LukOil(OAO) - Final Results

RNS Number:0487S
LukOil (OAO)
10 April 2008

OAO LUKOIL

CONSOLIDATED FINANCIAL STATEMENTS

(prepared in accordance with US GAAP)

As of December 31, 2007 and 2006
and for each of the years in the three-year period
ended December 31, 2007

Independent Auditors' Report

The Board of Directors of OAO LUKOIL:

We have audited the accompanying consolidated balance sheets of OAO LUKOIL and
its subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 2007.
These consolidated financial statements are the responsibility of the management
of OAO LUKOIL. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OAO LUKOIL and its
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.

ZAO KPMG
Moscow, Russian Federation
April 7, 2008

OAO LUKOIL
Consolidated Balance Sheets
As of December 31, 2007 and 2006
(Millions of US dollars, unless otherwise noted)

Note 2007 2006
Assets
Current assets
Cash and cash equivalents 3 841 752
Short-term investments 48 44
Accounts and notes receivable, net 5 7,467 5,158
Inventories 6 4,609 3,444
Prepaid taxes and other expenses 4,109 3,693
Other current assets 625 406
Assets held for sale 10 204 75
Total current assets 17,903 13,572
Investments 7 1,086 1,442
Property, plant and equipment 8 37,930 31,316
Deferred income tax assets 13 490 362
Goodwill and other intangible assets 9 934 791
Other non-current assets 1,289 754
Total assets 59,632 48,237

Liabilities and Stockholders' equity
Current liabilities
Accounts payable 4,554 2,759
Short-term borrowings and current portion of long-term debt 11 2,214 1,377
Taxes payable 2,042 1,663
Other current liabilities 918 1,132
Total current liabilities 9,728 6,931
Long-term debt 12, 16 4,829 4,807
Deferred income tax liabilities 13 2,079 2,116
Asset retirement obligations 8 811 608
Other long-term liabilities 395 352
Minority interest in subsidiary companies 577 523
Total liabilities 18,419 15,337

Stockholders' equity 15
Common stock 15 15
Treasury stock, at cost (1,591) (1,098)
Additional paid-in capital 4,499 3,943
Retained earnings 38,349 30,061
Accumulated other comprehensive loss (59) (21)
Total stockholders' equity 41,213 32,900
Total liabilities and stockholders' equity 59,632 48,237

President of OAO LUKOIL Chief accountant of OAO LUKOIL
Alekperov V.Y. Khoba L.N.

The accompanying notes are an integral part of these consolidated financial
statements.

OAO LUKOIL
Consolidated Statements of Income
For the years ended December 31, 2007, 2006 and 2005
(Millions of US dollars, unless otherwise noted)

Note 2007 2006 2005
Revenues
Sales (including excise and export tariffs) 23 81,891 67,684 55,774
Equity share in income of affiliates 7 347 425 441
Total revenues 82,238 68,109 56,215

Costs and other deductions
Operating expenses (6,172) (4,652) (3,443)
Cost of purchased crude oil, gas and products (27,982) (22,642) (19,590)
Transportation expenses (4,457) (3,600) (3,371)
Selling, general and administrative expenses (3,207) (2,885) (2,578)
Depreciation, depletion and amortization (2,172) (1,851) (1,315)
Taxes other than income taxes 13 (9,367) (8,075) (6,334)
Excise and export tariffs (15,033) (13,570) (9,931)
Exploration expenses (307) (209) (317)
(Loss) gain on disposals and impairments of assets (123) (148) 52
Income from operating activities 13,418 10,477 9,388
Interest expense (333) (302) (275)
Interest and dividend income 135 111 96
Currency translation gain (loss) 93 169 (134)
Other non-operating expense (240) (118) (44)
Minority interest (55) (80) (121)
Income before income taxes 13,018 10,257 8,910
Current income taxes (3,410) (2,906) (2,301)
Deferred income taxes (97) 133 (166)
Total income tax expense 13 (3,507) (2,773) (2,467)
Net income 9,511 7,484 6,443

Per share of common stock (US dollars):
Basic 15 11.48 9.06 7.91
Diluted 15 11.48 9.04 7.79

The accompanying notes are an integral part of these consolidated financial
statements.

OAO LUKOIL

Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the years ended December 31, 2007, 2006 and 2005
(Millions of US dollars, unless otherwise noted)

2007 2006 2005
Stockholders' Comprehen- Stockholders' Comprehen- Stockholders' Comprehen-
equity sive income equity sive income equity sive income
Common stock
Balance as of January 1 15 15 15
Balance as of December 31 15 15 15
Treasury stock
Balance as of January 1 (1,098) (527) (706)
Stock purchased (712) (782) -
Stock disposed 219 211 179
Balance as of December 31 (1,591) (1,098) (527)
Additional paid-in capital
Balance as of January 1 3,943 3,730 3,564
Premium on non-outstanding shares - 22 47
issued
Effect of stock compensation plan 103 - -
Proceeds from sale of treasury 453 191 119
stock in excess of carrying amount
Balance as of December 31 4,499 3,943 3,730
Retained earnings
Balance as of January 1 30,061 23,586 17,938
Net income 9,511 9,511 7,484 7,484 6,443 6,443
Dividends on common stock (1,223) (1,009) (795)
Balance as of December 31 38,349 30,061 23,586
Accumulated other comprehensive
loss, net of tax
Balance as of January 1 (21) - -
Pension benefits:
Prior service cost (16) (16) - - - -
Actuarial loss (22) (22) - - - -
Effect of initial adoption of SFAS - (21) -
No. 158
Balance as of December 31 (59) (21) -
Total comprehensive income for the 9,473 7,484 6,443
year
Total stockholders' equity as of 41,213 32,900 26,804
December 31

Share activity
2007 2006 2005
(thousands of (thousands of (thousands of
shares) shares) shares)
Common stock, issued
Balance as of January 1 850,563 850,563 850,563
Balance as of December 31 850,563 850,563 850,563
Treasury stock
Balance as of January 1 (23,632) (21,667) (33,884)
Purchase of treasury stock (8,756) (9,017) -
Disposal of treasury stock 9,067 7,052 12,217
Balance as of December 31 (23,321) (23,632) (21,667)

The accompanying notes are an integral part of these consolidated financial
statements.

OAO LUKOIL

Consolidated Statements of Cash Flows
For the years ended December 31, 2007, 2006 and 2005
(Millions of US dollars)

Note 2007 2006 2005
Cash flows from operating activities
Net income 9,511 7,484 6,443
Adjustments for non-cash items:
Depreciation, depletion and amortization 2,172 1,851 1,315
Equity share in income of affiliates, net of dividends 209 (106) (397)
received
Dry hole write-offs 143 91 170
Loss (gain) on disposals and impairments of assets 123 148 (52)
Deferred income taxes 97 (133) 166
Non-cash currency translation loss (gain) 193 86 (26)
Non-cash investing activities (36) (123) (133)
All other items - net 297 89 258
Changes in operating assets and liabilities:
Accounts and notes receivable (2,297) 388 (1,337)
Inventories (1,148) (816) (735)
Accounts payable 1,599 592 245
Taxes payable 386 (430) 705
Other current assets and liabilities (368) (1,355) (418)
Net cash provided by operating activities 10,881 7,766 6,204
Cash flows from investing activities
Acquisition of licenses (255) (7) (3)
Capital expenditures (9,071) (6,419) (3,979)
Proceeds from sale of property, plant and equipment 72 310 51
Purchases of investments (206) (312) (242)
Proceeds from sale of investments 175 216 234
Sale of interests in subsidiaries and affiliated 1,136 71 588
companies
Acquisitions of subsidiaries and minority shareholding (1,566) (1,374) (2,874)
interest (including advances related to acquisitions),
net of cash acquired
Net cash used in investing activities (9,715) (7,515) (6,225)
Cash flows from financing activities
Net movements of short-term borrowings (59) 700 (638)
Proceeds from issuance of long-term debt 2,307 1,092 2,474
Principal repayments of long-term debt (1,632) (1,077) (704)
Dividends paid on company common stock (1,230) (1,015) (800)
Dividends paid to minority (78) (119) (53)
Financing from related party and third party minority 177 - 101
shareholders
Purchase of treasury stock (712) (782) -
Proceeds from sale of treasury stock 129 - 46
Other - net - 15 6
Net cash (used in) provided by financing activities (1,098) (1,186) 432
Effect of exchange rate changes on cash and cash 21 37 (18)
equivalents
Net increase (decrease) in cash and cash equivalents 89 (898) 393
Cash and cash equivalents at beginning of year 752 1,650 1,257
Cash and cash equivalents at end of year 3 841 752 1,650

Supplemental disclosures of cash flow information
Interest paid 497 377 296
Income taxes paid 2,872 2,980 2,402

The accompanying notes are an integral part of these consolidated financial
statements.

OAO LUKOIL

Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 1. Organization and environment

The primary activities of OAO LUKOIL (the "Company") and its subsidiaries
(together, the "Group") are oil exploration, production, refining, marketing and
distribution. The Company is the ultimate parent entity of this vertically
integrated group of companies.

The Group was established in accordance with Presidential Decree 1403, issued on
November 17, 1992. Under this decree, on April 5, 1993, the Government of the
Russian Federation transferred to the Company 51% of the voting shares of
fifteen enterprises. Under Government Resolution 861 issued on September 1,
1995, a further nine enterprises were transferred to the Group during 1995.
Since 1995 the Group has carried out a share exchange program to increase its
shareholding in each of the twenty-four founding subsidiaries to 100%.

From formation, the Group has expanded substantially through consolidation of
its interests, acquisition of new companies and establishment of new businesses.

Business and economic environment

The Russian Federation has been experiencing political and economic change,
which has affected and will continue to affect the activities of enterprises
operating in this environment. Consequently, operations in the Russian
Federation involve risks, which do not typically exist in other markets.

The accompanying financial statements reflect management's assessment of the
impact of the business environment in the countries in which the Group operates
on the operations and the financial position of the Group. The future business
environments may differ from management's assessment.

Basis of preparation

These consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP").

Note 2. Summary of significant accounting policies

Principles of consolidation

These consolidated financial statements include the financial position and
results of the Company, controlled subsidiaries of which the Company directly or
indirectly owns more than 50% of the voting interest, unless minority interest
shareholders have substantive participating rights, and variable interest
entities where the Group is determined to be the primary beneficiary. Other
significant investments in companies of which the Company directly or indirectly
owns between 20% and 50% of the voting interest and over which it exercises
significant influence but not control, are accounted for using the equity method
of accounting. Investments in companies of which the Company directly or
indirectly owns more than 50% of the voting interest but where minority interest
shareholders have substantive participating rights are accounted for using the
equity method of accounting. Undivided interests in oil and gas joint ventures
are accounted for using the proportionate consolidation method. Investments in
other companies are recorded at cost. Equity investments and investments in
other companies are included in "Investments" in the consolidated balance sheet.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to such
estimates and assumptions include the carrying value of oil and gas properties
and other property, plant and equipment, goodwill impairment assessment, asset
retirement obligations, deferred income taxes, valuation of financial
instruments, and obligations related to employee benefits. Eventual actual
amounts could differ from those estimates.

Revenue

Revenues from the production and sale of crude oil and petroleum products are
recognized when title passes to customers. Revenues include excise on petroleum
products sales and duties on export sales of crude oil and petroleum products.

Revenues from non-cash sales are recognized at the fair market value of the
crude oil and petroleum products sold.

Foreign currency translation

The Company maintains its accounting records in Russian rubles. The Company's
functional currency is the US dollar and the Group's reporting currency is the
US dollar.

For operations in the Russian Federation, hyperinflationary economies and other
operations where the US dollar is the functional currency, monetary assets and
liabilities have been translated into US dollars at the rate prevailing at each
balance sheet date. Non-monetary assets and liabilities have been translated
into US dollars at historical rates. Revenues, expenses and cash flows have been
translated into US dollars at rates, which approximate actual rates at the date
of the transaction. Translation differences resulting from the use of these
rates are included in the consolidated statement of income.

For the majority of operations outside the Russian Federation, the US dollar is
the functional currency. For certain other operations outside the Russian
Federation, where the US dollar is not the functional currency and the economy
is not hyperinflationary, assets and liabilities are translated into US dollars
at year-end exchange rates and revenues and expenses are translated at average
exchange rates for the year. Resulting translation adjustments are reflected as
a separate component of comprehensive income.

Foreign currency transaction gains and losses are included in the consolidated
statement of income.

