321

9,048

 

 

 

 

 

Exports of refined products

 

4,439

 

5,144

           

 

 

 

1st half of

 

2016

2015

 

(thousands of barrels)

(thousands of tonnes)

(thousands of barrels)

(thousands of tonnes)

 

Exports of crude oil to Customs Union

14,323

1,954

14,183

1,935

Exports of crude oil beyond Customs Union

116,378

15,877

119,926

16,361

Total crude oil exports

130,701

17,831

134,109

18,296

 

 

 

 

 

Exports of refined products

 

9,370

 

10,403

In the first half of 2016, the volume of our crude oil exports from Russia decreased by 2.5%, and we exported 43.6% of our domestic crude oil production (43.1% in the first half of 2015) and 216 thousand tonnes of crude oil purchased from our affiliates and third parties (794 thousand tonnes in the first half of 2015). The decrease in crude oil exports was a result of lower domestic production. The volume of our refined products exports decreased by 9.9% compared to the first half of 2015 due to higher domestic sales volumes driven by favorable netbacks and decreased refining volumes.

Substantially, we use the Transneft infrastructure to export our crude oil. Nevertheless, during the second quarter and first half of 2016, we exported 2,178 thousand tonnes and 4,091 thousand tonnes, respectively, through our own infrastructure (1,865 thousand tonnes and 3,689 thousand tonnes during the second quarter and first half of 2015).  All the volume of crude oil exported that bypassed Transneft was routed beyond the Customs Union.

In the first half of 2016, the Company exported 600 thousand tonnes of light crude oil through the Eastern Siberia - Pacific Ocean pipeline compared to 795 thousand tonnes in the first half of 2015. This allowed us to preserve the premium quality of crude oil and thus enabled us to achieve higher netbacks compared to exports to traditional Western markets.

Power generation. In the first half of 2016, we continued to develop the power generation sector of our business as part of our strategic development program. This sector encompasses all aspects of the power generation business, from generation to transmission and sale of heat and electrical power. Our power generation business sector now includes OOO LUKOIL-Volgogradenergo, OOO LUKOIL-Kubanenergo, OOO LUKOIL-Astrakhanenergo, OOO LUKOIL-Rostovenergo, OOO LUKOIL-Stavropolenergo, OOO Rostovskie Teplovyie Seti, ООО LUKOIL-Ecoenergo, our own power generating facilities at our oil and gas fields in Russia and at our refineries in Bulgaria, Romania, Italy and Perm region of Russia.

 

Main macroeconomic factors affecting our results of operations

Changes in the international price of crude oil and refined products

The price at which we sell crude oil and refined products is the primary driver of the Group's revenues. During the first half of 2016, the price for Brent crude oil fluctuated between $26 and $50 per barrel, reached its maximum of $50.7 in the middle of June and minimum of $25.9 in the beginning of January, and averaged 31.2% less than in the first half of 2015. Nevertheless, as a result of ruble devaluation, the prices expressed in rubles decreased less significantly.

Substantially all the crude oil the Group exports is Urals blend. The following tables show the average crude oil and refined product prices in the respective periods of 2016 and 2015.

 

2nd quarter of

Change, %

1st half of

Change, %

 

2016

2015

2016

2015

 

(in US dollars per barrel, except for figures in percent)

Brent crude

45.59

61.88

(26.3)

39.81

57.84

(31.2)

Urals crude (CIF Mediterranean) (1)

44.30

62.25

(28.8)

38.55

57.68

(33.2)

Urals crude (CIF Rotterdam) (1)

43.37

61.21

(29.1)

37.56

56.83

(33.9)

 

(in US dollars per metric tonne, except for figures in percent)

Fuel oil 3.5% (FOB Rotterdam)

199.75

323.50

(38.3)

167.77

299.51

(44.0)

Diesel fuel 10 ppm (FOB Rotterdam)

411.25

579.97

(29.1)

362.30

554.66

(34.7)

High-octane gasoline (FOB Rotterdam)

503.24

671.00 

(25.0)

445.11

608.90 

(26.9)

Source: Platts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd quarter of

Change,

1st half of

Change,

 

2016

2015

%

2016

2015

%

 

(in rubles per barrel, except for figures in percent)

Brent crude

3,004

3,258

(7.8)

2,797

3,320

(15.8)

Urals crude (CIF Mediterranean) (1)

2,919

3,278

(11.0)

2,708

3,311

(18.2)

Urals crude (CIF Rotterdam) (1)

2,858

3,223

(11.3)

2,639

3,262

(19.1)

 

(in rubles per metric tonne, except for figures in percent)

Fuel oil 3.5% (FOB Rotterdam)

13,161

17,034

(22.7)

11,787

17,191

(31.4)

Diesel fuel 10 ppm (FOB Rotterdam)

27,097

30,538

(11.3)

25,455

31,836

(20.0)

High-octane gasoline (FOB Rotterdam)

33,158

35,331

(6.2)

31,273

34,949

(10.5)

                 

Translated into rubles using average exchange rate for the period.

(1) The Company sells various crude oil blends on foreign markets on various delivery terms. Thus, our average realized sale price of oil on international markets differs from the average prices of Urals blend on Mediterranean and Northern Europe markets.

Domestic crude oil and refined products prices

Substantially all crude oil produced in Russia is produced by vertically integrated oil companies such as ours. As a result, most transactions are between affiliated entities within vertically integrated groups. Thus, there is no concept of a benchmark domestic market price for crude oil. The price of crude oil that is produced but not refined or exported by one of the vertically integrated oil companies is generally determined on a transaction-by-transaction basis against a background of world market prices, but with no direct reference or correlation. At any time there may exist significant price differences between regions for similar quality crude oil as a result of competition and economic conditions in those regions.

Domestic prices for refined products are determined to some extent by world market prices, but they are also directly affected by local demand and competition.

The table below represents average domestic wholesale prices of refined products in the respective periods of 2016 and 2015.

 

2nd quarter of

Change, %

1st half of

Change, %

 

2016

2015

2016

2015

 

(in rubles per metric tonne, except for figures in percent)

Fuel oil

6,794

7,415

(8.4)

5,674

6,900

(17.8)

Diesel fuel

28,835

28,901

(0.2)

28,011

28,619

(2.1)

High-octane gasoline (Regular)

34,524

31,963

8.0

33,081

30,159

9.7

High-octane gasoline (Premium)

35,777

33,016

8.4

34,637

31,391

10.3

Source: InfoTEK (excluding VAT).

Changes in the US dollar-ruble exchange rate and inflation

A substantial part of our revenue is either denominated in US dollars or is correlated to some extent with US dollar crude oil prices, while most of our costs in the Russian Federation are settled in Russian rubles. Therefore, a devaluation of the ruble against the US dollar generally causes our revenues to increase in ruble terms, and vice versa. Ruble inflation also affects the results of our operations.

The following table provides data on inflation in Russia and change in the ruble-dollar and ruble-euro exchange rates.

 

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

 

 

 

 

Ruble inflation (CPI), %

1.2

1.0

3.3

8.5

Average exchange rate for the period (ruble to US dollar)

65.9

52.7

70.3

57.4

Exchange rate at the beginning of the period (ruble to US dollar)

67.6

58.5

72.9

56.3

Exchange rate at the end of the period (ruble to US dollar)

64.3

55.5

64.3

55.5

Average exchange rate for the period (ruble to euro)

74.4

58.2

78.4

64.3

Exchange rate at the beginning of the period (ruble to euro)

76.5

63.4

79.7

68.3

Exchange rate at the end of the period (ruble to euro)

71.2

61.5

71.2

61.5

Taxation

The rates of taxes specific to the oil industry in Russia are linked to international crude oil prices and are changed in line with them. The methods to determine the rates for such taxes are presented below.

Crude oil extraction tax rate is changed monthly and is calculated by multiplying the base rate by a coefficient reflecting average international Urals price and ruble-dollar exchange rate during the month. The base rate for 2016 is set at 857 rubles per metric tonne extracted (766 rubles for 2015).

The tax rate is zero when the average international Urals price is less than, or equal to, $15.00 per barrel. In 2016, each $1.00 per barrel increase in the international Urals price above $15.00 per barrel results in an increase in the tax rate by $0.45 per barrel ($0.40 per barrel in 2015).

The mineral extraction tax on crude oil is payable in rubles per tonne of crude oil extracted.

There are different types of tax incentives on the mineral extraction tax on crude oil applied to our fields and deposits:

·         A special coefficient is applied to the standard tax rate depending on location, depletion, type of reserves, size and complexity of a particular field, as well as on the average international Urals price and the ruble-dollar exchange rate. This type of incentive with different coefficients is applied to our highly depleted fields (more than 80% depletion), our Yu. Korchagin field located in the Caspian offshore, the Permian layers of our Usinskoye field in Timan-Pechora producing high-viscous crude oil, our Pyakyakhinskoye field located in the Yamal-Nenets region of Western Siberia, a number of fields in the Nenets Autonomous region, as well as to our new small-sized fields (recoverable reserves less than 5 million tonnes) and fields and deposits with low permeability like V. N. Vinogradov field and Tyumen deposits;

·         A fixed tax rate of 15% of the international Urals price is applied to our V. Filanovsky field, located in the Caspian offshore;

·      A zero tax rate is applied to our Yaregskoye field producing extra-viscous crude oil, as well as to unconventional deposits (Bazhenov and others).

