Lukoil

iso4217:RUB iso4217:RUB xbrli:shares 549300LCJ1UJXHYBWI24 2017-12-31 549300LCJ1UJXHYBWI24 2018-12-31 549300LCJ1UJXHYBWI24 2019-12-31 549300LCJ1UJXHYBWI24 2020-12-31 549300LCJ1UJXHYBWI24 2018-01-01 549300LCJ1UJXHYBWI24 2019-01-01 549300LCJ1UJXHYBWI24 2020-01-01 549300LCJ1UJXHYBWI24 2018-01-01 2018-12-31 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:IssuedCapitalMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:TreasurySharesMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:AdditionalPaidinCapitalMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:OtherReservesMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:RetainedEarningsMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember 549300LCJ1UJXHYBWI24 2019-12-31 ifrs-full:NoncontrollingInterestsMember 549300LCJ1UJXHYBWI24 2019-12-31 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:IssuedCapitalMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:TreasurySharesMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:AdditionalPaidinCapitalMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:OtherReservesMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:RetainedEarningsMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember 549300LCJ1UJXHYBWI24 2020-12-31 ifrs-full:NoncontrollingInterestsMember 549300LCJ1UJXHYBWI24 2020-12-31 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:IssuedCapitalMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:TreasurySharesMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:AdditionalPaidinCapitalMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:OtherReservesMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:RetainedEarningsMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember 549300LCJ1UJXHYBWI24 2018-12-31 ifrs-full:NoncontrollingInterestsMember 549300LCJ1UJXHYBWI24 2018-12-31 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:RetainedEarningsMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:NoncontrollingInterestsMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:OtherReservesMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:TreasurySharesMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:IssuedCapitalMember 549300LCJ1UJXHYBWI24 2020-01-01 2020-12-31 ifrs-full:AdditionalPaidinCapitalMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:RetainedEarningsMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:EquityAttributableToOwnersOfParentMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:NoncontrollingInterestsMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:OtherReservesMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:TreasurySharesMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:IssuedCapitalMember 549300LCJ1UJXHYBWI24 2019-01-01 2019-12-31 ifrs-full:AdditionalPaidinCapitalMember PJSC LUKOIL ANNUAL FINANCIAL REPORT 2020 Moscow March 2020 TABLE OF CONTENTS Responsibility statement....................................................................................................................................... 3 Consolidated financial statements with independent auditors’ report.................................................................. 4 Management’s discussion and analysis of financial condition and results of operations .................................. 56 Information about major business risks and uncertainties.................................................................................. 99 RESPONSIBILITY STATEMENT I hereby confirm that to the best of my knowledge: (a) the financial statements, prepared in accordance with the International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, (b) the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Alekperov V. Y. President of PJSC LUKOIL March 10, 2021 CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS’ REPORT PJSC LUKOIL Consolidated Statement of Financial Position (Millions of Russian rubles) Note 31 December 2020 31 December 2019 Assets Current assets Cash and cash equivalents Accounts receivable, net Other current financial assets Inventories 6 7 343,832 370,271 8,350 516,032 437,052 49,706 8 9 426,536 78,822 413,910 95,075 Prepaid taxes 10 11 Other current assets 48,649 42,412 Total current assets Property, plant and equipment Investments in associates and joint ventures Other non-current financial assets Deferred income tax assets Goodwill and other intangible assets Other non-current assets Total non-current assets Total assets 1,276,460 4,264,474 281,637 68,692 1,554,187 4,026,007 220,004 38,231 13 12 14 29 16 16,298 28,673 50,159 43,108 33,859 36,840 4,715,119 5,991,579 4,392,863 5,947,050 Liabilities and equity Current liabilities Accounts payable 17 18 597,932 82,636 142,458 27,136 35,497 - 607,734 130,300 142,471 37,232 Short-term borrowings and current portion of long-term debt Taxes payable 20 Provisions 22, 23 21 Other current liabilities Obligation to repurchase common shares Total current liabilities Long-term debt 168,952 120,988 1,207,677 422,932 264,159 77,045 24 885,659 577,075 268,956 126,665 2,458 19 29 Deferred income tax liabilities Provisions 22, 23 Other non-current liabilities Total non-current liabilities Total liabilities 1,788 975,154 1,860,813 765,924 1,973,601 24 Equity Share capital 938 968 Treasury shares (including obligation to repurchase common shares) (71,920) 39,298 (308,160) 39,277 Additional paid-in capital Other reserves 296,641 3,858,057 4,123,014 7,752 30,141 Retained earnings 4,203,138 3,965,364 8,085 Total equity attributable to PJSC LUKOIL shareholders Non-controlling interests Total equity 4,130,766 5,991,579 3,973,449 5,947,050 Total liabilities and equity President of PJSC LUKOIL Alekperov V.Y. Chief accountant of PJSC LUKOIL Verkhov V.A. The accompanying notes are an integral part of these consolidated financial statements. 9 PJSC LUKOIL Consolidated Statement of Profit or Loss and Other Comprehensive Income (Millions of Russian rubles, unless otherwise noted) Note 2020 2019 Revenues Sales (including excise and export tariffs) Costs and other deductions Operating expenses 33 5,639,401 7,841,246 (439,973) (3,000,916) (292,899) (199,027) (405,440) (569,078) (444,300) (6,114) (457,710) (4,308,073) (278,798) (197,172) (415,094) (928,190) (425,763) (9,348) Cost of purchased crude oil, gas and products Transportation expenses Selling, general and administrative expenses Depreciation, depletion and amortisation Taxes other than income taxes Excise and export tariffs Exploration expenses Profit from operating activities Finance income 281,654 13,051 821,098 25,134 26 26 12 Finance costs (44,122) 11,474 (44,356) 18,246 Equity share in income of associates and joint ventures Foreign exchange (loss) gain Other expenses (26,110) (137,160) 98,787 923 27 (27,691) 793,354 (144,615) (6,518) Profit before income taxes Current income taxes (61,362) (20,792) (82,154) 16,633 Deferred income taxes 29 Total income tax expense Profit for the year (151,133) 642,221 Profit for the year attributable to: PJSC LUKOIL shareholders Non-controlling interests 15,175 1,458 640,178 2,043 Other comprehensive income (loss), net of income taxes Items that may be reclassified to profit or loss: Foreign currency translation differences for foreign operations Items that will never be reclassified to profit or loss: 268,707 (164,117) Change in fair value of equity instruments at fair value through other comprehensive income (767) (1,423) (348) (1,976) Remeasurements of defined benefit liability / asset of pension plan Other comprehensive income (loss) 23 266,517 283,150 (166,441) 475,780 Total comprehensive income for the year Total comprehensive income for the year attributable to: PJSC LUKOIL shareholders Non-controlling interests 281,675 1,475 473,765 2,015 Earnings per share Profit for the year attributable to PJSC LUKOIL shareholders per share of common stock (in Russian rubles): 24 Basic 23.31 22.46 963.28 934.73 Diluted The accompanying notes are an integral part of these consolidated financial statements. 10 PJSC LUKOIL Consolidated Statement of Changes in Equity (Millions of Russian rubles) Total equity Additional paid-in attributable to Retained PJSC LUKOIL controlling Non- Share capital Treasury shares Other reserves Total equity capital earnings shareholders 3,965,364 15,175 interests 31 December 2019 Profit for the year Other comprehensive income 968 - (308,160) - 39,277 - 30,141 4,203,138 8,085 3,973,449 16,633 - 266,500 266,500 15,175 1,458 - - - - 17 266,500 281,675 266,517 283,150 Total comprehensive income 15,175 1,475 Dividends on common stock - - - - - - - (258,389) - - - (258,389) (2,026) (258,389) (2,026) Stock purchased (2,026) Equity-settled share- based compensation plan - - - - 15,381 - 15,381 15,381 Obligation to repurchase common shares - 120,988 117,278 - - - - - - - 120,988 - 120,988 - Share capital reduction (30) (117,248) Changes in non- controlling interests - - 21 - - (1,808) 21 (1,787) 31 December 2020 938 (71,920) 39,298 296,641 3,858,057 4,123,014 7,752 4,130,766 31 December 2018 Profit for the year Other comprehensive loss 1,015 - (134,810) - 39,173 - 196,554 3,963,628 7,966 2,043 4,065,560 640,178 4,073,526 642,221 - (166,413) (166,413) 640,178 - - - - (28) (166,413) 473,765 (166,441) 475,780 Total comprehensive (loss) income 640,178 2,015 Dividends on common stock - - - - - - - (229,669) - - - (229,669) (240,767) (229,669) (240,767) Stock purchased (240,767) Equity-settled share- based compensation plan - - - - 17,359 - 17,359 17,359 Obligation to repurchase common shares - (120,988) 188,405 - - - - - - - (120,988) - (120,988) - Share capital reduction (47) (188,358) Changes in non- controlling interests - - 104 - - (1,896) 104 (1,792) 31 December 2019 968 (308,160) 39,277 30,141 4,203,138 3,965,364 8,085 3,973,449 The accompanying notes are an integral part of these consolidated financial statements. 11 PJSC LUKOIL Consolidated Statement of Cash Flows (Millions of Russian rubles) Note 2020 2019 Cash flows from operating activities Profit for the year attributable to PJSC LUKOIL shareholders Adjustments for non-cash items: 15,175 640,178 Depreciation, depletion and amortisation Equity share in income of associates and joint ventures, net of dividends received Dry hole write-offs 405,440 (2,903) 4,425 415,094 (11,387) 7,694 Loss on disposals and impairments of assets Income tax expense 125,535 82,154 26,037 (13,051) 44,122 5,811 16,975 151,133 (1,120) (25,134) 44,356 9,340 Non-cash foreign exchange loss (gain) Finance income Finance costs Allowance for expected credit losses Equity-settled share-based compensation plan All other items, net 31,366 5,538 31,366 1,823 Changes in operating assets and liabilities: Trade accounts receivable 128,139 37,868 (48,023) (69,171) 88,977 Inventories Accounts payable (69,305) 10,200 Other taxes 24,053 Other current assets and liabilities Income tax paid (23,725) (57,250) 9,448 (2,617) (148,314) 6,636 Dividends received Interests received 11,550 19,985 Net cash provided by operating activities Cash flows from investing activities Acquisition of licenses 776,574 1,151,844 (235) (495,443) 657 (8,232) 12,323 17 (8,925) (449,975) 1,759 (7,198) 17,774 9,261 Capital expenditures Proceeds from sale of property, plant and equipment Purchases of financial assets Proceeds from sale of financial assets Sale of subsidiaries, net of cash disposed Sale of associates 312 259 Acquisitions of interests in the projects and subsidiaries, net of cash acquired Acquisitions of associates (1,040) (1,128) (492,769) (71,693) (1,388) (510,126) Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of short-term borrowings Principal repayments of short-term borrowings Proceeds from issuance of long-term debt Principal repayments of long-term debt Interest paid 1,971 (815) 264 (6,186) - 108,796 (171,980) (39,100) (407,309) (3,589) 47 (106,625) (41,589) (180,747) (4,040) 297 Dividends paid on Company common shares Dividends paid to non-controlling interest shareholders Financing received from non-controlling interest shareholders Purchase of Company’s stock (2,026) - (243,691) (27) Purchases of non-controlling interest Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (514,005) 58,000 (172,200) 516,032 343,832 (582,344) (35,992) 23,382 492,650 516,032 6 The accompanying notes are an integral part of these consolidated financial statements. 12 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 1. Organisation and environment The primary activities of PJSC 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 No. 1403, issued on 17 November 1992. Under this decree, on 5 April 1993, the Government of the Russian Federation transferred to the Company 51% of the voting shares of fifteen enterprises. Under Government Resolution No. 861 issued on 1 September 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 accompanying consolidated 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. COVID-19 In December 2019, the emergence of a new strain of coronavirus (COVID-19) was reported in China and has subsequently spread globally. On 11 March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Mobility restrictions, quarantines and similar lockdown measures implemented in different countries to cope with the pandemic had a significant negative impact on the global economy. Deceleration of economic activity resulted in a substantial decrease in demand for hydrocarbons leading to oversupply on the international oil market and a sharp decline in oil prices. On 12 April 2020, OPEC+ countries entered into a new agreement to reduce their collective output starting from 1 May 2020. This coordinated production cut together with the negative impact of low oil prices on crude oil production in different countries resulted in lower supply of crude oil, reduction of surplus on the crude oil market and led to a gradual recovery of oil prices. This upward oil price trend was further supported by the start of gradual lifting of lockdowns in different countries, recovery in economic activity and respective growth in demand for hydrocarbons. Acceleration of COVID-19 spread in October 2020 resulted in a renewal of lockdown measures in different countries and a decline in oil prices. However, progress with testing of vaccines against COVID-19 pushed the oil prices up by the end of December 2020. This upward trend continued in the beginning of 2021. From the beginning of COVID-19 pandemic the Group has taken necessary measures to avoid direct impact of the pandemic on its operations with a special focus on protection of the health of employees and clients and uninterrupted production processes. The major impact of COVID-19 on the macroeconomic environment in the oil and gas industry resulted in a number of consequences on operational and financial performance of the Group. For example, due to the OPEC+ agreement the Group cut its crude oil production in Russia and at some international projects. Management has considered the impact of COVID-19 and oil price decline on these consolidated financial statements. Current market conditions create additional estimation uncertainties and impact certain key assumptions in the valuation of assets used for preparation of these consolidated financial statements. Management believes that the Group is in a solid financial condition as of the end of 2020. This represents an incremental support for continuous operations and meeting all of the Group’s obligations, as well as adequate financing of the investment program in any macroeconomic situation. Management will continue monitoring the situation closely to ensure prompt reaction to the rapidly changing environment. 13 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 2. Basis of preparation Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements have been prepared on a historical cost basis, except certain assets and liabilities measured at fair value. The consolidated financial statements were authorised by the President of the Company on 10 March 2021. Functional and presentation currency The functional currency of each of the Group’s consolidated companies is the currency of the primary economic environment in which the company operates. The management has analysed factors that influence the choice of functional currency and has determined the functional currency for each Group company. For the majority of them the functional currency is the local currency. The functional currency of the Company is the Russian ruble (“RUB”). The presentation currency of the Group is the RUB. All financial information presented in the RUB has been rounded to the nearest million, except when otherwise indicated. The results and financial position of Group companies whose functional currency is different from the presentation currency of the Group are translated into presentation currency using the following procedures. Assets and liabilities are translated at period-end exchange rates, income and expenses are translated at rates which approximate actual rates at the date of the transaction. Resulting exchange differences are recognised in other comprehensive income. Note 3. Summary of significant accounting policies Principles of consolidation These consolidated financial statements include the financial position and results of operations of the Company and controlled subsidiaries. A company controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Investments in companies that the Group does not control, but where it has the ability to exercise significant influence (Group’s interests are between 20% and 50%) over operating and financial policies, are accounted for using the equity method. These investments include the Group’s interests in associates, joint ventures and investments where the Company owns the majority of the voting interest but has no control. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement. Interests in associates and joint ventures are accounted for using the equity method and are recognised initially at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the extent that the Group has an obligation or has made payments on behalf of the investee. 14 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) Group’s share in jointly controlled operations is recognised in the consolidated financial statements based on its share in assets, liabilities, income and expenses. Jointly controlled operations are arrangements in which parties that have joint control over operating or financial policies have respective rights to use assets and responsibility for liabilities in the arrangements. Certain of Group’s unincorporated joint exploration and production activities are conducted through arrangements that are not jointly controlled, either because unanimous consent is not required among all parties involved, or no single group of parties has joint control over the activity. Such activities where control can be achieved through agreement between more than one combination of involved parties are considered to be outside the scope of IFRS 11 Joint Arrangements. In relation to its interests in these arrangements, the Group recognises its share of any assets, liabilities, income and expenses. Business combinations For each business combination the Group measures goodwill at the acquisition date as:    the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less  the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of previous transactions. Such amounts are generally recognised in profit or loss. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Non-controlling interests Non-controlling interests are measured at their proportionate share of the fair value of acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated during the process of consolidation. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 15 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising in translation are recognised in profit or loss, except for differences arising on the translation of financial assets measured at fair value through other comprehensive income which are recognised in other comprehensive income. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the presentation currency at the exchange rates at the reporting date. The income and expenses of foreign operations are translated to the presentation currency at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. However, if the foreign operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is allocated to non-controlling interests. When a foreign operation is disposed of in a way that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gains and losses arising from such item form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve in equity. Revenues Revenues are recognised when a customer obtains control of the goods or services which usually occurs when the title is passed, provided that risks and rewards of ownership are assumed by the customer and the customer obtains obligation to pay for the goods or services. Revenues include excise on petroleum products’ sales and duties on export sales of crude oil and petroleum products. Revenue from the production of oil and natural gas in which the Group has an interest with other producers is recognised based on the Group’s working interest and the terms of the relevant production sharing contracts. Revenues from non-cash sales are recognised at the fair value of the crude oil and petroleum products sold. If the fair value of the non-cash consideration cannot be reasonably estimated, the consideration shall be measured indirectly by reference to the stand-alone selling price of the goods or services promised to the customer in exchange for the consideration. 