As of December 31, 2007, 2006 and 2005, exchange rates of 24.55, 26.33 and 28.78
Russian rubles to the US dollar, respectively, have been used for translation
purposes.

The Russian ruble and other currencies of republics of the former Soviet Union
are not readily convertible outside of their countries. Accordingly, the
translation of amounts recorded in these currencies into US dollars should not
be construed as a representation that such currency amounts have been, could be
or will in the future be converted into US dollars at the exchange rate shown or
at any other exchange rate.

Cash and cash equivalents

Cash and cash equivalents include all highly liquid investments with an original
maturity of three months or less.

Cash with restrictions on immediate use

Cash funds for which restrictions on immediate use exist are accounted for
within other non-current assets.

Accounts and notes receivable

Accounts and notes receivable are recorded at their transaction amounts less
provisions for doubtful debts. Provisions for doubtful debts are recorded to the
extent that there is a likelihood that any of the amounts due will not be
obtained. Non-current receivables are discounted to the present value of
expected cash flows in future periods using the original discount rate.

Inventories

Inventories, consisting primarily of stocks of crude oil, petroleum products and
materials and supplies, are stated at the lower of cost or market value. Cost is
determined using an "average cost" method.

Investments

Debt and equity securities are classified into one of three categories: trading,
available-for-sale, or held-to-maturity.

Trading securities are bought and held principally for the purpose of selling in
the near term. Held-to-maturity securities are those securities in which a Group
company has the ability and intent to hold until maturity. All securities not
included in trading or held-to-maturity are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at cost, adjusted for the amortization
or accretion of premiums or discounts. Unrealized holding gains and losses on
trading securities are included in the consolidated statement of income.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are reported as a separate component of
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific identification basis.
Dividends and interest income are recognized in the consolidated statement of
income when earned.

A permanent decline in the market value of any available-for-sale or
held-to-maturity security below cost is accounted for as a reduction in the
carrying amount to fair value. The impairment is charged to the consolidated
statement of income and a new cost base for the security is established.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity or available-for-sale security as an adjustment to yield using
the effective interest method and such amortization and accretion is recorded in
the consolidated statement of income.

Property, plant and equipment

Oil and gas properties are accounted for using the successful efforts method of
accounting whereby property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities are capitalized.
Unsuccessful exploratory wells are expensed when a well is determined to be
non-productive. Other exploratory expenditures, including geological and
geophysical costs are expensed as incurred.

The Group continues to capitalize costs of exploratory wells and
exploratory-type stratigraphic wells for more than one year after the completion
of drilling if the well has found a sufficient quantity of reserves to justify
its completion as a producing well and the company is making sufficient progress
assessing the reserves and the economic and operating viability of the project.
If these conditions are not met or if information that raises substantial doubt
about the economic or operational viability of the project is obtained, the well
would be assumed impaired, and its costs, net of any salvage value, would be
charged to expense.

Depreciation, depletion and amortization of capitalized costs of oil and gas
properties is calculated using the unit-of-production method based upon proved
reserves for the cost of property acquisitions and proved developed reserves for
exploration and development costs.

Production and related overhead costs are expensed as incurred.

Depreciation of assets not directly associated with oil production is calculated
on a straight-line basis over the economic lives of such assets, estimated to be
in the following ranges:

Buildings and constructions 5 - 40 Years
Machinery and equipment 5 - 20 Years

In addition to production assets, certain Group companies also maintain and
construct social assets for the use of local communities. Such assets are
capitalized only to the extent that they are expected to result in future
economic benefits to the Group. If capitalized, they are depreciated over their
estimated economic lives.

Asset retirement obligations

The Group records the fair value of liabilities related to its legal obligations
to abandon, dismantle or otherwise retire tangible long-lived assets in the
period in which the liability is incurred. A corresponding increase in the
carrying amount of the related long-lived asset is also recorded. Subsequently,
the liability is accreted for the passage of time and the related asset is
depreciated using the unit-of-production method.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed. It is assigned
to reporting units as of the acquisition date. Goodwill is not amortized, but is
tested for impairment at least on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. The impairment test
requires estimating the fair value of a reporting unit and comparing it with its
carrying amount, including goodwill assigned to the reporting unit. If the
estimated fair value of the reporting unit is less than its net carrying amount,
including goodwill, then the goodwill is written down to its implied fair value.

Intangible assets with indefinite useful lives are tested for impairment at
least annually. Intangible assets that have limited useful lives are amortized
on a straight-line basis over the shorter of their useful or legal lives.

Impairment of long-lived assets

Long-lived assets, such as oil and gas properties, other property, plant, and
equipment, and purchased intangibles subject to amortization, are assessed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset group to the estimated undiscounted future cash flows expected to be
generated by that group. If the carrying amount of an asset group exceeds its
estimated undiscounted future cash flows, an impairment charge is recognized by
writing down the carrying amount to the estimated fair value of the asset group,
generally determined as discounted future net cash flows. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.

Deferred income taxes

Deferred income tax assets and liabilities are recognized in respect of future
tax consequences attributable to temporary differences between the carrying
amounts of existing assets and liabilities for the purposes of the consolidated
financial statements and their respective tax bases and in respect of operating
loss and tax credit carryforwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse and the
assets be recovered and liabilities settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statement of income in the reporting period which includes the
enactment date.

The ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income in the reporting periods in which the
originating expenditure becomes deductible. In assessing the realizability of
deferred income tax assets, management considers whether it is more likely than
not that the deferred income tax assets will be realized. In making this
assessment, management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies.

Interest-bearing borrowings

Interest-bearing borrowings are initially recorded at the value of net proceeds
received. Any difference between the net proceeds and the redemption value is
amortized at a constant rate over the term of the borrowing. Amortization is
included in the consolidated statement of income each year and the carrying
amounts are adjusted as amortization accumulates.

If borrowings are repurchased or settled before maturity, any difference between
the amount paid and the carrying amount is recognized in the consolidated
statement of income in the period in which the repurchase or settlement occurs.

Pension benefits

The expected costs in respect of pension obligations of Group companies are
determined by an independent actuary. Obligations in respect of each employee
are accrued over the reporting periods during which the employee renders service
in the Group.

Treasury stock

Purchases by Group companies of the Company's outstanding stock are recorded at
cost and classified as treasury stock within Stockholders' equity. Shares shown
as Authorized and Issued include treasury stock. Shares shown as Outstanding do
not include treasury stock.

Earnings per share

Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted-average number of shares of common stock
outstanding during the reporting period. A calculation is carried out to
establish if there is potential dilution in earnings per share if convertible
securities were to be converted into shares of common stock or contracts to
issue shares of common stock were to be exercised. If there is such dilution,
diluted earnings per share is presented.

Contingencies

Certain conditions may exist as of the balance sheet date, which may result in
losses to the Group but the impact of which will only be resolved when one or
more future events occur or fail to occur.

If a Group company's assessment of a contingency indicates that it is probable
that a material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability is accrued and charged to the
consolidated statement of income. If the assessment indicates that a potentially
material loss is not probable, but is reasonably possible, or is probable, but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss, is disclosed in the notes to the
consolidated financial statements. Loss contingencies considered remote or
related to unasserted claims are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee is disclosed.

Environmental expenditures

Estimated losses from environmental remediation obligations are generally
recognized no later than completion of remedial feasibility studies. Group
companies accrue for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Costs of expected future expenditures for environmental remediation
obligations are not discounted to their present value.

Use of derivative instruments

The Group's derivative activity is limited to certain petroleum products
marketing and trading outside of its physical crude oil and petroleum products
businesses and hedging of commodity price risks. Currently this activity
involves the use of futures and swaps contracts together with purchase and sale
contracts that qualify as derivative instruments. The Group accounts for these
activities under the mark-to-market methodology in which the derivatives are
revalued each accounting period. Resulting realized and unrealized gains or
losses are presented in the consolidated statement of income on a net basis.
Unrealized gains and losses are carried as assets or liabilities on the
consolidated balance sheet.

Comparative amounts

Certain prior period amounts have been reclassified to conform with current
period presentation.

Recent accounting pronouncements

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." This Statement improves financial reporting
about derivative instruments and hedging activities by enhanced disclosures of
their effects on entity's financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements for fiscal years and
interim periods beginning after November 15, 2008, early application is
encouraged. The Group is required to adopt the provisions of SFAS No. 161 in the
first quarter 2009 and does not expect any material impact on its results of
operations, financial position or cash flows upon adoption.

In December 2007, the FASB issued SFAS No. 141 (Revised), "Business
combinations." This Statement will apply to all transactions in which an entity
obtains control of one or more businesses. SFAS No. 141 (Revised) requires an
entity to recognize the fair value of assets acquired and liabilities assumed in
a business combination; to recognize and measure the goodwill acquired in the
business combination or gain from a bargain purchase and modifies the disclosure
requirements. The Group is required to prospectively adopt the provisions of
SFAS No. 141 (Revised) for business combinations for which the acquisition date
is on or after January 1, 2009. Early adoption of SFAS No. 141 (Revised) is
prohibited.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51." This Statement
will apply to all entities that prepare consolidated financial statements
(except not-for-profit organizations) and will affect those which have an
outstanding noncontrolling interest (or minority interest) in their subsidiaries
or which have to deconsolidate a subsidiary. This Statement changes the
classification of a non-controlling interest; establishing a single method of
accounting for changes in the parent company's ownership interest that does not
result in deconsolidation and requires a parent company to recognize a gain or
loss when a subsidiary is deconsolidated. The Group is required to prospectively
adopt the provisions of SFAS No. 160 in the first quarter 2009, except for the
presentation and disclosure requirements which shall be applied retrospectively.
Early adoption of SFAS No. 160 is prohibited.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This Statement expands the
possibility of using fair value measurements and permits enterprises to choose
to measure certain financial assets and financial liabilities at fair value.
Enterprises shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings in each subsequent period. The Group
is required to adopt the provisions of SFAS No. 159 in the first quarter 2008
and does not expect any material impact on its financial statements upon
adoption.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)." This Statement requires an employer that
sponsors one or more single-employer defined benefit plans to: (a) Recognize the
funded status of a benefit plan in its statement of financial position; (b)
Recognize as a component of other comprehensive income, net of tax, the gains or
losses and prior service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost; (c) Measure defined
benefit plan assets and obligations as of the date of the employer's fiscal
year-end statement of financial position (with limited exceptions); (d) Disclose
in the notes to financial statements additional information about certain
effects on net periodic benefit cost for the next fiscal year that arise from
delayed recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. The provisions of this Statement were effective
December 31, 2006, except for the requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end, which is effective
December 31, 2008. The adoption of the provisions of SFAS No. 158 did not have a
material impact on the Group's results of operations, financial position or cash
flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. This Statement does not require any new fair value
measurements but is expected to increase the consistency of those measurements.
The Group is required to adopt the provisions of SFAS No. 157 in the first
quarter 2008 and does not expect any material impact on its financial statements
upon adoption.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" (FIN
48). This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." The Group adopted the
provisions of FIN 48 in the first quarter 2007. The adoption of the provisions
of Interpretation No. 48 did not have a material impact on the Group's results
of operations, financial position or cash flows.

In June 2006, the FASB ratified the consensus reached by the EITF on Issue No.
06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)." The consensus requires disclosure of either the gross or net
presentation, and any such taxes reported on a gross basis should be disclosed
in the interim and annual financial statements. The Group adopted the provisions
of EITF Issue No. 06-3 in 2006. The adoption of the Issue did not have a
material impact on the Group's financial statements.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
revises SFAS No. 123 and supersedes Accounting Principles Board (APB) Opinion
No. 25 regarding stock-based employee compensation plans. SFAS No.123(R)
requires liability classified share-based payment awards to employees to be
valued at fair value on the date of grant and as of each reporting date and
expensed over the vesting period. Equity classified share-based payment awards
to employees should be valued at fair value on the date of grant and expensed
over the vesting period. The adoption of the provisions of SFAS No. 123(R)
during 2006 did not have a material impact on the Group's results of operations,
financial position or cash flows.