Some of the mineral extraction tax incentives are limited in time or by cumulative oil production volumes.

The table on the page 14 illustrates the impact of mineral extraction tax incentives on the tax rate at $50 Urals price.

Natural gas extraction tax rate. The base rate amounts to 35 rubles per thousand cubic meters and is adjusted depending on average wholesale natural gas price in Russia, share of gas production in total hydrocarbon production, regional location and complexity of particular gas field.

In the first half of 2016, actual average natural gas extraction tax rate for our major gas field - Nakhodkinskoe in Western Siberia amounted to 208 rubles per thousand cubic meters (150 rubles in the first half of 2015). The rate to this field is subject to a special regional reducing coefficient. 

Crude oil export duty rate is denominated in US dollars per tonne of crude oil exported and is calculated on a progressive scale according to the bellow table.

International Urals price

Export duty rate

Less than, or equal to, $109.50 per tonne ($15.00 per barrel)

$0.00 per tonne

Above $109.50 but less than, or equal to, $146.00 per tonne ($20.00 per barrel)

35% of the difference between the actual price and $109.50 per tonne (or $0.35 per barrel per each $1.00 increase in the Urals price over $15.00)

Above $146.00 but less than, or equal to, $182.50 per metric tonne ($25.00 per barrel)

$12.78 per tonne plus 45% of the difference between the actual price and $146.00 per tonne (or $0.45 per barrel per each $1.00 increase in the Urals price over $20.00)

Above $182.50 per metric tonne ($25.00 per barrel)

$29.20 per tonne plus 42% of the difference between the actual price and $182.50 per tonne (or $0.42 per barrel per each $1.00 increase in the Urals price over $25.00)

The export duty rate changes every month with the rate for the next month being based on average Urals price for the period from the 15th day of the previous month to the 14th day of the current month.

Crude oil produced at some of our fields is subject to special export duty rates calculated according to special formulas, which are lower than standard rates. A reduced rate is applied to crude oil produced at our Yaregskoye field producing extra-viscous crude oil and our Yu. Korchagin field in the Caspian offshore. A zero rate applies to crude oil of our V. Filanovskogo field also located in the Caspian offshore.

The table below illustrates the impact of tax incentives for different fields and deposits in our portfolio at $50 per barrel Urals price under 2016 tax formulas.

 

 

 

Mineral extraction tax

Export duty

Total

As % of oil price

 

(in US dollars per barrel, except for figures in percent)

Standard

15.7

14.5

30.2

60.5

Yaregskoye field

0.0

1.8

1.8

3.6

Yu. Korchagin field

5.5

0.0

5.5

10.9

V. Filanovskogo field

7.5

0.0

7.5

15.0

Usinskoye (Permian layers)

5.5

14.5

20.0

39.9

Pyakakhinskoye field

5.5

14.5

20.0

39.9

V. Vinogradova field

7.5

14.5

22.0

44.1

Highly depleted fields

8.6-15.7

14.5

23.1-30.2

46.1-60.5

Small sized fields

9.3-15.7

14.5

23.8-30.2

47.6-60.5

Tyumen deposits

13.7

14.5

28.2

56.4

           

Export duty rates on refined products are calculated by multiplying the current crude oil export duty rate by a coefficient according to the table below.

 

From 1 January 2016
to 31 December 2016

From 1 January 2015

to 31 December 2015

 

 

 

Multiplier for:

 

 

Light and middle distillates

0.40

0.48

Diesel fuel

0.40

0.48

Gasolines

0.61

0.78

Straight-run gasoline0,

0.71

0.85

Fuel oil

0.82

0.76

Crude oil and refined products exports from Russia are subject to two steps of customs declaration and duty payments: temporary and complete. A temporary declaration is submitted based on preliminary exports volumes and the duty is paid in rubles translated from US dollars at the date of the temporary declaration. A complete declaration is submitted after receiving the actual data on the exported volumes, but no later than six months after the date of the temporary declaration. The final amount of the export duty is adjusted depending on the actual volumes, the US dollar exchange rate at the date of the complete declaration (except for pipeline deliveries when the exchange rate at the temporary declaration date is used) and the export duty rate. If temporary and complete declarations are submitted in different reporting periods, the final amount of the export duty is adjusted in the period of submission of the complete declaration. The high volatility of the ruble-dollar exchange rates may lead to significant adjustments. For the purposes of the IFRS consolidated financial statements, temporary declarations at the reporting period end are translated to rubles from US dollars using the period-end exchange rate.

Crude oil and refined products exported to the member countries of the Custom Union - Belarus and Kazakhstan, are not subject to export duties. 

The following tables represent average enacted rates for taxes specific to the oil industry in Russia for the respective periods.

 

 

2nd quarter of

Change, %

1st half of

Change, %

 

 

2016

2015

2016

2015

Export duties on crude oil

$/tonne

67.15 

130.41 

(48.5)

61.08 

130.30 

(53.1)

Export duties on refined products

 

 

 

 

 

 

 

Light and middle distillates

$/tonne

26.83 

62.56 

(57.1)

24.41 

62.48 

(60.9)

Fuel oil

$/tonne

55.02 

99.08 

(44.5)

50.04 

99.00 

(49.5)

Gasoline

$/tonne

40.89 

101.68 

(59.8)

37.20 

101.59 

(63.4)

Straight-run gasoline

$/tonne

47.62 

110.80 

(57.0)

43.32 

110.71 

(60.9)

Diesel fuel

$/tonne

26.83 

62.56 

(57.1)

24.41 

62.48 

(60.9)

 

 

 

2nd quarter of

Change, %

1st half of

Change, %

 

 

2016

2015

2016

2015

Export duties on crude oil(1)

RUB/tonne

4,425

6,867

(35.6)

4,291

7,479

(42.6)

Export duties on refined products(1)

 

 

 

 

 

 

 

Light and middle distillates

RUB/tonne

1,768

3,294

(46.3)

1,715

3,586

(52.2)

Fuel oil

RUB/tonne

3,625

5,217

(30.5)

3,516

5,682

(38.1)

Gasoline

RUB/tonne

2,694

5,354

(49.7)

2,614

5,831

(55.2)

Straight-run gasoline

RUB/tonne

3,138

5,834

(46.2)

3,043

6,354

(52.1)

Diesel fuel

RUB/tonne

1,768

3,294

(46.3)

1,715

3,586

(52.2)

Mineral extraction tax

 

 

 

 

 

 

 

Crude oil

RUB/tonne

6,139

7,073

(13.2)

5,109

6,954

(26.5)

(1) Translated to rubles using average exchange rate for the period.

Excise on refined products. The responsibility to pay excises on refined products in Russia is imposed on refined product producers (except for straight-run gasoline). Only domestic sales volumes are subject to excises.

In other countries where the Group operates, excises are paid either by producers or retailers depending on the local legislation.

Excise rates on refined products in Russia are tied to the ecological class of fuel. Excise tax rates for the respective periods of 2016 and 2015 are listed below.

 

 

2nd quarter of

Change, %

1st half of

Change, %

 

 

2016

2015

2016

2015

Gasoline

 

 

 

 

 

 

 

Euro-4 and below

RUR/tonne

13,100

7,300

79.5

11,800

7,300

61.6

Euro-5

RUR/tonne

10,130

5,530

83.2

8,830

5,530

59.7

Diesel fuel

 

 

 

 

 

 

 

All ecological classes

RUR/tonne

5,293 

3,450 

53.4

4,722 

3,450 

36.9

Motor oils

RUR/tonne

6,000 

6,500 

(7.7)

6,000 

6,500 

(7.7)

Straight-run gasoline

RUR/tonne

13,100 

11,300 

15.9

11,800 

11,300 

4.4

During the first half of 2016, excise rates in Russia were increased twice, on 1 January and 1 April.

Income tax. The federal income tax rate is 2.0% and the regional income tax rate varies between 13.5% and 18.0%. The Group's foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate.

The Company and its Russian subsidiaries file income tax returns in Russia. A number of Group companies in Russia are paying income tax as a consolidated taxpayers' group ("CTG"). This allows taxpayers to offset taxable losses generated by certain participants of a CTG against taxable profits of other participants of the CTG.

Transportation of crude oil, natural gas and refined products in Russia

The main Russian crude oil production regions are remote from the main crude oil and refined products markets. Therefore, access by crude oil production companies to the markets is dependent on the extent of diversification of the transport infrastructure and access to it. As a result, transportation cost is an important macroeconomic factor affecting our profit.

Transportation of crude oil produced in Russia to refineries and export destinations is primarily through the trunk oil pipeline system of the state-owned company, Transneft, or by railway transport.

Transportation of refined products in Russia is by railway transport and the pipeline system of Transnefteproduct. The Russian railway infrastructure is owned and operated by Russian Railways. Both these companies are state-owned. We transport the major part of our refined products by railway transport.