16 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) Cash and cash equivalents Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Financial assets The Group classifies financial assets into the following categories, as appropriate: measured at amortised cost, fair value through other comprehensive income and fair value through profit or loss. A financial asset is measured at amortised cost if both of the following conditions are met:   the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset is measured at fair value through other comprehensive income if both of the following conditions are met:   the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset is measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income. However, the Company may make an irrevocable election at initial recognition for particular instruments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. The Group initially recognises as financial assets loans and receivables on the date when they are originated and debt securities on the date when they are acquired. All other financial assets are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Non-derivative financial liabilities The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. 17 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) Derivative instruments The Group uses various derivative financial instruments to hedge its commodity price risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and subsequently re-measured at fair value. Resulting realised and unrealised gains or losses are presented in profit or loss on a net basis. The Group does not use hedge accounting. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories includes expenditure incurred in acquiring the inventories, production or conversion costs and other delivery costs. In the case of manufactured inventories, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The disposal of finished goods is accounted for using the first-in first-out principle, the disposal of other inventories by using the “average cost” method. Property, plant and equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. The cost of property, plant and equipment of major subsidiaries at 1 January 2014, the Group’s date of transition to IFRSs, was determined by reference to its fair value at that date. The Group recognises exploration and evaluation costs using the successful efforts method. Under this method, all costs related to exploration and evaluation are capitalised and accounted for as construction in progress in the amount incurred less impairment (if any) until the discovery (or absence) of economically feasible oil and gas reserves has been established. When the technical feasibility and commercial viability of reserves extraction is confirmed, exploration and evaluation assets should be reclassified into property, plant and equipment. Prior to reclassification these assets should be reviewed for impairment and impairment loss (if any) expensed to the financial results. If the exploration and evaluation activity is evaluated as unsuccessful, the costs incurred should be expensed. Depreciation, depletion and amortisation of capitalised 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. Depreciation, depletion and amortisation of the capitalised costs of oil and gas properties related to risk service contract is calculated using a depletion factor calculated as the ratio of value of the applicable crude oil production for the period to the total capitalised costs to be recovered. Depreciation of assets not directly associated with 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 3 – 20 years Depreciation methods and useful lives are reviewed at each reporting date and adjusted if appropriate. Production and related overhead costs are expensed as incurred. In addition to production assets, certain Group companies also maintain and construct social assets for the use of local communities. Such assets are capitalised only to the extent that they are expected to result in future economic benefits to the Group. If capitalised, they are depreciated over their estimated economic lives. 18 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) Impairment of non-current non-financial assets The carrying amounts of the Group’s non-current non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or related cash-generating unit (“CGU”). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to group of CGUs that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. Significant unproved properties are assessed for impairment individually on a regular basis and any estimated impairment is charged to expense. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Asset retirement obligations The Group records the present value of the estimated future costs to settle its legal obligations to abandon, dismantle or otherwise retire tangible non-current non-financial assets in the period in which the liability is incurred. A corresponding increase in the carrying amount of the related non-current non-financial assets is also recorded. Subsequently, the liability is accreted for the passage of time and the related asset is depreciated using the same method as asset to be abandoned, dismantled or otherwise retired. Changes in the estimates of asset retirement obligations (“ARO”) occur as a result of changes in cost and timing of liquidation or change of discount rates and are accounted as part of cost of property, plant and equipment in the current period. Lease A single, on-balance sheet lease accounting model is used by lessees. A contract is, or contains, a lease if it conveys a right to control the use of an identified asset for a period of time in exchange for consideration. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The Group has elected not to apply provided exemptions for short-term leases and leases for which the underlying asset is of low value. Lessors classify leases as finance or operating leases. 19 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) The Group recognises a depreciation charge for right-of-use assets and interest expense on lease liabilities. Assets classified as held for sale Assets classified as held for sale are separately presented in the consolidated statement of financial position 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 classified as held for sale are presented in current assets and liabilities of the consolidated statement of financial position. Income taxes Deferred income tax assets and liabilities are recognised in respect of the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purposes of the consolidated statement of financial position and their respective tax bases. But as opposed to deferred tax liabilities, deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. Similarly a deferred tax asset shall be recognised for the carryforward of unused tax losses to the extent that it is probable that future taxable profit will be available. At the end of each reporting period realizability of deferred tax assets (both recognised and unrecornized) should be reassessed. In case of existence of previously unrecognised deferred tax assets, they can be recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. 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 recognised in profit or loss in the reporting period which includes the enactment date. Employee benefits A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. An economic benefit is available to the Group if it is realisable during the life of the plan, or on settlement of the plan liabilities. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. 20 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued) When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. Treasury shares Purchases by Group companies of the Company’s outstanding shares are recorded at cost and classified as treasury shares within equity. Shares shown as Authorised and Issued include treasury shares. Shares shown as Outstanding do not include treasury shares. Earnings per share Basic earnings per share is computed by dividing profit available for distribution to common shareholders of the Company by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share is determined by adjusting profit available for distribution to common shareholders of the Company and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. Provisions and contingencies Certain conditions may exist as of the consolidated financial statements 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. Liabilities of the Group with high level of probability of loss are recognised in the consolidated financial statements as provisions. Liabilities of the Group with the level of probability that do not meet the conditions in order to be recognised as provisions are considered to be contingent liabilities. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements if probability of disposal of certain resources aimed to settle this liability is not remote. If probability of disposal of certain resources is remote the information about such contingencies is not disclosed. Environmental expenditures Estimated losses from environmental remediation obligations are generally recognised 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. Share-based payments The Group accounts for cash-settled share-based payment awards to employees at fair value on the grant date and as of each reporting date. Expenses are recognised over the vesting period. Equity-settled share-based payment awards to employees are valued at fair value on the grant date and expensed over the vesting period. Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the amendments to the existing standards effective as of 1 January 2020. These amendments did not have a significant impact on the consolidated financial statements:   amendments to references to Conceptual Framework in IFRS Standards. In particular, the amendments introduced new definitions of assets and liabilities, as well as amended definitions of income and expenses; definition of a business (amendments to IFRS 3 Business Combinations); 21 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 3. Summary of significant accounting policies (сontinued)  definition of a material (amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). Note 4. Use of estimates and judgments Preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are the following:      estimation of oil and gas reserves; estimation of useful lives of property, plant and equipment; impairment of non-current assets; assessment and recognition of provisions and contingent liabilities; definition of leases. Oil and gas reserves estimates that are used for the reporting purposes are made in accordance with the requirements adopted by U.S. Securities and Exchange Commission. Estimates are reassessed on an annual basis. Note 5. New standards and interpretations not yet adopted The following amendments to the standards are effective for annual periods beginning after 1 January 2021, available for early adoption:  Onerous contracts – Cost of Fulfilling a Contract (Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets);   COVID-19-Related Rent Concessions (Amendment to IFRS 16 Leases); Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16 Property, Plant and Equipment);   Reference to Conceptual Framework (Amendments to IFRS 3 Business Combinations); Classification of Liabilities as Current or Non-current (Amendments to IAS 1 Presentation of Financial Statements). However, the Group did not make an early adoption of the amended standards in the preparation of these consolidated financial statements, which are not expected to have a significant impact on the Group's consolidated financial statements. Note 6. Cash and cash equivalents 31 December 2020 16,537 31 December 2019 189,055 Cash held in RUB Cash held in US dollars Cash held in EUR 256,841 303,046 59,009 14,909 Cash held in other currencies Total cash and cash equivalents 11,445 9,022 343,832 516,032 22 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 7. Accounts receivable, net 31 December 2020 31 December 2019 Trade accounts receivable (net of allowances of 32,762 million RUB and 26,593 million RUB at 31 December 2020 and 2019, respectively) 357,159 428,415 Other current accounts receivable (net of allowances of 4,930 million RUB and 4,694 million RUB at 31 December 2020 and 2019, respectively) 13,112 8,637 Total accounts receivable, net 370,271 437,052 Note 8. Other current financial assets 31 December 2020 31 December 2019 Financial assets measured at amortised cost Short-term loans 8,350 6,814 Financial assets measured at fair value through profit or loss Short-term loans - 42,892 Total other current financial assets 8,350 49,706 Note 9. Inventories 31 December 2020 373,290 31 December 2019 366,795 Crude oil and petroleum products Materials for extraction and drilling Materials and supplies for refining Other goods, materials and supplies Total inventories 25,582 22,811 4,681 4,449 22,983 19,855 426,536 413,910 Note 10. Prepaid taxes 31 December 2020 17,983 31 December 2019 17,120 Income tax prepaid VAT and excise tax recoverable Export duties prepaid VAT prepaid 21,290 30,660 8,009 11,968 26,407 30,199 Other taxes prepaid Total prepaid taxes 5,133 5,128 78,822 95,075 Note 11. Other current assets 31 December 2020 15,904 31 December 2019 10,246 Advance payments Prepaid expenses Other assets 21,622 23,673 11,123 8,493 Total other current assets 48,649 42,412 23 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 12. Investments in associates and joint ventures Carrying value of investments in associates and joint ventures: Ownership Name of the company Joint ventures: Country 31 December 2020 31 December 2019 31 December 2020 31 December 2019 Tengizchevroil (TCO) Caspian Pipeline Consortium (CPC) South Caucasus Pipeline Company (SCPC) Kazakhstan Kazakhstan Azerbaijan 5.0% 12.5% 10.0% 5.0% 12.5% 10.0% 146,611 56,027 119,924 40,670 34,663 - 30,241 655 Others Associates: Associates Total 44,336 28,514 281,637 220,004 TCO is engaged in development of hydrocarbon resources in Kazakhstan. The Group has classified its interest in TCO as a joint venture as it has rights to the net assets of the arrangement. 31 December 2020 Current assets TCO 185,179 CPC 49,950 449,020 39,529 11,224 448,217 56,027 SCPC 17,923 363,283 17,584 16,995 346,627 34,663 Others Associates 37,049 Total 290,186 85 - Non-current assets Current liabilities Non-current liabilities Net assets (100%) Share in net assets 3,398,159 153,329 222,001 22,011 4,432,463 232,538 85 - 1,228,347 2,201,662 146,611 127,928 109,111 44,336 1,384,494 3,105,617 281,637 - - 31 December 2019 Current assets TCO 127,066 2,641,370 195,807 825,320 1,747,309 119,924 CPC 21,376 410,517 88,698 17,838 325,357 40,670 SCPC 10,196 315,987 9,311 Others 3,183 1,770 568 Associates 36,785 Total 198,606 3,563,184 430,827 892,438 2,438,525 220,004 Non-current assets Current liabilities Non-current liabilities Net assets (100%) Share in net assets 193,540 136,443 31,737 14,467 302,405 30,241 3,076 1,309 655 62,145 28,514 2020 TCO 657,608 113,342 3,407 CPC 151,648 57,684 7,210 SCPC 50,221 24,251 2,425 Others 4,627 1,402 701 Associates 74,160 Total 938,264 190,485 11,474 Revenues Net income (loss), 100% Share in net income (loss) (6,194) (2,269) 2019 TCO 1,055,783 296,060 12,474 CPC 146,646 46,918 5,865 SCPC 37,944 18,234 1,823 Others 6,988 167 Associates 122,041 (8,219) Total 1,369,402 353,160 18,246 Revenues Net income (loss), 100% Share in net income (loss) 84 (2,000) 24 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 13. Property, plant and equipment Exploration Refining, marketing and production and distribution Other Total Cost 31 December 2019 Additions 4,795,674 424,751 1,209 1,510,515 144,941 - 76,246 4,864 - 6,382,435 574,556 1,209 Acquisitions Disposals (37,156) 272,259 (23,473) 5,433,264 (42,014) 143,409 (201) (6,592) 2,704 (216) 77,006 (85,762) 418,372 (23,890) 7,266,920 Foreign currency translation differences Other 31 December 2020 Depreciation and impairment 31 December 2019 Depreciation for the period Impairment loss 1,756,650 (1,766,575) (278,237) (48,740) 18,358 (589,636) (135,596) (58,129) 38,776 (21,153) (3,705) - (2,377,364) (417,538) (106,869) 60,611 Disposals 3,477 (1,032) 45 Foreign currency translation differences Other (144,090) 25,550 (60,206) 1,914 (205,328) 27,509 31 December 2020 (2,193,734) (802,877) (22,368) (3,018,979) Advance payments for property, plant and equipment 31 December 2019 31 December 2020 Carrying amounts 31 December 2019 31 December 2020 Cost 6,791 13,314 831 20,936 16,533 10,218 5,757 558 3,035,890 934,193 55,924 4,026,007 4,264,474 3,249,748 959,530 55,196 31 December 2018 Adjustment on adoption of IFRS 16 1 January 2019 4,476,824 54,335 1,373,743 102,189 1,475,932 120,221 529 75,882 5,527 81,409 2,133 - 5,926,449 162,051 6,088,500 519,385 72,700 4,531,159 397,031 72,171 Additions Acquisition of the interest in the project Disposals (55,461) (165,027) 15,801 (19,197) (71,067) 4,097 (2,833) (1,804) (2,659) 76,246 (77,491) (237,898) 17,239 Foreign currency translation differences Other 31 December 2019 Depreciation and impairment 31 December 2018 Depreciation for the period Impairment loss 4,795,674 1,510,515 6,382,435 (1,586,508) (288,349) (21,559) 9,797 (513,668) (121,721) (1,324) - (19,380) (4,064) - (2,119,556) (414,134) (22,883) 9,797 Impairment reversal Disposals - 36,114 15,289 27,564 4,224 789 52,192 Foreign currency translation differences Other 83,848 723 112,135 5,085 82 779 31 December 2019 (1,766,575) (589,636) (21,153) (2,377,364) Advance payments for property, plant and equipment 31 December 2018 31 December 2019 Carrying amounts 31 December 2018 31 December 2019 5,916 15,669 686 22,271 20,936 6,791 13,314 831 2,896,232 875,744 57,188 3,829,164 4,026,007 3,035,890 934,193 55,924 25 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 13. Property, plant and equipment (сontinued) The cost of assets under construction included in property, plant and equipment was 458,265 million RUB and 369,926 million RUB at 31 December 2020 and 2019, respectively. Exploration and evaluation assets 2020 129,951 36,881 362 2019 107,105 41,446 - 1 January Capitalised expenditures Acquisitions through business combinations Reclassified to development assets Charged to expenses (5,238) (3,542) 6,244 (8,742) (7,159) (3,537) 838 Foreign currency translation differences Other movements (1,407) 163,251 31 December 129,951 Due to a significant deterioration in the macroeconomic environment in the first quarter of 2020, the Company revised the scenario conditions used in the impairment test at the end of 2019 and performed an impairment test for assets at 31 March 2020. As a result, in the first quarter of 2020, the Group recognised an impairment loss for its exploration and production assets in Russia in the amount of 5,219 million RUB, for its international exploration and production assets in the amount of 2,209 million RUB and for its international refining, marketing and distribution assets in the amount of 28,859 million RUB. The recoverable amounts of CGUs subject to impairment in the first quarter of 2020 in the amount of 139,180 million RUB were determined as value in use equal to the present value of the expected cash flows. Value in use was estimated using 9% discount rate for exploration and production assets in Russia, 8.2% discount rate for international exploration and production assets and 7.5% discount rate for international refining, marketing and distribution assets. For impairment test purposes at 31 March 2020 the following Brent Blend price assumptions have been used: $40.0 per barrel in 2020–2021, $45.0 per barrel in 2022, $50.0 per barrel in 2023, $55.0 per barrel in 2024 and $60.0 per barrel from 2025. Also, in the second quarter of 2020, the Group recognised an impairment loss for its international exploration and production assets in the amount of 38,148 million RUB. Of this amount, 35,986 million RUB relates to gas projects in the Republic of Uzbekistan and are determined based on the revised business model, which takes into account conservative approaches to assessing the structure of gas supplies and pricing. The recoverable amounts of CGUs in the amount of 106,003 million RUB which relate to impaired assets were determined as value in use equal to the present value of the expected cash flows. Value in use was estimated using 11.2% discount rate. The Company performs a regular annual impairment test of its assets. The test is based on geological models and development programs, which are revised on a regular basis, at least annually. In the fourth quarter of 2020, the Group recognised an impairment loss for its exploration and production assets in Russia in the amount of 3,020 million RUB, for its international exploration and production assets in the amount of 144 million RUB, for its refining, marketing and distribution assets in Russia in the amount of 7,656 million RUB and for its international refining, marketing and distribution assets in the amount of 21,614 million RUB. 26 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 13. Property, plant and equipment (сontinued) The recoverable amounts of CGUs subject to impairment in the fourth quarter of 2020 in the amount of 51,843 million RUB were determined as value in use equal to the present value of the expected cash flows. Value in use was estimated using the following discount rates: for exploration and production assets in Russia – 8%, for refining, marketing and distribution assets in Russia – from 10% to 13% and for international refining, marketing and distribution assets – 6.4%. For impairment test purposes at 31 December 2020 the following Brent Blend price assumptions have been used: $50.0 per barrel in 2021, $54.0 per barrel in 2022, $57.0 per barrel in 2023, $58.0 per barrel in 2024 