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LITASCO SA

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY

LUKOIL A Vertically Integrated Oil Company


Gati Al-Jebouri, CEO LITASCO SA Geneva University, Geneva, 3rd October 2008

LUKOIL: ONE OF THE WORLDS MAJOR INTEGRATED OIL & GAS COMPANIES

LUKOIL GROUP A GLOBAL OIL INDUSTRY PLAYER, 2007 DATA


Net income: $ 9,511 mln
Proven hydrocarbon reserves: 20.4 bln bbls Production of marketable hydrocarbons: 2.23 mln bpd*
Operations in over 30 countries Market cap near $52Bn** 1.3% of global oil reserves and 2.3% of global oil production 19% of Russian oil production and 18% of Russian oil refining The second largest company worldwide by proven reserves of hydrocarbons The 6th largest oil company worldwide by production of hydrocarbons The largest Russian oil group with annual turnover near USD 83 billion The first Russian company and the most liquid Eastern European stock on the LSE The only private Russian oil company whose share capital is dominated by minority stakeholders Work force of more than 148000 employees

Refineries throughput: 1.04 mln bpd

Refining in Europe: 0.2 mln bpd

Crude and products export: 1.34 mln bpd


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* Includes all marketable hydrocarbons produced crude oil, condensate, NGL, gas **at closing 05/09/08

LUKOIL CRUDE OIL PRODUCTION

Crude produced at 361 fields 12 new oil fields under development: Tsentralno-Stanovoye field (Volga region) Chekaldinskoye Vladimirskoye fields (Tatarstan), Mokhovskoye, Dozortsevskoye, Sypovskoye and Lesnoye fields (Urals) Verkhnee-Volminskoye, Oshskoye, Osvanyurskoye fields (Timan-Pechora) Domnovskoye field (Kaliningrad Region) Kumkol (Kazakhstan) Khauzak gas field (Uzbekistan). 28,470 production wells, 24,100 operated.

LUKOIL crude oil production in 2007 totaled 96.645 mln MT (1.953 mln bpd)

LUKOIL REFINING
LUKOIL has currently 15 oil refining operations*, 10 of which are fully or partly owned, in 5 countries: Bulgaria, Italy, Romania, Russia and Ukraine Overall capacity of LUKOIL Group refineries at the end of 2007 was 59.4 mln tons of crude oil per year (1.1706 mln bpd) or 1.4% of global capacities Oil refineries of LUKOIL Group refined at the end of 2007 52.2 mln tons (1.04 mln bpd) of crude oil in 2007, representing 1.3% of total world refining Refining at LUKOIL Group refineries at the end of 2007 rose by 56.7% from 2001 to 2007, and the Company's share in total world refining rose by nearly 1.4 times. Capacity utilization rate at Russian refineries of LUKOIL Group in 2007 was 87.8% compared with the Russian average of 83.1% Depth of refining at refineries of LUKOIL Group is higher than the Russian average

* Including two mini refineries and major processing operations at Ufa, Mozyr and Polotsk

LUKOIL REFINERIES AT A GLANCE

Refinery

157

Isab

LUKOIL GLOBAL RETAIL OPERATIONS BY COUNTRY


2007 data

Legend

In July 2008 LUKOIL took over the Turkish network Akpet, 6th largest in Turkey, operating 693 stations The acquisition brings its market share of Turkish retail market to 5%
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KEY DETAILS OF THE LITASCO GROUP

LITASCO Corporate structure 100% subsidiary of OAO LUKOIL (Moscow) Headquarters and company registration in Geneva Over 300 staff in 14 countries (~ 180 in Geneva) 2007 Results Total sales of USD 53.4 billion (about 60% of OAO LUKOIL turnover) Operating profit of USD 315 mln Crude oil sales of 44.8 million mt Product sales of 55.8 million mt
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Source: LITASCO SA, LUKOIL

WHERE DOES LITASCO ADD VALUE?


