No. 1, 2007

Ilya Klebanov,
Plenipotentiary Representative of the President of the Russian Federation in the North-Western Federal District


The North-Western Federal District is a key region for the successful implementation of Russia's energy-related strategy

Formed on May 13, 2000, the North-Western Federal District specializes in the sphere of sophisticated mechanical engineering - in accordance with the territorial division of labor. Traditionally, it supplies other parts of the country with the latest technological equipment, including products of electrical engineering, electronics, instrument making and marine shipbuilding, and also supplies all of that for export. The economic potential of the Federal District is determined by the presence of large mineral reserves, including hydrocarbons, which ensures further accelerated economic development of the District.

On land and sea

At present the North-Western Federal District holds the third place in Russia for the reserves and production of hydrocarbons. It has 18.4% of the country's reserves of oil and 7.6% of natural gas. In terms of conventional fuel, its recoverable reserves of crude oil, gas-condensate and natural gas total 7.3 billion tons.

Being realized in the District are uniquely innovative oil and gas projects, including those in which major foreign investors take part. The most successful in that respect, however, is one of the leaders of Russia's economy, JSC LUKOIL, which carries out the entire range of operations - from the exploration well to the gasoline filling stations.

During the 2000-2005 period the Company's subsidiaries raised the oil production in the North-Western Federal District from 8.8 to 13.6 million tons. In 2006, the Company planned to produce 15 million tons of oil, and by the year 2012 it plans to raise its output to 23 million tons.

In the past six years LUKOIL invested about 120 billion rubles into the economy of the District. This is comparable with the aggregate amount transferred by all the enterprises registered in the territory of the District to the consolidated budget of the Russian Federation. LUKOIL's projects in North-Western Russia will play an important part in implementing the Company's Strategic Development Program for 2007-2016. In that period the total amount of investments in the District is expected to exceed 400 billion rubles.

The first objective of LUKOIL's activity in North-Western Russia was the enclave called Kaliningrad Region. Right from the start the Company's activity was aimed at strengthening the ties of the Region with the rest of the country and also at integrating the enclave into the European economic environment. The Company has placed some large orders at Kaliningrad's enterprises. The Region receives supplies of petroleum products from the Company's refineries in the cities of Perm and Nizhny Novgorod. At the same time, the Kaliningrad Region itself is an important supplier of petroleum to Europe: based at Kaliningrad is an ancillary fleet to support operations in the Baltic and Barents Seas.

In 2004, owing to the Kravtsovskoye field on the Baltic shelf having been put into service, the Kaliningrad Region doubled its crude oil production. That project was significant not only for LUKOIL but also for the whole of Russia. It showed that our country is capable of protecting effectively its economic interests while strictly observing the requirements of ecological organizations and the entire world community. The unique technical solutions implemented by LUKOIL in the Baltic area would be applied later on for the production of hydrocarbons on the Caspian shelf.

The transport infrastructure is of crucial importance for the economic development of the Kaliningrad Region - considering its geographic location. LUKOIL exports crude oil and supplies petroleum products to the population of the Region via its own terminal located in the settlement of Izhevskoye.

The Company regards ensuring the energy security of the Kaliningrad Region as one of its main tasks. During the 2001-2006 period the volume of investment into production in the Region totaled 20,766 million rubles. LUKOIL's tax payments in the North-Western Federal District amount to billions of rubles. Thus, in the period between 2001 and 2006 the company transferred to the budgets of all levels in the Kaliningrad Region about 23 billion rubles. In the next few years the Company plans to substantially increase the deliveries of fuel to the regional market. And it has all the necessary infrastructure for that: its own terminal, a network of gasoline filling stations and a gas filling station in the settlement of Nivenskoye.

It should be emphasized that LUKOIL's active presence in the Baltic area, including Lithuania, Latvia, Estonia, Poland and Finland, makes it possible to minimize the threat of economic isolation for the Kaliningrad Region.

The Timan-Pechora province

The next step in LUKOIL's activity in North-Western Russia was to acquire the assets of the Timan-Pechora oil- and gas-bearing province which embraces the territories of the Komi Republic, the Arkhangelsk Region and the Nenets Autonomous Area.