Note 3. Cash and cash equivalents

As of December As of December
31, 2007 31, 2006
Cash held in Russian rubles 285 119
Cash held in other currencies 417 321
Cash of a banking subsidiary in other currencies 47 130
Cash held in related party banks in Russian rubles 80 97
Cash held in related party banks in other currencies 12 85
Total cash and cash equivalents 841 752

Note 4. Non-cash transactions

The consolidated statement of cash flows excludes the effect of non-cash
transactions, which are described in the following table:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Non-cash investing activity 36 123 133
Settlement of stock-based compensation plan 537 - -
liability
Non-cash acquisition of minority interest in a - 314 -
subsidiary
Settlement of bond liability with the Company's - 91 300
common stock
Total non-cash transactions 573 528 433

The following table shows the effect of non-cash transactions on investing
activity:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Net cash used in investing activity 9,715 7,515 6,225
Non-cash acquisition of minority interest in a - 314 -
subsidiary
Non-cash investing activity 36 123 133
Total investing activity 9,751 7,952 6,358

Note 5. Accounts and notes receivable, net

As of December As of December
31, 2007 31, 2006
Trade accounts and notes receivable (net of provisions of $69 million and $84 5,962 3,873
million as of December 31, 2007 and 2006, respectively)
Current VAT and excise recoverable 1,196 1,097
Other current accounts receivable (net of provisions of $48 million and $38 309 188
million as of December 31, 2007 and 2006, respectively)
Total accounts and notes receivable 7,467 5,158

Note 6. Inventories

As of December As of December
31, 2007 31, 2006
Crude oil and petroleum products 3,609 2,713
Materials for extraction and drilling 477 323
Materials and supplies for refining 24 28
Other goods, materials and supplies 499 380
Total inventories 4,609 3,444

Note 7. Investments

As of December As of December
31, 2007 31, 2006
Investments in equity method affiliates and joint ventures 836 1,157
Long-term loans given by non-banking subsidiaries 232 261
Other long-term investments 18 24
Total long-term investments 1,086 1,442

Investments in "equity method" affiliates and joint ventures

The summarized financial information below is in respect of equity method
affiliates and corporate joint ventures. The companies are primarily engaged in
crude oil exploration, production, marketing, refining and distribution
operations in the Russian Federation and crude oil production and marketing in
Kazakhstan.

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Total Group's Total Group's Total Group's
share share share
Revenues 2,930 1,382 2,367 1,251 2,972 1,383
Income before income taxes 1,398 650 1,315 690 1,214 605
Less income taxes (605) (303) (529) (265) (338) (164)
Net income 793 347 786 425 876 441

As of December 31, 2007 As of December 31, 2006
Total Group's Total Group's
share share
Current assets 1,320 618 1,668 829
Property, plant and equipment 2,082 1,082 2,140 1,168
Other non-current assets 181 88 53 25
Total assets 3,583 1,788 3,861 2,022

Short-term debt 204 89 161 70
Other current liabilities 682 329 511 264
Long-term debt 1,005 511 1,003 518
Other non-current liabilities 47 23 24 13
Net assets 1,645 836 2,162 1,157

Note 8. Property, plant and equipment and asset retirement obligations

At cost Net
As of December As of December As of December As of December
31, 2007 31, 2006 31, 2007 31, 2006
Exploration and Production:
Western Siberia 19,424 16,911 10,811 8,673
European Russia 18,776 15,378 13,303 10,277
International 4,360 5,238 3,716 4,594
Total 42,560 37,527 27,830 23,544
Refining, Marketing, Distribution and
Chemicals:
Western Siberia 22 19 16 16
European Russia 9,216 7,281 6,292 4,700
International 4,855 3,988 3,241 2,605
Total 14,093 11,288 9,549 7,321
Other:
Western Siberia 156 157 69 72
European Russia 399 307 338 267
International 181 140 144 112
Total 736 604 551 451
Total property, plant and equipment 57,389 49,419 37,930 31,316

As of December 31, 2007 and 2006, the asset retirement obligations amounted to
$821 million and $618 million, respectively, of which $10 million was included
in "Other current liabilities" in the consolidated balance sheets as of each
balance sheet date. During 2007 and 2006, asset retirement obligations changed
as follows:

2007 2006
Asset retirement obligations as of January 1 618 397
Accretion expense 60 39
New obligations 91 113
Changes in estimates of existing obligations 20 39
Spending on existing obligations (10) (8)
Property dispositions (7) (3)
Foreign currency translation and other adjustments 49 41
Asset retirement obligations as of December 31 821 618

Note 9. Goodwill and other intangible assets

The carrying value of goodwill and other intangible assets as of December 31,
2007 and 2006 was as follows:

As of December As of December
31, 2007 31, 2006
Amortized intangible assets
Software 410 327
Licenses and other assets 56 52
Goodwill 468 412
Total goodwill and other intangible assets 934 791

All goodwill amounts relate to the refining, marketing and distribution segment.
As a result of the acquisition of 376 petrol stations in Europe the Group
recognized goodwill in the amount of $64 million during the current year (refer
to Note 17. Business combinations).

Note 10. Dispositions of subsidiaries and assets

In December 2007, a Group company committed to a plan to sell 162 petrol
stations, located in Pennsylvania and the southern New Jersey of USA, previously
acquired from ConocoPhillips in 2004. In February 2008, this company entered
into an agreement to sell these petrol stations to a third party investor for
$138 million, less estimated amounts to extinguish environmental remediation
liabilities of approximately $19 million. The Group will continue to supply
petroleum products to these petrol stations under a 15 year supply contract with
the new owners. The transaction is expected to be finalized in May 2008. As of
December 31, 2007, the Group classified these petrol stations with the carrying
value of $134 million as assets held for sale in the consolidated balance sheet,
additionally the Group had a liability related to assets held for sale with the
carrying value of $14 million included in "Other current liabilities" of the
consolidated balance sheet.

In April 2007, a Group company completed the sale of 50% of its interest in
Caspian Investment Resources Ltd. ("Caspian", formerly Nelson Resources
Limited), which has exploration and production operations in western Kazakhstan,
to Mittal Investments S.A.R.L. for $980 million. In addition, Mittal Investments
S.A.R.L. paid a liability in the amount of $175 million, which represented 50%
of Caspian's outstanding debt to Group companies.

In December 2006, a Group company completed the sale of its 100% interest in
LUKOIL Shelf Limited and LUKOIL Overseas Orient Limited for $40 million. LUKOIL
Shelf Limited and LUKOIL Overseas Orient Limited render drilling services in the
Caspian Sea shelf and own the Astra jack-up rig.

In May 2006, the Group completed the sale of its remaining 21% ownership
interest in OAO Bank Petrocommerce for $33 million. The sale was made to a
related party, whose management and directors include members of the Group's
management and Board of Directors. The carrying value of this investment as of
the date of transaction was equal to the selling price.

In December 2005, the Company made a decision to sell ten tankers. A Group
company finalized the sale of eight tankers in May 2006 for a price that
approximated their carrying value of $190 million. The sale of the remaining two
tankers is expected to be finalized in April 2008 for a price that approximates
their carrying value of $70 million. As of December 31, 2007 and 2006, the Group
classified these tankers as assets held for sale in the consolidated balance
sheets.

Note 11. Short-term borrowings and current portion of long-term debt

As of December As of December
31, 2007 31, 2006
Short-term borrowings from third parties 938 949
Short-term borrowings from related parties - 52
Current portion of long-term debt 1,276 376
Total short-term borrowings and current portion of long-term debt 2,214 1,377

Short-term borrowings are unsecured and primarily payable in US dollars. The
weighted-average interest rate on short-term borrowings from third parties was
5.97% and 5.64% per annum as of December 31, 2007 and 2006, respectively.

Note 12. Long-term debt

As of December As of December
31, 2007 31, 2006
Long-term loans and borrowings from third parties (including loans from banks 2,439 3,277
in the amount of $2,391 million and $3,204 million as of December 31, 2007 and
2006, respectively)
Long-term loans and borrowings from related parties 1,745 1,043
3.5% Convertible US dollar bonds, maturing 2007 - 4
6.356% Non-convertible US dollar bonds, maturing 2017 500 -
6.656% Non-convertible US dollar bonds, maturing 2022 500 -
7.25% Russian ruble bonds, maturing 2009 244 228
7.10% Russian ruble bonds, maturing 2011 326 304
7.40% Russian ruble bonds, maturing 2013 244 228
Capital lease obligations 107 99
Total long-term debt 6,105 5,183
Current portion of long-term debt (1,276) (376)
Total non-current portion of long-term debt 4,829 4,807

Long-term loans and borrowings

Long-term loans and borrowings are primarily repayable in US dollars, maturing
from 2008 through 2037. Approximately 6% of this debt is secured by export sales
and property, plant and equipment. The weighted-average interest rate on
long-term loans and borrowings from third parties was 5.77% and 6.23% per annum
as of December 31, 2007 and 2006, respectively.

A Group company has an unsecured syndicated loan agreement, arranged by
Citibank, ABN AMRO Bank, BNP Paribas, Sumitomo Banking Corporation and Societe
Generale with an outstanding amount of $934 million as of December 31, 2007,
maturing in 2008. Borrowings under this agreement bear interest at LIBOR plus
0.7% per annum. This loan facility was used for financing the acquisition of
Caspian in 2005.

The Company has a loan agreement with European Bank for Reconstruction and
Development with an outstanding amount of $250 million as of December 31, 2007,
maturing in 2017. Borrowings under this agreement bear interest from LIBOR plus
0.45% to LIBOR plus 0.65% per annum.

The Company has a loan agreement with CALYON with an outstanding amount of $225
million as of December 31, 2007, maturing in 2013. Borrowings under this
agreement bear interest at LIBOR plus 0.4% per annum.

A Group company has a loan agreement with ABN AMRO with an outstanding amount of
$59 million as of December 31, 2007, maturing in 2016. Borrowings under this
agreement bear interest at EURIBOR plus 0.18% per annum.

A Group company has an unsecured syndicated loan agreement with CALYON and ABN
AMRO with an outstanding amount of $221 million as of December 31, 2007.
Borrowings under this agreement bear interest at LIBOR plus 0.85% per annum and
have maturity dates up to 2010.

A Group company has a secured loan agreement, arranged by Credit Suisse,
supported by an Overseas Private Investment Corporation guarantee, with an
outstanding amount of $203 million as of December 31, 2007. Borrowings under
this agreement bear interest at LIBOR plus 4.8% per annum and have maturity
dates up to 2015.

A Group company has a loan agreement with Vnesheconombank with an outstanding
amount of $123 million as of December 31, 2007. Borrowings under this agreement
bear interest at a fixed rate of 3% per annum and have maturity dates up to
2011.

As of December 31, 2007, the Group has a number of other fixed rate loan
agreements with a number of banks and organizations totaling $67 million,
maturing from 2008 to 2017. The weighted average interest rate under these loans
was 3.88% per annum.

As of December 31, 2007, the Group has a number of other floating rate loan
agreements with a number of banks and organizations totaling $357 million,
maturing from 2008 to 2018. The weighted average interest rate under these loans
was 5.99% per annum.

A Group company has a number of loan agreements with ConocoPhillips, the Group's
related party, with an outstanding amount of $1,745 million as of December 31,
2007. Borrowings under these agreements bear interest at fixed rate ranging from
6.8% to 8.2% per annum and have maturity dates up to 2037. These agreements are
a part of the Company's broad-based strategic alliance with ConocoPhillips and
this financing is used to develop oil production and distribution infrastructure
in the Timan-Pechora region of the Russian Federation.

Non-convertible US dollar bonds

In June 2007, a Group company issued non-convertible bonds totaling $1 billion.
$500 million were placed with a maturity of 10 years and a coupon yield of
6.356% per annum. Another $500 million were placed with a maturity of 15 years
and a coupon yield of 6.656% per annum. All bonds were placed at nominal value
and have a half year coupon period.

Convertible US dollar bonds

On November 29, 2002, a Group company issued 350,000 3.5% convertible bonds with
a face value of $1,000 each, maturing on November 29, 2007, and exchangeable for
12.246 (previously 12.112) global depository receipts ("GDRs") of the Company
per bond. The bonds are convertible into GDRs on, or after, January 9, 2003, up
to the maturity dates. The GDRs are exchangeable into four shares of common
stock of the Company. Bonds not converted by the maturity date must be redeemed
for cash. The redemption price at maturity will be 120.53% of the face value in
respect of these bonds. The carrying amount of the bonds is being accreted to
their redemption value with the accreted amount being charged to the
consolidated statement of income. Prior to the redemption date bondholders had
converted 349,250 bonds into 16.9 million shares, remaining bonds were redeemed
for cash on November 29, 2007.