and $60.0 per barrel from 2025. In the fourth quarter of 2019, the Group recognised an impairment loss for its exploration and production assets in Russia in the amount of 20,142 million RUB, for its international exploration and production assets in the amount of 1,270 million RUB, for its refining, marketing and distribution assets in Russia in the amount of 476 million RUB and for its international refining, marketing and distribution assets in the amount of 848 million RUB. Also the Group recognised an impairment reversal of 9,651 million RUB, which was mainly a result of improvement of economic parameters of our production projects in Western Siberia and European part of Russia. The recoverable amounts of CGUs subject to impairment and impairment reversal in 2019 in the amount of 55,822 million RUB and 100,270 million RUB, respectively, were determined as value in use equal to the present value of the expected cash flows. Value in use was estimated using the following discount rates: for exploration and production assets in Russia – 8.5%, for refining, marketing and distribution assets in Russia – from 10% to 13%. Impairment reversal and impairment loss are included in “Other income (expenses)” in the consolidated statement of profit or loss and other comprehensive income. The measurement of recoverable amounts of property, plant and equipment is most sensitive to the volatility of oil and gas prices. However, price reductions would also result in changes in other factors used when estimating recoverable amounts. Quantitative assessment of suchlike impacts is very complicated, as it demands detailed technical, geological and economical evaluations based on hypothetical scenarios rather than existing business or development plans. Note 14. Other non-current financial assets 31 December 2020 31 December 2019 Financial assets measured at fair value through other comprehensive income Equity instruments 2,491 2,656 Financial assets measured at amortised cost Long-term loans 31,075 1,916 15 26,008 1,371 34 Non-current accounts and notes receivable Other financial assets Financial assets measured at fair value through profit or loss Long-term loans 33,195 8,162 Total other non-current financial assets 68,692 38,231 27 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 15. Acquisition of interests in the projects In the second quarter of 2019, a Group company entered into a contract with New Age M12 Holdings Limited to acquire a 25% interest in the Marine XII license in the Republic of Congo (Congo-Brazzaville) developed under the production sharing agreement. In September 2019, the transaction in the amount of 51.4 billion RUB ($768 million) was closed after all the customary conditions, including approval by the Government of the Republic of Congo, were fulfilled. The Company has completed allocation of the purchase price to the fair value of assets acquired and liabilities assumed which includes property plant and equipment and assets under construction in the amount of 51.3 billion RUB ($767 million), inventories in the amount of 0.9 billion RUB ($13 million), accounts receivable in the amount of 0.5 billion RUB ($7 million) and asset retirement obligations in the amount of 1.3 billion RUB ($19 million). After acquisition the Group accounts for this project similar to accounting for jointly controlled operations. Note 16. Goodwill and other intangible assets Other internally Internally generated Acquired generated software intangible assets intangible assets Goodwill Total Cost 31 December 2019 19,532 4,975 52,782 32,337 109,626 Additions as result of internal developments 1,914 - 1,859 - - 5,597 - - - 3,773 5,597 Additions - separately acquired Disposals (190) (23) (11,088) (11,301) Foreign currency translation differences 281 284 4 (242) 6,573 3,617 87 6,239 - 10,141 129 Other 31 December 2020 Amortisation and impairment 31 December 2019 Amortisation for the year Impairment loss 21,821 50,995 38,576 117,965 (14,797) (917) - (1,306) (299) (1) (40,491) (4,881) (18) (9,924) (66,518) (6,097) (19) - - - Disposals 164 - 10,950 11,114 Foreign currency translation differences (260) 55 (4) (2) (2,851) (199) (3,025) - (6,140) (146) Other 31 December 2020 Carrying amounts 31 December 2019 31 December 2020 (15,755) (1,612) (37,490) (12,949) (67,806) 4,735 3,669 12,291 22,413 43,108 50,159 6,066 4,961 13,505 25,627 28 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 16. Goodwill and other intangible assets (continued) Other internally generated intangible assets intangible assets Internally generated software Acquired Goodwill Total Cost 31 December 2018 17,714 3,538 50,296 35,681 107,229 Additions as result of internal developments 1,678 1,886 - 16 - - - - 3,564 16 Acquisitions - - - - Additions - separately acquired Disposals 6,922 (1,030) 6,922 (1,044) (7) (7) Foreign currency translation differences (289) 436 (2) (440) 4,975 (3,287) (135) (3,344) - (6,922) (139) Other 31 December 2019 Amortisation and impairment 31 December 2018 Amortisation for the year Disposals 19,532 52,782 32,337 109,626 (14,242) (837) 7 (1,001) (298) 5 (38,503) (5,329) 706 (11,718) (65,464) (6,464) 718 - - Foreign currency translation differences 274 1 2 (14) 2,398 237 1,794 - 4,468 224 Other 31 December 2019 Carrying amounts 31 December 2018 31 December 2019 (14,797) (1,306) (40,491) (9,924) (66,518) 3,472 2,537 11,793 23,963 41,765 43,108 4,735 3,669 12,291 22,413 Goodwill was tested for impairment and no impairment was identified. Note 17. Accounts payable 31 December 2020 533,598 31 December 2019 555,823 Trade accounts payable Other accounts payable Total accounts payable 64,334 51,911 597,932 607,734 Note 18. Short-term borrowings and current portion of long-term debt 31 December 2020 18,736 31 December 2019 13,940 Short-term borrowings from third parties Short-term borrowings from related parties 2,522 2,222 Current portion of long-term debt 61,378 114,138 Total short-term borrowings and current portion of long-term debt 82,636 130,300 Short-term borrowings from third parties include amounts repayable in US dollars of 17,510 million RUB and 12,694 million RUB and amounts repayable in other currencies of 1,226 million RUB and 1,246 million RUB at 31 December 2020 and 2019, respectively. The weighted-average interest rate on short-term borrowings from third parties was 2.63% and 4.00% per annum at 31 December 2020 and 2019, respectively. At 31 December 2020, short-term borrowings from third parties are unsecured. 29 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 19. Long-term debt 31 December 2020 112,660 - 31 December 2019 117,864 61,866 Long-term loans and borrowings from third parties 6.125% non-convertible US dollar bonds, maturing 2020 6.656% non-convertible US dollar bonds, maturing 2022 4.563% non-convertible US dollar bonds, maturing 2023 4.750% non-convertible US dollar bonds, maturing 2026 3.875% non-convertible US dollar bonds, maturing 2030 Lease obligations 36,901 30,905 110,737 73,751 92,769 61,786 110,532 193,872 638,453 (61,378) 577,075 - 171,880 537,070 (114,138) 422,932 Total long-term debt Current portion of long-term debt Total non-current portion of long-term debt Long-term loans and borrowings Long-term loans and borrowings from third parties include amounts repayable in US dollars of 101,376 million RUB and 104,819 million RUB and amounts repayable in euros of 11,284 million RUB and 13,045 million RUB at 31 December 2020 and 2019, respectively. This debt has maturity dates from 2021 through 2028. The weighted-average interest rate on long-term loans and borrowings from third parties was 2.54% and 4.08% per annum at 31 December 2020 and 2019, respectively. A number of long-term loan agreements contain certain financial covenants which are being met by the Group. Approximately 51% of total long-term loans and borrowings from third parties at 31 December 2020 are secured by shares in a PSA project, export sales and property, plant and equipment. Non-convertible bonds On 6 May 2020, a Group company issued non-convertible bonds totaling $1.5 billion (110.8 billion RUB). The bonds were placed with a maturity of 10 years and a coupon yield of 3.875% per annum. All bonds were placed at face value and have a half year coupon period. In November 2016, a Group company issued non-convertible bonds totaling $1 billion (73.9 billion RUB). The bonds were placed with a maturity of 10 years and a coupon yield of 4.750% per annum. All bonds were placed at face value and have a half year coupon period. In April 2013, a Group company issued two tranches of non-convertible bonds totaling $3 billion (221.6 billion RUB). The first tranche totaling $1.5 billion (110.8 billion RUB) was placed with a maturity of 5 years and a coupon yield of 3.416% per annum. The second tranche totaling $1.5 billion (110.8 billion RUB) was placed with a maturity of 10 years and a coupon yield of 4.563% per annum. All bonds were placed at face value and have a half year coupon period. In April 2018, a Group company redeemed all issued bonds of the first tranche in accordance with the conditions of the bond issue. In November 2010, a Group company issued two tranches of non-convertible bonds totaling $1 billion (73.9 billion RUB) with a maturity of 10 years and a coupon yield of 6.125%. The first tranche totaling $800 million (59.1 billion RUB) was placed at a price of 99.081% of the bond’s face value with a resulting yield to maturity of 6.250%. The second tranche totaling $200 million (14.8 billion RUB) was placed at a price of 102.44% of the bond’s face value with a resulting yield to maturity of 5.80%. All bonds have a half year coupon period. In November 2020, a Group company redeemed all issued bonds of the first and second tranches in accordance with the conditions of the bond issue. 30 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 19. Long-term debt (continued) In November 2009, a Group company issued two tranches of non-convertible bonds totaling $1.5 billion (110.8 billion RUB). The first tranche totaling $900 million (66.5 billion RUB) with a coupon yield of 6.375% per annum was placed with a maturity of 5 years at a price of 99.474% of the bond’s face value with a resulting yield to maturity of 6.500%. The second tranche totaling $600 million (44.3 billion RUB) with a coupon yield of 7.250% per annum was placed with a maturity of 10 years at a price of 99.127% of the bond’s face value with a resulting yield to maturity of 7.375%. All bonds have a half year coupon period. In November 2014 and 2019, a Group company redeemed all issued bonds of the first and second tranches in accordance with the conditions of the bond issue. In June 2007, a Group company issued two tranches of non-convertible bonds totaling $1 billion (73.9 billion RUB). $500 million (36.95 billion RUB) were placed with a maturity of 10 years and a coupon yield of 6.356% per annum. Another $500 million (36.95 billion RUB) were placed with a maturity of 15 years and a coupon yield of 6.656% per annum. All bonds were placed at face value and have a half year coupon period. In June 2017, a Group company redeemed all issued bonds of the first tranche in accordance with the conditions of the bond issue. Reconciliation of liabilities arising from financing activities Loans and borrowings Lease obligations Other liabilities Bonds Total 31 December 2019 134,026 247,326 171,880 135,920 689,152 Changes from financing cash flows: Proceeds from issuance of short-term borrowings 1,971 - - - 1,971 (815) Principal repayments of short-term borrowings Proceeds from issuance of long-term debt Principal repayments of long-term debt Interest paid (815) - 108,796 (78,456) - - - - - - 108,796 (171,980) (39,100) (407,309) (508,437) (30,686) (62,838) (10,501) - - - - (28,599) (407,309) (435,908) Dividends paid on Company common stock Total changes from financing cash flows Other changes: - (29,530) 30,340 (73,339) Interest accrued 1,853 - 128 10,501 - 26,810 258,389 1,082 - 39,292 258,389 111,905 50,009 Dividends declared on Company common stock The effect of changes in foreign exchange rates Non-cash additions to lease obligations Other changes - 54,125 - 27,010 - 29,688 50,009 5,133 95,331 193,872 559 2 16,972 303,253 3,265 22,666 Total other changes 29,422 133,918 54,255 331,921 482,261 662,976 31 December 2020 Note 20. Taxes payable 31 December 2020 16,614 31 December 2019 12,031 Income tax Mineral extraction tax 49,332 61,464 Tax on additional income from hydrocarbon production 2,881 3,380 VAT 35,650 38,566 Excise tax 22,733 14,359 Property tax Other taxes Total taxes payable 5,675 5,120 9,573 7,551 142,458 142,471 31 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 21. Other current liabilities 31 December 2020 31,142 31 December 2019 30,868 Advances received Dividends payable Other 1,610 135,034 2,745 3,050 Total other current liabilities 35,497 168,952 Note 22. Provisions Asset retirement Provision for Provision for Provision for unused employee environmental Pension Other obligations compensations liabilities 4,204 liabilities vacations provisions Total 153,801 126,665 27,136 31 December 2020 Incl.: Non-current Current 111,614 110,916 698 10,939 175 13,794 11,678 2,116 6,326 322 6,924 2,245 1,329 10,764 9,762 263 2,875 6,004 5,861 153 4,679 31 December 2019 Incl.: Non-current Current 63,387 62,667 720 3,783 12,544 10,310 2,234 18,940 2,477 114,277 77,045 1,175 9,499 2,608 5,708 16,463 37,232 Asset retirement obligations changed as follows: 2020 63,387 39,826 (154) 2019 36,424 2,158 (387) (119) 2,707 23,092 1,360 (1,882) 34 1 January Provisions made during the period Reversal of provisions Provisions used during the period Accretion expense (325) 3,882 8,921 (9,395) 5,450 22 Change in discount rate Changes in estimates Foreign currency translation differences Other 31 December 111,614 63,387 Note 23. Pension liabilities The Group sponsors a postretirement defined benefit pension plan that covers the majority of the Group’s employees. One type of pension plan is based on years of service, final remuneration levels as of the end of 2003 and employee gratitude, received during the period of work. The other type of pension plan is based on salary. These plans are solely financed by Group companies. Simultaneously employees have the right to receive pension benefits with a partial payment by the Group (up to 4% of the annual salary of the employee). Plan assets and pensions payments are managed by a non-state pension fund, JSC “NPF Otkritie” (former “NPF LUKOIL-GARANT”). The Group also provides several long-term social benefits, including lump-sum death- in-service benefit, in case of disability and upon retirement payments. Also certain payments are received by retired employees upon reaching a certain old age or invalidity. The Company uses 31 December as the measurement date for its pension obligation. An independent actuary has assessed the benefit obligations at 31 December 2020 and 2019. 32 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 23. Pension liabilities (сontinued) The following table sets out movement in the pension liabilities before taxation during 2020 and 2019. 2020 2019 8,910 3,182 2,510 (1,385) (680) (5) 1 January 12,544 1,771 1,680 (1,566) (693) 49 Components of defined benefit costs recorded in profit or loss Components of defined benefit costs recorded in other comprehensive loss Contributions from employer Benefits paid Opening balance adjustment Liability assumed in business combination 31 December 9 12 13,794 12,544 Note 24. Equity Common shares 31 December 2020 31 December 2019 (thousands of shares) (thousands of shares) Issued common shares, par value of 0.025 RUB each Treasury shares 692,866 (40,367) 652,499 715,000 (62,119) 652,881 Outstanding common shares The Company has the right to issue additional 85,000 thousands of common shares. On 3 December 2019, at the extraordinary general shareholders’ meeting a decision was made to reduce the share capital of the Company by purchase of a portion of issued shares in order to reduce the total number thereof. At 31 December 2019, the Group recognised an obligation to repurchase common shares in the amount of 120,988 million RUB. Share capital reduction to 693 million common shares by purchase and cancellation of 22 million common shares was executed on 10 February 2020. Most of the common shares were purchased from a Group company. On 20 June 2019, at the annual general shareholders’ meeting a decision was made to reduce the share capital of the Company to 715 million common shares by purchase and cancellation of 35 million common shares. Share cancellation and share capital reduction was executed on 28 August 2019. Out of 35 million common shares 15.5 million common shares were purchased from a Group company. In 2019, a Group company purchased 24.5 million common shares and depositary receipts of the Company as part of the open market buyback programme announced on 30 August 2018. Dividends At the extraordinary general shareholders’ meeting on 3 December 2020, interim dividends for 2020 were approved in the amount of 46.00 RUB per common share. At the annual general shareholders’ meeting on 23 June 2020, dividends for 2019 were approved in the amount of 350.00 RUB per common share. At the extraordinary shareholders’ meeting on 3 December 2019, interim dividends for 2019 were approved in the amount of 192.00 RUB per common share. Total dividends for 2019 were approved in the amount of 542.00 RUB per common share. Dividends on the Company’s shares payable of 699 million RUB and 133,514 million RUB are included in “Other current liabilities” in the consolidated statement of financial position at 31 December 2020 and 2019, respectively. 33 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 24. Equity (сontinued) Earnings per share The calculation of basic and diluted earnings per share was as follows: 2020 15,175 650,965 24,827 - 2019 640,178 664,578 20,122 180 Profit for the year attributable to PJSC LUKOIL shareholders Weighted average number of common shares (thousands of shares) Dilutive effect of equity-settled share-based compensation plan (thousands of shares) Dilutive effect related to obligation to repurchase common shares (thousands of shares) Weighted average number of common shares, assuming dilution (thousands of shares) 675,792 684,880 Profit per share of common stock attributable to PJSC LUKOIL shareholders (in Russian rubles): Basic 23.31 22.46 963.28 934.73 Diluted Note 25. Personnel expenses Personnel expenses were as follows: 2020 154,093 35,063 2019 143,602 33,417 Payroll costs Statutory insurance contributions Share-based compensation Total personnel expenses 31,366 31,366 220,522 208,385 Note 26. Finance income and costs Finance income was as follows: 2020 6,244 4,245 2,562 13,051 2019 15,452 4,878 Interest income from deposits Interest income from loans Other finance income 4,804 Total finance income 25,134 Finance costs were as follows: 2020 37,333 4,505 2019 39,145 2,752 Interest expenses Accretion expenses Other finance costs Total finance costs 2,284 2,459 44,122 44,356 Note 27. Other income and expenses Other income was as follows: 2020 2,618 7,267 8,085 17,970 2019 10,496 13,468 8,837 Gain on disposal of assets Reversal on impairments of assets Other income Total other income 32,801 34 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 27. Other income and expenses (сontinued) Other expenses were as follows: 2020 20,755 114,665 8,423 2019 18,056 22,883 9,228 Loss on disposal of assets Impairments loss Charity expenses Other expenses 11,287 155,130 10,325 60,492 Total other expenses Note 28. Lease Primarily the Group leases such assets as transport (vessels, tank cars), land, drilling rigs and other equipment, storage facilities. The lease typically runs for a period of 3–5 years. Some leases include an option to renew the lease for additional period after the end of the non-cancellable period. The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that includes renewal option. Moreover, in determining the lease term the Group also took into account economic factors, which influence asset usage duration in its activity. Exploration Refining, marketing and production and distribution Other Total Carrying amounts Property, plant and equipment owned Right-of-use assets 3,214,181 35,567 820,657 138,873 959,530 802,364 131,829 934,193 49,574 5,622 4,084,412 180,062 31 December 2020 3,249,748 2,995,944 39,946 55,196 51,518 4,406 4,264,474 3,849,826 176,181 Property, plant and equipment owned Right-of-use assets 31 December 2019 3,035,890 55,924 4,026,007 Right-of-use assets: Exploration Refining, marketing and production and distribution 131,829 45,573 Other 4,406 1,868 (754) 102 Total 176,181 50,030 1 January 2020 39,946 Additions 2,589 Depreciation for the period Other movements 31 December 2020 1 January 2019 (10,322) 3,354 (54,497) 15,968 (65,573) 19,424 35,567 138,873 125,657 35,011 5,622 5,527 94 180,062 185,519 42,618 54,335 Additions 7,513 Depreciation for the period Other movements 31 December 2019 (13,326) (8,576) 39,946 (31,850) 3,011 (818) (397) 4,406 (45,994) (5,962) 176,181 131,829 Lease liabilities: 31 December 2020 Incl.: Non-current Current 193,872 159,340 34,532 31 December 2019 Incl.: Non-current Current 171,880 143,902 27,978 35 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 28. Lease (сontinued) Within the consolidated statement of profit or loss and other comprehensive income the following expenses were recognized: interest on lease liabilities in the amount of 9,435 million RUB and 9,836 million RUB and variable lease payments not included in the measurement of lease liabilities in the amount of 10,853 million RUB and 9,418 million RUB during 2020 and 2019, respectively. Income from sub-leasing right-of-use assets was not material. Within the consolidated statement of cash flows the total cash outflow under leases, including variable lease payments attributable to capital expenditure, amounted to 170,990 million RUB and 120,755 million RUB during 2020 and 2019, respectively. Note 29. Income tax Operations in the Russian Federation are subject to a 20% income tax rate. For the period from 2017 till 2024 (inclusive) the Federal income tax rate is set as 3.0% and the regional income tax rate is set as 17.0%. Regional income tax rate may be reduced for certain categories of taxpayers by the laws of constituent entities of the Russian Federation, however certain restrictions apply on the application of the reduced regional rates. The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate. A number of Group companies in Russia are paying income tax as a consolidated taxpayers’ group (“CTG”). This allows taxpayers to offset taxable losses generated by certain participants of a CTG against taxable profits of other participants of the CTG. Income tax was as follows: 2020 63,458 (2,096) 61,362 20,792 82,154 2019 149,032 (4,417) 144,615 6,518 Current income tax expense for the year Adjustment for prior periods Current income taxes Deferred income tax Total income tax expense 151,133 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 of 20% applicable to the Company to profit before income taxes to total income taxes. 