LITASCOs mission as LUKOILs trading arm, is to add value to LUKOILs crude and products after they leave the export location point

Point of final sale


Wellhead Refinery gate Inland transportation

LITASCO value add area


Shore tanks Sea transport Delivered to end customer

Hydrocarbon flow - from wellhead to pump


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TRADING FOCUS OF LITASCOS MAIN INTERNATIONAL OFFICES


Stockholm Rotterdam New Jersey Hamburg Geneva Dubai

Singapore

LUKOIL Pan Americas Focus of operations Crude oil and all products

LUKOIL Benelux Local market fuel oil and marine fuels

LITASCO Geneva Crude oil All products Petrochemicals

LUKOIL Hamburg Naphtha Gasoil Gasoline

LITASCO Sweden Local market gasoil sales

LUKOIL Asia Pacific Marine fuels in Singapore Trading all products in Singapore and the Middle East Persian Gulf IndiaSE Asia

Main markets served

Transatlantic Caribbean US

Benelux coast Baltic-Benelux Benelux-Far East/US

Baltic - W Europe Black Sea Mediterranean NW Russia - Europe 85.8

Africa-Western Europe

IntraScandinavian (GothenburgCopenhagen)

10.3 Volume traded 2007 million mt 4.7 3.1 6.2 0.7

GLOBAL OIL DEMAND VS PRODUCTION BY REGION THROUGH 2030


Trading is the natural result of regional demand and supply imbalances
Central and S. America Africa Middle East Non-OECD Asia Non-OECD Europe & Eurasia OECD Asia OECD Europe
Mln bbls per day

112.5

112.9

90.46 101.5
7 4 8.2 24.3

90.46 103.0
9.7 14.9

84.3

84.6

7.8 4.3 9.5

12.3 17

5.6 2.9 6.2 15.5 4.9 8.6 15.5

7.2 10.4 30.8 31.1 25.4 7.7 12.5 5.5 0.7 26.7 15.2 17.4
Demand Production Demand Production

33.7 6.9 9.2

6.3 9 16 8.4

8.7 18.9 3.4 0.9

16 17.2 3.5 0.9 28

25.1
OECD North America Demand

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Production

2007

2020

2030

World overall oil consumption is forecast to grow at 1.2% per year over the next 25 years OECD world oil demand is forecast to grow at 0.3% per year over the same period while non-OECD world oil demand is forecast to grow at 2.2% per year The fastest growing market will be China (+3.4% per year over the next 5 years) World oil production capacity is forecast to grow at 1.4% per year over the next 25 years Large oil producers are forecast to meet the increase in demand over the same period: OPEC: +1.3% per year Caspian area: +3.6% per year Large oil consumers will see their local production lag behind: North America: +0.7% per year over the next 25 years
Source: History: Energy Information Administration (EIA),Office of Energy Markets and End Use, 2008. Projections: EIA, Generate World Oil Balance Model (2008), International oil outlook 2008, Litasco SA analysis

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WHAT DOES A TRADING COMPANY DO?

Buy and sell physical and paper barrels Match supplier and consumer requirements through: flexible pricing / financing customized delivery patterns price risk management

Trading companies take advantage of location or quality imbalances, shipping optimization and price structure. They rely on financial instruments to hedge or manage their price risk exposure By doing so, they ensure that customers demand requirements are met while sourcing from prevailing, most commercially attractive supply region
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MAIN CATEGORIES OF PARTICIPANTS IN THE INTERNATIONAL OIL MARKET


Examples
National Oil Companies (NOCs)

Participation in the market


NOCs mostly sell under term contracts (NOCs account for 70% of world production and for most of the OPEC production) Limited number of term contracts prevent re-selling to third parties

Saudi Aramco, INOC, PDVSA, KPC, etc

International Oil Majors and Their Trading Arms

ExxonMobil, Total, Chevron, ConocoPhillips, BP, Shell, LUKOIL , etc

Privately owned international majors are large vertically integrated companies that are present in all the activities along the supply chain (upstream exploration and production, refining, trading, downstream distribution and marketing through fuel distribution networks) Majors do not trade all of their production, because an important part of it is devoted to the needs of their own supply chain system Majors have a risk aversion corporate profile that discourages high levels of exposure to price risks and the resulting speculation Trade energy and other commodities while holding few or no production assets Actively trade in spot physical and derivatives markets Trade a wide spectrum of commodities while offering other financial products and services Have a controlled speculative exposure in oil derivatives markets, similar to other financial markets

Independent Oil Trading Companies

Vitol, Glencore, Sempra, Trafigura, etc Morgan Stanley, J. Aron, hedge funds, etc

Financial houses and non industry speculators

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NEW OIL MARKET PARTICIPANTS CHANGE MARKET NATURE


BEFORE NOW

Banks related to oil trade


Oil companies

Banks related to oil trade Oil traders

Global trading housess

Oil traders

Oil companies

Hedge funds

Other Financial institutions

The market today features a radically different set of players with varied agendas and targets as well as the capability of playing various commodity markets against each other and against stock market or money market

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Evolution of oil trading - Physical commodity markets, derivatives markets and price determination
Volumes Traded Annually
3% 5%