Russian ruble bonds

In December 2006, the Company issued 14 million non-convertible bonds with a
face value of 1,000 Russian rubles each. Eight million bonds were placed with a
maturity of 5 years and a coupon yield of 7.10% per annum and six million bonds
were placed with a maturity of 7 years and a coupon yield of 7.40% per annum.
All bonds were placed at the face value and have a half year coupon period.

In November 2004, the Company issued 6 million non-convertible bonds with a face
value of 1,000 Russian rubles each, maturing on November 23, 2009. The bonds
have a half year coupon period and bear interest at 7.25% per annum.

Maturities of long-term debt

Annual maturities of total long-term debt during the next five years, including
the portion classified as current, are $1,276 million in 2008, $502 million in
2009, $384 million in 2010, $516 million in 2011, $144 million in 2012 and
$3,283 million thereafter.

Note 13. Taxes

The Group is taxable in a number of jurisdictions within and outside of the
Russian Federation and, as a result, is subject to a variety of taxes as
established under the statutory provisions of each jurisdiction.

The total cost of taxation to the Group is reported in the consolidated
statement of income as "Total income tax expense" for income taxes, as "Excise
and export tariffs" for excise taxes, export tariffs and petroleum products
sales taxes and as "Taxes other than income taxes" for other types of taxation.
In each category taxation is made up of taxes levied at various rates in
different jurisdictions.

Operations in the Russian Federation are subject to Federal income tax rate of
6.5% and a regional income tax rate that varies from 13.5% to 17.5% at the
discretion of the individual regional administration. The Group's foreign
operations are subject to taxes at the tax rates applicable to the jurisdictions
in which they operate.

As of January 1, 2007, and for the 12 months period ended December 31, 2007, the
Group does not have any unrecognized tax benefits and thus, no interest and
penalties related to unrecognized tax benefits were accrued. The Group's policy
is to record interest and penalties related to unrecognized tax benefits as
components of income tax expense. In addition, the Group does not expect that
the amount of unrecognized tax benefits will change significantly within the
next 12 months.

The Company and its Russian subsidiaries file standalone income tax returns in
Russia. With a few exceptions, income tax returns in Russia are open to
examination by the Russian tax authorities for the tax years beginning in 2005.

There are not currently, and have not been during the three years ended December
31, 2007, any provisions in the taxation legislation of the Russian Federation
to permit the Group to reduce taxable profits in a Group company by offsetting
tax losses in another Group company against such profits. Tax losses of a Group
company in the Russian Federation may, however, be used fully or partially to
offset taxable profits in the same company in any of the ten years following the
year of loss.

Domestic and foreign components of income before income taxes were:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Domestic 11,702 9,215 7,992
Foreign 1,316 1,042 918
Income before income taxes 13,018 10,257 8,910

Domestic and foreign components of income taxes were:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Current
Domestic 2,940 2,419 2,194
Foreign 470 487 107
Current income tax expense 3,410 2,906 2,301
Deferred
Domestic 135 (40) 61
Foreign (38) (93) 105
Deferred income tax expense (benefit) 97 (133) 166
Total income tax expense 3,507 2,773 2,467

The following table is a reconciliation of the amount of income tax expense that
would result from applying the Russian combined statutory income tax rate to
income before income taxes to total income taxes:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Income before income taxes 13,018 10,257 8,910
Notional income tax at Russian statutory rate 3,124 2,462 2,138
Increase (reduction) in income tax due to:
Non-deductible items, net 462 476 407
Foreign rate differences 84 47 (12)
Domestic regional rate differences (237) (232) (125)
Foreign currency effect 15 5 (5)
Change in valuation allowance 59 15 64
Total income tax expense 3,507 2,773 2,467

Taxes other than income taxes were:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Mineral extraction tax 8,482 7,281 5,590
Social taxes and contributions 442 356 324
Property tax 313 247 233
Other taxes and contributions 130 191 187
Taxes other than income taxes 9,367 8,075 6,334

Deferred income taxes are included in the consolidated balance sheets as
follows:

As of December As of December
31, 2007 31, 2006
Other current assets 73 68
Deferred income tax assets - non-current 490 362
Other current liabilities (147) (69)
Deferred income tax liabilities - non-current (2,079) (2,116)
Net deferred income tax liability (1,663) (1,755)

The following table sets out the tax effects of each type of temporary
differences which give rise to deferred income tax assets and liabilities:

As of December As of December
31, 2007 31, 2006
Accounts receivable 12 27
Long-term liabilities 267 209
Inventories 14 8
Property, plant and equipment 238 141
Accounts payable 39 24
Long-term investments 3 3
Operating loss carry forwards 464 312
Other 136 104
Total gross deferred income tax assets 1,173 828
Less valuation allowance (208) (149)
Deferred income tax assets 965 679
Property, plant and equipment (2,206) (2,064)
Accounts payable (5) (64)
Accounts receivable (1) -
Long-term liabilities (199) (162)
Inventories (65) (42)
Long-term investments (4) (16)
Other (148) (86)
Deferred income tax liabilities (2,628) (2,434)
Net deferred income tax liability (1,663) (1,755)

As a result of business combinations during 2007 and 2006, the Group recognized
a net deferred tax liability of $158 million and $279 million, respectively.

As of December 31, 2007, retained earnings of foreign subsidiaries included
$13,535 million for which deferred taxation has not been provided because
remittance of the earnings has been indefinitely postponed through reinvestment
and, as a result, such amounts are considered to be permanently invested. The
amount of deferred tax liability on this amount is not practicable to calculate.

In accordance with SFAS No. 52, "Foreign currency translation," and SFAS No.
109, "Accounting for Income Taxes," deferred tax assets and liabilities are not
recognized for exchange rate effects resulting from the translation of
transactions and balances from the Russian ruble to the US dollar using
historical exchange rates. Also, in accordance with SFAS No. 109, no deferred
tax assets or liabilities are recognized for the effects of the related
statutory indexation of property, plant and equipment.

Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred income tax assets are
deductible, management believes it is more likely than not that Group companies
will realize the benefits of the deductible temporary differences and loss carry
forwards, net of existing valuation allowances as of December 31, 2007 and 2006.

As of December 31, 2007, the Group had operating loss carry forwards of $1,791
million of which $15 million expire during 2008, $10 million expire during 2009,
$27 million expire during 2010, $4 million expire during 2011, $59 million
expire during 2012, $35 million expire during 2013, $13 million expire during
2014, $32 million expire during 2015, $368 million expire during 2016, $386
million expire during 2017, $42 million expire during 2018, $5 million expire
during 2025, $67 million expire during 2026, $77 million expire during 2027, $1
million expire during 2035, and $650 million have indefinite carry forward.

Note 14. Pension benefits

The Company sponsors a post employment and post retirement benefits program. The
primary component of the post employment and post retirement benefits program is
a defined benefit pension plan that covers the majority of the Group's
employees. This plan is administered by a non-state pension fund, LUKOIL-GARANT,
and provides pension benefits primarily based on years of service and final
remuneration levels. The Company also provides several long-term employee
benefits such as death-in-service benefit and lump-sum payments upon retirement
of a defined benefit nature and other defined benefits to certain old age and
disabled pensioners who have not vested any pensions under the pension plan.

The Company's pension plan primarily consists of a defined benefit plan enabling
employees to contribute a portion of their salary to the plan and at retirement
to receive a lump sum amount from the Company equal to all past contributions
made by the employee up to 7% of their annual salary. Employees also have the
right to receive upon retirement the benefits accumulated under the previous
pension plan that was replaced in December 2003. These benefits have been fixed
and included in the benefit obligation as of December 31, 2007 and 2006. The
amount was determined primarily based on a formula including past pensionable
service and relative salaries as of December 31, 2003.

On December 31, 2006, the Group adopted the provisions of SFAS No. 158, "
Employers' Accounting for Defined Benefit Pension and Other Post retirement
Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)." This
Statement requires employers to recognize the funded status of all
postretirement defined benefit plans in the statement of financial position with
corresponding adjustments to accumulated other comprehensive income. The
adjustment to accumulated other comprehensive income at adoption represents the
net unrecognized actuarial gains and unrecognized prior service costs, both of
which were previously netted against the plan's funded status in the statement
of financial position. These amounts will be subsequently recognized as net
periodic benefit cost. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic benefit cost in the
same periods will be recognized as a component of other comprehensive income.
These amounts will be subsequently recognized as a component of net periodic
benefit cost on the same basis as the amounts recognized in accumulated other
comprehensive income at adoption of SFAS No. 158.

The Company uses December 31 as the measurement date for its post employment and
post retirement benefits program. An independent actuary has assessed the
benefit obligations as of December 31, 2007 and 2006.

The following tables provide information about the benefit obligations, plan
assets used as of December 31, 2007 and 2006. The benefit obligations below
represent the projected benefit obligation of the pension plan.

2007 2006
Benefit obligations
Benefit obligations as of January 1 258 202
Effect of exchange rate changes 20 18
Service cost 15 14
Interest cost 16 19
Plan amendments 29 12
Actuarial loss 30 13
Benefits paid (40) (20)
Benefit obligations as of December 31 328 258

2007 2006
Plan assets
Fair value of plan assets as of January 1 94 73
Effect of exchange rate changes 7 6
Return on plan assets 10 9
Employer contributions 37 26
Benefits paid (40) (20)
Fair value of plan assets as of December 31 108 94
Funded status (220) (164)
Amounts recognized in the consolidated balance sheet as of December 31,
2007 and 2006
Accrued benefit liabilities included in "Other long-term liabilities" (220) (164)

Weighted average assumptions used to determine benefit obligations as of
December 31, 2007 and 2006:

2007 2006
Discount rate 6.34% 6.60%
Rate of compensation increase 8.12% 7.10%

Weighted average assumptions used to determine net periodic benefit costs for
the year ended December 31, 2007 and 2006:

2007 2006
Discount rate 6.60% 9.18%
Rate of compensation increase 7.10% 9.18%
Expected rate of return on plan assets 9.34% 9.85%

Included in accumulated other comprehensive loss as of December 31, 2007 and
2006, are the following before-tax amounts that have not yet been recognized in
net periodic benefit cost:

2007 2006
Unamortized prior service cost 82 61
Unrecognized actuarial gain (4) (34)
Total costs 78 27

Amounts recognized in other comprehensive loss during the year ended December
31, 2007 and 2006:

2007 2006
Additional loss (gain) arising during the period 29 (34)
Re-classified gain amortization 1 -
Additional prior service cost from plan amendment 29 61
Re-classified prior service cost amortization (8) -
Net amount recognized for the period 51 27

The real returns on bonds and equities are based on what is observed in the
international markets over extended periods of time. In the calculation of the
expected return on assets no use is made of the historical returns LUKOIL-GARANT
has achieved.

In addition to the plan assets, LUKOIL-GARANT holds assets in the form of an
insurance reserve. The purpose of this insurance reserve is to satisfy pension
obligations should the plan assets not be sufficient to meet pension
obligations. The Group's contributions to the pension plan are determined
without considering the assets in the insurance reserve.

The plans are funded on a discretionary basis through a solidarity account,
which is held in trust with LUKOIL-GARANT. LUKOIL-GARANT does not allocate
separately identifiable assets to the Group or its other third party clients.
All funds of plan assets and other individual pension accounts are managed as a
pool of investments.

The asset allocation of the investment portfolio maintained by LUKOIL-GARANT for
the Group and its clients was as follows:

As of December As of December
Type of assets 31, 2007 31, 2006
Promissory notes of Russian issuers 6% 24%
Russian corporate bonds 33% 23%
Bank deposits 8% 9%
Equity securities of Russian issuers 22% 21%
Russian state bonds 2% 2%
Shares of OAO LUKOIL 3% 8%
Shares in investment funds 17% 8%
Russian municipal bonds - 1%
Other assets 9% 4%
100% 100%

The investment strategy employed by LUKOIL-GARANT includes an overall goal to
attain a maximum investment return, while guaranteeing the principal amount
invested. The strategy is to invest with a medium-term perspective while
maintaining a level of liquidity through proper allocation of investment assets.
Investment policies include rules and limitations to avoid concentrations of
investments.

The investment portfolio is primarily comprised of two types of investments:
securities with fixed yield and equity securities. The securities with fixed
yield include mainly high yield corporate bonds and promissory notes of banks
with low and medium risk ratings. Maturities range from one to three years.

Components of net periodic benefit cost were as follows:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Service cost 15 14 9
Interest cost 16 19 17
Less expected return on plan assets (9) (8) (6)
Amortization of prior service cost 8 6 5
Actuarial gain (1) (2) (3)
Total net periodic benefit cost 29 29 22

Total employer contributions for 2008 are expected to be $32 million. An amount
of $11 million is included in other comprehensive income and expected to be
recognized in the net periodic benefit cost in 2008.