In Russia, gas is mostly sold at the wellhead and then transported through the Unified Gas Supply System ("UGSS"). The UGSS is responsible for gathering, transporting, dispatching and delivering substantially all natural gas supplies in Russia and is owned and operated by Gazprom.

 

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

 

(millions of rubles)

 

Revenues

 

 

 

 

 

Sales (including excise and export tariffs)

1,338,959

1,476,966

2,516,633

2,917,271

 

Costs and other deductions

 

 

 

 

 

Operating expenses

(113,709)

(105,828)

(226,953)

(211,509)

 

Cost of purchased crude oil, gas and products

(677,297)

(777,640)

(1,215,030)

(1,477,705)

 

Transportation expenses

(77,665)

(68,377)

(164,364)

(147,162)

 

Selling, general and administrative expenses

(45,302)

(40,028)

(93,125)

(81,213)

 

Depreciation, depletion and amortization

(71,608)

(87,058)

(155,956)

(165,521)

 

Taxes other than income taxes

(118,724)

(141,219)

(202,277)

(271,054)

 

Excise and export tariffs

(113,820)

(123,609)

(228,769)

(296,458)

 

Exploration expenses

(2,871)

(13,586)

(4,552)

(14,783)

 

Profit from operating activities

117,963

119,621

225,607

251,866

 

Finance income

3,511

4,036

7,342

8,567

 

Finance costs

(11,098)

(11,026)

(21,469)

(22,486)

 

Equity share in income of affiliates

3,425

2,382

5,778

6,475

 

Foreign exchange loss

(28,945)

(29,154)

(74,323)

(23,479)

 

Other expenses

(4,205)

(2,784)

(7,548)

(8,556)

 

Profit before income taxes

80,651

83,075

135,387

212,387

 

Current income taxes

(17,183)

(19,394)

(27,659)

(42,334)

 

Deferred income taxes

(774)

575

(2,064)

(1,358)

 

Total income tax expense

(17,957)

(18,819)

(29,723)

(43,692)

 

 

 

 

 

 

 

Profit for the period

62,694

64,256

105,664

168,695

 

Profit for the period attributable to non-controlling interests

(127)

(508)

(272)

(916)

 

Profit for the period attributable to PJSC LUKOIL shareholders

62,567

63,748

105,392

167,779

 

Earning per share of common stock attributable
to
PJSC LUKOIL shareholders (in Russian rubles):

 

 

 

 

 

Basic

87.76

89.42

147.83

235.34

 

Diluted

87.76

88.13

147.83

231.28

           

The analysis of the main financial indicators of the financial statements is provided below.

 

Sales revenues

Sales breakdown

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

Crude oil

 

 

 

 

Export and sales on international markets other than Customs Union

325,492

376,988

605,638

742,902

Export and sales to Customs Union

15,366

13,776

27,768

28,099

Domestic sales

23,404

37,859

44,744

75,232

 

364,262

428,623

678,150

846,233

Refined products

 

 

 

 

Export and sales on international markets

 

 

 

 

Wholesale

669,088

743,051

1,215,661

1,465,805

Retail

71,660

74,593

149,974

154,625

Domestic sales

 

 

 

 

Wholesale

55,569

61,045

104,366

114,019

Retail

90,541

88,172

171,920

166,177

 

886,858

966,861

1,641,921

1,900,626

Petrochemicals

 

 

 

 

Export and sales on international markets

8,804

8,875

18,962

17,089

Domestic sales

8,915

6,296

18,094

9,394

 

17,719

15,171

37,056

26,483

Gas and gas products

 

 

 

 

Export and sales on international markets

19,877

21,187

44,285

48,859

Domestic sales

8,582

9,533

17,820

18,831

 

28,459

30,720

62,105

67,690

Sales of energy and related services

 

 

 

 

Sales on international markets

2,797

1,719

6,525

4,209

Domestic sales

11,642

11,523

30,678

29,420

 

14,439

13,242

37,203

33,629

Other

 

 

 

 

Sales on international markets

14,545

12,552

37,302

23,982

Domestic sales

12,677

9,797

22,896

18,628

 

27,222

22,349

60,198

42,610

 

 

 

 

 

Total sales

1,338,959

1,476,966

2,516,633

2,917,271

 

Sales volumes

2nd quarter of

1st half of

 

2016

2015

2016

2015

Crude oil

(thousands of barrels)

Export and sales on international markets other than Customs Union

118,805

125,966

247,967

243,033

Export and sales to Customs Union

7,030

6,245

14,162

13,018

Domestic sales

11,618

18,831

25,413

37,808

 

137,453

151,042

287,542

293,859

 

 

 

 

 

Crude oil

(thousands of tonnes)

Export and sales on international markets other than Customs Union

16,208

17,185

33,829

33,156

Export and sales to Customs Union

959

852

1,932

1,776

Domestic sales

1,585

2,569

3,467

5,158

 

18,752

20,606

39,228

40,090

 

 

 

 

 

Refined products

(thousands of tonnes)

Export and sales on international markets

 

 

 

 

Wholesale

25,140

24,964

48,221

49,019

Retail

986

1,119

2,021

2,175

Domestic sales

 

 

 

 

Wholesale

2,610

2,582

5,169

4,790

Retail

2,352

2,353

4,486

4,501

 

31,088

31,018

59,897

60,485

 

 

 

 

 

Total sales volume of crude oil and refined products

49,840

51,624

99,125

100,575

 

Realized average sales prices

 

2nd quarter of

1st half of

 

 

2016

2015

2016

2015

Average realized price international

 

 

 

 

Oil (beyond Customs Union)

(RUB/barrel)

2,740

2,993

2,442

3,057

Oil (Customs Union)

(RUB/barrel)

2,186

2,204

1,961

2,158

Refined products

 

 

 

 

 

Wholesale

(RUB/tonne)

26,614

29,764

25,210

29,902

Retail

(RUB/tonne)

72,677

66,660

74,208

71,092

 

 

 

 

 

 

Oil (beyond Customs Union)

($/barrel)

41.58

56.84

34.76

53.26

Oil (Customs Union)

($/barrel)

33.18

41.86

27.91

37.60

Refined products

 

 

 

 

 

Wholesale

($/tonne)

403.93

565.27

358.82

520.97

Retail

($/tonne)

1,103.04

1,266.00

1,056.22

1,238.60

 

 

 

 

 

 

Average realized price within Russia

 

 

 

 

 

Oil

(RUB/barrel)

2,014

2,010

1,761

1,990

Refined products

 

 

 

 

 

Wholesale

(RUB/tonne)

21,291

23,648

20,191

23,804

Retail

(RUB/tonne)

38,495

37,481

38,324

36,923

During the second quarter of 2016, our revenues decreased by 138 billion RUB, or by 9.3%, compared to the second quarter of 2015. Our revenues from crude oil sales decreased by 64 billion RUB, or by 15.0%, and our revenues from sales of refined products decreased by 80 billion RUB, or by 8.3%.

During the first half of 2016, our revenues decreased by 401 billion RUB, or by 13.7%, compared to the first half of 2015. Our revenues from crude oil sales decreased by 168 billion RUB, or by 19.9%, and our revenues from sales of refined products decreased by 259 billion RUB, or by 13.6%.

The main reason for the decrease in revenue was the decrease in international hydrocarbon prices. That was partially compensated for by the effect of ruble devaluation on our revenues denominated in other currencies.

Sales of crude oil

Our international crude oil sales revenue decreased by 13.7%, or by 51 billion RUB, and by 18.5%, or by 137 billion RUB, compared to the second quarter and the first half of 2015, respectively. Our international sales volumes (beyond the Customs Union) decreased by 977 thousand tonnes, or by 5.7%, in the second quarter of 2016 driven by decrease in the Company's share in production from the West Qurna-2 field, and increased by 673 thousand tonnes, or by 2.0%, in the first half of 2016, due to higher volumes of crude oil trading. Our average international realized crude oil prices decreased by 8.5% and 20.1% compared to the second quarter and the first half of 2015, respectively.

Our realized domestic crude oil sales price did not change compared to the second quarter of 2015 and decreased by 11.5% compared to the first half of 2015, while our domestic sales volumes decreased by 984 thousand tonnes, or by 38.3%, and by 1,691 thousand tonnes, or by 32.8%, respectively, following the decrease in production in Russia. As a consequence, in the second quarter and the first half of 2016, our domestic sales revenue decreased by 38.2%, or by 14 billion RUB, and by 40.5%, or by 30 billion RUB, respectively.

In the second quarter and the first half of 2016, our revenue from crude oil export from Russia both to Group companies and third parties amounted to 172 billion RUB and 307 billion RUB, respectively (196 billion RUB and 395 billion RUB in the second quarter and the first half of 2015).

Sales of refined products

Compared to the second quarter and the first half of 2015, our revenue from the wholesale of refined products outside Russia decreased by 74 billion RUB, or by 10.0%, and by 250 billion RUB, or by 17.1%, respectively, that was largely price driven. During the second quarter of 2016, our dollar and ruble realized prices decreased by 28.5% and 10.6%, respectively, and during the first half of 2016 they decreased by 31.1% and 15.7%, respectively. At the same time, compared to the second quarter and the first half of 2015, our sales volumes didn't change significantly.

