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No. 4, 2012


Oil of Russia magazine talks to Denis Dolgov, LUKOIL Vice-President for Power Generation

Exactly a year ago, we carried a public statement by Denis Dolgov, head of the LUKOIL Power Generation business sector, about LUKOIL's expansion program into the electricity sphere. Today, Denis Dolgov tells readers about the initial results of program implementation, the achievements and setbacks of energy companies, and also about potential ways of resolving problems that arise.

Q: What significant events have occurred in the development of LUKOIL's energy business since then?

A: Indeed, there has been a whole series of major events in the activities of the Power Generation business sector over the last year. Let us begin with the fact that, since January 1, 2012, we have been operating within the framework of a target ownership and management structure of the business sector that was set by the LUKOIL Board back in 2008. All our restructuring plans have been fulfilled.

Among the most significant events of 2011, I would like to mention the visit, on October 5, 2011, to Krasnodar by the then President of the Russian Federation, Dmitry Medvedev, who ceremonially started up the gas turbine at CCP-410. It was a great honor for us that our facility was started up by the country top leader and this emphasizes its social and economic significance not only for the Southern Federal District but also for the Russian Federation as a whole.

I would also like to mention launch of the solar photovoltaic power plant in April 2012 at the LUKOIL Neftochim Burgas Refinery in Bulgaria. This is the first full-scale LUKOIL project in the alternative energy sphere that has been fully implemented at the Company's own expense.

Another significant event was completion, in September last year, of a transaction to acquire an operating 40 MW windfarm, also in Bulgaria. The windfarm is owned by LUKERG Renew, a joint venture of JSC LUKOIL-Ecoenergo and the Italian company ERG Renew.

Q: What are the business sector's overall performance indicators?

A: I would like to note two indicators. Electricity production is growing thanks to the commissioning of major new generating facilities. During the first half of 2012, we produced 27% more electricity than during the same period a year ago. Quite an eloquent figure. Even so, the electricity prices were set by the tariff regulator at such a level that, despite the rise in production, we are anticipating a fall in our income by 5% compared to the first half of 2011.

Q: Which lines of the business sector's activities (generation, transportation, sales) do you believe are in need of priority development?

A: Above all generation: it is planned to start up major new electric power plants requiring substantial investment. They will determine our strategy for the long term. At the legislative level, mechanisms have been created for such projects for recouping investments in the form of capacity delivery agreements (CDA).

It is within the scope of CDA-facility construction that the latest technologies and equipment are used. In particular, combined cycle technology deserves mention. The key performance indicators of combined cycle units are much better than those of generation facilities built in Soviet times. Startup of new generating capacities should improve the economic efficiency indicators of the business sector. Our main task in relation to generation is to implement current CDA projects with the design parameters and by the set deadlines.

Q: Please tell us how their implementation is going.

A: All our major CDA projects are currently at the stage of active implementation. In Astrakhan, for instance, alongside the Tsentralnaya boiler unit, preparatory installation works are in full swing and generating and process equipment has been brought on site for CCP-235. Thanks to web-cameras set up at the facility, we can observe virtually in real time how the work is going, everything that is happening on the site.

In the fall of this year, we launched construction of a 135 MW CCP in Budyonnovsk: we have already received all the permits and hope to start construction and installation work in September.

Q: Which electricity generation projects will be the Company's priority for the coming year?

A: In addition to those already mentioned, there is another priority project for the near and medium-term future, for which we received implementation approval not so long ago. This is construction in Perm of a power center on the grounds of the Permnefteorgsintez Refinery. The tender, permission and all other documents are currently being drawn up. We hope that, by the end of 2012, this project will enter the active implementation phase.

Q: Could you tell us a few words about the development prospects and new tasks for JSC LUKOIL-Energoengineering, JSC TD Energoservis, JSC LUKOIL-ENERGOSETI, JSC LUKOIL-TsUR?

A: LUKOIL-Energoengineering is a service company set up within the business sector for managing investments. It is responsible for the key tasks of utilizing investment resources and starting up facilities, including major ones that determine development of the entire business sector. So the company bears serious responsibility. I keep a personal eye on its operations. It has a strong team of top-notch professionals who, I believe, are capable of coping with the complex tasks set for the company.