The following benefit payments, which reflect expected future services, as
appropriate, are expected to be paid:

2008 2009 2010 2011 2012 5-year 5-year period
period 2013-2017
2008-2012
Pension benefits 54 17 16 15 17 119 71
Other long-term employee benefits 36 19 20 20 21 116 111
Total expected benefits to be paid 90 36 36 35 38 235 182

Note 15. Stockholders' equity

Common stock

As of As of
December December
31, 2007 31, 2006
(thousands of (thousands of
shares) shares)
Authorized and issued common stock, par value of 0.025 Russian rubles each 850,563 850,563
Common stock held by subsidiaries, not considered as outstanding (1,248) (1,268)
Treasury stock (23,321) (23,632)
Outstanding common stock 825,994 825,663

Dividends and dividend limitations

Profits available for distribution to common stockholders in respect of any
reporting period are determined by reference to the statutory financial
statements of the Company prepared in accordance with the laws of the Russian
Federation and denominated in Russian rubles. Under Russian Law, dividends are
limited to the net profits of the reporting year as set out in the statutory
financial statements of the Company. These laws and other legislative acts
governing the rights of shareholders to receive dividends are subject to various
interpretations.

The Company's net profits were 64,917 million Russian rubles, 55,130 million
Russian rubles and 66,327 million Russian rubles respectively for 2007, 2006 and
2005, pursuant to the statutory financial statements, which at the US dollar
exchange rates as of December 31, 2007, 2006 and 2005, amounted to $2,645
million, $2,094 million and $2,304 million, respectively.

At the annual stockholders' meeting on June 28, 2007, dividends were declared
for 2006, in the amount of 38 Russian rubles per common share, which at the date
of the meeting was equivalent to $1.47. Dividends payable of $35 million and $7
million are included in "Other current liabilities" in consolidated balance
sheet as of December 31, 2007 and 2006, respectively.

At the annual stockholders' meeting on June 28, 2006, dividends were declared
for 2005, in the amount of 33 Russian rubles per common share, which at the date
of the decision was equivalent to $1.22.

At the annual stockholders' meeting on June 28, 2005, dividends were declared
for 2004, in the amount of 28 Russian rubles per common share, which at the date
of the decision was equivalent to $0.98.

Earnings per share

The calculation of diluted earnings per share for these years was as follows:

Year ended Year ended Year ended
December 31, 2007 December 31, 2006 December 31, 2005
Net income 9,511 7,484 6,443
Add back interest on 3.5% Convertible US dollar bonds, - 4 26
maturing 2007 (net of tax at effective rate)
Total diluted net income 9,511 7,488 6,469
Weighted average number of outstanding common shares 828,335 826,131 814,417
(thousands of shares)
Add back treasury shares held in respect of convertible 166 2,557 15,957
debt (thousands of shares)
Weighted average number of outstanding common shares, 828,501 828,688 830,374
after dilution (thousands of shares)

Note 16. Financial and derivative instruments

Commodity derivative instruments

The Group uses derivative instruments in its international petroleum products
marketing and trading operations. The types of derivative instruments used
include futures and swap contracts, used for hedging purposes, and purchase and
sale contracts that qualify as derivative instruments. The Group maintains a
system of controls over these activities that includes policies covering the
authorization, reporting and monitoring of derivative activity. The Group
recognized the following financial results from the use of derivative
instruments: expense of $575 million, income of $183 million and expense of $171
million during 2007, 2006 and 2005, respectively. The result is included in "
Cost of purchased crude oil, gas and products" in the consolidated statements of
income. The fair value of derivative contracts outstanding and recorded on the
consolidated balance sheets was a net liability of $50 million and a net asset
of $43 million as of December 31, 2007 and 2006, respectively.

Fair value

The fair values of cash and cash equivalents, current accounts and notes
receivable, and liquid securities are approximately equal to their value as
disclosed in the consolidated financial statements.

The fair value of long-term receivables included in other non-current assets
approximates the amounts disclosed in the consolidated financial statements as a
result of discounting using estimated market interest rates for similar
financing arrangements. The fair value of long-term debt differs from the amount
disclosed in the consolidated financial statements. The estimated fair value of
long-term debt as of December 31, 2007 and 2006, was $6,250 million and $5,299
million, respectively, as a result of discounting using estimated market
interest rates for similar financing arrangements. These amounts include all
future cash outflows associated with the long-term debt repayments, including
the current portion, and interest.

Note 17. Business combinations

In June 2007, the Group acquired a 100% interest in companies owning 376 petrol
stations in Europe for $442 million from ConocoPhillips, its related party. The
Group acquired these petrol stations to expand its presence in the European
market. The results of operations of these petrol stations are included in the
Group's consolidated statements of income from the date of acquisition. The
Group made an estimation of the fair value of the assets acquired and
liabilities assumed at the date of acquisition. As a result the Group recognized
goodwill, property, plant and equipment, other assets and liabilities amounting
to $64 million, $413 million, $203 million and $238 million, respectively.
Goodwill relates to the refinery, marketing and distribution segment and is
non-deductible for tax purposes.

In January 2007, a Group company acquired the remaining 34% of the share capital
of OOO Geoilbent for $300 million. The acquisition increased the Group's
ownership to 100%. Prior to this acquisition the Group accounted for its
investment using the equity method of accounting due to the fact that minority
shareholder held substantive participating rights. OOO Geoilbent was an
exploration and production company operating in the West Siberian region of the
Russian Federation.

During 2007, the Group acquired 7.65% of the share capital of OAO "
LUKOIL-Nizhegorodnefteorgsintez" from minority shareholders for $154 million,
increasing the Group's ownership to 96.91%. OAO "LUKOIL-Nizhegorodnefteorgsintez
" is a refinery plant located in European Russia.

In June 2006, a Group company acquired 100% of the share capital of
Khanty-Mansiysk Oil Corporation ("KMOC") from Marathon Oil Corporation for $847
million (including $249 million repayment of KMOC debt). At the purchase date
KMOC owned 95% of the share capital of OAO Khantymansiysk-neftegazgeologia and
100% of the share capital of OAO Paitykh Oil and OAO Nazymgeodobycha ("KMOC
subsidiaries"). KMOC's subsidiaries operate oil and gas fields in the West
Siberian region of the Russian Federation.

KMOC's results of operations are included in the Group's consolidated statement
of income from June 2006.

The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition.

Current assets 91
Property, plant and equipment 897
Other non-current assets 38
Total assets acquired 1,026

Current liabilities (23)
Non-current deferred tax liabilities (133)
Long-term debt (249)
Minority interest (14)
Other long-term liabilities (9)
Total liabilities assumed (428)

Net assets acquired 598

In September 2006, a Group company acquired the remaining 40% of share capital
of Chaparral Resources Inc., Caspian group company and the owner of 60% interest
in the Karakuduk field, for $89 million. The acquisition increased the Group's
ownership stake in Chaparral Resources Inc. and effective interest in the
Karakuduk field to 100%.

In May 2006, a Group company acquired the remaining 49% of the share capital of
OAO Primorieneftegaz for 4.165 million shares of common stock of the Company (at
a market value of approximately $314 million), thereby increasing the Group's
ownership stake in OAO Primorieneftegaz to 100%. OAO Primorieneftegaz is a
Russian oil and gas exploration company operating in European Russia.

The acquisition of the petrol stations, interests in Geoilbent, KMOC and
Chaparral Resources Inc. did not have a material impact on the Group's
consolidated operations for the period ended December 31, 2007 and 2006.
Therefore, no pro-forma income statement information has been provided.

Note 18. Consolidation of Variable Interest Entity

The Company formed a joint venture with ConocoPhillips within the framework of
their broad-based strategic alliance in June 2005. This joint venture was
created by selling ConocoPhillips an interest in the Company's wholly owned
subsidiary OOO Narianmarneftegaz ("NMNG") for $529 million. The purpose of the
joint venture is to develop oil reserves in the Timan-Pechora region of the
Russian Federation. The Group and ConocoPhillips have equal voting rights over
the joint venture's activity and effective ownership interests of 70% and 30%,
respectively. NMNG's total assets were approximately $5.1 billion and $3.0
billion as of December 31, 2007 and 2006, respectively.

The Group determined that NMNG is a variable interest entity as the Group's
voting rights are not proportionate to its ownership rights and all of NMNG's
activities are conducted on behalf of the Group and ConocoPhillips, its related
party. The Group is considered to be the primary beneficiary and has
consolidated NMNG.

As a result of the transaction, the Group recognized a gain of $152 million
which is included in the consolidated statement of income for the year ended
December 31, 2005.

The Group and ConocoPhillips provide financing to NMNG by means of long-term
loans in the proportion of their effective ownership interests. The loan
maturities are 30 years, with the option to be extended for a further 35 years
with the agreement of both parties. These loans bore an initial interest rate of
0.1% per annum. The loan proceeds were originally accounted for by NMNG
primarily as equity contributions as a result of recording the loan obligations
at their present value based on market interest rates. The difference between
the proceeds and the present value represented contributions to NMNG's equity.

In the second quarter of 2006, the Group and ConocoPhillips reached an agreement
to amend the contractual interest rates of the loans. Borrowings under these
agreements bear fixed interest at a range from 6.8% to 8.2% per annum. As a
result of the amendment, the financing received from the Group and
ConocoPhillips was transferred from equity to long-term debt.

As of December 31, 2007, the outstanding amount due to ConocoPhillips from NMNG
was $1,397 million, which consists of a number of loans with a weighted-average
interest rate of 7.84% per annum. This amount is presented within "Long-term
loans and borrowings from related parties."

Note 19. Financial guarantees

The Group has entered into various guarantee arrangements. These arrangements
arose in transactions related to enhancing the credit standing of an affiliated
companies and borrowings of the Group's suppliers.

The following table provides the undiscounted maximum amount of potential future
payments for each major group of guarantees:

As of December As of December
31, 2007 31, 2006
Guarantees of equity investees' debt 361 410
Guarantees of third parties' debt - 8
Total 361 418

Guarantees on debt

LUKARCO, an investee recorded under the equity method of accounting has a loan
facility on which $610 million was drawn as of December 31, 2007. Borrowings
under this loan bear interest at LIBOR plus 2.5% per annum, maturing by May 1,
2012. To enhance the credit standing of LUKARCO, the Company guarantees 54% of
the interest payment as well as the repayment of 54% of the loan at maturity. As
of December 31, 2007, the total amount of the Company's guarantee was $348
million, which includes $19 million related to accrued interest on the
outstanding amount. Payments are due if the Company is notified that LUKARCO is
not able to fulfill its obligations at maturity date. The Company's guarantee is
secured by its 54% interest in LUKARCO with the carrying value of $462 million
and $358 million as of December 31, 2007 and 2006, respectively. There are no
material amounts being carried as liabilities for the Group's obligations under
this guarantee.

Note 20. Commitments and contingencies

Capital expenditure, exploration and investment programs

The Group owns and operates refineries in Bulgaria (LUKOIL Neftochim Bourgas AD)
and Romania (Petrotel-LUKOIL). As a result of Bulgaria and Romania joined the
European Union in 2007, LUKOIL Neftochim Bourgas AD and Petrotel-LUKOIL are
required to upgrade their refining plants to comply with the requirements of
European Union legislation in relation to the quality of produced petroleum
products and environmental protection. These requirements are stricter than
existed Bulgarian and Romanian legislation. The Group estimates the amount of
future capital commitment required to upgrade LUKOIL Neftochim Bourgas AD and
Petrotel-LUKOIL to be approximately $878 million and $59 million, respectively.

Group companies have commitments under the terms of existing license agreements
in the Russian Federation of $1,561 million over the next 5 years and of $46
million thereafter. Management believes that a significant portion of these
commitments will be fulfilled by the services to be provided by Eurasia Drilling
Company and ZAO Globalstroy-Engineering as discussed below.

In connection with the sale of LUKOIL-Burenie in 2004 the Group signed a five
year contract for drilling services. Under the terms of the contract, drilling
services of $1,211 million and $753 million will be provided by LUKOIL-Burenie
(now Eurasia Drilling Company) during 2008 and 2009, respectively.

The Company has signed a four-year agreement for the provision of construction,
engineering and technical services with ZAO Globalstroy-Engineering. The volume
of these services is based on the Group's capital construction program, which is
re-evaluated on an annual basis. The Group estimates the amount of capital
commitment under this agreement for 2008 to be approximately $706 million.