During the second quarter and the first half of 2016, our dollar realized retail prices outside Russia decreased by 12.9% and 14.7%, respectively, while our ruble realized prices increased by 9.0% and 4.4%, respectively, due to the ruble devaluation. Our sales volumes decreased by 11.9% and 7.1% as a consequence of sale of our retail networks in Eastern Europe. As a result, our international retail revenue decreased by 3 billion RUB, or by 3.9%, and by 5 billion RUB, or by 3.0%, compared to the second quarter and the first half of 2015, respectively.

During the second quarter and the first half of 2016, our revenue from the wholesale of refined products on the domestic market decreased by 9.0%, or by 5 billion RUB, and by 8.5%, or by 10 billion RUB, respectively. Our realized prices decreased by 10.0% and 15.2%, but our sales volumes increased by 1.1% and 7.9% in the second quarter and the first half of 2016.

During the second quarter and the first half of 2016, our revenue from refined products retail sales in Russia increased by 2 billion RUB, or by 2.7%, and by 6 billion RUB, or by 3.5%, respectively. Our average domestic retail prices increased by 2.7% and 3.8%, while our retail volumes did not change significantly.

In the second quarter and the first half of 2016, our revenue from export of refined products from Russia both to Group companies and third parties amounted to 98 billion RUB and 186 billion RUB, respectively (118 billion RUB and 239 billion RUB in the second quarter and the first half of 2015).

Sales of petrochemical products

In the second quarter and the first half of 2016, our revenue from sales of petrochemical products increased by 3 billion RUB, or by 16.8%, and by 11 billion RUB, or by 39.9%, respectively, largely due to the increase in domestic output against the background of low production as a consequence of a fire at our plant in the Stavropol region of Russia at the end of the first quarter of 2014. Production at the plant was resumed in early April 2015. 

Sales of gas and gas products

Compared to the second quarter and the first half of 2015, sales of gas and gas refined products decreased by 2 billion RUB, or by 7.4%, and by 6 billion RUB, or by 8.3%, respectively, mainly as a result of the decrease in sales prices.

Natural gas sales revenue decreased by 1 billion RUB, or by 5.0%, in the second quarter of 2016 and by 3 billion RUB, or by 8.1%, in the first half of 2016.

Gas products revenue decreased by 1 billion RUB, or by 9.9%, and by 3 billion RUB, or by 8.4%, compared to the second quarter and the first half of 2015, respectively.

Sales of energy and related services

During the second quarter and the first half of 2016, our revenue from sales of electricity, heat and related services increased by 1 billion RUB, or by 9.0%, and by 4 billion RUB, or by 10.6%, respectively. In Russia, the increase was largely due to putting in operation a combined cycle gas turbine with a capacity of 135 MW at the Group's power plant in the Stavropol region of Russia in March 2015. Our international revenue increased as a result of the significant increase in volumes of electricity sales in Sicily, Italy.

Other sales

Other sales include non-petroleum sales through our retail network, transportation services, rental revenue, crude oil extraction services, and other revenue of our production and marketing companies from sales of goods and services not related to our primary activities.

During the second quarter and the first half of 2016, revenue from other sales increased by 5 billion RUB, or by 21.8%, and by 18 billion RUB, or by 41.3%, respectively. The non-petrol revenue of our retail network increased by 2 billion RUB, or by 23.4%, and by 3 billion RUB, or by 21.1%. In the second quarter and the first half of 2016, revenue from transportation services abroad increased by 2 billion RUB, or by 63.4%, and by 5 billion RUB, or by 78.5%, respectively. In the second quarter and the first half of 2016, our other sales also included revenue from sales of diamonds in the amount of 3 billion RUB and 11 billion RUB, respectively (3 billion RUB and 5 billion RUB in the second quarter and the first half of 2015).

 

Operating expenses

Operating expenses include the following:

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

Hydrocarbon extraction expenses(1)

45,187 

40,771 

89,061 

80,042 

Extraction expenses at the West Qurna-2 field

8,407 

11,373 

18,610 

23,936 

Own refining expenses

22,804

21,004

45,254

43,172

Refining expenses at third parties refineries

173

525

421

1,078

Expenses for crude oil transportation to refineries

10,917

9,612

23,228

20,120

Power generation and distribution expenses

8,618

9,566

18,889

18,633

Petrochemical expenses

3,289

2,410

6,602

4,793

Other operating expenses

14,314

10,567

24,888

19,735

Total operating expenses

113,709

105,828

226,953

211,509

           

(1) Excluding extraction expenses at the West Qurna-2 field.

The method of allocation of operating expenses above differs from the approach used in preparing the data for Note 28 "Segment information" to our condensed interim consolidated financial statements. Expenditures in the segment reporting are grouped depending on the segment to which a particular company belongs. Operating expenses for the purposes of this analysis are grouped based on the nature of the costs incurred.

Compared to the respective periods of 2015, our operating expenses increased by 8 billion RUB, or by 7.4%, in the second quarter of 2016, and by 15 billion RUB, or by 7.3%, in the first half of 2016, largely as a result of inflation in Russia and the effect of the ruble devaluation on the ruble value of foreign subsidiaries' expenses.

Hydrocarbon extraction expenses

Our extraction expenses include expenditures related to repairs of extraction equipment, labor costs, expenses on artificial stimulation of reservoirs, fuel and electricity costs, cost of extraction of natural gas liquids, property insurance of extraction equipment and other similar costs.

In the second quarter and the first half of 2016, our extraction expenses increased by 4 billion RUB, or by 10.8%, and by 9 billion RUB, or by 11.3%.

Our average hydrocarbon extraction expenses increased from 213 RUB per BOE in the second quarter of 2015 to 246 RUB per BOE in the second quarter of 2016, or by 15.5%. In the first half of 2016, our average hydrocarbon extraction expenses increased from 209 RUB per BOE in the first half of 2015 to 238 RUB per BOE, or by 13.9%. In Russia, average hydrocarbon extraction expenses increased by 13.7% to 241 RUB per BOE in the second quarter of 2016 and by 13.0% to 234 RUB per BOE in the first half of 2016. Our domestic expenses increased driven by higher costs of materials and services and shift towards more cost-intensive projects benefiting from tax exemptions.

At the same time, our average hydrocarbon extraction expenses decreased from $4.04 per BOE in the second quarter of 2015 to $3.73 per BOE in the second quarter of 2016, or by 7.7%, and from $3.68 per BOE in the first half of 2015 to $3.41 per BOE in the first half of 2016, or by 7.3%. In Russia, average hydrocarbon extraction expenses decreased by 9.2% to $3.65 per BOE in the second quarter of 2016 and by 8.0% to $3.35 per BOE in the first half of 2016.

Crude oil extraction expenses at the West Qurna-2 field

Crude oil extraction expenses at the West Qurna-2 field represent expenses related to 100% production from the West Qurna-2 field, while we are only eligible for a share of production that compensates our historically incurred costs and expenses. For details see p. 6.

In the second quarter and the first half of 2016, our expenses related to the West Qurna-2 project amounted to 8 billion RUB and 19 billion RUB, respectively (11 billion RUB and 24 billion RUB in the second quarter and the first half of 2015). The decrease in expenses was a result of completion of commissioning stage of the field development and consecutive decrease in personnel involved and associated transportation, security and other related services provided.

Own refining expense

During the second quarter and the first half of 2016, our own refining expenses increased by 2 billion, or by 8.6%, and by 2 billion, or by 4.8%, respectively.

Despite lower production volumes, refining expenses at our domestic refineries increased by 6.5%, or by 1 billion RUB, in the second quarter of 2016, and by 12.1%, or by 2 billion RUB, in the first half of 2016, as a result of increase in consumption and costs of additives and commissioning of new units at our refineries in Nizhny Novgorod and Volgograd.

Refining expenses at our refineries outside Russia increased by 1 billion RUB, or by 10.6%, compared to the second quarter of 2015 and did not change significantly compared to the first half of 2015. The increase was a result of the ruble devaluation and commissioning of heavy residue processing complex at our Bulgarian refinery, but in the first half of 2016, it was offset by lower overhaul expenses at our Italian refinery compared to first quarter of 2015.

Expenses for crude oil transportation to refineries

Expenses for crude oil transportation to refineries include pipeline, railway, freight and other costs related to delivery of crude oil and refined products to refineries for further processing.

During the second quarter and the first half of 2016, our expenses for crude oil transportation to refineries increased by 1 billion RUB, or by 13.6%, and by 3 billion RUB, or by 15.4%, largely as a result of the increase in transportation tariffs, international refining volumes and the effect of the ruble devaluation. 

Petrochemical expenses

In the second quarter and the first half of 2016, operating expenses of our petrochemical plants increased by 1 billion RUB, or by 36.5%, and by 2 billion RUB, or by 37.7%, respectively, due to the increase in domestic production volumes after commencement of production at our petrochemical plant in the Stavropol region of Russia in April 2015.

Other operating expenses

Other operating expenses include expenses of the Group's upstream and downstream entities that do not relate to their core activities, namely rendering of transportation and extraction services, costs of other services provided and goods sold by our production and marketing companies, and of non-core businesses of the Group.