2020 98,787 19,757 2019 793,354 158,671 Profit before income taxes Notional income tax at the Russian statutory rate Increase (reduction) in income tax due to: Non-deductible items, net 9,483 7,907 18,056 (17,709) (4,417) (3,468) 151,133 Domestic and foreign rate differences Adjustment for prior periods (2,096) 47,103 82,154 Change in recognised deductible temporary differences Total income tax expense The following table sets out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities. 36 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 29. Income tax (сontinued) 31 December 2020 31 December 2019 Property, plant and equipment Investments 9,221 53 5,332 60 Inventories 6,658 4,768 Accounts receivable Accounts payable and provisions Tax loss carry forward Other 1,586 1,583 9,691 11,052 35,344 514 22,614 522 Total deferred income tax assets Set off of tax 50,345 (34,047) 16,298 (290,641) (1,863) (3,149) (4,662) (652) 58,653 (29,980) 28,673 (276,175) (1,517) (4,557) (8,551) (1,518) (1,821) (294,139) 29,980 (264,159) (235,486) Deferred income tax assets Property, plant and equipment Investments Inventories Accounts receivable Accounts payable and provisions Other (2,036) (303,003) 34,047 (268,956) (252,658) Total deferred income tax liabilities Set off of tax Deferred income tax liabilities Net deferred income tax liabilities Foreign currency translation Recognition in Acquisitions 31 December 2019 profit or loss and disposal differences and other 31 December 2020 Property, plant and equipment Investments (270,843) (1,457) 211 (9,859) (306) 244 - (962) (47) (281,420) (1,810) 3,509 Inventories 3,110 (9) (13) (17) (75) - 197 Accounts and notes receivable Accounts payable and provisions Tax loss carry forward Other (6,968) 9,534 4,385 (480) 928 (3,076) 9,039 (1,406) (16,687) (29) 35,344 (1,307) (235,486) 4,032 (178) 3,490 22,614 (1,514) (252,658) Net deferred income tax liabilities (20,792) 130 Foreign currency translation Recognition in Acquisitions 31 December 2018 profit or loss and disposal differences and other 31 December 2019 Property, plant and equipment Investments (259,171) (2,326) 1,224 (12,358) 835 (1,477) 2,163 34 (270,843) (1,457) 211 - Inventories (1,016) 1,742 (217) 4,264 232 - 3 Accounts and notes receivable Accounts payable and provisions Tax loss carry forward Other (9,145) 10,349 - 435 (6,968) 9,534 - (4) (598) (1,905) 176 32,989 35,344 (1,307) (235,486) (1,715) (227,795) - Net deferred income tax liabilities (6,518) (1,481) 308 37 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 29. Income tax (сontinued) Deferred tax assets have not been recognised in respect of the temporary differences related to the following items: 31 December 2020 31 December 2019 Property, plant and equipment Tax loss carry forward Other 15,136 39,126 5,670 1,412 10,374 1,043 Total unrecognised deferred tax assets 59,932 12,829 Management believes that it is not probable that taxable profit will be available against which these deductible temporary differences can be utilised. Amounts recognised in other comprehensive income during 2020: Before tax Tax Net of tax Foreign currency translation differences for foreign operations 268,707 - 268,707 Change in fair value of financial assets at fair value through other comprehensive income (767) (1,680) - 257 257 (767) (1,423) Remeasurements of defined benefit liability/asset of pension plan Total 266,260 266,517 Amounts recognised in other comprehensive income during 2019: Before tax Tax Net of tax Foreign currency translation differences for foreign operations (164,117) - (164,117) Change in fair value of financial assets at fair value through other comprehensive income (348) (2,510) - 534 534 (348) (1,976) Remeasurements of defined benefit liability/asset of pension plan Total (166,975) (166,441) Retained earnings of foreign subsidiaries for which deferred taxation has not been provided included 1,361,368 million RUB and 1,109,000 million RUB at 31 December 2020 and 2019, respectively. This liability was not recognised because the Group considers such amounts to be indefinitely invested, i.e. management believes that they will not be returned in the foreseeable future. Moreover the Group controls the dividend policy of its subsidiaries and is able to veto the payment of dividends. The consequences of taxation in Russia of certain profits of controlled foreign corporations in accordance with applicable tax legislation are accounted for within current and deferred tax liabilities. Note 30. Commitments and contingencies Capital commitments Capital commitments of the Group relating to construction and acquisition of property, plant and equipment amount to 501,550 million RUB and 517,977 million RUB at 31 December 2020 and 2019, respectively. Insurance To provide insurance protection, the Group uses the services of Russian and international insurance companies with high ratings. The Group's most significant risks are reinsured at the first-class foreign markets. In respect of liability to third parties for damages to property and the environment resulting from accidents related to the Group's property or activities, the Group has insurance coverage that is generally higher than the limits set by law. Management believes that the Group has sufficient insurance coverage of its core operating assets, as well as risks, which could have a material effect on the Group’s operations and financial position. 38 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 30. Commitments and contingencies (сontinued) Environmental liabilities Group companies and their predecessor companies have operated in the Russian Federation and other countries for many years, which resulted in certain environmental consequences. Environmental regulations are currently in development stage in the Russian Federation and other countries where the Group has operations. Group companies routinely assess and evaluate their environmental 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 recognised in profit or loss. 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 material 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 capitalised 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 characterised 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, who are enabled by law to impose substantial fines, penalties and interest charges. In the Russian Federation a tax year remains open for review by the tax authorities during 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 significantly increase taxation risks in the Russian Federation and other emerging markets where Group companies operate, comparing to other countries where taxation regimes have been subject to development and clarification over longer periods. The tax authorities in each region of the Russian Federation may have a different interpretation of similar taxation issues which may result in taxation issues successfully defended by the Group in one region being unsuccessfully defended by the Group 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. The Group is subject to tax authority audits on an ongoing basis, which is a normal practice in the Russian Federation 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 the requirements 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 consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. 39 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 30. Commitments and contingencies (сontinued) Litigation and claims In July 2015, the prosecutors with the Ploesti Court of Appeals (hereinafter the “Prosecutor’s Office”) charged the general director and several officers of PETROTEL-LUKOIL S.A., a Group company, with bad faith use of the company’s credit and money laundering. Similar charges were brought against LUKOIL Europe Holdings B.V., a Group company, for 2010–2014. On 10 May 2016, the Prahova Tribunal lifted all preventive measures that were in effect against the accused individuals. Upon preliminary hearings the Prosecutor’s Office revised the amount of damage claimed from $2.2 billion (162.5 billion RUB) to $1.5 billion (110.8 billion RUB). An expertise of all relevant issues of the criminal case was carried out during 2017, the results of which were accepted by the Tribunal on 12 February 2018. At the final hearing on the case which was held on 23 October 2018 the court issued a not guilty decision to all the accused, including general director of PETROTEL-LUKOIL S.A., his deputies and PETROTEL-LUKOIL S.A. and LUKOIL Europe Holdings B.V. themselves. As a result freezing injunction in the amount of approximately $1.5 billion (110.8 billion RUB) was removed from all assets of the refinery, shares and accounts of PETROTEL-LUKOIL S.A. and LUKOIL Europe Holdings B.V. On 1 November 2018, this decision was appealed by the Prosecutor’s Office to the Ploesti Court of Appeals. On 27 November 2019, the Ploesti Court of Appeals issued a decision to return the case for a new examination in the court of first instance. On 24 December 2019, the defendants appealed the decision in an order of extraordinary appeal to the Ploesti Court of Appeals. On 17 June 2020, the Ploesti Court of Appeals rejected the appeal of PETROTEL-LUKOIL S.A. and transferred the case to the Prahova Tribunal. On 9 December 2020, the Prahova Tribunal issued a repeated acquittal due to the absence of an event of a crime. On 16 December 2020, the Prosecutor’s Office filed a protest against the court's verdict. Management does not believe that the outcome of this matter will have a material adverse effect on the Group’s financial position. LUKOIL Overseas Karachaganak B.V., a Group company, among other contractors, is involved in the disputes with the Republic of Kazakhstan arising from the Final Production Sharing Agreement relating to the Contract area of the Karachaganak Oil and Gas Condensate Field. Currently, within the framework of the dispute with respect to cost recovery in 2010-2016 the parties are making efforts to resolve the existing controversies by way of negotiations. Management believes that the ultimate outcome of this dispute will not have a material adverse effect on the financial position of the Group. Within the framework of the arbitration proceedings regarding the correctness of the calculation of the "Fairness index", the parties signed a settlement agreement. On 11 December 2020, after the fulfillment of conditions stipulated by the agreement, the arbitration dispute was settled (the Group's share in the settlement was $196 million). The case is over. On 21 May 2020, the Federal Antimonopoly Service of Russia (hereinafter – FAS of Russia) filed a claim to the Arbitration court of the Arkhangelsk region for invalidating the transaction of PJSC LUKOIL for the sale of 100% of shares of JSC Arkhangelskgeoldobycha to LLC Otkritie Promyshlennye Investitsii in May 2017 and applying the consequences of its invalidity. On 31 July 2020, the Arbitration court of Arkhangelsk region passed the case to Arbitration court of Moscow. The hearing date was postponed to 19 March 2021. The transaction to sell shares of JSC Arkhangelskgeoldobycha was concluded after a five-month due diligence and verification of information provided by the seller and the buyer, without any objections from regulatory authorities, in strict compliance with the Russian legislation, after an approval was obtained from the Governmental Commission for Control over Foreign Investments in the Russian Federation. In addition, a written approval was obtained from FAS of Russia to conduct this transaction. The price of the asset was agreed by the parties of the transaction as a result of the lengthy negotiations where largest investment banks were involved as advisers, which confirms the market nature of the deal. In this regard, the Company does not agree with the arguments set out in the claim of FAS of Russia and regards itself as a bona fide seller in this transaction, and will take all necessary measures to protect its rights and legitimate interests. Management does not believe that the outcome of this matter will have a material adverse effect on the Group’s financial position. 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 position. 40 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 30. Commitments and contingencies (сontinued) Political situation In July – September 2014, the United States (“US”), the European Union (“EU”) and several other countries imposed a set of sanctions on Russia, including sectoral sanctions which affect several Russian oil and gas companies. The US Department of the Treasury has placed the Company onto the Sectoral Sanctions Identifications List subject to Directive 4 of the Office of foreign assets control (OFAC). Directive 4 prohibits US companies and individuals from providing, exporting, or re-exporting directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area spreading from the Russian territory and claimed by the Russian Federation. From January 2018 (based on acts adopted in August – October 2017), the US expanded abovementioned sanctions to include certain categories of international oil projects initiated on or after 29 January 2018 in any part of the world, in which companies placed on the Sectoral Sanctions Identifications List subject to Directive 4 (including the Company) have an ownership interest of 33% or more, or ownership of a majority of the voting interests. Management believes that current sanctions do not have a material adverse effect on the current or planned Group’s oil projects. At the same time the Company continues to monitor and evaluate potential risks for its operations in connection with sanctions. The Group is exposed to political, economic and legal risks due to its operations in Iraq. Management monitors these risks and believes that there is no adverse effect on the Group’s financial position that can be reasonably estimated at present. Other matters The Company and other Group companies have been notified by various counterparties of claims in respect of off-specification quantities of crude oil volumes delivered through the Druzhba pipeline (owned and operated by the state-owned company, PJSC Transneft) in the second quarter of 2019. The claims assert that the oil had an average organic chlorine content in excess of the contractual specification, which may allegedly cause the purchasers to suffer certain financial losses. According to publicly available information, this situation was caused by unlawful actions of certain third parties that were aimed at concealing thefts of oil from the pipeline. Currently, agreements have been signed between the Company, PJSC Transneft and all counterparties, which have settled all submitted claims related to this incident. Note 31. Related party transactions The senior management of the Company believes that the Group has appropriate procedures in place to identify and properly disclose transactions with related parties 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 associates and joint ventures. Other financial assets mostly represent loans given to associates and joint ventures. Short-term borrowings and long-term debt mostly represent lease obligations. Outstanding balances with related parties were as follows: 31 December 2020 2,474 31 December 2019 1,645 Accounts receivable and other current assets Other financial assets 32,403 51,053 Total assets 34,877 52,698 Accounts payable 6,902 5,002 Short-term borrowings and long-term debt Total liabilities 17,649 13,759 24,551 18,761 41 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 31. Related party transactions (сontinued) Related party transactions were as follows: 2020 15,351 2,707 2019 31,028 2,356 Sales of oil and oil products Other sales Purchases of oil and oil products Other purchases 57,915 18,342 5,075 84,400 18,936 10,872 2,964 Proceeds from sale of other financial assets, net Proceeds from issuance of short-term borrowings and long-term debt, net 2,080 Key management remuneration Key management personnel includes members of the Board of Directors and members of the Management Board. Remuneration of key management personnel, including basic salary, bonuses and other payments, amounted to 1,728 million RUB and 1,866 million RUB during 2020 and 2019, respectively. Also, a provision under the compensation plan (disclosed in Note 32 “Compensation plan”) was accrued in relation to the Company’s key management personnel in the amount of 3,137 million RUB during 2020 and 2019. Note 32. Compensation plan In late December 2017, the Company announced a compensation plan based on approximately 40 million shares available to certain members of management and key employees for the period from 2018 to 2022, which was implemented in July 2018 and recognised as equity-settled share-based compensation plan. The fair value of the plan was estimated at the grant date at 156.8 billion RUB based on forecasting principles of Monte-Carlo model and is not going to be recalculated in the future. The fair value was estimated assuming a spot-price of the Company’s share in the amount of 4,355 RUB at the grant date, discount for illiquidity in the amount of 9.95% per annum, a risk-free interest rate of 7.50% per annum, an expected dividend yield of 4.99% per annum, an expected time to maturity of five years and a volatility factor of 25.68%. The expected volatility factor was estimated based on the historical volatility of the Company’s shares for the previous five years. The vesting of shares is contingent on meeting the requisite service period, certain KPIs and share price appreciation. The Group is planning to recognise expenses related to the plan evenly during the vesting period. Related to this share plan the Group recognised compensation expenses of 31,366 million RUB during 2020 and 2019. Note 33. Segment information The Group has the following operating segments – exploration and production; refining, marketing and distribution; corporate and other. 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 crude oil and gas. The refining, marketing and distribution segment includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services. The corporate and other business operating segment includes activities of the Company and businesses beyond the Group’s traditional operations. Geographical segments are based on the area of operations and include two segments: Russia and International. 