Over the past five years the increment in recoverable reserves of commercial grades produced by the Company in the Timan-Pechora region totals more than 100 million tons. Five new fields were discovered. Oil production rose from 8 to 12 million tons. The main prospects for an increase in the output of hydrocarbons in the Timan-Pechora province are associated with the newly discovered fields. First and foremost, these are fields of the South-Khylchuyuskaya group, which are being developed jointly by LUKOIL and the U.S. company ConocoPhillips. Also, LUKOIL plans to develop some high-viscosity oil fields which account for a large share of the overall reserves in the province.

Meanwhile, the oil transshipment capacities existing in the Nenets Autonomous Area and the Arkhangelsk Region are not sufficient for a steady production growth. For that reason, LUKOIL plans to export the Timan-Pechora crude oil via its own terminal in the settlement of Varandey. To this end, the annual capacity of the terminal will be brought up to 12 million tons. By using the infrastructure of the Murmansk Region the Company will be able to deliver oil from Varandey not only to Europe but also to the eastern coast of the United States.

LUKOIL supplies lubricants produced by the Ukhta Refinery to the population of Russia's European North. After it became part of the Company's structure the refinery, built back in 1934, became completely transformed. The depth of refining rose from 40 to 70%. Today, the refinery is fully ready to go over to producing diesel fuel of the Euro-4 and Euro-5 standards. Furthermore, it is being considered as the main facility for the production of high-quality bitumen from the Yareg heavy oil.

Not resting on one's laurels

The problem of the motor fuel quality is particularly urgent for the densely populated areas of Russia's North-West, such as the city of St. Petersburg, the Leningrad Region, the Kaliningrad Region and the neighboring parts which are constituent entities of the Russian Federation. It was not so long ago that LUKOIL entered the fuel market, but the Company has already gained important positions there. At present, LUKOIL's marketing network on the territory of the North-Western Federal District comprises about 25 oil storage facilities and approximately 300 gasoline filling stations. In addition to that there are 32 gasoline filling stations and one oil storage facility in the Kaliningrad Region.

About 2.5 million tons of petroleum products were sold in the North-Western region last year, including over 750,000 tons - through the network of gasoline filling stations. By the year 2014 the Company plans to expand its retail network in the Federal District up to 400 gasoline filling stations and to sell through it 1.5 million tons of light oil products, thereby meeting over 30% of the region's requirements.

Russia's North-West presents a broad market for the entire range of products turned out by LUKOIL's enterprises. The industrial enterprises, sea ports and truck fleet of the region ensure an ever growing effective demand for diesel fuel, marine and Arctic-grade fuel, bitumen, fuel oil, and lubricants. The North-Western Federal District remains "a door to Europe", opening up vast opportunities for the export of oil and petroleum products.

Completion of the third stage of LUKOIL's distribution and transshipment complex on the island of Vysotsky in the Leningrad Region was an important event for the North-Western Federal District in 2006. The level of its technical equipment puts the complex on a par with the leading projects of this kind abroad. The investments made into the construction of the complex totaled $684 million. According to the plans about nine million tons of petroleum products will be exported via Vysotsky-II distribution and transshipment complex by the end of 2006.

Further development of the railroad infrastructure and connecting the project with the Kstovo-Primorsk main petroleum-products pipeline will make it possible to transship up to 13.5 million tons of petroleum products a year and to broaden their range considerably.

LUKOIL's productive work in the North-Western Federal District is inseparable from its social activity there which is based on cooperation agreements with constituent members of the District. Such agreements were concluded with the administration of St. Petersburg and the governments of the Leningrad, Vologda and Arkhangelsk regions, and the Komi Republic. Envisaged in the agreements are investments and efforts to develop the infrastructures of the regions, as well as provision of high-quality products to the population and socially-significant consumers. For instance, the Company traditionally undertakes to supply petroleum products to agricultural, road-building, lumbering, and municipal enterprises. In the North-Western Federal District today the name of LUKOIL is closely associated with such concepts as stability, reliability, high quality and a high degree of social responsibility.

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Oil of Russia, No. 1, 2007
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