In the second quarter and the first half of 2016, other operating expenses increased by 4 billion RUB, or by 35.5%, and by 5 billion RUB, or by 26.1%, respectively, largely as a result of the increased cost of transportation services provided to third parties, non-petrol sales of our retail network and the increase in the ruble value of other operating expenses of our foreign subsidiaries.

Cost of purchased crude oil, gas and products

Cost of purchased crude oil, gas and products includes the cost of crude oil and refined products purchased for trading or refining, gas and fuel oil to supply our power generation entities and the result of hedging of crude oil and refined products sales.

In the second quarter and the first half of 2016, the cost of purchased crude oil, gas and products decreased by 100 billion RUB, or by 12.9%, and by 263 billion RUB, or by 17.8%, respectively, following the decrease in hydrocarbon prices. Crude oil purchases in the second quarter and the first half of 2016 also included 45 billion RUB and 74 billion RUB related to 2,588 thousand tonnes and 5,143 thousand tonnes of compensation crude oil received from Iraq's state-owned South Oil Company within the West Qurna-2 project (53 billion RUB and 95 billion RUB related to 2,497 thousand tonnes and 4,769 thousand tonnes of compensation crude oil in the second quarter and the first half of 2015).

In the second quarter of 2016, we recognized a 36 billion RUB net loss from hedging, compared to a 16 billion RUB net loss in the second quarter of 2015. In the first half of 2016 we recognized a 34 billion RUB net loss from hedging, compared to a 26 billion RUB net loss in the first half of 2015.

 

Transportation expenses

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

Crude oil transportation expenses

25,070

21,575

49,617

46,082

- in Russia

13,737

13,796

26,939

27,068

- outside Russia

11,333

7,779

22,678

19,014

Refined products transportation expenses

45,047

41,968

101,192

92,085

- in Russia

20,102

18,829

42,241

39,778

- outside Russia

24,945

23,139

58,951

52,307

Other transportation expenses

7,548

4,834

13,555

8,995

- in Russia

3,868

2,743

7,199

4,931

- outside Russia

3,680

2,091

6,356

4,064

Total transportation expenses

77,665

68,377

164,364

147,162

Our transportation expenses increased by 9 billion RUB, or by 13.6%, in the second quarter of 2016 and by 17 billion RUB, or by 11.7%, in the first half of 2016.

Our expenses for transportation of crude oil in Russia were flat both to the second quarter and the first half of 2015 as inflation of tariffs was offset by decrease in exports volumes. Outside of Russia, increase in crude oil transportation expenses was driven primarily by the effect of the ruble devaluation.

The increase in domestic expenses for transportation of refined products by 6.8% against the second quarter of 2015 and by 6.2% against the first half of 2015 was triggered mainly by the increase in tariffs. Outside of Russia, the increase was again mostly a result of the ruble devaluation.

Other transportation expenses were mostly represented by the expenses for transportation of gas. In Russia, the increase to the respective periods of 2015 was mainly due to higher volumes of transportation of gas from the Yu. Korchagin field in the Caspian Sea. Internationnaly, the increase that resulted from higher transportation volumes as a result of the increase in gas production was amplified by the ruble devaluation.

Selling, general and administrative expenses

Selling, general and administrative expenses include payroll costs (excluding extraction entities', refineries' and power generation entities' production staff costs), insurance costs (except for property insurance related to extraction and refinery equipment), costs of maintenance of social infrastructure, movement in bad debt provision and other expenses. Our selling, general and administrative expenses are roughly equally split between domestic and international operations.

Our selling, general and administrative expenses increased by 5 billion RUB, or by 13.2%, in the second quarter of 2016, and by 12 billion RUB, or by 14.7%, in the first half of 2016. In Russia, expenses increased by 6 billion RUB, or by 23.2%, in the second quarter of 2016 and by 7 billion RUB, or by 16.2%, in the first half of 2016 as a result of inflation and higher accruals within share-based compensation program. Internationally, decrease in selling expenses denominated in local currencies as a result of the sale of our retail networks in Eastern Europe was offset by the effect of the ruble devaluation on the expenses of our foreign subsidiaries and our expenses outside of Russia decreased by 1 billion RUB, or by 5.6%, compared to the second quarter of 2015 and increased by 5 billion RUB, or by 13.0%, compared to the first half of 2015.

Depreciation, depletion and amortization

Our depreciation, depletion and amortization expenses decreased by 15 billion RUB, or by 17.7%, compared to the second quarter of 2015, and by 10 billion RUB, or by 5.8%, compared to the first half of 2015. The effect of the increase in the depreciation rate of upstream assets following the decrease in hydrocarbon proved reserves was offset by the decrease of expenses related to the West Qurna-2 project. Our depreciation, depletion and amortization expenses for the second quarter of 2016 and 2015 included 5 billion RUB and 34 billion RUB, respectively, related to the West Qurna-2 field. In the first half of 2016 and 2015, those expenses amounted to 24 billion RUB and 57 billion RUB, respectively. Other international subsidiaries' depreciation, depletion and amortization increased as a result of the effect of the ruble devaluation.

Equity share in income of affiliates

The Group has investments in equity method affiliates and corporate joint ventures. These companies are primarily engaged in crude oil exploration, production, marketing and distribution operations in the Russian Federation, crude oil production and marketing in Kazakhstan. Currently, our largest affiliates are Tengizchevroil, exploration and production company operating in Kazakhstan, Bashneft-Polus, an exploration and production company that develops the Trebs and Titov oilfelds in Timan-Pechora, Russia, Shakh-Deniz Midstream and Caspian Pipeline Consortium, midstream companies in Azerbaijan and Kazakhstan. One of our major affiliates was Caspian Investments Resources Ltd, which was sold in August 2015.

Our share in income of affiliates increased by 1 billion RUB, or by 43.8%, compared to the second quarter of 2015 and decreased by 1 billion RUB, or by 10.8%, compared to the first half of 2015.

Taxes other than income taxes

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

In Russia

 

 

 

 

Mineral extraction taxes

105,073

128,720

174,811

245,369

Social security taxes and contributions

5,808

5,506

11,835

10,850

Property tax

4,728

4,398

9,266

8,732

Other taxes

642

398

1,097

1,102

Total in Russia

116,251

139,022

197,009

266,053

 

 

 

 

 

International

 

 

 

 

Social security taxes and contributions

1,586

1,319

3,159

2,794

Property tax

38

258

564

749

Other taxes

849

620

1,545

1,458

Total internationally

2,473

2,197

5,268

5,001

 

 

 

 

 

Total

118,724

141,219

202,277

271,054

In the second quarter of 2016, our taxes other than income taxes decreased by 22 billion RUB, or by 15.9%, compared to the second quarter of 2015. In the first half of 2016, our taxes other than income taxes decreased by 69 billion RUB, or by 25.4%, compared to the first half of 2015. This was largely driven by the decrease in the mineral extraction tax rate in Russia.

In the second quarter and the first half of 2016, application of the reduced rate for crude oil produced from depleted oilfields and the zero rate for crude oil produced from oilfields with extra heavy crude oil and from greenfields led to a 15 billion RUB and 26 billion RUB mineral extraction tax reduction, respectively (19 billion RUB and 37 billion RUB in the second quarter and the first half of 2015).

Excise and export tariffs

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

In Russia

 

Excise tax on refined products

23,591

13,373

40,182

25,673

Crude oil еxport tariffs

30,872

50,566

62,364

119,823

Refined products еxport tariffs

9,160

19,112

24,686

64,174

Total in Russia

63,623

83,051

127,232

209,670

 

 

 

 

 

International

 

 

 

 

Excise tax and sales taxes on refined products

50,100

40,219

101,317

85,757

Crude oil еxport tariffs

12

15

21

28

Refined products еxport tariffs

85

324

199

1,003

Total internationally

50,197

40,558

101,537

86,788

 

 

 

 

 

Total

113,820

123,609

228,769

296,458

In the second quarter and the first half of 2016, export tariffs decreased by 30 billion RUB, or by 42.7%, and by 98 billion RUB, or by 52.8%, respectively, due to the sharp decrease in export duty rates for crude oil and refined products in Russia amplified by the decrease in export volumes. Compared to the second quarter and the first half of 2015, the volumes of crude oil export beyond the Customs Union decreased by 1.0% and 3.0% and the volumes of the refined products exports decreased by 13.7% and 9.9%, respectively. The increase in excise tax expenses in Russia was driven by increase in rates, while international excise expenses increased due to the ruble devaluation.

Foreign exchange loss

Foreign exchange loss mostly related to revaluation of US dollar and euro net monetary position of Russian subsidiaries that mostly consists of accounts receivables and loans to our foreign subsidiaries.

During the second quarter of 2016 and 2015, US dollar exchange rate showed similar decline that, along with comparable net monetary position, resulted in 29 billion RUB foreign exchange loss in both periods.

