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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Pjsc Lukoil | LSE:LKOH | London | Ordinary Share | RU0009024277 | ORD RUB0.025 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 56.2184 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMLKOD
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
Hot Features
Premium
2(nd) quarter Change, 1(st) half Change,
of % of %
------- --------
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.
2(nd) quarter 1(st) half
of 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
--------------------------------
1(st) 1(st)
half Total, Change Organic half
(thousands of tonnes) of 2016 % in structure change 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
-------------------------------
1(st) 1(st)
(millions of cubic half Total, Change Organic half
meters) of 2016 % in structure change 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.
osts
incurred Crude Unrecovered Remuneration
(1) oil received costs 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:
2(nd) quarter
2016 2015
--------------------------- ------------------------ ------------------------
(thousand (thousand (thousand (thousand
barrels) tonnes) barrels) 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 (millions (millions (millions
of rubles) of US of rubles) of US
dollars) 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.
1(st) half of
2016 2015
--------------------------- ------------------------ ------------------------
(thousand (thousand (thousand (thousand
barrels) tonnes) barrels) 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 (millions (millions (millions
of rubles) of US of rubles) of US
dollars) 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.
2(nd) quarter 1(st) half
of 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.
2(nd) quarter of
2016 2015
(thousand
(thousand of (thousand (thousand
of barrels) tonnes) of barrels) 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
----------------------------- ------------ --------- ------------ -----------
1(st) half of
2016 2015
(thousand (thousand (thousand (thousand
of barrels) of tonnes) of barrels) 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.
2(nd) quarter 1(st) half
of 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:
2(nd) quarter of
2016 2015
(thousands (thousands (thousands (thousands
of barrels) of tonnes) of barrels) 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
----------------------------- ------------- ------------ ------------- ------------
1(st) half of
2016 2015
(thousands (thousands (thousands (thousands
of barrels) of tonnes) of barrels) 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.
During the second quarter of 2016, our revenue from export of crude oil and refined products from Russia both to Group companies and third parties amounted to 172 billion RUB and 98 billion RUB, respectively (196 billion RUB for crude oil and 118 billion RUB for refined products in the second quarter of 2015). During the first half of 2016, our revenue from export of crude oil and refined products from Russia both to Group companies and third parties amounted to 307 billion RUB and 186 billion RUB, respectively (395 billion RUB for crude oil and 239 billion RUB for refined products in the first half of 2015).
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, 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.
2(nd) quarter Change, 1(st) half Change,
of % of %
-------- -------
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.
2(nd) quarter Change, 1(st) half Change,
of of
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.
2(nd) quarter Change, 1(st) half Change,
of % of %
------- -------
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.
2(nd) quarter 1(st) half
of 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
35% of the difference
between the actual price
Above $109.50 but less and $109.50 per tonne
than, or equal to, (or $0.35 per barrel per
$146.00 per tonne ($20.00 each $1.00 increase in
per barrel) the Urals price over $15.00)
$12.78 per tonne plus
45% of the difference
between the actual price
Above $146.00 but less and $146.00 per tonne
than, or equal to, (or $0.45 per barrel per
$182.50 per metric each $1.00 increase in
tonne ($25.00 per barrel) the Urals price over $20.00)
$29.20 per tonne plus
42% of the difference
between the actual price
and $182.50 per tonne
(or $0.42 per barrel per
Above $182.50 per metric each $1.00 increase in
tonne ($25.00 per barrel) 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 As % of
tax Export duty Total 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 From 1 January
2016 2015
to 31 December to 31 December
2016 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.
2(nd) quarter 1(st) half
of of
------- -------
Change, 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)
------------------------- -------- ------ ------- ------- ----- ------ -------
2(nd) quarter 1(st) half
of of
------- -------
Change, 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.
2(nd) quarter 1(st) Change,
of half of %
2016 2015 Change, 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.
Three and six months ended 30 June 2016 compared to three and six months ended 30 June 2015
The table below sets forth data from our consolidated statements of profit or loss and other comprehensive income for the periods indicated.
2(nd) quarter 1(st) half
of 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
2(nd) quarter 1(st) half
Sales breakdown of 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
----------------------------------- ---------- ---------- ---------- ----------
2(nd) quarter 1(st) half
Sales volumes of 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 2(nd) quarter 1(st) half
sales prices of 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:
2(nd) quarter 1(st) half
of 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
2(nd) quarter 1(st) half
of 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
2(nd) quarter 1(st) half
of 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
2(nd) quarter 1(st) half
of 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 xport tariffs 30,872 50,566 62,364 119,823
Refined products xport
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 xport tariffs 12 15 21 28
Refined products xport
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
1(st) 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%.
2(nd) quarter 1(st) half
of 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.
2(nd) quarter 1(st) half
of 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
IR LLFFETFIAFIR
(END) Dow Jones Newswires
August 30, 2016 02:00 ET (06:00 GMT)
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