42 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 33. Segment information (сontinued) Operating segments Refining, Exploration and marketing and Corporate and 2020 production distribution other Elimination Consolidated Sales and other operating revenues Third parties 164,993 1,377,246 5,455,680 70,300 18,728 40,892 - 5,639,401 - Inter-segment (1,488,438) Total revenues 1,542,239 262,343 5,525,980 195,558 59,620 14,875 (1,488,438) (32,803) 5,639,401 439,973 Operating expenses Selling, general and administrative expenses 48,670 120,607 62,838 (33,088) 199,027 Profit (loss) for the year attributable to PJSC LUKOIL shareholders 125,192 500,081 (4,882) (102,523) (39,378) (2,612) 15,175 EBITDA 243,322 (16,931) 687,094 (82,154) 13,051 (44,122) (26,110) Income tax expense Finance income Finance costs Foreign exchange loss Equity share in income of associates and joint ventures 11,474 Other expenses (137,160) Depreciation, depletion and amortisation Profit for the year attributable to non-controlling interests Profit for the year attributable to PJSC LUKOIL shareholders (405,440) (1,458) 15,175 Refining, Exploration and production marketing and Corporate and 2019 distribution other Elimination Consolidated Sales and other operating revenues Third parties 270,842 2,093,342 7,548,121 76,077 22,283 45,601 - 7,841,246 - Inter-segment (2,215,020) Total revenues 2,364,184 274,934 7,624,198 228,576 67,884 19,709 (2,215,020) (65,509) 7,841,246 457,710 Operating expenses Selling, general and administrative expenses 47,964 121,383 63,515 (35,690) 197,172 Profit (loss) for the year attributable to PJSC LUKOIL shareholders 473,517 893,950 190,998 371,642 (35,569) (39,962) 11,232 10,562 640,178 EBITDA 1,236,192 (151,133) 25,134 (44,356) 923 Income tax expense Finance income Finance costs Foreign exchange gain Equity share in income of associates and joint ventures 18,246 Other expenses (27,691) Depreciation, depletion and amortisation Profit for the year attributable to non-controlling interests (415,094) (2,043) Profit for the year attributable to PJSC LUKOIL shareholders 640,178 43 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 33. Segment information (continued) Geographical segments 2020 23,522 2019 22,528 Sales of crude oil within Russia Export of crude oil and sales of crude oil by foreign subsidiaries Sales of petroleum products within Russia Export of petroleum products and sales of petroleum products by foreign subsidiaries Sales of chemicals within Russia 1,918,944 785,663 2,548,961 36,386 2,684,320 923,715 3,748,364 40,971 Export of chemicals and sales of chemicals by foreign subsidiaries Sales of gas within Russia 57,036 91,687 32,649 32,490 Sales of gas by foreign subsidiaries 68,200 138,997 53,276 Sales of energy and related services within Russia Sales of energy and related services by foreign subsidiaries Other sales within Russia 53,607 10,451 14,604 40,169 42,270 Other export sales and other sales of foreign subsidiaries Total sales 63,813 48,024 5,639,401 7,841,246 2020 Russia International Elimination Consolidated Sales and other operating revenues Third parties 1,041,967 994,845 2,036,812 314,341 91,727 4,597,434 1,670 - (996,515) (996,515) 34,133 5,639,401 - Inter-segment Total revenues 4,599,104 91,499 5,639,401 439,973 199,027 Operating expenses Selling, general and administrative expenses 110,938 (3,638) Profit (loss) for the year attributable to PJSC LUKOIL shareholders 202,309 590,553 (184,450) 105,065 (2,684) (8,524) 15,175 EBITDA 687,094 2019 Russia International Elimination Consolidated Sales and other operating revenues Third parties 1,221,549 1,606,632 2,828,181 329,688 6,619,697 2,726 - (1,609,358) (1,609,358) 9,766 7,841,246 - Inter-segment Total revenues 6,622,423 118,256 106,939 52,593 7,841,246 457,710 197,172 640,178 1,236,192 Operating expenses Selling, general and administrative expenses Profit for the year attributable to PJSC LUKOIL shareholders EBITDA 93,963 (3,730) 577,939 9,646 1,032,126 199,811 4,255 In the International segment the Group receives the most substantial revenues in Switzerland, the USA and Singapore. 2020 2019 Sales revenues in Switzerland in the USA 2,449,415 680,033 357,647 3,503,238 1,128,181 482,132 in Singapore These amounts are attributed to individual countries based on the jurisdiction of subsidiaries making the sale. 44 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 34. Subsidiaries The most significant subsidiaries of the Group are presented below: 31 December 2020 31 December 2019 Total shares Voting shares Total shares Voting shares Country of incorporation Subsidiary LUKOIL-West Siberia LLC LUKOIL-PERM LLC Russia 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Russia LUKOIL-Komi LLC Russia RITEK LLC Russia LUKOIL-Permnefteorgsintez LLC LUKOIL-Nizhegorodnefteorgsintez LLC LUKOIL-Nizhnevolzhskneft LLC LUKOIL-Volgogradneftepererabotka LLC ISAB S.r.l. Russia Russia Russia Russia Italy LITASCO SA Switzerland Netherlands Austria LUKARCO B.V. LUKOIL INTERNATIONAL GmbH LUKOIL International Upstream Holding B.V. LUKOIL Neftohim Burgas AD LUKOIL Overseas Karachaganak B.V. LUKOIL Overseas Shah Deniz Ltd. LUKOIL Overseas Uzbekistan Ltd. LUKOIL Securities B.V. Netherlands Bulgaria Netherlands Cyprus 99.85% 99.85% 99.85% 99.85% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cyprus Netherlands USA LUKOIL Pan Americas LLC Note 35. Fair value There are the following methods of fair value measurement based on the valuation method: Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3 – unobservable inputs. The following tables show the carrying amounts and fair values of financial assets and financial liabilities included in the consolidated statement of financial position at 31 December 2020 and 2019. Fair value 31 December 2020 Carrying amount Level 1 Level 2 Level 3 Total Financial assets: Commodity derivative contracts Financial assets at fair value through profit or loss 316 33,195 2,491 - - 316 - 33,195 - 316 33,195 2,491 - - Financial assets at fair value through other comprehensive income 2,491 Financial liabilities: Commodity derivative contracts Loans and borrowings 418 - 418 - - 418 638,453 362,818 307,832 670,650 45 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 35. Fair value (сontinued) Fair value Level 2 31 December 2019 Carrying amount Level 1 Level 3 Total Financial assets: Commodity derivative contracts Financial assets at fair value through profit or loss 180 51,054 2,656 - - 180 - 51,054 - 180 51,054 2,656 - - Financial assets at fair value through other comprehensive income 2,656 Financial liabilities: Commodity derivative contracts Loans and borrowings 550 - 550 - - 550 537,070 265,109 295,726 560,835 The fair values of cash and cash equivalents (Level 1), accounts receivable and long-term accounts receivable (Level 3), short-term borrowings (Level 3) are approximately equal to their value as disclosed in the consolidated statement of financial position. The fair value of long-term receivables was determined by discounting with estimated market interest rates for similar financing arrangements. The fair value of long-term loans (Level 3) was determined as a result of discounting using estimated market interest rates for similar financing instruments. These amounts include all future cash outflows associated with the long-term debt repayments, including the current portion and interest. Market interest rates mean the rates of raising long-term debt by companies with a similar credit rating for similar tenors, repayment schedules and other similar main terms. The fair value of bonds (Level 1) was determined based on market quotations at 31 December 2020 and 2019. Note 36. Capital and risk management The Group’s governing bodies pay great attention to risk management issues to provide a reasonable guarantee for the achievement of the set objectives under the conditions characterized by uncertainties and negative impact factors. The Group is constantly identifying, describing, estimating and monitoring the possible events that may affect its activities, and is elaborating measures to prevent them or mitigate their negative impact to the greatest extent possible if such events do take place. The Group seeks to actively promote risk management and is presently focusing its efforts on the improvement of a general enterprise risk management system (ERM) based on the best international practices. The Group is constantly improving the applicable regulatory methodological risk management base that establishes requirements aimed at organizing the risk management process at all stages, and defines management standards for certain risk types of utmost importance, which are uniform for all of Group organizations. The Risk Committee, a dedicated body under the President of the Company, was set up and began its work in 2011. The information with regard to key financial risks of the Group is presented below. Credit risk The Group’s most significant credit risks include first of all the risk of failure by its counterparties to perform their obligations in terms of payment for the products supplied by the Group. In order to mitigate these risks, the Group focuses on partnerships with counterparties that have high credit ratings, accepts letters of credit and guarantees issued by reputable banks and sometimes demands prepayment for the products supplied. In addition, it utilizes tools to limit the credit risks of a given counterparty. Another group of credit risks includes risks associated with contractor banks’ activities and potential impairment of their financial stability. In order to mitigate these risks, the Group is involved in centralized treasury operations, part of which are aimed at fund raising, investment and operations involving currency exchange and financial derivatives. The credit ratings of contractor banks are monitored on a regular basis. The carrying amount of financial assets represents the maximum exposure to credit risk. 46 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 36. Capital and risk management (сontinued) Trade and other receivables Analysis of the aging of receivables: 31 December 2020 342,930 10,895 31 December 2019 402,713 21,299 Not past due Past due less than 45 days Past due from 46 to 180 days Past due from 181 to 270 days Past due from 271 to 365 days Past due more than 365 days Total trade and other receivables 4,315 8,809 635 963 11,053 587 443 2,681 370,271 437,052 Not past due accounts receivable are not considered of high credit risk. Allowance for expected credit losses changed as follows during 2020: 31 December 2019 31,287 5,771 Increase in allowance charged to profit or loss Write-off (2,379) 3,679 Foreign currency translation differences Other (666) 31 December 2020 37,692 Allowance for expected credit losses changed as follows during 2019: 31 December 2018 27,798 9,270 (3,381) (2,492) 92 Increase in allowance charged to profit or loss Write-off Foreign currency translation differences Other 31 December 2019 31,287 Financial instruments used by the Group and potentially exposed to concentrations of credit risk consist primarily of cash equivalents, over-the-counter production contracts and trade receivables. The cash and cash equivalents are held with banks, which are generally highly rated. The credit risk from the Group’s over-the-counter derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction, typically a major bank or financial institution. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant non-performance. The Group also uses futures contracts, but futures have a negligible credit risk because they are traded on the New York Mercantile Exchange or the Intercontinental Exchange (ICE Futures). Liquidity risk The Group’s liquidity is managed on a centralized basis. There is an efficient global system in place to manage the Group’s liquidity, which includes an automated system of concentrating and re-distributing the funds, corporate dealing and also rolling cash-flow forecasts. The liquidity indicators are monitored on a continuous basis. 47 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 36. Capital and risk management (сontinued) Contractual maturities of the Group’s financial liabilities (the Group itself determines the grouping of the maturity based on contractual maturities and, where relevant, on judgment): Contractual Carrying cash flows Less than 12 amount (undiscounted) months 1-2 years 2-5 years Over 5 years Loans and borrowings, including interest expense 134,150 173,227 50,966 23,218 47,289 51,754 Bonds, including interest expense 334,255 193,872 597,406 418 407,958 257,533 597,406 418 15,295 44,232 595,465 418 50,764 27,429 1,437 - 135,780 67,514 141 206,119 118,358 363 Lease obligations Trade and other payables Derivative financial liabilities 31 December 2020 - - 1,260,101 1,436,542 706,376 102,848 250,724 376,594 Contractual Carrying cash flows Less than 12 amount (undiscounted) months 1-2 years 2-5 years Over 5 years Loans and borrowings, including interest expense 134,484 174,563 45,260 25,980 49,746 53,577 Bonds, including interest expense 249,274 171,880 606,566 550 290,545 235,613 606,566 550 71,091 37,069 605,203 550 9,225 26,742 932 136,712 59,077 350 73,517 112,725 81 Lease obligations Trade and other payables Derivative financial liabilities 31 December 2019 - - - 1,162,754 1,307,837 759,173 62,879 245,885 239,900 Currency risk The Group is subject to foreign exchange risks since it operates in a number of countries. The exchange rate of the Russian ruble to the US dollar produces the greatest impact on transaction results, since the Group’s export proceeds are denominated in dollars, while the major costs are incurred in Russia and are denominated in Russian rubles. As part of the centralized approach to management of the treasury operations and liquidity of the Group, the risks associated with unfavorable changes in the exchange rates are generally consolidated at the corporate level. The Company uses an integrated approach to manage its currency risks, including the application of natural hedging mechanisms, which encompass management of the currency structure of its monetary assets and liabilities. The carrying amounts of the Group’s assets and liabilities which form currency risk at 31 December 2020 and 2019 are presented in the tables below and contain balances between Group companies whose functional currency is different from the currency of the contract. 31 December 2020 Financial assets: USD EUR Other currencies Cash and cash equivalents Trade and other receivables Loans 2,014 79,401 260,894 1,698 56,041 181 778 4,516 - 3,452 2 Other financial assets Financial liabilities: Loans and borrowings Trade and other payables Net exposure 90 (354,100) (29,350) (39,443) (41,051) (8,622) 10,003 (8,470) (19,875) (22,961) 48 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 36. Capital and risk management (сontinued) 31 December 2019 Financial assets: USD EUR Other currencies Cash and cash equivalents Trade and other receivables Loans 64,708 144,336 199,764 2,651 12,309 6,699 4,794 54 761 4,765 - Other financial assets Financial liabilities: Loans and borrowings Trade and other payables Net exposure 124 (399,921) (51,560) (40,022) (37,104) (14,655) (27,903) (3,651) (11,696) (9,697) The following exchange rates applied: 31 December 2020 73.88 31 December 2019 61.91 USD EUR 90.68 69.34 Sensitivity analysis Analysis of the currency position shows that the Group mainly uses RUR, US dollar and EUR in its operating activity. Thus sensitivity analysis shows how strengthening (weakening) of these currencies at 31 December 2020 and 2019 would have affected the measurement of financial assets and liabilities denominated in foreign currencies and affected profit (loss) before taxes. The analysis assumes that all other variables remain constant. Profit (loss) 2020 (5,262) 1,121 2019 (1,952) 222 US Dollar (increase by 10%) Euro (increase by 10%) Russian ruble (increase by 10%) 3,873 1,113 The weakening of these currencies by 10% will have equal effect on profit (loss) but with opposite sign. Interest rate risk The Group is exposed to a significant interest rate risk both in the short- and long-term. A change in interest rates may affect the cost of funds borrowed by the Group as well as the size of cash flows. To mitigate this risk, the Group is constantly monitoring market conditions, taking measures to improve the debt structure by reaching an optimum balance between fixed and variable interest rates, controlling the need for additional financing and outstanding debt refinancing, extending the term of debt obligations. The interest rate profiles of the Group are presented below: 31 December 2020 31 December 2019 Fixed rate instruments: Financial assets 35,603 (527,063) (491,460) 44,970 (420,239) (375,269) Financial liabilities Net exposure Variable rate instruments: Financial assets 39,523 (132,648) (93,125) 41,596 (132,993) (91,397) Financial liabilities Net exposure 49 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted) Note 36. Capital and risk management (сontinued) Sensitivity analysis for variable rate instruments A reasonably possible change of 100 basis points in interest rates at 31 December 2020 and 2019 would have increased (decreased) profit (loss) before taxes by the amounts shown below. This analysis assumes that all other variables remain constant. Profit (loss) before taxes 100 bp increase 100 bp decrease 2020 Net financial liabilities 2019 (931) 931 914 Net financial liabilities (914) Capital management The Group’s capital management objectives are to secure the ability to continue as a going concern and to optimize the cost of capital in order to enhance value to shareholders. The Company’s management performs regular assessment of the net debt to equity ratio to ensure it meets the Company’s current rating requirements. Equity includes share capital, reserves and retained earnings, as well as non-controlling interests. Net debt is a non-IFRS measure and is calculated as a sum of loans and borrowings, as presented in the consolidated statement of financial position, less cash and cash equivalents. Net debt to equity ratio enables the users to see how significant net debt is. The Group’s net debt to equity ratio was as follows: 31 December 2020 659,711 31 December 2019 553,232 Total debt Less cash and cash equivalents Net debt (343,832) 315,879 (516,032) 37,200 Equity 4,130,766 7.65% 3,973,449 0.94% Net debt to equity ratio 50 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted) Supplementary Information on Oil and Gas Exploration and Production Activities IFRS do not require the information on oil and gas reserves to be disclosed in consolidated financial statements. However, management believes that this supplementary information will benefit the users of consolidated financial statements of the Group. The information on oil and gas exploration and production activities is presented in six separate tables: I. Capitalised 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. Standardised measure of discounted future net cash flows. VI. Principal sources of changes in the standardised measure of discounted future net cash flows. Amounts shown for equity method companies represent the Group’s share in its exploration and production associates and joint ventures, which are accounted for using the equity method of accounting. I. Capitalised costs relating to oil and gas producing activities Total Group's share in consolidated companies equity method companies 31 December 2020 International 105,907 Russia 123,493 Unproved oil and gas properties Proved oil and gas properties Accumulated DD&A 229,400 5,203,864 (2,193,734) 3,239,530 37,901 370,006 (120,843) 287,064 1,645,275 (980,878) 770,304 3,558,589 (1,212,856) 2,469,226 Net capitalised costs Total Group's share in consolidated companies equity method companies 31 December 2019 International 84,203 Russia 109,313 Unproved oil and gas properties Proved oil and gas properties Accumulated DD&A 193,516 28,692 300,337 (99,189) 229,840 1,305,806 (720,304) 669,705 3,296,352 (1,046,271) 2,359,394 4,602,158 (1,766,575) 3,029,099 Net capitalised costs II. Costs incurred in oil and gas property acquisition, exploration, and development activities Total Group's share in consolidated companies equity method companies 2020 International Russia 1,443 Acquisition of properties - Unproved Exploration costs - 1,443 - 237 8,151 43,959 52,110 30,862 311,355 343,660 39,013 Development costs Total costs incurred 355,314 395,770 10,824 11,061 Total Group's share in consolidated companies equity method companies 2019 International 31,393 Russia 2,317 Acquisition of properties - Proved Acquisition of properties - Unproved Exploration costs 33,710 - - 32,419 14,937 17,014 309,797 344,065 47,356 13,439 30,453 4,336 11,254 15,590 Development costs 53,495 363,292 474,811 Total costs incurred 130,746 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted) 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. 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. Total Group's share in consolidated companies equity method companies 2020 International Russia Revenue Sales 123,966 - 645,991 572,660 769,957 572,660 33,879 1,039 34,918 (7,395) - Transfers Total revenues 123,966 (40,583) (3,163) (77,736) (755) 1,218,651 (158,328) (2,951) 1,342,617 (198,911) (6,114) Production costs (excluding production taxes) Exploration expenses Depreciation, depletion and amortisation Taxes other than income taxes Related income taxes (191,707) (611,640) (56,455) 197,570 (269,443) (612,395) (57,618) 198,136 (8,632) (8,864) (4,161) 5,866 (1,163) 566 Total results of operations for producing activities Total Group's share in consolidated companies equity method companies 2019 International Russia Revenue Sales 211,230 - 961,273 985,859 1,172,503 985,859 60,642 1,420 Transfers Total revenues 211,230 (40,277) (7,493) (83,726) (531) 1,947,132 (170,590) (1,855) 2,158,362 (210,867) (9,348) 62,062 (5,899) (33) Production costs (excluding production taxes) Exploration expenses Depreciation, depletion and amortisation Taxes other than income taxes Related income taxes (193,696) (1,035,635) (104,585) 440,771 (277,422) (1,036,166) (116,321) 508,238 (11,144) (15,446) (11,384) 18,156 (11,736) 67,467 Total results of operations for producing activities IV. Reserve quantity information Proved reserves are the estimated quantities of oil and gas reserves which according to geological and engineering data are going to be recoverable with reasonable certainty in future years from known reservoirs under existing economic and operating conditions. Existing economic and operating conditions are based on the 12-months average price and the year-end costs. 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. 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. 