During the first half of 2016, US dollar exchange rate to ruble decreased from 72.88 rubles per dollar at 1 January to 64.26 rubles per dollar at 30 June that resulted in a 74 billion RUB foreign exchange loss. During the first half of 2015, US dollar exchange rate changed less significantly (decreased from 56.26 rubles per dollar at 1 January to 55.52 rubles per dollar at 30 June) that resulted in a 23 billion RUB foreign exchange loss.

Income taxes

The maximum statutory income tax rate in Russia is 20%. Nevertheless, the actual effective income tax rate may be higher due to non-deductible expenses or lower due to certain non-taxable gains.

In the second quarter of 2016, our total income tax expense decreased by 1 billion RUB, or by 4.6%, compared to the second quarter of 2015. At the same time, our profit before income tax decreased by 2 billion RUB, or by 2.9%.

In the first half of 2016, our total income tax expense decreased by 14 billion RUB, or by 32.0%, compared to the first half of 2015. At the same time, our profit before income tax decreased by 77 billion RUB, or by 36.3%.

In the second quarter of 2016, our effective income tax rate was 22.3%, compared to 22.7% in the second quarter of 2015. In the first half of 2016, our effective income tax rate was 22.0%, compared to 20.6% in the first half of 2015.

 

Liquidity and capital resources

 

1st half of

 

2016

2015

 

(millions of rubles)

Net cash provided by operating activities

344,478

383,103

Net cash used in investing activities

(258,515)

(290,868)

Net cash provided by (used in) financing activities

37,267

(89,562)

Operating activities

Our primary source of cash flow is funds generated from our operations. In the first half of 2016, cash generated from operations decreased by 39 billion RUB, or by 10.1%, compared to the first half of 2015, mainly as a result of the decrease in profit.

Investing activities

In the first half of 2016, the amount of cash used in investing activities decreased by 32 billion RUB, or by 11.1%, mostly due to a decrease in capital expenditures.

In the first half of 2016, our capital expenditures, including non-cash transactions, decreased by 63 billion RUB, or by 20.8%.

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

Capital expenditures, including non-cash transactions and prepayments

 

 

 

 

Exploration and production

 

 

 

 

Western Siberia

28,172

27,919

60,176

61,775

Timan-Pechora

20,980

19,592

45,535

38,942

Ural region

6,173

8,204

11,989

14,792

Volga region

11,979

10,201

20,543

20,109

Other in Russia

1,068

4,156

3,038

8,507

Total in Russia

68,372

70,072

141,281

144,125

Iraq

2,400

7,575

11,696

21,422

Other outside Russia

32,486

42,408

55,167

77,060

Total outside Russia

34,886

49,983

66,863

98,482

Total exploration and production

103,258

120,055

208,144

242,607

Refining, marketing and distribution

 

 

 

 

Russia

11,852

22,366

24,639

43,533

International

3,144

7,033

7,535

15,964

Total refining, marketing and distribution

14,996

29,399

32,174

59,497

Corporate and other

 

 

 

 

Russia

442

846

692

1,497

International

190

473

437

1,243

Total corporate and other

632

1,319

1,129

2,740

Total capital expenditures

118,886

150,773

241,447

304,844

In the first half of 2016, our capital expenditures in the exploration and production segment decreased by 34 billion RUB, or by 14.2%. The decrease was largely in our international segment and related to completion of current stage of the West Qurna-2 project and of exploratory drilling in Cameroon and Romania.

The decrease in capital expenditures in the domestic refining, marketing and distribution segment in Russia was due to completion of upgrades at our Russian refineries. The decrease in the international segment was a result of completion of the construction of a heavy residue processing complex at our Bulgarian refinery.

 

The table below presents our exploration and production capital expenditures in new promising oil regions.

 

2nd quarter of

1st half of

 

2016

2015

2016

2015

 

(millions of rubles)

Western Siberia (Pyakyakhinskoye field)

4,076

7,636

13,333

17,084

Caspian region (Projects in Russia)

9,546

7,606

16,324

14,949

Timan-Pechora (Yaregkoye field)

6,448

3,539

12,072

5,873

Iraq

2,400

7,575

11,696

21,422

Uzbekistan

20,320

17,604

26,276

27,560

Nigeria

554

10,077

5,050

10,077

Romania

246

5,603

660

11,721

Cameroon

95

250

259

8,034

Total

43,685

59,890

85,670

116,720

Financing activities

In the first half of 2016, net movements of short-term and long-term debt generated an inflow of 110 billion RUB, compared to an outflow of 30 billion RUB in the first half of 2015.

 

 

Information about Basic Business Risks and Uncertainties of PJSC LUKOIL

PJSC LUKOIL management bodies pay great attention to the risk management issues in order to ensure reasonable assurance of the set goals in the conditions characterized by uncertainties and adverse factors. PJSC LUKOIL is constantly identifying, describing, estimating and monitoring the possible events that may affect the Company's activities, and is elaborating and implementing measures to minimize the probability of such events and/or to mitigate their negative impact on the Company's performance.

PJSC LUKOIL seeks to actively promote risk management and is presently focusing its efforts on the development and improvement of its General Enterprise Risk and Internal Control Management System based on the best international practices. The Company is constantly improving the applicable regulatory methodological risk management base which establishes requirements, uniform for all of the LUKOIL Group organizations, aimed at organizing the risk management process at all stages, and defines management standards for certain risk types of utmost importance. The Risk Committee, a dedicated body under the President of PJSC  LUKOIL, was set up and began its risk management work in 2011.

The risk management process in the LUKOIL Group is supported by a special information system providing for the following:

-   a unified information environment for all participants of the risk management process (at all managerial levels);

-     automation of the processes of collection, due diligence, approval and storage of risk information;

-     the necessary response time and risk management efficiency in general;

-     development of a risk management knowledge base.

The following information reflects the Company's current vision of the major risks that may affect its financial performance, and may not be exhaustive.

 

Macroeconomic Risks

Macroeconomic changes resulting from the global price volatility for energy carriers, foreign exchange rate fluctuations, inflation processes may have an adverse impact on the Company's financial performance.

In Q2 2016 the oil price continued to follow the recovery trend set in Q1 after a sharp fall in January 2016. Gradual reduction of the surplus on the world market due to increasing seasonal demand and declining production by independent producers accounted for the price growth.  As a result, Brent crude oil price reached USD 50/barrel.

Over the past period risks of the world economy slowdown have increased considerably, aggravated by the results of the UK referendum on the country's exit from the European Union. This event can provoke a banking crisis and fuel separatist sentiments in the region, which is already experiencing major economic problems.

Concerns of the market players are still raised about the slow economic growth in China, the largest oil consumer. The monetary measures applied to stimulate the economy in this country mitigate the negative impacts for a limited time only, the long-lasting solution however requires structural changes in the economy. In the developed countries monetary easing is expanding, which detects significant challenges faces by the economies of these countries. In addition to that, negative growth slowdown signs are becoming more obvious in the US, the most sustainable economy in the recent years. In this context, the probability of the interest rate rise in the country this year is becoming ever more elusive. A number of developing export-oriented countries continue to be under pressure due to the lingering low commodity prices. All of the above increases the risks of a global economic slowdown. In this situation, the global capital will flow into the most secure assets, including the US dollar, which could affect the oil price.

In Q2 2016 the world market supply of oil continued to decline, primarily on account of independent producers. A significant drop in production was recorded in the United States against the backdrop of the ongoing decline in drilling activity. Besides, more frequent interruption of supplies from countries such as Canada, Nigeria and Kuwait contributed to the market surplus drop. However, the effect of this factor is unlikely to be lasting. At the same time, OPEC production output broke the historical record again. In the short term perspective, there is a potential that the cartel will increase its production output, in particular due to Iran seeking to go back to its pre-sanction production rates.

Nevertheless, we can expect the oil price growth in the mid-term perspective due to the delayed effect of the reduced investment and cost optimization of the oil and gas companies. Growth in supply will gradually slow down due to the lasting trend of independent producers cutting back on production. Low prices will also instigate the global oil consumption.

Lingering low oil prices and the preservation of sanctions against Russia continue to hold back growth of the Russian economy. Despite a slight drop, the interest rate remains rather high to resume investments. There has been a significant decrease in the rate of inflation due to lower consumer demand. GDP in Russia in the 1st quarter of 2016 dropped by 1.2% as opposed to the previous year. Growth is not expected before 2017. Due to the imposed sanctions the Russian companies are struggling to obtain access to foreign funds and technologies. Low energy carrier prices, if they persist, pose a serious threat to the stability of the Russian economy.

The Company has been employing a scenario approach to forecast macroeconomic indicators. One of them is defined as a base-case scenario and describes the most likely macroeconomic development trends according to the Company's management. In addition, best-case and worst-case scenarios are being developed. They assess the potential consequences of changes in macroeconomic indices for the Company.

The Company is fully committed to minimizing the potential effects resulting from the realization of macroeconomic risks. The application of the worst-case scenario makes it possible to identify assets and investment projects that are most vulnerable to macroeconomic changes. The data of this analysis serve as the basis for top management decisions to optimize the Company's asset portfolio.