A Group company has commitment to purchase equipment for modernization of the
petrochemical refinery in Ukraine over the next 2 years. As of December 31,
2007, this commitment was approximately $160 million.

Group companies have commitments for capital expenditure contributions in the
amount of $357 million related to various production sharing agreements over the
next 30 years.

Group companies have investment commitments relating to oil deposits in Iraq of
$495 million to be spent within 3 years from when exploitation becomes possible.
Due to significant changes in the political and economic situation in Iraq the
future of this contract is not clear, however, the Group is actively pursuing
its legal right to this contract in Iraq in alliance with ConocoPhillips.

Operating lease obligations

A Group company has commitments of $1,782 million primarily for the lease of
vessels and petroleum distribution outlets. Commitments for minimum rentals
under these leases as of December 31, 2007 are as follows:

As of December
31, 2007
2008 500
2009 426
2010 235
2011 155
2012 133
beyond 333

Insurance

The insurance industry in the Russian Federation and certain other areas where
the Group has operations is in the course of development. Management believes
that the Group has adequate property damage coverage for its main production
assets. In respect of third party liability for property and environmental
damage arising from accidents on Group property or relating to Group operations,
the Group has insurance coverage that is generally higher than insurance limits
set by the local legal requirements. Management believes that the Group has
adequate insurance coverage of the risks, which could have a material effect on
the Group's operations and financial position.

Environmental liabilities

Group companies and their predecessor entities have operated in the Russian
Federation and other countries for many years and, within certain parts of the
operations, environmental related problems have developed. Environmental
regulations are currently under consideration in the Russian Federation and
other areas where the Group has operations. Group companies routinely assess and
evaluate their obligations in response to new and changing legislation.

As liabilities in respect of the Group's environmental obligations are able to
be determined, they are charged against income. The likelihood and amount of
liabilities relating to environmental obligations under proposed or any future
legislation cannot be reasonably estimated at present and could become material.
Under existing legislation, however, management believes that there are no
significant unrecorded liabilities or contingencies which could have a
materially adverse effect on the operating results or financial position of the
Group.

Social assets

Certain Group companies contribute to Government sponsored programs, the
maintenance of local infrastructure and the welfare of their employees within
the Russian Federation and elsewhere. Such contributions include assistance with
the construction, development and maintenance of housing, hospitals and
transport services, recreation and other social needs. The funding of such
assistance is periodically determined by management and is appropriately
capitalized or expensed as incurred.

Taxation environment

The taxation systems in the Russian Federation and other emerging markets where
Group companies operate are relatively new and are characterized by numerous
taxes and frequently changing legislation, which is often unclear,
contradictory, and subject to interpretation. Often, differing interpretations
exist among different tax authorities within the same jurisdictions and among
taxing authorities in different jurisdictions. Taxes are subject to review and
investigation by a number of authorities, which are enabled by law to impose
severe fines, penalties and interest charges. In the Russian Federation a tax
year remains open for review by the tax authorities during the three subsequent
calendar years; however, under certain circumstances a tax year may remain open
longer. Recent events within the Russian Federation suggest that the tax
authorities are taking a more assertive position in their interpretation and
enforcement of tax legislation. Such factors may create taxation risks in the
Russian Federation and other emerging markets where Group companies operate that
are substantially more significant than those in other countries where taxation
regimes have been subject to development and clarification over long periods.

The tax authorities in each region may have a different interpretation of
similar taxation issues which may result in taxation issues successfully
defended by the Group in one region being unsuccessful in another region. There
is some direction provided from the central authority based in Moscow on
particular taxation issues.

The Group has implemented tax planning and management strategies based on
existing legislation at the time of implementation. The Group is subject to tax
authority audits on an ongoing basis, as is normal in the Russian environment
and other republics of the former Soviet Union, and, at times, the authorities
have attempted to impose additional significant taxes on the Group. Management
believes that it has adequately met and provided for tax liabilities based on
its interpretation of existing tax legislation. However, the relevant tax
authorities may have differing interpretations and the effects on the financial
statements, if the authorities were successful in enforcing their
interpretations, could be significant.

Litigation and claims

On November 27, 2001, Archangel Diamond Corporation ("ADC"), a Canadian diamond
development company, filed a lawsuit in the District Court of Denver, Colorado
against OAO "Arkhangelskgeoldobycha" ("AGD"), a Group company, and the Company
(together the "Defendants"). ADC alleged that the Defendants interfered with the
transfer of a diamond exploration license to Almazny Bereg, a joint venture
between ADC and AGD. ADC claimed total damages of approximately $4.8 billion,
including compensatory damages of $1.2 billion and punitive damages of $3.6
billion. On October 15, 2002, the District Court dismissed the lawsuit for lack
of personal jurisdiction. This ruling was upheld by the Colorado Court of
Appeals on March 25, 2004. On November 21, 2005, the Colorado Supreme Court
affirmed the lower courts' ruling that no specific jurisdiction exists over the
Defendants. By virtue of this finding, AGD (the holder of the diamond
exploration license) was dismissed from the lawsuit. The Supreme Court found,
however, that the trial court made a procedural error by not holding an
evidentiary hearing before making its ruling concerning general jurisdiction
regarding the Company, which is whether the Company had systematic and
continuous contacts in the State of Colorado at the time the lawsuit was filed.
In a modified opinion dated December 19, 2005, the Colorado Supreme Court
remanded the case to the Colorado Court of Appeals (instead of the District
Court) to consider whether the lawsuit should have been dismissed on alternative
grounds (i.e., forum non conveniens). On June 29, 2006, the Colorado Court of
Appeals declined to dismiss the case based on forum non conveniens. The Company
filed a petition for certiorari on August 28, 2006, asking the Colorado Supreme
Court to review this decision. This petition has been rejected. On March 5,
2007, the Colorado Supreme Court remanded the case to the District Court. On
June 11, 2007, the District Court ruled it would conduct an evidentiary hearing
on the issue of whether the Company is subject to general personal jurisdiction
in the State of Colorado. A status conference with the Court is scheduled for
June 13, 2008. Management does not believe that the ultimate resolution of this
matter will have a material adverse effect on the Group's financial condition.

On February 20, 2004, the Stockholm District Court overturned the decision of
the Arbitral Tribunal of the Arbitration Institute of the Stockholm Chamber of
Commerce ("Arbitration Tribunal"), made on June 25, 2001, dismissing ADC's
action against AGD based on lack of jurisdiction. ADC's lawsuit against AGD was
initially filed with the Arbitral Tribunal claiming alleged non-performance
under an agreement between the parties and its obligation to transfer the
diamond exploration license to Almazny Bereg. This lawsuit claimed compensation
of damages amounting to $492 million. In March 2004, AGD filed an appeal against
the Stockholm District Court decision with the Swedish Court of Appeals. On
November 15, 2005, the Swedish Court of Appeals denied AGD's appeal and affirmed
the Stockholm District Court decision. On December 13, 2005, AGD filed an appeal
against the Swedish Court of Appeals decision with the Swedish Supreme Court. On
April 13, 2006, the Swedish Supreme Court denied the application of AGD for
appeal against the Swedish Court of Appeal's decision dated November 15, 2005.
On May 6, 2006, a Notice of Arbitration was received on behalf of ADC. On
December 20, 2006, the first session of the Arbitration Tribunal with
participation of both parties took place in order to define procedural issues
related to the tribunal. As a result of the hearing the Arbitration Tribunal
issued a detailed procedural order setting out the rules and timetable for the
conduct of the arbitration. In May 2007, ADC filed a statement of claim that
requested the Tribunal to require AGD to transfer the diamond exploration
license to Almazny Bereg. On October 22, 2007, AGD submitted a statement of
defense. On December 21, 2007, the Arbitration Tribunal issued a procedural
order on suspension of the arbitration for four months. Management does not
believe that the ultimate resolution of this matter will have a material adverse
effect on the Group's financial condition.

The Group is involved in various other claims and legal proceedings arising in
the normal course of business. While these claims may seek substantial damages
against the Group and are subject to uncertainty inherent in any litigation,
management does not believe that the ultimate resolution of such matters will
have a material adverse impact on the Group's operating results or financial
condition.

Note 21. Related party transactions

In the rapidly developing business environment in the Russian Federation,
companies and individuals have frequently used nominees and other forms of
intermediary companies in transactions. The senior management of the Company
considers that the Group has appropriate procedures in place to identify and
properly disclose transactions with related parties in this environment and has
disclosed all of the relationships identified which it deemed to be significant.
Related party sales and purchases of oil and oil products were primarily to and
from affiliated companies and the Company's shareholder ConocoPhillips.
Insurance services are provided by the related parties, whose management and
directors include members of the Group's management. Purchases of construction
services were primarily from affiliated companies.

Below are related party transactions not disclosed elsewhere in the financial
statements. Refer also to Notes 3, 4, 7, 10, 11, 12, 14, 17, 18, 19 and 22 for
other transactions with related parties.

Sales of oil and oil products to related parties were $652 million, $754 million
and $605 million for the years ended December 31, 2007, 2006 and 2005,
respectively.

Other sales to related parties were $77 million, $19 million and $58 million for
the years ended December 31, 2007, 2006 and 2005, respectively.

Purchases of oil and oil products from related parties were $1,333 million,
$1,739 million and $2,248 million for the years ended December 31, 2007, 2006
and 2005, respectively.

Purchases of construction services from related parties were $30 million, $13
million and $378 million for the years ended December 31, 2007, 2006 and 2005,
respectively.

Other purchases from related parties were $26 million, $49 million and $54
million for the years ended December 31, 2007, 2006 and 2005, respectively.

Purchases of insurance services from related parties were $143 million, $133
million and $133 million during the years ended December 31, 2007, 2006 and
2005, respectively.

Amounts receivable from related parties, including loans and advances, were $563
million and $121 million as of December 31, 2007 and 2006, respectively. Amounts
payable to related parties were $139 million and $89 million as of December 31,
2007 and 2006, respectively.

Note 22. Compensation plan

During the period from 2003 to 2006, the Company had a compensation plan
available to certain members of management, which provided compensation based
upon share appreciation rights on the Company's common stock. The number of
shares or rights allocated to individuals under the plan was 8.8 million shares.
These rights vested in December 2006. In February 2007, the Group settled the
plan. As a result of this settlement employees purchased 8.8 million shares held
by the Group as treasury stock at the grant price for $129 million and resold
1.5 million shares back to the Group for $134 million. The accrued liability in
relation to this plan of $537 million was extinguished through the issuance of
7.3 million shares.

In December 2006, the Company introduced a new compensation plan to certain
members of management for the period from 2007 to 2009, which is based on
assigned phantom shares and provides compensation consisting of two parts (the "
Phantom share plan"). The first part represents annual bonuses that are based on
the number of assigned phantom shares and amount of dividend per share declared
by the shareholders. The payment of these bonuses is contingent on the Group
meeting certain financial performance indicators in each financial year. The
second is based upon the Company's common stock appreciation from 2007 to 2009
with rights vesting after the date of the compensation plan's termination. The
number of assigned phantom shares is approximately 15.5 million shares.

For the first part of the Phantom share plan the Group recognizes a liability
based on expected dividends and number of assigned phantom shares.

The second part of the Phantom share plan is classified as equity. The grant
date fair value of the plan is estimated at $289 million. The fair value was
estimated using the Black-Sholes-Merton option-pricing model, assuming a
risk-free interest rate of 6.00% per annum, an expected dividend yield 1.59% per
annum, expected term of three years and a volatility factor of 30.07%. The
expected volatility factor was estimated based on the historical volatility of
the Company's shares for the previous three year period up to January 2007.

Related to this plan the Group recorded $125 million of compensation expense
during the period ended December 31, 2007, of which $103 million is recognized
as an increase in additional paid-in capital and $22 million is included in "
Other long-term liabilities" of the consolidated balance sheet as of December
31, 2007. The total recognized tax benefit related to this accrual is $30
million.

As of December 31, 2007, there was $186 million of total unrecognized
compensation cost related to unvested benefits. This cost is expected to be
recognized periodically by the Group up to December 2009.

Note 23. Segment information

Presented below is information about the Group's operating and geographical
segments for the years ended December 31, 2007, 2006 and 2005, in accordance
with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."