TD Energoservis is our service and sales company that buys electricity on the wholesale market and supplies it to LUKOIL companies at retail market rates. Within the framework of the business sector, this is the most profitable unit. The main tasks of the Energoservis Trading House are connected with ensuring that all the capacity it contracts is supplied and with development of supplies for outside, solvent consumers.

LUKOIL-ENERGOSETI is also a service company for the network and electrical equipment of LUKOIL Group companies, i.e., it is focused on internal service. We do not plan any outside work for LUKOIL-ENERGOSETI, which will grow in step, as they say, with the companies it serves.

LUKOIL-TsUR (Mode Control Center) is another service outfit set up for implementing, on the wholesale market, a unified sales policy of electricity and capacity producers. Much depends on the Center's efficiency. It is not enough just to generate electric power; it has to be efficiently placed on the market, sold to consumers and generate income. LUKOIL-TsUR is thus responsible for the efficient operation of our generation facilities on the wholesale market.

Q: How, in your opinion, do energy companies influence LUKOIL's public image in Russia?

A: On the whole, the people of Russia hardly think high of the nation's energy sector. Unfortunately, there is a constant conflict regarding tariffs and the activities of management companies in this sector of the Russian economy, and this does nothing to improve the image. Using the example of the Southern Federal District (SFD), however, I would like to note that, since LUKOIL arrived on the electric power scene, confidence in energy suppliers has grown considerably. The image of our Company in the SFD is at a very high level. Why is this? In recent years, we invested heavily in power plant reliability enhancement. Despite the fierce frosts of last winter (the coldest since the 1950s), we provided an uninterrupted supply of electric power and none of our consumers froze, be they private houses or apartment blocks, social or industrial facilities.

In Astrakhan, the main heat supplier is our company LUKOIL-TTK. Not only did we not allow a single incident in fulfillment of our heat supply obligations, we also helped in emergencies at other resource-supply organizations that either lacked sufficient reserve fuel or where something happened.

LUKOIL's impeccable work in its new business did not go unnoticed in the SFD, as is also confirmed by collective communications from consumers whenever a rumor goes round that the Company intends to withdraw from the unprofitable business.

Q: What is your opinion of the government's energy policy?

A: The current public energy policy has not been well thought out or become entrenched. How is this manifested? The rules of the game are often changed, above all the legal and regulatory framework. Many of the issues and problems that have accumulated in the Russian energy sector are left unresolved for years on end.

Take, for example, default on payment. Consumers can get away with not paying for years for electricity supplied to them. No decisions are taken to modernize existing grids, both for heat and for electricity. I believe a heap of problems has piled up that need immediate action on the part of the government at the legislative level. Moreover, what is particularly alarming is the fact that the deadline for resolving these issues is totally unknown. So government policy in the industry could be a lot better.

Q: How does LUKOIL plan development of its electricity sector in light of the unstable legislative framework and tariff constraints?

A: The planning system in our business sector is the same as in the other business sectors in which LUKOIL operates. Even so, we do have our own specifics. These are connected, above all, with the electric power business in Russia being under government control through tariff setting. Long-term planning is based on the development program drawn up by us and then approved by the Company's Management Board and Board of Directors for a ten-year period. We have such a program in place at the moment, called "12-21." It sets out the investment volumes, project profitability and rate of returns. The constantly changing rules in the electricity sector do, of course, have an adverse effect on our operations and the plans have to be modified accordingly. Suffice it to note just the single fact that the wholesale and retail market rules have repeatedly changed in the country over the last two years.

The Russian electricity business possesses special features. This is manifested primarily in tariff regulation by the government. I must mention that the promises of a 100% liberalization of the country's market have never been fulfilled. Previously, during the reform of RAO UES, we were told that, from January 2012, the market in Russia would be completely liberalized but this did not happen. The regulated market share is still 25%. This has a negative effect on planning and reflects adversely on the entire sector's profitability.

Q: Is LUKOIL, as a major investor, satisfied with the model of the electricity and capacity market in Russia?

A: I think that, as a major investor, the Company is not satisfied with the current model but we are not sitting on our hands. We are aware of the existing problems, and we often reach out to the top executive and legislative authorities, focusing the attention of responsible persons on the problems, and we hope that there will be changes in the near future. At meetings in the Energy Ministry to which we are invited, we actively present our positions on the issues at hand.