 

Country Risks

Among other things, PJSC LUKOIL has operations in a number of countries with high political and economic risks. Should they be realized, such risks may significantly complicate the Company's business or even cause the Company to suspend its operations in a certain region. In particular, the Company has launched a number of projects in Iraq, Egypt, Uzbekistan, West African countries where country risks are deemed high.

The Company seeks to diversify its operations and alongside with its activities in unstable regions has been implementing projects in Europe and the US, where regional risks are considered minimal.

The major part of the Company's development and refining assets is located in the Russian Federation. The political environment in the RF is characterized by a fair degree of stability and high support of the population for the policies undertaken by the President and the Government.

The main factors which are capable of affecting LUKOIL's activities include:

-   Instability of the political situation in the countries where the Company's is implementing its investment projects, due to regime changes;

-     Escalation of military conflicts in the countries of the Company's presence;

-     Macroeconomic instability in the countries of the Company's presence;

-     Expropriation of the Company's assets;

-     Inefficiency of the legislation regulating economic relations, and of the court system.

When implementing projects with high country risks, the Company applies more stringent return level requirements to such projects. Besides, should the political or social and economic situation deteriorate in a region of the Company's presence, PJSC LUKOIL shall implement a set of crisis response measures, including cost saving, optimization of the investment program based on the new conditions, equity drawdown, and invite partners to share project risks.

 

Industry-Specific Risks

Risks Associated with Well Construction and Hard-to-recover Hydrocarbon Field Development

The risk associated with the prohibition of supply of the equipment and materials currently used for well construction is essential to the Company. The fact that a considerable share of the materials and equipment required for well construction is purchased today by the Company and its contractors from foreign contractors is regarded as a risk factor.

The greatest part of the chemical agents intended for preparation and processing of drill muds, as well as for preparation of grouting mixtures currently purchased from the EU and the US manufacturers, can be replaced with the products manufactured by the enterprises of China, Thailand, the RF and the Belarus Republic. It is also worth mentioning that the chemical products currently purchased from the EU and the US manufacturers are low-tonnage;

Based on the information received from the Company's contractors providing maintenance services during well construction, as of today the Company's projects have now stocked spare parts, equipment and supplies for 1 year.

Due to the sanctions imposed against Russia there is a risk of constraints arising as hard-to-recover-hydrocarbon fields are developed with application of the multi-zone hydrofracturing technique. The equipment for multi-zone hydrofracturing used today as part of the Company's projects knows no equals produced by the enterprises of the RF or China.

Risks Associated with the Growth of Tariffs and Suppliers' Prices for Goods/Work/Services in Operations, except Critical Raw Material

The risk associated with tariff growth is accounted for the activities of such monopolies as JSC Russian Railways, PJSC Gazprom and other monopolies in the countries of the Company's presence, since the prices for their services grow on a regular basis.

The expenses on product logistics as the product volumes rise directly affect PJSC LUKOIL profit.

There is also a risk of price growth for the services of other suppliers, including motor transportation, the services of customs brokers, warehouse storage cost, etc.

In order to minimize the risks associated with tariff growth of JSC Russian Railways, and other similar monopolies in the countries of its presence the Company:

-  diversifies ways to transport the Company's products;

-  in order to reduce the risks of advanced tariff growth of the above monopolies the Company participates in the coordinated operations aimed at the prevention of advanced tariff growth together with other consumers;

-  when suppliers are selected to cooperate on a long-term basis, the Company holds bidding procedures.

Risk of Restricted Access to Petroleum Product Transshipment Infrastructure

The risk scenario depends on:

-  inability to ensure safety of goods in transit on the part of the natural monopolist in petroleum product pipeline transport;

-  limited infrastructure capabilities given the growth in third-party transportation, and changes in the quality of transported goods.

-  the political situation.

The Company invests great efforts to find ways to reduce these risks:

-  diversifies types of transport and petroleum product export destinations;

-  conducts systematic work with natural monopolies in terms of pipeline transfer to increase transportation output through the PJSC Transneft system given the ever-growing oil production rates and/or increasing refining output at the Company's refineries;

-  develops its own transportation and logistics infrastructure to satisfy oil and petroleum product export.

 

Financial Risks

Price Risks

Oil and petroleum product price fluctuations may significantly affect the Company's financial performance and the value of its securities. The Company has a limited influence on the output prices, which depend a lot on the market situation and measures taken by the regulatory authorities.

High oil price volatility is expected to persist in the near term as a result of the uncertainty as to the outlooks of the global economic growth, oil supply interruptions to the market, the gap between the global oil demand and supply, and high geopolitical tensions.

LUKOIL is a vertically integrated oil company which embraces production, refining and distribution assets. This structure serves as a natural hedging mechanism, where multidirectional risk factors compensate each other.

In addition to this, the Company uses a number of measures to reduce the negative price risk impact:

-  As long-term programs are developed, several price scenarios are considered, while the investment project portfolio is shaped in view of the tolerance analysis of the project performance figures to the changes in price parameters;

-  A commodity supply management system has been implemented which makes it possible to respond to market changes very quickly and conduct arbitrary shipments;

-  In its trading activities, the Company uses hedging operations which help significantly reduce the negative impact of the price fluctuations on the oil and petroleum product markets as part of the LUKOIL Group operations.

Liquidity Risks

High volatility of oil prices, exchange rates of foreign currencies to the US dollar, refining margin, petrochemistry and power generation margin, growth of tariffs and suppliers' prices, as well as possible international economic sanctions against the Russian Federation may create an imbalance in the figures included into the plans, budgets and investment programs of the LUKOIL Group, thus leading to the shortage of liquidity and financing sources.

This risk is managed through sensitivity assessment of the performance figures included into the plans, budgets and investment programs to the changes in macroeconomic indicators. The Company also develops proposals related to plan adjustments, possible sequestering of expenses associated with the transition to the stress scenario, shifting of due dates and project implementation dates or inclusion of optional projects in the plan in case of improvements in the macroeconomic situation, as well as the proposals to ensure well-timed financing of its business activities. Much attention is paid to cost minimization by means of bidding procedures.

LUKOIL Group's liquidity is managed on a centralized basis, but there's also an efficient global system in place to manage LUKOIL Group's liquidity, which includes an automated system of concentration and re-distribution of funds, corporate dealing, and cashflow rolling forecasts. The liquidity indicators are monitored on a continuous basis.

Despite the unfavorable market situation for the Russian borrowers, the volume of bilateral backup credit lines required to provide a sufficient level of liquidity in line with the requirements of the rating agencies is maintained at the required level.

Currently, PJSC LUKOIL has investment ratings from two largest international rating agencies, including: S&P (BBB- which is higher than the sovereign rating of the Russian Federation) and Fitch (BBB-). The Company is monitoring and ensuring compliance of its financial indicators with the rating agencies' requirements on a regular basis.

The fact that its credit rating exceeds the sovereign rating of the Russian Federation testifies to high financial stability of PJSC LUKOIL.

Foreign Exchange Risks

The fact that the Company's assets are mainly concentrated in the RF makes its financial indicators dependent on the ruble to dollar exchange rate. The Company's proceeds are mainly shaped by US dollar proceeds from the oil and petroleum product sales, while operating and capital expenses are mainly denominated in rubles. The Company has to sell foreign currency to finance ruble denominated expenses. When the ruble appreciates, the Company needs to sell an extra amount of its foreign currency proceeds to finance ruble denominated expenses, which will have an adverse effect on the Company's net profit in rubles.

The Company's foreign currency revenue and expenses mix serves as natural hedging. For instance, the oil price reduction, as a rule, is accompanied by a weaker ruble exchange rate, which helps partially offset the negative impact of the oil price reduction on the Company's financial indicators.

In order to mitigate the negative consequences of the changes in the currency exchange rates the Company takes advantage of its geographic diversification. The Company also applies hedging tools to its currency proceeds.

Risk of Contractor's Default, Failure to Pay on the part of the Contractor

The risk manifests itself in the possibility of untimely proceeds from the supplied goods. As related to export sales, untimely and/or incomplete proceeds may require additional funds to ensure fulfillment of the Company's financial obligations.

This risk is minimized by the contractual terms in view of which the settlements with third parties, non-members of the LUKOIL Group are either made on a pre-paid basis or secured by letters of credit or bank guarantees on the part of end buyers. The list of banks issuing letters of credit and bank guarantees is subject to approval by the Company's corporate center.

 

Legal Risks

Tax and Customs Regulation Risks

The actions of the RF government focused on amending the taxation and customs policy are primarily dictated by the state of the RF budget system and the way the domestic market is regulated. Increased tax burden, unexpected changes in the tax and customs duty rates, cancellation of the applicable incentive rates for a number of the Company's fields may affect financial performance of the LUKOIL Group and its organizations.

Due to considerable fluctuations of the ruble to dollar exchange rate in the recent months and a persisting trend towards further depreciation of the Russian ruble, there is a risk of additional payments of customs duties accompanied by occasional declaration of oil and petroleum product export supplies in excess of the planned amounts (except for pipeline transport supplies).

At the same time, in accordance with the Russian Law "On Customs Tariff" the Government of the Russian Federation reconsiders export customs duties on oil and petroleum products on a monthly basis. Customs duties are calculated based on what the oil price on the global oil markets is, therefore, as the oil price falls, the duty rates are reducing as well, however starting next calendar month.