The Group has four operating segments - exploration and production; refining,
marketing and distribution; chemicals and other business segments. These
segments have been determined based on the nature of their operations.
Management on a regular basis assesses the performance of these operating
segments. The exploration and production segment explores for, develops and
produces primarily crude oil. The refining, marketing and distribution segment
processes crude oil into refined products and purchases, sells and transports
crude oil and refined petroleum products. The chemicals segment refines and
sells chemical products. Activities of the other business operating segment
include the development of businesses beyond the Group's traditional operations.

Geographical segments have been determined based on the area of operations and
include three segments. They are Western Siberia, European Russia and
International.

Operating segments

Exploration Refining, Chemicals Other Elimination Consolidated
and marketing and
2007 production distribution

Sales
Third parties 1,527 77,960 2,348 56 - 81,891
Inter-segment 22,331 2,191 19 325 (24,866) -
Total sales 23,858 80,151 2,367 381 (24,866) 81,891

Operating expenses 3,813 52,032 1,904 206 (23,801) 34,154
and total cost of
purchases
Depreciation, 1,427 663 28 54 - 2,172
depletion and
amortization
Interest expense 611 621 4 218 (1,121) 333
Income tax expense 1,838 1,642 23 4 - 3,507
Net income 4,686 4,770 148 243 (336) 9,511
Total assets 43,395 41,091 1,004 8,412 (34,270) 59,632
Capital expenditures 7,262 1,822 171 117 - 9,372

Exploration Refining, Chemicals Other Elimination Consolidated
and marketing and
2006 production distribution

Sales
Third parties 1,659 64,116 1,869 40 - 67,684
Inter-segment 18,989 1,786 22 216 (21,013) -
Total sales 20,648 65,902 1,891 256 (21,013) 67,684

Operating expenses 3,232 43,098 1,561 138 (20,735) 27,294
and total cost of
purchases
Depreciation, 1,269 542 19 21 - 1,851
depletion and
amortization
Interest expense 451 341 2 187 (679) 302
Income tax expense 1,617 1,129 23 4 - 2,773
Net income 3,578 3,652 96 272 (114) 7,484
Total assets 34,152 32,168 794 7,340 (26,217) 48,237
Capital expenditures 5,120 1,475 172 119 - 6,886

Exploration Refining, Chemicals Other Elimination Consolidated
and marketing and
2005 production distribution

Sales
Third parties 1,047 53,064 1,628 35 - 55,774
Inter-segment 14,821 1,041 22 138 (16,022) -
Total sales 15,868 54,105 1,650 173 (16,022) 55,774

Operating expenses 2,602 34,800 1,314 126 (15,809) 23,033
and total cost of
purchases
Depreciation, 824 464 15 12 - 1,315
depletion and
amortization
Interest expense 73 335 2 50 (185) 275
Income tax expense 1,111 1,317 35 4 - 2,467
Net income 3,362 3,059 122 52 (152) 6,443
Total assets 25,480 23,682 586 5,130 (14,533) 40,345
Capital expenditures 2,918 1,129 77 53 - 4,177

Geographical segments

2007 2006 2005
Sales of crude oil within Russia 440 376 120
Export of crude oil and sales of crude oil by foreign 19,258 17,649 16,367
subsidiaries
Sales of petroleum products within Russia 9,583 8,151 6,725
Export of petroleum products and sales of petroleum products by 47,154 37,459 29,216
foreign subsidiaries
Sales of chemicals within Russia 733 569 469
Export of chemicals and sales of chemicals by foreign 1,569 1,260 1,134
subsidiaries
Other sales within Russia 1,644 1,167 821
Other export sales and other sales by foreign subsidiaries 1,510 1,053 922
Total sales 81,891 67,684 55,774

Western Siberia European Russia International Elimination Consolidated

2007
Sales
Third parties 118 13,226 68,547 - 81,891
Inter-segment 14,045 31,781 30 (45,856) -
Total sales 14,163 45,007 68,577 (45,856) 81,891

Operating expenses and 1,995 17,323 59,692 (44,856) 34,154
total cost of purchases
Depletion, depreciation 649 969 554 - 2,172
and amortization
Interest expense 22 244 239 (172) 333
Income taxes 988 2,087 432 - 3,507
Net income 3,587 5,341 884 (301) 9,511
Total assets 16,227 32,764 20,805 (10,164) 59,632
Capital expenditures 2,253 5,448 1,671 - 9,372

Western Siberia European Russia International Elimination Consolidated

2006
Sales
Third parties 318 10,693 56,673 - 67,684
Inter-segment 11,673 26,773 33 (38,479) -
Total sales 11,991 37,466 56,706 (38,479) 67,684

Operating expenses and 1,751 14,038 49,757 (38,252) 27,294
total cost of purchases
Depletion, depreciation 568 781 502 - 1,851
and amortization
Interest expense 17 104 234 (53) 302
Income taxes 849 1,530 394 - 2,773
Net income 2,769 4,117 978 (380) 7,484
Total assets 12,967 25,483 18,921 (9,134) 48,237
Capital expenditures 1,487 3,944 1,455 - 6,886

Western Siberia European Russia International Elimination Consolidated

2005
Sales
Third parties 250 8,656 46,868 - 55,774
Inter-segment 8,947 21,098 31 (30,076) -
Total sales 9,197 29,754 46,899 (30,076) 55,774

Operating expenses and 1,372 10,925 40,642 (29,906) 23,033
total cost of purchases
Depletion, depreciation 389 618 308 - 1,315
and amortization
Interest expense 17 160 133 (35) 275
Income taxes 539 1,716 212 - 2,467
Net income 2,116 4,015 925 (613) 6,443
Total assets 9,301 21,207 14,361 (4,524) 40,345
Capital expenditures 1,100 2,146 931 - 4,177

The Group's international sales to third parties include sales in Switzerland of
$35,868 million, $31,037 million and $25,652 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The Group's international sales
to third parties include sales in USA of $11,481 million, $9,112 million and
$8,937 million for the years ended December 31, 2007, 2006 and 2005,
respectively. These amounts are attributed to individual countries based on the
jurisdiction of subsidiaries making the sale.

Note 24. Subsequent events

Business combinations

In March 2008, a Group company acquired 100% of the share capital of the SNG
Holdings Ltd. Group for $578 million. The purchase agreement provides for an
additional two components of contingent purchase consideration.

- An amount of $100 million payable if an agreed level of proved and
probable hydrocarbon reserves are verified by an independent petroleum engineer
by June 2008;

- An amount of $100 million payable upon approval of the agreed
development program by the Uzbekistan authorities and an agreed minimum
production volume of crude oil is achieved by March 2009.

The SNG Holdings Ltd. Group holds a 100% interest in a production sharing
agreement in oil and gas condensate fields located in the South-Western Gissar
and Ustyurt regions of Uzbekistan. The purpose of the acquisition was to
increase the Group's presence in the Uzbekistan oil and gas sector.

In March 2008, a Group company entered into an agreement with a related party,
whose management and directors include members of the Group's management and
Board of Directors, to acquire a 64.3% interest in OAO "UGK TGK-8" for
approximately $2,117 million. The agreement purchase consideration consists of
23.55 million shares of common stock of the Company (at a market value of
approximately $1,620 million) and a cash payment of approximately $497 million.
As of March 31, 2008, a Group company had acquired 29.99% of OAO "UGK TGK-8".
The transaction is expected to be finalized in the second quarter of 2008. OAO "
UGK TGK-8" is a power generation company which owns power plants located in
Astrakhan, Volgograd and Rostov regions, Krasnodar and Stavropol Districts, and
the Republic of Dagestan of the Russian Federation. This acquisition is made in
accordance with the Company's plans to develop its electric power business.

OAO LUKOIL

Supplementary Information on Oil and Gas Exploration and Production Activities
(Unaudited)

(Millions of US dollars, except as indicated)

This section provides unaudited supplemental information on oil and gas
exploration and production activities in accordance with SFAS No. 69, "
Disclosures About Oil and Gas Producing Activities" in six separate tables:

I. Capitalized costs relating to oil and gas producing activities

II. Costs incurred in oil and gas property acquisition, exploration, and
development activities

III. Results of operations for oil and gas producing activities

IV. Reserve quantity information

V. Standardized measure of discounted future net cash flows

VI. Principal sources of changes in the standardized measure of discounted
future net cash flows

Amounts shown for equity companies represent the Group's share in its
exploration and production affiliates, which are accounted for using the equity
method of accounting.

I. Capitalized costs relating to oil and gas producing activities

International Russia Group's Total
As of December 31, 2007 Total share in
consolidated equity
companies companies
Unproved oil and gas properties 454 446 900 20 920
Proved oil and gas properties 3,906 36,664 40,570 677 41,247
Accumulated depreciation, depletion, and (644) (13,813) (14,457) (164) (14,621)

amortization
Net capitalized costs 3,716 23,297 27,013 533 27,546

Net capitalized costs related to asset retirement obligations in the amount of
$406 million, as of December 31, 2007, was included in net capitalized costs.

International Russia Group's Total
As of December 31, 2006 Total share in
consolidated equity
companies companies
Unproved oil and gas properties 351 511 862 13 875
Proved oil and gas properties 4,887 30,817 35,704 746 36,450
Accumulated depreciation, depletion, and (644) (13,125) (13,769) (166) (13,935)

amortization
Net capitalized costs 4,594 18,203 22,797 593 23,390

Net capitalized costs related to asset retirement obligations in the amount of
$310 million, as of December 31, 2006, was included in net capitalized costs.

International Russia Group's Total
As of December 31, 2005 Total share in
consolidated equity
companies companies
Unproved oil and gas properties 196 531 727 17 744
Proved oil and gas properties 4,331 26,951 31,282 786 32,068
Accumulated depreciation, depletion, and (377) (12,691) (13,068) (173) (13,241)

amortization
Net capitalized costs 4,150 14,791 18,941 630 19,571

Net capitalized costs related to asset retirement obligations in the amount of
$151 million, as of December 31, 2005, was included in net capitalized costs.

II. Costs incurred in oil and gas property acquisition, exploration, and
development activities

Year ended December 31, 2007 International Russia Group's Total
Total share in
consolidated equity
companies companies
Acquisition of properties - proved - 393 393 - 393
Acquisition of properties - unproved 27 486 513 - 513
Exploration costs 180 366 546 12 558
Development costs 670 5,887 6,557 103 6,660
Total costs incurred 877 7,132 8,009 115 8,124

Year ended December 31, 2006 International Russia Group's Total
Total share in
consolidated equity
companies companies

Acquisition of properties - proved 50 529 579 - 579
Acquisition of properties - unproved 5 769 774 - 774
Exploration costs 192 276 468 11 479
Development costs 594 3,901 4,495 157 4,652
Total costs incurred 841 5,475 6,316 168 6,484

Year ended December 31, 2005 International Russia Group's Total
Total share in
consolidated equity
companies companies
Acquisition of properties - proved 1,726 183 1,909 80 1,989
Acquisition of properties - unproved 690 370 1,060 100 1,160
Exploration costs 171 252 423 3 426
Development costs 260 2,235 2,495 124 2,619
Total costs incurred 2,847 3,040 5,887 307 6,194

III. Results of operations for oil and gas producing activities

The Group's results of operations for oil and gas producing activities are
presented below. In accordance with SFAS No. 69, sales and transfers to Group
companies are based on market prices. Income taxes are based on statutory rates.
The results of operations exclude corporate overhead and interest costs.