We are members of partnerships and organizations set up in the Russian electricity sector and regularly collaborate with the NP Market Council, NP Electricity Producers' Council and other organizations. When regularly attending all conferences and meetings held, we raise the pressing problems we have already mentioned. Unfortunately, these organizations today lack the influence to get things going but we hope, within the scope of noncommercial partnerships, to gain a high lobbying weight so as to, first of all, draw the government's attention to our problems and then proceed to actively resolving them.

Q: What are LUKOIL energy companies doing to resolve HR problems? How can the best employees be attracted and retained?

A: Fairly recently, a conference was held at the Company's headquarters chaired by LUKOIL President Vagit Alekperov. The conference was dedicated to HR issues, to fulfillment of our programs for attracting and retaining personnel. To briefly sum up my own speech at the conference, I can note that the electricity sector today is one of the least attractive industries in the Russian economy, both from the salary point of view and that of how up-to-date the equipment and technologies used in the sector are. For young people, these are the two key factors in choosing a future profession, as is confirmed by a number of HR agency studies.

Such a position naturally complicates fulfillment of the large-scale tasks we are facing. Yet I do not believe the situation is hopeless. The approach needs to be changed and individual work with personnel intensified. A special standing working group for personnel has been set up within the Company to implement the best proposals.

Q: How do you see the renewable energy prospects?

A: In 2011, a separate company, JSC LUKOIL-Ecoenergo, was set up to handle alternative energy development projects. The company is focused on two lines of business: operating existing hydropower assets in Russia (we have four hydropower plants) and developing renewable energy projects in Eastern European countries.

The priority tasks in developing alternative energy have been fulfilled. In Bulgaria, we are managing the operation of an acquired windfarm, have built and started up a photovoltaic power plant. In Romania, a project is also being implemented for purchasing a windfarm: a suitable asset has been selected and is currently undergoing a due diligence. We hope that soon, in early fall, we will submit this project for consideration to JSC LUKOIL's management.

This will complete the initial stage in the development of alternative energy sources within the Company. Then we must halt all investments in this sphere for a while in order to see how efficient the facilities are and what returns alternative energy projects bring. It is important to assess the extent to which the indicators actually received comply with those set in the projects. The data obtained need to be weighed and then a decision taken on further development of this line of our business.

Even though special incentive mechanisms have been created in the countries of Eastern Europe, alternative energy companies are highly sensitive to market conditions. In the Russian Federation, despite the tremendous potential of wind, solar and small hydro power, no such projects are being developed. The reason is that the country has no legislative framework acting as an incentive to making investments in alternative energy and guaranteeing returns on investments.

Q: The LUKOIL energy companies in the South of Russia and these supplying power to oil fields throughout the country today operate virtually independently of one another. Will contacts be established between them?

A: Yes, from the viewpoint of operating procedures, they are independent. The Southern Federal District is, for us, primarily a center for production of thermal and electric power, while Western Siberia, Yamal, the Pre-Urals region and the Perm Territory are, of course, primarily major energy consumption centers. Even so, within the scope of the business sector, we have already organized active collaboration between companies. Above all, let me note the personnel rotation that took place in 2009-2010: employees from the Pre-Urals area were sent to our southern production centers. Middle level personnel continue to be transferred from one region to another quite frequently. We also hold a variety of competitions and events for exchange of experience. Contacts are also established through our corporate newspaper Energovector.

Q: What can you say to the work teams of the business sector?

A: I would like to wish them stability and confidence in the morrow. This applies even to the problems that need resolving at the level of the executive and legislative authorities, at the level of the country's leaders, because practical implementation of their decisions will be up to us. As they say, "it's the squeaky wheel that gets the grease." Nothing will change for a long time unless we are active and insistent. So everyone should discharge his/her obligations at the workplace as best as possible, do this well, on time and efficiently. Then the situation will change.

Moreover, our main tasks consist, of course, in making the Company's energy business in general more efficient. If everything with respect to efficiency and economics is OK, everything will be in order in our work teams and there will, indeed, be confidence in the morrow.

I would like to wish the work teams of our business sector achievement of the strategic goals and fulfillment of the tasks set.

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Oil of Russia, No. 4, 2012
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