High ruble volatility continues to bear significant risks and uncertainty in terms of the amount of the export duties paid in rubles.  

To manage the specified risks the Company conducts continuous monitoring of the taxation and customs policy changes, participates in the discussions of legislative initiatives, promptly assesses the influence produced by the probable changes in the taxation and customs legislation upon the LUKOIL Group performance indicators, and takes respective measures in order to either mitigate or offset the negative consequences of the changes in the taxation policy and customs policy, for example, if possible, to be able to submit customs declarations as the ruble to US dollar exchange rate is on the rise.

Risks Associated with Changes of the Russian Legislation on Joint-Stock Companies and Securities Markets

Changes in the Russian corporate governance regulations, including those related to the structure and competences of the regulatory bodies of a joint-stock company, due to the expected amendments made into the Federal Law "On Joint-Stock Companies", as well as transition to practical application of the provisions of the Corporate Governance Code (Letter of the Bank of Russia No.06-52/2463 of April 10, 2014) in view of the reporting recommendations in accordance with the Corporate Governance Code (Letter of the Bank of Russia No.IN-06-52/8 of February 17, 2016) may lead to changes in the Company's corporate structure and corporate governance procedures, which in its turn may affect the Company's decision-making process and performance.

The Company is constantly monitoring legislation changes in this field. The Company also takes measures to collect information on such changes at the stage of preliminary discussion, and to ensure participation of the Company's representatives in such discussions in order to provide a detailed explanation of the Company's standpoint on these issues, risks and uncertainties which may arise as a result of the proposed legislative initiatives.

The Company also takes measures to ensure participation of its representatives in the activities focused on the development of efficient solutions in the area of practical application of the effective legislative innovations.

Risks Associated with Circulation of the Company's Securities

The Company's securities circulate in regulated markets in Russia and abroad. Changes in the requirements to the issuers on the part of the regulatory authorities for securities and stock exchanges, as well as the changes in the listing structure may induce the Company to amend its corporate governance procedures and assume extra obligations as to information disclosure and shareholder relations. Should the Company fail to ensure compliance with these requirements and fulfill the required obligations, it may result in transfer of the Company's securities to lower listing segments, including delisting, which may have an adverse impact on the liquidity and cost of the securities.

The Company monitors changes in the listing rules of stock exchanges and other requirements of stock exchanges and regulatory authorities to the issuers whose securities are admitted for circulation. The Company's representatives participate in the working meetings and other issuer events arranged by stock exchanges and other organizations that provide consulting and educational services to the issuers of the securities circulating in regulated markets. The Company also seeks to introduce the best global practice in corporate governance and shareholder relations.

 

Geological Risks

The Risk of Failure to Discover Geological Reserves or Discovery of the Reserves below the Initially Expected Level

The Company's business is exposed to the risk that while implementing new projects, and exploratory drilling, we might not discover any productive (commercially efficient) oil and gas reserves, and/or that the discovered reserves will be considerably below the initially expected level. Therefore, the Company may have to incur additional expenses or even cease operations in a number of license areas.

PJSC LUKOIL strives to manage this risk at the level sufficient for prompt risk response, by means of additional geologic exploration.

Risks Associated with Subsurface Use and Licensing

The applicable Russian legislation on subsurface use and licensing of exploration and production activities, as well as their practical application expose oil companies to a number of risks. The most important are the following ones:

-  risk of early termination of the subsoil license;

-  risk of failure to provide the companies with equal access to the subsoil resources of the continental shelf;

-  risk of having no legislative guarantees to grant the right to subsurface use to a legal entity that discovered a field of federal significance or a field located in the subsurface area of federal significance (Russian continental shelf, internal and territorial seas of the RF, as well as the Russian sector of the Caspian sea bottom), including the subsurface users with the share of foreign investors in the companies' authorized capital);

-  risk of refusal to accept bidding documents for participation in competitive sales/biddings in view of technicalities from subsurface users of the LUKOIL Group entities;

-  risk of fines imposed for administrative offenses for failure to fulfill the terms of license agreements.

The Company is fully committed to minimizing the potential effects resulting from the realization of the above risks, including the following:

- conducts monitoring of the changes in the legislation and in the area of subsurface use and licensing, forwarding proposals to update the applicable regulatory framework;

-  creates a list of sites associated with the Unallocated Subsoil Stock, which are of interest to the Company, in the oil and gas production companies, to ensure timely decision-making on participation of the LUKOIL Group entities in the bidding procedures for subsoil use rights. Prepares feasibility studies of new geological areas in the context of the existing basic unified scenario conditions;

-  has established permanent working groups in the LUKOIL Group entities to develop the bidding documents to participate in the bidding procedures and re-register licenses.

-  holds annual advanced training workshops for specialists in the area of licensing and subsoil use, participates in workshops with governmental officers;

-  monitors current subsoil use state with application of a special information system;

-  interacts with the regulatory authorities in order to mitigate the risk of early subsoil license termination.

 

Risk of Terrorist Attacks, Wrongful Acts by Third Parties

As the number of terrorist organizations increases, as well as that of terrorist attacks in the countries of the Company's presence, there is a possibility of terrorist attacks and other wrongful acts against the Company's assets.

Additional risks to the Company's assets are caused by the development of the military and political situation in Iraq and in Syria in connection with the engagement of the international coalition, as well as the Russian Federation, aimed at the destruction of illegal armed groups of the Islamic State of Iraq and the Levant (ISIL).

There are also risks related to wrongdoings on the part of LUKOIL's competitors (specifically, risks of unfair competition), risks of financial and other abuses on the part of the LUKOIL Group employees, as well as those related to theft of financial resources and commodity stocks.

The Company manages this risk in the following key areas:

-  participates in anti-terror events organized by the National Anti-terrorism Committee of Russia, the RF Federal Security Service, the RF Ministry of Internal Affairs;

-  identifies persons who are intentionally inflicting harm on the Company's interests for the benefit of competing and other third-party (including criminal) structures and persons;

-  plans and arranges events aimed at information security improvement;

-  implements the Information Safety Program in the LUKOIL Group Organizations;

-  obtains licenses issued by the RF Federal Security Services to use encryption-based information security tools.

 

HSE Risks

The Company is exposed to the risk of failure of technical equipment at hazardous production facilities, which may result in accidents, shutdowns, harmful emissions, negative environmental impact, fire and occupational injuries, including those occurring as a result of offshore oil and gas field development. This risk may result in unscheduled shutdowns of the production capacities and, consequently, failure to receive the expected level of operating income.

In order to mitigate these risks the Company has created and is successfully implementing its industrial safety system, including:

-  the use of  corporate standards, including those governing environmental safety matters;

-  production control over the operation of hazardous production facilities;

-  dedicated expert training;

-  diagnostics (non-destructive inspection) and monitoring of equipment parameters;

-  assessment of workplaces based on working conditions;

-  repairs and timely replacement of equipment;

-  building up a reserve for continuous preparedness of emergency response teams and resources;

-  other measures to minimize accident rates at the Company's production facilities.

The applicable HSE Management System certified for compliance with the requirements of ISO 14001 and OHSAS 18001 international standards ensures prompt detection of discrepancies in work organization and equipment operation, as well as development and implementation of corporate target industrial and fire safety programs and plans, training of service personnel and accident prevention services in emergency response.

 

Risks of Failure to Implement the Investment Program

While implementing investment projects, the Company has to face the risk of higher costs and untimely commissioning of production assets.

Delays in project implementation, including those caused by the delays in preparing design and estimate documentation, obtainment of approvals, conclusion of contracts, work execution period, as well as changes in field development plans in connection with the collection of additional geological information may result in a failure to implement the investment program. This may lead to the deteriorated performance indicators for the subsequent years, undermined efficiency of investment projects and the need to raise "excessive" funds.

The Company pays great attention to managing this risk by means of quarterly monitoring of project implementation progress as well as by investment program adjustment. As the investment program is developed, the greenfield development projects without any design and estimate documentation are excluded from the plans for the coming year.

 

Risk Associated with the Lack of Qualified Personnel

The competence and expertise of the newly recruited employees may prove insufficient for them to adequately fulfill their duties, which, in its turn, may adversely affect the financial performance indicators of the Company.

To mitigate the negative impact of this risk, the Company focuses on integrated development of the personnel potential. The Company has created and replenishes its personnel pool consisting of the most experienced and the most promising employees; it pays special attention to the recruitment of young specialists and graduates.

 

 

 

Responsibility statement

 

I hereby confirm that to the best of my knowledge:

 

(a) the set of financial statements, which has been prepared in accordance with the International Financial Reporting Standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the consolidation as a whole as required by the Disclosure and Transparency Rules ('DTR') 4.2.4R,

 

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year,

 

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R, being related parties transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position and performance of the enterprise during that period, and any changes in the related parties transactions described in the last annual report that could do so.

 

 

 

G. S. Fedotov,

Member of PJSC LUKOIL Management Committee,

Vice-President, Economics and Planning

 

August 29, 2016

 

 

This half-yearly report is also available at the Company's website at http://www.lukoil.com.

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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