Year ended December 31, 2007 International Russia Group's Total
Total share in
consolidated equity
companies companies
Revenue
Sales 1,351 15,232 16,583 883 17,466
Transfers - 15,444 15,444 79 15,523
Total revenues 1,351 30,676 32,027 962 32,989
Production costs (excluding production taxes) (140) (2,638) (2,778) (76) (2,854)
Exploration expense (158) (149) (307) (13) (320)
Depreciation, depletion, and amortization (259) (1,130) (1,389) (33) (1,422)
Accretion expense - (21) (21) - (21)
Taxes other than income taxes (7) (17,087) (17,094) (134) (17,228)
Related income taxes (384) (2,378) (2,762) (336) (3,098)
Total results of operations for producing 403 7,273 7,676 370 8,046
activities

Year ended December 31, 2006 International Russia Group's Total
Total share in
consolidated equity
companies companies
Revenue
Sales 1,207 14,241 15,448 714 16,162
Transfers - 11,747 11,747 374 12,121
Total revenues 1,207 25,988 27,195 1,088 28,283
Production costs (excluding production taxes) (151) (2,161) (2,312) (97) (2,409)
Exploration expense (52) (157) (209) (5) (214)
Depreciation, depletion, and amortization (261) (973) (1,234) (50) (1,284)
Accretion expense - (29) (29) - (29)
Taxes other than income taxes (17) (15,644) (15,661) (258) (15,919)
Related income taxes (316) (1,659) (1,975) (322) (2,297)
Total results of operations for producing 410 5,365 5,775 356 6,131
activities

Year ended December 31, 2005 International Russia Group's Total
Total share in
consolidated equity
companies companies
Revenue
Sales 620 12,327 12,947 720 13,667
Transfers - 8,072 8,072 268 8,340
Total revenues 620 20,399 21,019 988 22,007
Production costs (excluding production taxes) (93) (1,672) (1,765) (137) (1,902)
Exploration expense (192) (125) (317) (1) (318)
Depreciation, depletion, and amortization (106) (718) (824) (60) (884)
Accretion expense - (30) (30) - (30)
Taxes other than income taxes (6) (11,160) (11,166) (285) (11,451)
Related income taxes (160) (1,548) (1,708) (181) (1,889)
Total results of operations for producing 63 5,146 5,209 324 5,533
activities

IV. Reserve quantity information

Proved reserves are the estimated quantities of oil and gas reserves which
geological and engineering data demonstrate will be recoverable with reasonable
certainty in future years from known reservoirs under existing economic and
operating conditions (i.e. prices and costs as of the date the estimate is
made). Proved reserves do not include additional quantities of oil and gas
reserves that may result from applying secondary or tertiary recovery techniques
not yet tested and determined to be economic.

Reserves are estimated using the definitions of reserves prescribed by the US
Society of Petroleum Engineers and the World Petroleum Congress requirements.
The proved reserves include volumes which are recoverable up to and after
license expiry dates.

Proved developed reserves are the quantities of proved reserves expected to be
recovered through existing wells with existing equipment and operating methods.

Due to the inherent uncertainties and the necessarily limited nature of
reservoir data, estimates of reserves are inherently imprecise, require the
application of judgment and are subject to change as additional information
becomes available.

Management has included within proved reserves significant quantities which the
Group expects to produce after the expiry dates of certain of its current
production licenses in the Russian Federation. These licenses expire between
2011 and 2026, with the most significant expiring between 2011 and 2014.
Management believes the licenses will be extended to produce subsequent to their
current expiry dates. The Group is in the process of extending all of its
production licenses in the Russian Federation. The Group has already extended a
portion of these licenses and expects to extend the remaining licenses for
indefinite periods. To date there have been no unsuccessful license renewal
applications.

Estimated net proved oil and gas reserves and changes thereto for the years
2007, 2006 and 2005, are shown in the tables set out below.

Consolidated subsidiaries Group's share Total
Millions of barrels in equity
companies
International Russia Total
Crude oil
January 1, 2005 264 15,252 15,516 456 15,972
Revisions of previous estimates (43) 29 (14) (6) (20)
Purchase of hydrocarbons in place* 174 266 440 (86) 354
Extensions and discoveries 28 472 500 6 506
Production (15) (619) (634) (30) (664)
Sales of reserves - (34) (34) - (34)
December 31, 2005 408 15,366 15,774 340 16,114
Revisions of previous estimates 15 (278) (263) 12 (251)
Purchase of hydrocarbons in place - 226 226 - 226
Extensions and discoveries 14 527 541 10 551
Production (27) (648) (675) (28) (703)
Sales of reserves - (10) (10) - (10)
December 31, 2006 410 15,183 15,593 334 15,927
Revisions of previous estimates 2 35 37 (23) 14
Purchase of hydrocarbons in place* - 178 178 (104) 74
Extensions and discoveries 20 463 483 35 518
Production (26) (668) (694) (19) (713)
Sales of reserves (105) - (105) - (105)
December 31, 2007 301 15,191 15,492 223 15,715

Proved developed reserves
December 31, 2005 255 10,070 10,325 258 10,583
December 31, 2006 217 9,714 9,931 245 10,176
December 31, 2007 164 9,715 9,879 180 10,059

* Purchase of hydrocarbons in place for equity companies includes transfers of
reserves to the consolidated group upon those equity companies becoming subject
to consolidation.

The minority interest share included in the above total proved reserves was 559
million barrels, 563 million barrels and 580 million barrels as of December 31,
2007, 2006 and 2005, respectively. The minority interest share included in the
above proved developed reserves was 228 million barrels, 191 million barrels and
172 million barrels as of December 31, 2007, 2006 and 2005, respectively.
Substantially all minority interests relate to the reserves in the Russian
Federation.

Consolidated subsidiaries Group's share Total
in equity
Billions of cubic feet companies
International Russia Total
Natural gas
January 1, 2005 3,029 21,356 24,385 213 24,598
Revisions of previous estimates 402 (520) (118) (4) (122)
Purchase of hydrocarbons in place* - 8 8 (6) 2
Extensions and discoveries 273 742 1,015 5 1,020
Production (35) (155) (190) (10) (200)
December 31, 2005 3,669 21,431 25,100 198 25,298
Revisions of previous estimates 667 795 1,462 5 1,467
Purchase of hydrocarbons in place - 3 3 - 3
Extensions and discoveries - 398 398 1 399
Production (60) (494) (554) (11) (565)
Sales of reserves - (5) (5) - (5)
December 31, 2006 4,276 22,128 26,404 193 26,597
Revisions of previous estimates 506 550 1,056 (2) 1,054
Purchase of hydrocarbons in place* - 19 19 (14) 5
Extensions and discoveries 207 630 837 7 844
Production (87) (482) (569) (10) (579)
December 31, 2007 4,902 22,845 27,747 174 27,921

Proved developed reserves:
December 31, 2005 1,102 4,834 5,936 153 6,089
December 31, 2006 1,108 6,234 7,342 138 7,480
December 31, 2007 1,369 6,553 7,922 133 8,055

* Purchase of hydrocarbons in place for equity companies includes transfers of
reserves to the consolidated group upon those equity companies becoming subject
to consolidation.

The minority interest share included in the above total proved reserves was 49
billion cubic feet, 43 billion cubic feet and 23 billion cubic feet as of
December 31, 2007, 2006 and 2005, respectively. The minority interest share
included in the above proved developed reserves was 30 billion cubic feet, 27
billion cubic feet and 15 billion cubic feet as of December 31, 2007, 2006 and
2005, respectively. Substantially all minority interests relate to the reserves
in the Russian Federation.

V. Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows, related to the
above oil and gas reserves, is calculated in accordance with the requirements of
SFAS No. 69. Estimated future cash inflows from production are computed by
applying year-end prices for oil and gas to year-end quantities of estimated net
proved reserves. Adjustment in this calculation for future price changes is
limited to those required by contractual arrangements in existence at the end of
each reporting year. Future development and production costs are those estimated
future expenditures necessary to develop and produce year-end estimated proved
reserves based on year-end cost indices, assuming continuation of year-end
economic conditions. Estimated future income taxes are calculated by applying
appropriate year-end statutory tax rates. These rates reflect allowable
deductions and tax credits and are applied to estimated future pre-tax net cash
flows, less the tax bases of related assets. Discounted future net cash flows
have been calculated using a ten percent discount factor. Discounting requires a
year-by-year estimate of when future expenditures will be incurred and when
reserves will be produced.

The information provided in the tables set out below does not represent
management's estimate of the Group's expected future cash flows or of the value
of the Group's proved oil and gas reserves. Estimates of proved reserve
quantities are imprecise and change over time as new information becomes
available. Moreover, probable and possible reserves, which may become proved in
the future, are excluded from the calculations. The arbitrary valuation
prescribed under SFAS No. 69 requires assumptions as to the timing and amount of
future development and production costs. The calculations should not be relied
upon as an indication of the Group's future cash flows or of the value of its
oil and gas reserves.

International Russia Total Group's Total
consolidated share
companies in equity
companies
As of December 31, 2007
Future cash inflows 34,051 660,363 694,414 17,892 712,306
Future production and development costs (13,015) (442,801) (455,816) (4,639) (460,455)
Future income tax expenses (2,414) (48,552) (50,966) (3,568) (54,534)
Future net cash flows 18,622 169,010 187,632 9,685 197,317
Discount for estimated timing of cash (9,576) (106,185) (115,761) (4,857) (120,618)
flows (10% p.a.)
Discounted future net cash flows 9,046 62,825 71,871 4,828 76,699
Minority share in discounted future net - 1,379 1,379 - 1,379
cash flows

Included as a part of the $460 billion of future production and development
costs are $7.8 billion of future dismantlement, abandonment and rehabilitation
costs.

International Russia Total Group's Total
consolidated share
companies in equity
companies
As of December 31, 2006
Future cash inflows 24,767 421,215 445,982 13,896 459,878
Future production and development costs (9,476) (284,993) (294,469) (5,699) (300,168)
Future income tax expenses (2,867) (30,307) (33,174) (2,271) (35,445)
Future net cash flows 12,424 105,915 118,339 5,926 124,265
Discount for estimated timing of cash (6,282) (66,489) (72,771) (3,038) (75,809)
flows (10% p.a.)
Discounted future net cash flows 6,142 39,426 45,568 2,888 48,456
Minority share in discounted future net - 1,158 1,158 - 1,158
cash flows

Included as a part of the $300 billion of future production and development
costs are $6.6 billion of future dismantlement, abandonment and rehabilitation
costs.

International Russia Total Group's Total
consolidated share
companies in equity
companies
As of December 31, 2005
Future cash inflows 21,028 375,279 396,307 12,290 408,597
Future production and development costs (9,471) (200,288) (209,759) (4,513) (214,272)
Future income tax expenses (3,563) (40,135) (43,698) (2,220) (45,918)
Future net cash flows 7,994 134,856 142,850 5,557 148,407
Discount for estimated timing of cash (4,140) (86,622) (90,762) (2,898) (93,660)
flows (10% p.a.)
Discounted future net cash flows 3,854 48,234 52,088 2,659 54,747
Minority share in discounted future net - 1,730 1,730 - 1,730
cash flows

Included as a part of the $214 billion of future production and development
costs are $5.6 billion of future dismantlement, abandonment and rehabilitation
costs.

VI. Principal sources of changes in the standardized measure of discounted
future net cash flows

Consolidated companies 2007 2006 2005
Discounted present value as at January 1 45,568 52,088 35,106
Net changes due to purchases and sales of minerals in place (46) 571 1,761
Sales and transfers of oil and gas produced, net of production (11,848) (9,014) (7,771)
costs
Net changes in prices and production costs estimates 75,908 17,496 24,556
Net changes in mineral extraction taxes (43,384) (30,592) (5,770)
Extensions and discoveries, less related costs 2,947 1,753 2,619
Development costs incurred during the period 2,308 2,383 2,495
Revisions of previous quantity estimates 980 223 (320)
Net change in income taxes (6,562) 4,002 (5,346)
Other changes 185 (300) 149
Accretion of discount 5,815 6,958 4,609
Discounted present value at December 31 71,871 45,568 52,088

Group's share in equity companies 2007 2006 2005
Discounted present value as at January 1 2,888 2,659 1,940
Net changes due to purchases and sales of minerals in place (367) - (473)
Sales and transfers of oil and gas produced, net of production (739) (728) (565)
costs
Net changes in prices and production costs estimates 3,622 906 2,389
Net changes in mineral extraction taxes (643) (632) (455)
Extensions and discoveries, less related costs 1,020 45 62
Development costs incurred during the period 74 47 124
Revisions of previous quantity estimates (716) 153 (82)
Net change in income taxes (629) (13) (432)
Other changes (38) 104 (88)
Accretion of discount 356 347 239
Discounted present value at December 31 4,828 2,888 2,659

Total 2007 2006 2005
Discounted present value as at January 1 48,456 54,747 37,046
Net changes due to purchases and sales of minerals in place (413) 571 1,288
Sales and transfers of oil and gas produced, net of production (12,587) (9,742) (8,336)
costs
Net changes in prices and production costs estimates 79,530 18,402 26,945
Net changes in mineral extraction taxes (44,027) (31,224) (6,225)
Extensions and discoveries, less related costs 3,967 1,798 2,681
Development costs incurred during the period 2,382 2,430 2,619
Revisions of previous quantity estimates 264 376 (402)
Net change in income taxes (7,191) 3,989 (5,778)
Other changes 147 (196) 61
Accretion of discount 6,171 7,305 4,848
Discounted present value at December 31 76,699 48,456 54,747

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