52 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted) 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. The Subsoil Law of the Russian Federation states that, upon expiration, a license is subject to renewal at the initiative of the license holder provided that further exploration, appraisal, production or remediation activities are necessary and provided that the license holder has not violated the terms of the license. Since the law applies to both newly issued and old licenses and the Group has currently renewed 66% of its licenses, management believes that licenses will be renewed upon their expiration for the remainder of the economic life of each respective field. Estimated net proved oil and gas reserves and changes thereto for 2020 and 2019 are shown in the tables set out below. Group's share in equity method companies Millions of barrels Consolidated subsidiaries Crude oil International Russia 11,478 (55) Total 11,794 (12) 31 December 2018 316 43 288 1 Revisions of previous estimates Purchase of hydrocarbons in place Extensions and discoveries Production 29 18 47 - 26 531 557 2 (30) 384 140 28 (614) 11,358 (268) 373 (644) 11,742 (128) 401 (18) 273 6 31 December 2019 Revisions of previous estimates Extensions and discoveries Production 2 (39) 513 (549) 10,914 (588) 11,427 (16) 265 31 December 2020 Proved developed reserves 31 December 2019 219 7,464 7,683 116 31 December 2020 283 7,210 7,493 104 The non-controlling interest share included in the above total proved reserves was 61 million barrels and 71 million barrels at 31 December 2020 and 2019, respectively. The non-controlling interest share included in the above proved developed reserves was 38 million barrels and 37 million barrels at 31 December 2020 and 2019, respectively. All non-controlling interests relate to reserves in the Russian Federation. Group's share in equity method companies Billions of cubic feet Natural gas Consolidated subsidiaries International Russia 16,500 124 Total 22,852 18 31 December 2018 6,352 (106) 138 241 18 - Revisions of previous estimates Purchases of hydrocarbons in place Extensions and discoveries Production - 138 70 428 498 - (586) 5,868 204 (626) 16,426 73 (1,212) 22,294 277 (26) 233 11 - 31 December 2019 Revisions of previous estimates Extensions and discoveries Production 15 350 365 (381) 5,706 (617) 16,232 (998) 21,938 (26) 218 31 December 2020 Proved developed reserves 31 December 2019 4,504 5,753 10,257 133 31 December 2020 4,118 5,746 9,864 113 The non-controlling interest share included in the above total proved reserves was 23 billion cubic feet and 26 billion cubic feet at 31 December 2020 and 2019, respectively. The non-controlling interest share included in the above proved developed reserves was 15 billion cubic feet and 14 billion cubic feet at 31 December 2020 and 2019, respectively. All non-controlling interests relate to reserves in the Russian Federation. 53 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted) V. Standardised measure of discounted future net cash flows Estimated future cash inflows from hydrocarbons production are computed by applying the 12-months average price for oil and gas and the year-end exchange rates to year-end quantities of estimated net proved reserves. Adjustments in this calculation for future price changes are 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 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. Total Group's share in consolidated companies equity method companies 31 December 2020 International 2,361,227 (1,462,485) (108,293) 790,449 Russia 28,537,502 (23,445,365) (679,792) Future cash inflows 30,898,729 (24,907,850) (788,085) 639,463 (392,022) (76,904) 170,537 (84,307) 86,230 Future production and development costs Future income tax expenses Future net cash flows 4,412,345 5,202,794 Discount for estimated timing of cash flows (10% p.a.) Discounted future net cash flows (306,616) 483,833 (2,345,485) 2,066,860 (2,652,101) 2,550,693 Non-controlling share in discounted future net cash flows - 12,861 12,861 - Total Group's share in consolidated equity method companies 31 December 2019 International 2,567,902 (1,488,826) (91,906) Russia 39,282,386 (30,022,601) (1,514,998) 7,744,787 companies 41,850,288 (31,511,427) (1,606,904) 8,731,957 Future cash inflows 877,924 (537,056) (105,121) 235,747 Future production and development costs Future income tax expenses Future net cash flows 987,170 Discount for estimated timing of cash flows (10% p.a.) Discounted future net cash flows (375,184) 611,986 (4,129,628) 3,615,159 (4,504,812) 4,227,145 (110,174) 125,573 Non-controlling share in discounted future net cash flows - 26,963 26,963 - 54 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted) VI. Principal sources of changes in the standardised measure of discounted future net cash flows Consolidated companies 2020 4,227,145 23 2019 5,636,665 31,212 Discounted present value at 1 January Net changes due to purchases and sales of minerals in place Sales and transfers of oil and gas produced, net of production costs Net changes in prices and production costs estimates Net changes in mineral extraction taxes Extensions and discoveries, less related costs Previously estimated development cost incurred during the year Revisions of previous quantity estimates Net change in income taxes (525,197) (4,640,038) 2,622,343 86,574 (901,981) (4,542,732) 2,640,183 210,417 360,474 20,422 308,689 (6,476) 381,202 461,076 (443,331) 2,550,693 389,446 Accretion of discount 616,850 Other changes (155,128) 4,227,145 Discounted present value at 31 December Group's share in equity method companies Discounted present value at 1 January 2020 125,573 (60) 2019 158,208 - Net changes due to purchases and sales of minerals in place Sales and transfers of oil and gas produced, net of production costs Net changes in prices and production costs estimates Net changes in mineral extraction taxes Extensions and discoveries, less related costs Previously estimated development cost incurred during the year Revisions of previous quantity estimates Net change in income taxes (18,659) (116,411) 74,626 1,047 (40,684) (122,290) 69,049 452 26,199 2,013 38,478 1,254 14,268 17,621 (39,987) 86,230 18,370 22,222 (19,486) 125,573 Accretion of discount Other changes Discounted present value at 31 December 55 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following report contains a discussion and analysis of the financial position of PJSC LUKOIL at 31 December 2020 and results of its operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019, as well as significant factors that may affect its future performance. It should be read in conjunction with our International Financial Reporting Standards (“IFRS”) consolidated financial statements, including notes and supplementary information on oil and gas exploration and production activities. References to “LUKOIL,” “the Company,” “the Group,” “we” or “us” are references to PJSC LUKOIL and its subsidiaries and associates. All ruble amounts are in millions of Russian rubles (“RUB”), unless otherwise indicated. Income and expenses of our foreign subsidiaries were translated to rubles at rates, which approximate actual rates at the date of the transaction. Tonnes of crude oil and natural gas liquids produced were translated into barrels using conversion rates characterizing the density of crude oil from each of our oilfields and the actual density of liquids produced at our gas processing plants. Hydrocarbon extraction expenses per barrel were calculated using these actual production volumes. Other operational indicators expressed in barrels were translated into barrels using an average conversion rate of 7.33 barrels per tonne. Translations of cubic meters to cubic feet were made at the rate of 35.31 cubic feet per cubic meter. Translations of barrels of crude oil into barrels of oil equivalent (“BOE”) were made at the rate of 1 barrel per BOE and of cubic feet – at the rate of 6 thousand cubic feet per BOE. This report includes forward-looking statements – words such as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “plans,” etc. – that reflect management’s current estimates and beliefs, but are not guarantees of future results. Please see “Forward-looking statements” on page 44 for a discussion of some factors that could cause actual results to differ materially. 56 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Table of Contents Business overview................................................................................................................................... 58 Impact of COVID-19 on the Group’s operations.................................................................................... 58 Key financial and operational results ...................................................................................................... 60 Changes in the Group structure............................................................................................................... 61 Main macroeconomic factors affecting our results of operations ........................................................... 62 International crude oil and refined products prices ............................................................................. 62 Domestic crude oil and refined products prices .................................................................................. 62 Changes in ruble exchange rate and inflation ..................................................................................... 63 Taxation .............................................................................................................................................. 63 Transportation tariffs on crude oil, natural gas and refined products in Russia .................................. 68 Reserves base .......................................................................................................................................... 69 Segments highlights ................................................................................................................................ 70 Exploration and production................................................................................................................. 70 West Qurna-2 project.......................................................................................................................... 73 Refining, marketing and distribution .................................................................................................. 75 Financial results ...................................................................................................................................... 80 Sales revenues..................................................................................................................................... 81 Operating expenses ............................................................................................................................. 85 Cost of purchased crude oil, gas and products .................................................................................... 87 Transportation expenses...................................................................................................................... 88 Selling, general and administrative expenses...................................................................................... 89 Depreciation, depletion and amortization ........................................................................................... 89 Equity share in income of associates and joint ventures ..................................................................... 89 Taxes other than income taxes ............................................................................................................ 90 Excise and export tariffs...................................................................................................................... 91 Exploration expenses .......................................................................................................................... 92 Foreign exchange gain (loss) .............................................................................................................. 92 Other expenses .................................................................................................................................... 92 Income taxes ....................................................................................................................................... 92 Non-GAAP items reconciliation ............................................................................................................. 93 EBITDA reconciliation....................................................................................................................... 93 Free cash flow reconciliation .............................................................................................................. 93 Liquidity and capital resources ............................................................................................................... 94 Operating activities ............................................................................................................................. 94 Investing activities .............................................................................................................................. 94 Financing activities ............................................................................................................................. 95 Credit rating ........................................................................................................................................ 96 Debt maturity ...................................................................................................................................... 96 Litigation and claims............................................................................................................................... 96 Critical accounting policies..................................................................................................................... 96 Other information.................................................................................................................................... 97 Sectoral sanctions against the Russian companies .............................................................................. 97 Operations in Iraq................................................................................................................................ 97 Forward-looking statements.................................................................................................................... 98 57 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Business overview The primary activities of LUKOIL and its subsidiaries are hydrocarbon exploration, production, refining, marketing and distribution. LUKOIL is one of the world’s largest publicly traded vertically integrated energy companies. Our proved reserves under SEC standards amounted to 15.4 billion BOE at 1 January 2021 and comprised of 11.7 billion barrels of crude oil and 22.2 trillion cubic feet of gas. Most of our reserves are conventional. We undertake exploration for, and production of, crude oil and gas in Russia and internationally. In Russia, our major oil producing regions are West Siberia, Timan- Pechora, Ural and Volga region. Our international upstream segment includes stakes in PSAs and other projects in Kazakhstan, Azerbaijan, Uzbekistan, Romania, Iraq, Egypt, Ghana, Norway, Cameroon, Nigeria, Mexico, the Republic of Congo and the UAE. Our daily hydrocarbon production in 2020 amounted to 2.1 million BOE, with liquid hydrocarbons representing approximately 78% of our overall production volumes. LUKOIL has geographically diversified downstream assets portfolio primarily in Russia and Europe. Our downstream operations include crude oil refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, retail sales of refined products, power generation, transportation and sales of electricity, heat and related services. We own and operate four refineries located in European Russia and three refineries located outside Russia – in Bulgaria, Romania, and Italy. Moreover, we have a 45% interest in the Zeeland refinery in the Netherlands. We also own two petrochemical plants in Russia and have petrochemical facilities at our refineries in Bulgaria and Italy. Along with our own production of refined products, we refine crude oil at third party refineries depending on market conditions and other factors. Throughput at our refineries in 2020 amounted to 1.2 million barrels per day, and we produced 1.2 million tonnes of petrochemicals, including olefins, polyolefins and products of organic synthesis. We market our own and purchased crude oil and refined products through our sales channels in Russia, Europe, South- East Asia, Central and North America and other regions. We own petrol stations in 19 countries. Most of our retail networks are located close to our refineries. Our retail sales in 2020 amounted to 12.7 million tonnes of refined products. We also supply jet fuel to airports and bunker fuel to sea and river ports in and outside Russia. We are involved in production, distribution and marketing of electrical energy and heat both in Russia and internationally. In 2020, our total output of commercial electrical energy was 17.1 billion kWh. Our operations and finance activities are coordinated from headquarters in Moscow. We divide our operations into three main business segments: “Exploration and production,” “Refining, marketing and distribution,” and “Corporate and other”. Impact of COVID-19 on the Group’s operations In December 2019, the emergence of a new strain of coronavirus (COVID-2019) was reported in China and has subsequently spread globally. On 11 March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Mobility restrictions, quarantines and similar lockdown measures implemented in different countries to cope with the pandemic had a significant negative impact on the global economy. Deceleration of economic activity resulted in a substantial decrease in demand for hydrocarbons leading to oversupply on the international oil market and a sharp decline in oil prices. Failure of OPEC+ countries to reach a new agreement on crude oil production quotas in the beginning of March put an incremental pressure on oil prices. As a result, the price for Brent collapsed to a 20-years minimum of $13 per barrel in April. On 12 April 2020, OPEC+ countries entered into a new agreement to reduce their collective output by 9.7 million barrels per day starting from 1 May 2020. This coordinated production cut together with the negative impact of low oil prices on crude oil production in different countries resulted in lower supply of crude oil and reduction of surplus on the crude oil market and led to a gradual recovery of oil prices. This upward oil price trend was further supported by the gradual lifting of lockdowns in different countries, recovery in economic activity and respective growth in demand for hydrocarbons. As a result, the price for Brent exceeded $46 per barrel in August 2020. Acceleration of COVID-19 spread in October 2020 resulted in a renewal of lockdown measures in different countries and a decline in the price for Brent to $36 per barrel. Progress with testing of vaccines against COVID-19 pushed the price for Brent up to $52 per barrel by the end of December 2020. From the beginning of COVID-19 pandemic the Group has taken necessary measures to avoid direct impact of the pandemic on its operations with a special focus on protection of the health of employees and clients and uninterrupted production processes. The major impact of COVID-19 on the macroeconomic environment in the oil and gas industry resulted in a number of consequences on operational and financial performance of the Group. 58 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 From February through August 2020, we reduced production of gas at our projects in Uzbekistan to approximately 20% of the projects capacity due to lower demand for Uzbek gas from China. At the same time, since September we have been recovering our gas production in Uzbekistan on the back of growing demand for gas from China, and as of December 2020 production was back to the project levels. Due to the new OPEC+ agreement we cut our crude oil production in Russia in May 2020 by approximately 310 thousand barrels per day, or by 19%, as compared to our daily crude oil production in Russia in the first quarter of 2020. To minimize the negative impact of this production cut on our financial performance the cut was implemented at the least profitable fields. By the end of 2020, production stepped up sequentially by approximately 100 thousand barrels per day as compared to the May level. Due to the agreement crude oil production was also cut at some of our international projects. For example, production at the West Qurna-2 project in Iraq was 90 thousand barrels per day below its capacity as at the end of 2020. Our refining and marketing segment was also affected as demand for jet fuel and motor fuels declined substantially, which had a negative impact on the benchmark refining margins and sales volumes. We adjusted the product slate and optimized utilization rates at our refineries starting from the second quarter of 2020 in order to efficiently react to the adverse macro changes. As a result of optimization, as well as major scheduled maintenance works at several refineries, average daily refinery throughput volumes in 2020 were approximately 25% lower at our European refineries and approximately 9% lower at our Russian refineries as compared to 2019. We also faced a steep decline in the retail sales volumes of motor fuels at our filling stations in Russia and other countries in April 2020, when volumes were 40% lower compared to April 2019. However, from May 2020 retail sales volumes started recovering on the back of the recovery in economic activity in different countries and, in the second half of 2020, reached approximately 94% of the level of the second half of 2019. The impact of the pandemic on the Group’s financial performance in 2020 is discussed in detail in the below discussion and analysis. Management expects that as a result of the effects of the pandemic the macroeconomic environment in the oil and gas industry will remain volatile. Management will continue monitoring the situation closely to ensure prompt reaction to the rapidly changing environment. Management believes that the Group is in a solid financial condition and has adequate liquidity with net financial debt position (excluding lease obligations) of only 122 billion RUB at the end of 2020. This represents an incremental support for continuous operations and meeting all of the Group’s obligations, as well as adequate financing of the investment programme. 