Crude oil and all major refined petroleum products trade on international markets Liquid and transparent futures markets allow participants to hedge their spot and term supply contracts prices in the forward months

92%

Paper market =10 to 15 times the size of the physical market

Appropriate financial instruments enable industry participants to manage their price risk exposure and offer additional profit opportunities The main price indexes known to the general public today are futures
WTI: traded on the NYMEX Brent: traded on the ICE in London

OPEC production Rest of the world production Total volume (physical+paper) traded

In the modern oil markets, far greater volumes are traded on the derivatives (paper) markets than on physical markets Because of the vast liquidity and transparency of the futures contracts, physical oil prices are driven by the paper market Financial players and speculators such as hedge funds trade on these markets in addition to traditional industry participants (producers, refiners, end users)

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Paper market growth what does it mean in US$ terms?


Value of WTI trades at NYMEX
22612.3

Lots traded monthly in 2007-2008


30,000,000

20,000

Lots, 1 Lot = 1,000 bbls

USD billion

15,000

Since the start of crude price rise in 1999 NYMEX paper market grew 30+fold from $700 billion to $23 trillion
9275.9

25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0

10,000

1120.0

731.2

973.2

5,000

1195.1

1411.7

2194.0

3506.0

4691.1

AY

AR M AY

JA

AR

JU

JA

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

SE

JU

NO

Annual trades and WTI price


250.00

0 .0 14 1 120.00
100.00
150.00 140.00 130.00

Average monthly WTI price 2007-2008


5 4 .1 4 5 9 .3 1 60 .6 2 6 3 .8 4 6 3 .4 0 6 7 .4 4 7 4 .1 0 7 2 .3 6 7 9 .9 8 8 5 .8 7 9 4 .7 4 9 1 .3 7 9 2 .9 8 9 5 .3 9 105 .4 5 112 .6 3 125 .3 8 1 33 .9 3 133 .3 0 11 6 .5 8 102 .9 5
JA N M AR M AY JU L P SE NO V JA N M AR M AY JU L P SE

200.00

Million lots

USD/bbl

150.00

100.00

128.5

71.1

50.00

31 9. 1
37.9

7 .3 30

93 5. 2
37.5

6 .1 26
45.7

07 1. 3

198.4

41

9 .4

60.00 40.00 20.00 0.00

USD/bbl

59 6. 5

2 .0 66

0 .2 72

80.00

120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00

0.00
99 19 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20

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Source: Nymex, Litasco * 2008 Extrapolated from Jan-Sept 2008 results

36.9

45.4

52.9

62.0

SE

Paper market influence over oil prices


Non commercial players (hedge funds, investors and entities with no direct involvement in oil) drive the market prices according to their global investment positions When building up long net positions oil prices rise Conversely when those long positions are unwound or when they initiate short positions first oil prices decline As traded paper barrels outnumber physical barrels (about: x10 times) oil producers have limited leverage to drive prices

Source: CFTC / LITASCO

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*Net position: Longs minus Shorts

THE OIL MARKET EVOLUTION

Before Price Participants Market Forces Trade Stable Limited Fundamentals Regional

Today Volatile Numerous Fundamentals and Sentiments Global Paper (Derivatives = 10/15x Physical Volumes)

Type of Business Physical Only

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Key elements affecting prices and price trends


2004 to mid 2006 2007 2008

Near term demand-supply tightness

Near term outlook


Warm weather. Fears of a
hard USA economic landing Non-OPEC growth Despite OPEC cuts spare capacity concerns remain More Bio fuels capacity

Near term outlook


Stronger than expected

Spread of US banking crisis


and global demand deterioration Non-OPEC growth lower than expected, OPEC keep sustained production. Low inventories New capacity added Bio fuels

economic and oil demand growth Less non-OPEC supply growth Less OPEC spare capacity Refining capacity near maximum utilisation

Medium/ L-T supply-demand tightness


OPEC Lack of increases in OPEC capacity

Medium term outlook


Bio-fuels/CO2 Slower growth/peaking
non-OPEC Lack of increases in OPEC capacity

Medium term outlook


Lower demand due to global Slower growth in both OPEC
and non-OPEC Lack of increases in OPEC capacity economy downturn

Projected L-T demand growth Slower growth/peaking non


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Concerns over supply disruptions

Concerns over supply


disruptions

Concerns over supply


disruptions

Geopolitical risks, hurricanes

Same risks

Same risks

Greater investors interest in commodities

Investors keep on buying


commodities

Too high prices affect

demand and prices fall

Source: IMF, EIA, PIRA, LITASCO

THANK YOU!
Visit our web sites: www.lukoil.com www.litasco.com

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