December 22 - LUKOIL’s Vice President Leonid Fedoun announced the results of the company’s operating and financial performance in January-September 1997 at a news conference in Moscow.

During the reporting period the company effected exploration activities and studies to enlarge reserves and improve resources potential. Within 9 month of 1997 LUKOIL subsidiaries spent 0.9 trillion rubles on geology. Successful exploratory drilling added 17.3 million tons of crude to reserves (under Russian category C1). As the result of acquisitions LUKOIL increased its reserves by 9.2 million tons of crude.

Crude production within LUKOIL areas of activity in the period ended September 30, 1997 amounted to 46,376 thousand tons, 6.3% higher than a year ago. During the period the group extracted 2,342 million cubic meters of gas (109.2%) including 2,014 million m3 of associated gas and 328 million cubic meters of free natural gas.

Oil and gas production increase was supported by a number of measures aimed at better utilization of operational wells, preventive maintenance and workover operations for wells and producing equipment, growth of drilling and active implication of modern technologies to improve recovery, said Leonid Fedoun.

Number of oil wells under operation as of September 30, 1997 amounted to 23,945 units or 628 more than a year ago and non-producing holes as a percentage of total went down from 18.3 to 15.9.

Additional production was achieved from increased drilling volumes due to better financing of drilling operations by the company. 1,417 thousand meters were drilled (137%) of which 1,236 thousand meters - in development (147%). 518 new oil wells were put into operations and 1.7 million tons were added to total production.

In 1997 LUKOIL continued to employ new methods of oil lifting. Such technologies gave over 6.5 million tons of extra crude. The most efficient with a view to output and costs were hydraulic fracturing and chemical stimulation.

Total refining runs of LUKOIL amounted to 16,937 thousand tons, 18% growth as compared to the same period last year. LUKOIL refineries processed 14,583 thousand tons of crude and the rest was put through leased capacities of other oil companies. Total output of all main products in 1997 was higher and the refining depth (conversion factor) at LUKOIL refineries went up to 78%.

In the third quarter of 1997 LUKOIL revenues and earnings were affected by negative impacts from a number of external factors, federal limitations for free export sales were the most significant. In terms of still low domestic prices and high taxes, non-payments by domestic consumers, overseas deliveries have proved to be reliable providers of real earnings for LUKOIL.

During the first 3 quarters of 1997 LUKOIL and its consolidated subsidiaries reported 58,124 billion rubles of total gross revenues - 40% more to the similar period last year. Net revenues free of value-added tax, excises and other similar deductions reached 46,203 billion rubles or US$ 8,043 million at average exchange rate.

Operating margin exceeded 3,833 billion rubles versus 3,731 billion rubles last year (nominal increase of 3%). Financial investment of the group (long-term and short-term income assets) gave 152 billion rubles of dividends, 92% more than 9 month 1996. Net non-operating items were negative (703 billion rubles). The biggest non-operating cost which is not included in cost of sales under Russian accounting rules was still property tax. Actual computation of the tax for consolidated subsidiaries was 950 billion rubles which increased by 80% over last year.

Earnings and profitability of the group in 1997 were reduced by a falling export quota and almost doubled sales for state needs. Other reasons were higher crude excise taxes in the first half of 1997 as compared to the same period of previous year, escalated road and property taxes as wells as tariffs on energy and transportation. Regulation of selling prices for associated gas by the government during the year resulted in operating losses from gas production and sales only in Western Siberia at 119 billion rubles, Fedoun said.

Higher taxes were observed in businesses dealing with refining and marketing. Thus value-added tax, excises and other indirect taxes for 2 refineries grew from 908 to 1,412 billion rubles, 23 and 29 percent of gross revenues respectively. Gasoline excise tax in 1997 was the main contributor to fiscal escalation in refining activity. It grew by 77% (theoretical tax rate from 20 to 25%). Indirect taxation at marketing subsidiaries as a percentage of added value (gross revenues less purchases of products) amounted to 49% versus 41% a year ago.

Income before taxation increased by 4.5% and totaled 3,282 billion rubles. Income tax grew by 64%. This is explained by the changes in taxation procedures in 1997 and the lessening of non-payment problems. Intensive income taxation led to decrease of net (after tax) reported income from 2,609 to 2,408 billion rubles ( - 8% ). However earnings of the group attributed to shareholders’ interest were 6% higher as the result of the acquisition by LUKOIL of minority interests in subsidiaries.

Financial results in dollar terms became weaker by 10-20% affected by above-mentioned reasons as well as after influence of exchange rates fluctuations and appreciation of US dollar to Russian ruble.

In the 4^th quarter of 1997 we expect export restrictions to be nil and taxation - relaxed. This results from guarantees accepted by the government for extra overseas deliveries for oil companies during next 5 years and the beginning of tax reforms.

Despite the traditional seasonal worsening of payment discipline in the summer period LUKOIL succeeded in collection of payments from goods sold within 9 month of the year at the ratio of 95%. Cash component of proceeds was over 40%. That is why net income of the group computed on a cash method for fiscal accounting exceeded 2.4 trillion rubles (101% of reported earnings for financial accounting), 26% higher than a year ago.

Nonetheless accrued revenues of 9 months 1997 of 3 trillion rubles at selling prices remained unpaid. That stipulated additions to current payables and as a subsequent result - higher short-term liabilities of LUKOIL itself.

Repayments of the fiscal liabilities were regular on the whole. LUKOIL and its subsidiaries paid 17.5 trillion rubles of taxes and non-budget state funds duties. Fiscal settlements were finalized with 91% of average payment ratio. In the last quarter the company intends to catch 100% for the ratio and to cover totally overdue budget debt.

Capital expenditures (investment in property, plant and equipment) of consolidated subsidiaries left 5 trillion rubles behind and were 35% more than during 9 months of 1996. About 90% of all investments were spent by oil and gas producing subsidiaries.

LUKOIL shares in 1997 appreciated 2 times and maintained high and competitive return to shareholders and investors. The number of LUKOIL voting and non-voting holders amounted to 117.9 thousand owners (79.7 thousand as of September 30, 1996). Structured trading volumes for LUKOIL stock grew from 11.5% in January to 24.4% in September of all investment in Russian corporate securities within National trading system. It proves the retaining of strong confidence of Russian and overseas investors to LUKOIL.

The company expects to preserve its growth rates in the 4^th Q 1997 as well as to improve the financial results mainly due to new possibilities of additional export sales of crude. It allows to finish 1997 successfully on the whole and makes the basis for further steady development, said LUKOIL’s Vice President Leonid Fedoun.

LUKOIL’s net income is expected to amount to 4 trillion rubles in 1997 and will be preserved at the level of the last year. Capital expenditures are estimated to reach 6.5 trillion rubles. The company and its subsidiaries will pay about 23-24 trillion rubles of taxes - 30-35% more than in 1996.

Statement of income

unaudited

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