59 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Key financial and operational results Q4 2020 Q3 Change, 12 months of 2020 2019 (millions of rubles) 5.1 5,639,401 7,841,246 Change, % 2020 % Sales ................................................................................ 1,530,339 1,456,650 (28.1) (44.4) (44.1) (34.5) (46.1) EBITDA¹, including ........................................................ Exploration and production segment........................... Refining, marketing and distribution segment ............ EBITDA¹ net of West Qurna-2 project............................ 189,612 166,567 46,649 202,223 151,979 77,638 (6.2) 9.6 (39.9) (6.9) 687,094 1,236,192 500,081 243,322 893,950 371,642 182,496 196,008 655,098 1,214,502 Profit for the period attributable to LUKOIL shareholders..................................................................... Capital expenditures ........................................................ Free cash flow² ................................................................ Free cash flow before changes in working capital ........... 29,435 135,161 85,482 61,252 50,420 112,826 114,623 88,318 (41.6) 19.8 (25.4) (30.6) 15,175 495,443 281,131 197,954 640,178 449,975 701,869 708,650 (97.6) 10.1 (59.9) (72.1) (thousand BOE per day) Production of hydrocarbons, including our share in associates and joint ventures............................................ crude oil and natural gas liquids.................................. gas............................................................................... Refinery throughput at the Group refineries .................... 2,099 1,573 526 1,927 1,545 382 8.9 1.8 37.7 (11.5) 2,117 1,651 466 2,380 1,815 565 (11.1) (9.0) (17.5) (15.0) 1,047 1,183 1,174 1,381 ¹ Profit from operating activities before depreciation, depletion and amortization. ² Cash flow from operating activities less capital expenditures. In the fourth quarter of 2020, compared to the previous quarter, our results were positively impacted by an increase in international gas production volumes, higher crude oil production volumes, the ruble depreciation, an increase in international hydrocarbon prices, higher positive export duty lag effect, as well as positive inventory effect at our refineries. At the same time, these were more than offset by the accounting specifics of our international trading operations, lower refinery throughput volumes, weaker refining and trading margins. The dynamics of our results compared to 2019 was largely defined by the impacts of the COVID-19 pandemic, such as a decrease in international hydrocarbon prices and refining margins, lower hydrocarbon production and refinery throughput volumes, a decrease in sales volumes at our filling stations, as well as negative export duty lag effect and negative inventory effect at our refineries. At the same time, our results were supported by the ruble depreciation, higher trading margin and accounting specifics of our international trading operations and an increase in share of high-margin volumes in our domestic crude oil production. As a result, our EBITDA decreased by 6.2% and by 44.4% compared to the third quarter of 2020 and the full year 2019, respectively. Stronger ruble as at the fourth quarter end as compared to the beginning of the quarter resulted in a currency exchange gain of 12 billion RUB in the fourth quarter of 2020 compared to a loss of 27 billion RUB in the third quarter of 2020. The ruble depreciation in 2020 resulted in a currency exchange loss of 26 billion RUB in 2020, as opposed to a gain of 1 billion RUB in 2019 as a result of the ruble appreciation. Compared to the third quarter of 2020 and the full year 2019, our depreciation, depletion and amortization expenses decreased by 12.5% and by 2.3%, respectively. The decrease in the fourth quarter of 2020 was mainly due to positive effect of an increase in proved developed hydrocarbon reserves at Group’s certain fields at the end of 2020 and consequent recalculation of depletion of respective fixed assets for the full year, despite an increase in depletion expenses in Uzbekistan following the recovery of gas production volumes. Due to a significant deterioration in the macroeconomic environment, the Group recognized impairment loss of property, plant and equipment and other non-current assets in the total amount of 115 billion RUB during 2020. In the fourth quarter of 2020, profit attributable to LUKOIL shareholders amounted to 29 billion RUB, compared to profit in the amount of 50 billion RUB in the third quarter of 2020. In 2020, profit attributable to LUKOIL shareholders amounted to 15 billion RUB compared to profit in the amount of 640 billion RUB in 2019. Our capital expenditures increased by 22 billion RUB, or by 19.8%, compared to the third quarter of 2020, and by 45 billion RUB, or by 10.1%, compared to 2019. Our free cash flow amounted to 85 billion RUB in the fourth quarter of 2020, a decrease of 25.4% compared to the third quarter of 2020, that was mainly a result of an increase in capital expenditures, as well as the dynamics of the working capital. 60 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Our free cash flow amounted to 281 billion RUB in 2020, a decrease of 59.9% compared to 2019. Such decline was a result of a decrease in profitability of our core operations, as well as higher capital expenditures. The Group’s average daily hydrocarbon production increased by 8.9% compared to the third quarter of 2020 mainly as a result of gas production recovery in Uzbekistan, as well as due to partial lifting of external limitations on oil production under the new OPEC+ agreement. In 2020, the Group’s average daily hydrocarbon production decreased by 11.1% compared to 2019 mainly due to the new OPEC+ agreement and a temporary decrease in gas supplies from Uzbekistan to China, that were driven by the negative impact of the COVID-19 pandemic on hydrocarbon demand. Compared to the third quarter of 2020 and full year 2019, average daily throughput volumes at our refineries decreased by 11.5% and by 15.0%, respectively, mainly due to throughput optimization at some of the Group’s refineries on the back of lower demand for petroleum products and decline in refining margins due to the COVID-19 pandemic, as well as scheduled maintenance works. Changes in the Group structure In October 2019, a Group company acquired a 5% interest in the Ghasha Concession in the United Arab Emirates from the Abu Dhabi National Oil Company for approximately 13.8 billion RUB ($214 million). In the second quarter of 2019, a Group company entered into a contract with New Age M12 Holdings Limited to acquire a 25% interest in the Marine XII license in the Republic of Congo (Congo-Brazzaville). In September 2019, the transaction in the amount of 51.4 billion RUB ($768 million) was closed after all the customary conditions, including approval by the government of the Republic of Congo, were fulfilled. 61 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Main macroeconomic factors affecting our results of operations International crude oil and refined products prices The price at which we sell crude oil and refined products is the primary driver of the Group’s revenues. The dynamics of our realized prices on international markets generally matches the dynamics of commonly used spot benchmarks such as Brent crude oil price, however our average prices are usually different from such benchmarks due to different delivery terms, quality mix, as well as specifics of regional markets in case of petroleum product sales. During 2020, the price for Brent crude oil dropped sharply from $70.0 per barrel in January to $13.2 per barrel in the end of April as a result of a substantial decrease in global demand for crude oil due to the COVID-19 pandemic. Gradual recovery of global demand together with the new OPEC+ agreement led to a price increase to $52.0 per barrel by the end of December. As a result, average price increased by 3.0% compared to the third quarter of 2020, and decreased by 35.0% compared to 2019. The following tables show the average crude oil and refined product prices. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (US dollars per barrel) Brent FOB dated........................................................ Urals crude (average MED and Rotterdam) .............. 44.24 44.31 42.93 43.24 3.0 2.5 41.79 41.39 64.28 63.89 (35.0) (35.2) (US dollars per tonne) Diesel fuel 10 ppm (FOB Rotterdam) ....................... High-octane gasoline (FOB Rotterdam).................... Naphtha (FOB Rotterdam) ........................................ Jet fuel (FOB Rotterdam).......................................... Vacuum gas oil (FOB Rotterdam)............................. Marine fuel 0.5% (FOB Rotterdam).......................... Fuel oil 3.5% (FOB Rotterdam) ................................ Source: Platts, Argus. 364.68 397.03 389.10 376.52 311.54 326.37 255.45 353.88 394.45 372.17 340.70 297.22 296.40 240.35 3.1 0.7 4.5 10.5 4.8 10.1 6.3 367.07 382.61 351.35 361.50 297.95 311.50 221.37 591.28 614.96 501.31 630.10 450.36 451.30 329.97 (37.9) (37.8) (29.9) (42.6) (33.8) (31.0) (32.9) Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (rubles per barrel) Brent FOB dated........................................................ Urals crude (average MED and Rotterdam) .............. 3,372 3,377 3,158 3,181 6.8 6.2 3,015 2,986 4,161 4,136 (27.5) (27.8) (rubles per tonne) Diesel fuel 10 ppm (FOB Rotterdam) ....................... High-octane gasoline (FOB Rotterdam).................... Naphtha (FOB Rotterdam) ........................................ Jet fuel (FOB Rotterdam).......................................... Vacuum gas oil (FOB Rotterdam)............................. Marine fuel 0.5% (FOB Rotterdam).......................... Fuel oil 3.5% (FOB Rotterdam) ................................ 27,797 30,263 29,658 28,700 23,746 24,877 19,471 26,031 29,015 27,377 25,062 21,863 21,803 17,680 6.8 4.3 8.3 14.5 8.6 14.1 10.1 26,483 38,277 39,810 32,453 40,790 29,154 29,215 21,361 (30.8) (30.7) (21.9) (36.1) (26.3) (23.1) (25.2) 27,604 25,349 26,081 21,496 22,473 15,971 Translated to rubles using average exchange rate for the period. Domestic crude oil and refined products prices Most of the crude oil in Russia is produced and then refined or exported by vertically integrated oil companies. As a result, there is no liquid spot market for crude oil in Russia and no publicly available spot price benchmark. Domestic prices may deviate significantly from export netbacks and they also vary between different regions of Russia driven by supply-demand balance on regional markets. Domestic prices for refined products correlate to some extent with export netbacks, but are also materially affected by supply-demand balance on regional markets. 62 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 The table below represents average domestic wholesale prices for refined products for the respective periods. Q4 2020 Q3 2020 Change, % 12 months of 2020 2019 Change, % (rubles per tonne) Diesel fuel ................................................................. High-octane gasoline (Regular)................................. High-octane gasoline (Premium)............................... Fuel oil ...................................................................... Source: InfoTEK (excluding VAT). 39,226 39,139 40,944 13,889 38,892 42,049 44,292 10,625 0.9 (6.9) (7.6) 30.7 37,292 40,724 38,243 40,487 14,514 (8.4) 3.9 3.4 39,727 41,866 10,990 (24.3) Changes in ruble exchange rate and inflation A substantial part of our revenue is either denominated in US dollars and euro or correlated to some extent with US dollar crude oil prices, while most of our costs are settled in Russian rubles. Therefore, a depreciation of the ruble against the US dollar and euro generally causes our revenues to increase in ruble terms, and vice versa. Ruble inflation also affects the results of our operations. The following table provides data on inflation in Russia and change in the ruble-dollar and the ruble-euro exchange rates. Q4 2020 2.0 Q3 2020 0.2 12 months of 2020 2019 4.9 3.0 Ruble inflation (CPI), %.............................................................................. Ruble to US dollar exchange rate 76.2 79.7 73.9 73.6 70.0 79.7 72.1 61.9 73.9 64.7 69.5 61.9 Average for the period............................................................................ At the beginning of the period ................................................................ At the end of the period .......................................................................... Ruble to euro exchange rate 90.8 93.0 90.7 86.0 78.7 93.0 82.4 69.3 90.7 72.5 79.5 69.3 Average for the period............................................................................ At the beginning of the period ................................................................ At the end of the period .......................................................................... Source: CBR, Federal State Statistics Service. Taxation Key upstream tax rates. The following tables represent average statutory enacted rates applicable to our upstream operations in Russia with no taxation incentives: Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (US dollars per tonne) Mineral extraction tax¹ .............................................. Export duty on crude oil............................................ 131.34 43.21 127.87 44.03 2.7 (1.9) 120.87 45.87 201.40 93.77 (40.0) (51.1) ¹ Translated from rubles using average exchange rate for the period. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (rubles per tonne) Mineral extraction tax ............................................... Export duty on crude oil¹........................................... 10,011 3,294 9,406 3,239 6.4 1.7 8,720 3,309 13,038 6,070 (33.1) (45.5) ¹ Translated to rubles using average exchange rate for the period. These rates are linked to international crude oil prices and change in line with them. Tax manoeuvre. The Russian Government has been implementing the so-called tax manoeuvre in the oil industry, which involves reduction of export duty rate and increase in the crude oil extraction tax and excise tax rates, as well as an introduction of a negative excise tax on refinery feedstock. In 2018, new laws were adopted which came into effect on 1 January 2019. These laws provide for concluding the tax manoeuvre by 2024 through the gradual reduction of crude oil export duty rate to zero and the equivalent increase in the mineral extraction tax rate for crude oil. To eliminate the negative effect of export duty reduction on refining margins, a negative excise on refinery feedstock was introduced. To reduce the sensitivity of domestic prices for motor fuel to changes in international prices, a so-called damper coefficient was included into the negative excise formula, which also led to increase in mineral extraction tax rate. 63 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Crude oil extraction tax rate is calculated on a monthly basis. Crude oil extraction tax is payable in rubles per metric tonne extracted. The tax rate is calculated according to the formula below: Exchange Rate ( ) Rate = 919 × Price − 15 × – Incentive + 428 261 + Tax Manoeuvre Factor + Damper Factors, where Price is a Urals blend price in US dollars per barrel and Exchange Rate is an average ruble exchange rate to US dollar during the period. The Incentive Factor represents incentives discussed further in this section. The Tax Manoeuvre Factor is derived as Export duty reduction factor multiplied by the base export duty rate. The two fixed Damper Factors are applicable when the corresponding components of a negative excise formula are positive. From 2020, a new variable Damper Factor was added to the formula in addition to the fixed factors. The new factor is linked to the export netbacks for gasoline and diesel fuel. The table below sets out key fixed components of the extraction tax formula for crude oil. 1 January to 30 September 2019 1 October to 31 December 2019 2024 and further 1 2020 0.333 (rubles) 105 2021 0.500 2022 0.667 2023 0.833 Export duty reduction factor.................. 0.167 0.167 Damper Factor for gasoline................... Damper Factor for diesel fuel................ 125 110 200 185 105 92 105 92 105 92 105 92 92 Mineral extraction tax on crude oil has the following types of tax incentives applied to our fields and deposits: . A special reducing coefficient is applied to the standard tax rate depending on location, size and complexity of a particular field. This type of incentive with different coefficients is applied to our Yu. Korchagin field located in the Caspian offshore, a number of fields in the Nenets Autonomous region, as well as to our new small-sized fields (recoverable reserves less than 5 million tonnes) and fields and deposits with low permeability like V. Vinogradov, Sredne-Nazymskoye and Imilorskoye fields and Tyumen deposits. Before the end of 2020 the incentive was applied to our highly depleted fields (more than 80% depletion), the Permian layers of our Usinskoye field in Timano-Pechora producing high-viscous crude oil as well as our Yaregskoye field producing extra-viscous crude oil. After the adoption of amendments to the Russian Tax Code in October 2020 these tax incentives have been cancelled as of 1 January 2021. The cancellation of mineral extraction tax incentives for our highly depleted fields was followed by allowance of inclusion of the respective license areas into Group 3 of tax on additional income (hereinafter TAI) regime (see below) as of beginning of 2021; . A fixed tax rate of 15% of the Urals price is applied to our V. Filanovsky offshore field and other greenfields, located in the Caspian Sea; . . A fixed tax rate of 30% of the Urals price is applied to our offshore greenfields, located in the Baltic Sea; A special tax rate is applied to crude oil produced at license areas with TAI regime. For Groups 1 and 4 of TAI a discount to special tax rate is applied depending on the duration of commercial production at the particular license area. For highly depleted license areas in Group 3 of TAI a 20% discount is applied to special tax rate starting from 1 January 2024. Some of the mineral extraction tax incentives are limited in time or capped by cumulative oil production volumes. Tax on additional income. Starting from 2019, a tax on additional income from the crude oil and gas condensate production has been implemented for certain license areas. The TAI rate is set at 50% and is applied to the estimated sales revenue less actual and estimated costs, where actual costs include both operating expenses and capital expenditures. Moreover, TAI tax base may be reduced by the historical cumulative losses attributable to the license area. For crude oil production subject to TAI, a special mineral extraction tax rate formula is applied. The special mineral extraction tax rate (in US dollars per barrel) equals to 50% of the difference between Urals oil price and $15 less the enacted export duty rate. TAI is implemented for five groups of license areas. In Group 1, LUKOIL has nineteen license areas with greenfields in the Yamal-Nenets Autonomous District, including Pyakyakhinskoye field, and a number of fields in Timan-Pechora. In Group 3, LUKOIL has eight license areas with brownfields in West Siberia adopted TAI regime as of 1 January 2019, as well as 105 license areas with depleted reserves in different regions transferred to TAI regime since 1 January 2021. In Group 4, LUKOIL has two license areas with greenfields in traditional regions (West Siberia). LUKOIL has license areas neither in Group 2 nor in Group 5 of the TAI regime. 64 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Crude oil export duty rate is denominated in US dollars per tonne of crude oil exported and is calculated by multiplying the base export duty rate calculated on a monthly basis by the adjusting factor from tables below. International Urals price Base export duty rate Less than, or equal to, $109.5 per tonne ($15 per barrel) $0 per tonne Above $109.5 but less than, or equal to, $146.0 per tonne ($20 per barrel) 35% of the difference between the actual price and $109.5 per tonne (or $0.35 per barrel per each $1 increase in crude oil price over $15 per barrel) Above $146.0 but less than, or equal to, $182.5 per tonne ($25 per barrel) $12.78 per tonne plus 45% of the difference between the actual price and $146.0 per tonne (or $1.75 plus $0.45 per barrel per each $1 increase in crude oil price over $20 per barrel) Above $182.5 per tonne ($25 per barrel) $29.2 per tonne plus 30% of the difference between the actual price and $182.5 per tonne (or $4 plus $0.3 per barrel per each $1 increase in crude oil price over $25 per barrel) 2024 and 2019 2020 2021 2022 2023 further Adjusting factor.............................................................. 0.833 0.667 0.500 0.333 0.167 0 The rate for the next month is being based on average Urals price for the period from the 15th day of the previous month to the 14th day of the current month. This calculation methodology results in the so-called “export duty lag effect,” when export duty rate lags the oil price changes, which may result in sizeable impact on our financial results in the periods of high oil price volatility. As a result of the tax manoeuvre, the lag effect will gradually migrate from the export duty to the mineral extraction tax by 2024. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (US dollars per barrel) Urals price (Argus).................................................... Export duty on crude oil ....................................... Mineral extraction tax on crude oil....................... Net Urals price¹..................................................... Export duty lag effect....................................... Mineral extraction tax lag effect....................... Net Urals price¹ assuming no lag ..................... 44.31 5.92 17.99 20.40 0.61 43.24 6.03 17.52 19.69 0.28 2.5 (1.8) 2.7 41.39 6.28 63.89 12.85 27.59 23.45 0.20 (35.2) (51.1) (40.0) (20.9) - 16.56 18.55 (0.39) (0.20) 19.14 3.6 >100 >100 1.1 0.31 19.48 0.14 19.27 0.03 23.22 - (17.6) (rubles per barrel)² Urals price (Argus).................................................... Export duty on crude oil ....................................... Mineral extraction tax on crude oil....................... Net Urals price¹..................................................... Export duty lag effect....................................... Mineral extraction tax lag effect....................... Net Urals price¹ assuming no lag ..................... 3,377 451 1,371 1,555 46 3,181 444 1,288 1,449 21 6.2 1.6 6.4 2,986 4,136 832 1,786 1,518 13 (27.8) (45.6) (33.1) (11.9) - 453 1,195 1,338 (28) (14) 1,380 7.3 >100 >100 4.8 23 1,486 10 1,418 2 - 1,503 (8.2) ¹ Urals price net of export duty and mineral extraction tax on crude oil. ² Translated to rubles for Urals and export duty on crude oil using average exchange rate for the period. Crude oil produced at some of our fields and license areas under special tax regimes is subject to zero export duty. In particular, a zero rate applies to crude oil of our V. Filanovsky field and other offshore greenfields located in the Caspian Sea, the offshore greenfields in the Baltic Sea as well as license areas belonging to the Group 1 of the TAI regime. A reduced rate was applied to crude oil produced at our Yaregskoye field producing extra-viscous crude oil and our Yu. Korchagin field in the Caspian offshore. In October 2020, amendments to the Russian customs legislation were adopted, providing for the cancellation of reduced export duty rates applied to crude oil produced at these fields starting from 1 January 2021. Crude oil exported to member countries of the Customs Union in the Eurasian Economic Union of Russia, Belarus, Kazakhstan, Armenia and the Kyrgyz Republic (Customs Union) is not subject to export duties. 65 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Crude oil and refined products exported from Russia are subject to two steps of customs declaration and duty payments: temporary and complete. A temporary declaration is submitted based on preliminary exports volumes and the duty is paid in rubles translated from US dollars at the date of the temporary declaration. A complete declaration is submitted after receiving the actual data on the exported volumes, but no later than six months after the date of the temporary declaration. The final amount of the export duty is adjusted depending on the actual volumes, the ruble-US dollar exchange rate at the date of the complete declaration (except for pipeline deliveries for which the exchange rate at the temporary declaration date is used) and the export duty rate. If temporary and complete declarations are submitted in different reporting periods, the final amount of the export duty is adjusted in the period of submission of the complete declaration. The high volatility of the ruble-dollar exchange rates may lead to significant adjustments. For the purposes of the IFRS consolidated financial statements, data from temporary declarations at the reporting period end is translated to rubles from US dollars using the period-end exchange rate. Tax incentives The table below illustrates the impact of tax incentives on taxation of crude oil production from different fields and deposits in our portfolio calculated at $50 per barrel Urals price and zero damper factors. Mineral extraction tax Export duty (in US dollars per barrel) As % of oil price Total Under 2020 tax formulas 21.6 7.7 29.3 58.6 Standard .......................................................................................... Yu. Korchagin field .......................................................................... V. Filanovsky field ........................................................................... D41 field........................................................................................... V. Vinogradov and Imilorskoye fields.............................................. New fields with reserves below 5 million tonnes.............................. Tyumen deposits............................................................................... 7.5 7.5 15.0 0.0 0.0 0.0 7.7 7.7 7.7 7.5 7.5 15.0 15.0 15.0 30.0 13.4 21.1 42.1 15.2–21.6 19.5 22.9–29.3 27.2 45.7–58.6 54.5 Natural gas extraction tax rate is calculated using a special formula depending on average regulated wholesale natural gas price in Russia, Urals price, the share of gas production in total hydrocarbon production at particular license area, regional location and complexity of particular gas field. Reinjected natural gas and associated petroleum gas are subject to zero extraction tax rate. Gas produced from our two major fields in Russia, Nakhodkinskoye and Pyakyakhinskoye, is taxed at the rates subject to application of reducing coefficients due to the fields’ geographical location and the depth of reservoir. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (US dollars per thousand cubic meters)¹ Nakhodkinskoye field ............................................... Pyakyakhinskoye field .............................................. 5.42 7.05 5.56 7.06 (2.5) (0.1) 5.63 6.97 5.48 8.26 2.7 (15.6) ¹ Translated from rubles using average exchange rate for the period. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (rubles per thousand cubic meters) Nakhodkinskoye field ............................................... Pyakyakhinskoye field .............................................. 413 537 409 519 1.0 3.5 406 503 355 535 14.4 (6.0) Export duty rates on refined products are calculated by multiplying the enacted crude oil export duty rate by a coefficient according to the table below. 2019 and further Multiplier for: Gasolines, diesel fuel and other light and middle distillates......................................................................... Straight-run gasoline .................................................................................................................................... Fuel oil ......................................................................................................................................................... 0.30 0.55 1.00 Refined products exported to member countries of the Customs Union are not subject to export duties. 66 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Excise taxes on refined products. The responsibility to pay excises on refined products in Russia is imposed on refined product producers (except for straight-run gasoline). Only domestic sales volumes are subject to excises. Excise tax expense on straight-run gasoline used as a petrochemical feedstock is reimbursed with a coefficient of 1.7, and excise tax expense on middle distillates used as refinery feedstock, bunker fuel or fuel at power plants is reimbursed in double amount. Since 1 April 2020, the fixed excise tax rate for middle distillates was replaced with formula-based rate linked to the level of damper for diesel fuel. In other countries where the Group operates, excise taxes are paid by either producers or retailers depending on the local legislation. Excise rates on motor fuels in Russia are tied to the ecological class of fuel. Average excise tax rates for the periods considered are listed below. Q4 2020 Q3 2020 Change, % 12 months of 2020 2019 Change, % (rubles per tonne) Gasoline (below Euro-5) ........................................... Gasoline (Euro-5)...................................................... Diesel fuel ................................................................. Motor oils.................................................................. Middle distillates..................................................... 13,100 12,752 8,835 5,616 13,766 13,100 12,752 8,835 5,616 15,075 - - - - 13,100 12,752 8,835 5,616 14,524 13,100 12,314 8,541 5,400 9,241 - 3.6 3.4 4.0 57.2 (8.7) Excise tax rates for middle distillates after 1 April 2020 are calculated by formula. Established excise tax rates are listed below. 2023 14,736 14,345 9,938 2020 2021 2022 14,169 13,793 9,556 Gasoline (below Euro-5) ................................ Gasoline (Euro-5)........................................... Diesel fuel ...................................................... Motor oils....................................................... 13,100 12,752 8,835 13,624 13,262 9,188 6,075 6,318 5,616 5,841 Negative excise tax on refinery feedstock The reduction of export duties on crude oil in the course of the tax manoeuvre in Russia leads to an increase in feedstock costs for the domestic refineries. This negative effect is partially compensated by a decrease in export duties on refined products, with the remaining part of the negative effect being fully offset by the negative excise tax implemented from 1 January 2019. The negative excise tax is payable by the Government to the refineries. The negative excise tax rate is calculated separately for each refinery based on the average Urals crude oil price and refinery slate during the month. Our Ukhta refinery benefits from a special uplift regional coefficient of 1.3 applied to the negative excise tax. The negative excise tax formula also includes the damper coefficient for gasoline and diesel fuel sold on the domestic market and starting from 2021 also includes an investment factor. The damper coefficient is calculated by multiplying the corresponding Compensation Coefficients and a difference between gasoline and diesel fuel export netbacks at North- Western Russia delivery basis and corresponding Fixed benchmarks. When the damper coefficient is positive, it is payable by the Government to the refinery, and vice versa. The investment factor is a multiplier to the negative excise tax excluding the damper, which is applicable when a special agreement is signed with the Government providing for at least 60 billion RUB of investments into development of а refinery. The amount of the multiplier depends on the refinery’s geography. The Fixed benchmarks and Compensation Coefficients are presented in the tables below: 1 January to 1 July to 30 June 31 December 2019 2019 2020 2021 2022 2023 2024 (rubles per tonne) Fixed benchmark for gasoline................................ Fixed benchmark for diesel fuel ............................ 56,000 50,000 51,000 53,600 56,300 59,000 62,000 65,000 46,000 48,300 50,700 53,250 56,000 58,700 1 January to 30 June 2019 1 July to 31 December 2019 2020 and further 0.68 Compensation coefficient for gasoline ........................................................... Compensation coefficient for diesel fuel ........................................................ 0.60 0.75 0.60 0.70 0.65 67 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 The following tables present the average enacted damper coefficients for the respective periods: Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (US dollars per tonne)¹ Gasoline .................................................................... Diesel fuel ................................................................. (45.90) (54.85) (61.19) (74.63) (25.0) (26.5) (89.65) (78.06) 56.52 72.93 - - ¹ Translated from rubles using average exchange rate for the period. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (rubles per tonne) Gasoline .................................................................... Diesel fuel ................................................................. (3,498) (4,181) (4,501) (5,490) (22.3) (23.8) (6,468) (5,632) 3,659 4,721 - - Income tax. Operations in the Russian Federation are subject to a 20% income tax rate. For the period from 2017 till 2024 (inclusive) a Federal income tax rate is set as 3.0% and a regional income tax rate is set as 17.0%. Regional income tax rate may be reduced for certain categories of taxpayers by the laws of constituent entities of the Russian Federation, however certain restrictions apply on the application of the reduced regional rates. The Company and its Russian subsidiaries file income tax returns in Russia. A number of Group companies in Russia are paying income tax as a consolidated taxpayers’ group (“CTG”). This allows taxpayers to offset taxable losses generated by certain participants of a CTG against taxable profits of other participants of the CTG. The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate. Transportation tariffs on crude oil, natural gas and refined products in Russia Many of our production assets are located relatively far from our customers. As a result, transportation tariffs are an important factor affecting our profitability. Сrude oil produced at our fields in Russia is transported to refineries and exported primarily through the trunk oil pipeline system of the state-owned company, Transneft. In some cases, crude oil is also shipped via railway infrastructure of the state-owned company, Russian Railways. Refined products produced at our Russian refineries are transported primarily by railway (Russian Railways) and the pipeline system of Transnefteproduct, a subsidiary of Transneft. Gas that is not sold at the wellhead is transported through the Unified Gas Supply System owned and operated by Gazprom. Transneft, Russian Railways and Gazprom are state-controlled natural transportation infrastructure monopolies and their tariffs are regulated by the Federal Antimonopoly Service of Russia and set in rubles. The following table sets forth the changes in the average tariffs charged by the state-controlled transportation service providers in Russia. Q4 2020 to Q3 2020 0.0% 12 months of 2020 to 12 months of 2019 3.4% Transneft (crude oil)........................................................................................ Russian Railways (crude oil and refined products).......................................... 0.0% 3.5% 68 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Reserves base The tables below summarize the net proved reserves of our consolidated subsidiaries and our share in net proved reserves of our associates and joint ventures under the standards of the US Securities and Exchange Commission (until the economic limit of commercial production is reached) that have been derived from our reserve reports audited by Miller and Lents Ltd, our independent reservoir engineers, at 31 December 2020 and 2019. Changes in 2020 Extensions, discoveries and Revision of 31 December 2020 Production(1) changes in structure previous 31 December (hydrocarbons, millions of BOE) estimates (265) 60 2019 8,185 2,414 2,247 1,173 176 West Siberia ..................................................... Timan-Pechora ................................................. Ural region ....................................................... Volga region ..................................................... Other in Russia ................................................. Outside Russia .................................................. Proved oil and gas reserves ............................ Probable oil and gas reserves ........................ Possible oil and gas reserves .......................... ¹ Gas production shown before own consumption. 7,884 2,403 2,156 1,116 163 1,663 15,385 5,581 2,802 (319) (113) (124) (90) (11) (118) (775) 284 42 93 40 3 (60) (8) (5) 2 464 205 (73) 1,574 15,769 6,217 3,000 Changes in 2020 Extensions, discoveries and Revision of 31 December 2020 changes in structure previous 31 December (crude oil, millions of barrels) Production (245) (102) (115) (80) estimates (271) 52 2019 6,070 2,289 2,112 810 West Siberia .................................................... Timan-Pechora ................................................ Ural region ....................................................... Volga region .................................................... Other in Russia ................................................ Outside Russia ................................................. Proved oil reserves ......................................... Probable oil reserves .................................... Possible oil reserves ....................................... 5,789 2,278 2,030 756 160 679 11,692 4,105 2,314 235 39 88 36 3 (55) (10) (11) (51) (604) (6) 174 2 403 168 560 (122) 12,015 4,671 2,506 Changes in 2020 Extensions, discoveries and Revision of 31 December changes in structure previous 31 December 2020 Production(1) estimates 2019 12,688 748 (gas, billions of cubic feet) West Siberia .................................................... Timan-Pechora ................................................ Ural region ....................................................... Volga region .................................................... Other in Russia ................................................ Outside Russia ................................................. Proved gas reserves ....................................... Probable gas reserves .................................... Possible gas reserves ...................................... ¹ Gas production shown before own consumption. 12,572 (444) (65) (51) (58) (2) 289 20 31 25 - 39 47 750 754 2,159 16 (38) 10 4 812 2,182 14 5,905 22,156 8,861 2,927 (404) (1,024) - 226 288 6,083 22,527 9,275 2,966 365 The Company’s proved hydrocarbon reserves at 31 December 2020 amounted to 15.4 billion BOE and comprised of 11.7 billion barrels of crude oil and 22.2 trillion cubic feet of gas. As a result of geological exploration and production drilling conducted in 2020, LUKOIL added 464 million barrels of oil equivalent to proved reserves. The largest contribution was made by the assets in West Siberia, Ural region and Russian sector of the Caspian Sea. Optimization of development systems and wellwork programmes at existing fields, as well as conversion of contingent resources to reserves added 258 million barrels of oil equivalent to proved reserves, which was more than offset by a 34% decrease in annual average oil price used for reserves estimate. 69 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Segments highlights Our operations are divided into three main business segments: . Exploration and Production – which includes our exploration, development and production operations related to crude oil and gas. These activities are primarily located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico. . . Refining, Marketing and Distribution – which includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services. Corporate and other – which includes operations related to our headquarters (which coordinates operations of the Group companies), finance activities, and certain other activities, that are not primary to the Group. Each of our segments is dependent on the others, with a portion of the revenues of one segment being a part of the costs of the others. In particular, our Refining, Marketing and Distribution segment purchases crude oil from our Exploration and Production segment. As a result of certain factors considered in the “Domestic crude oil and refined products prices” section on p. 62, benchmark crude oil market prices in Russia cannot be determined with certainty. Therefore, the prices set for inter-segment purchases of crude oil reflect a combination of market factors, primarily international crude oil market prices, transportation costs, regional market conditions, the cost of crude oil refining and other factors. We present the financial data for each segment in Note 33 “Segment information” to our consolidated financial statements. Exploration and production The following table summarizes key figures on our Exploration and production segment: Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) EBITDA.................................................................... in Russia........................................................... outside Russia and Iraq .................................... in Iraq............................................................... 166,567 147,964 11,487 7,116 151,979 136,108 9,656 9.6 8.7 19.0 14.5 500,081 893,950 729,077 143,183 21,690 (44.1) (42.2) (67.5) 47.5 421,573 46,512 31,996 6,215 Hydrocarbon extraction expenses.............................. in Russia........................................................... outside Russia and Iraq .................................... in Iraq............................................................... 51,037 39,532 6,567 46,670 37,552 5,297 9.4 5.3 24.0 29.2 198,911 158,328 23,371 17,212 210,867 170,590 23,267 17,010 (5.7) (7.2) 0.4 4,938 3,821 1.2 (rubles per BOE) Hydrocarbon unit extraction expenses (excluding Iraq)........................................................................... in Russia........................................................... outside Russia and Iraq .................................... 249 251 240 254 241 404 (1.8) 4.0 (40.6) 247 243 282 232 237 200 6.4 2.2 41.3 (US dollars per BOE) Hydrocarbon unit extraction expenses (excluding Iraq)........................................................................... in Russia........................................................... outside Russia and Iraq .................................... 3.27 3.29 3.15 3.45 3.28 5.50 (5.2) 0.3 (42.7) 3.42 3.36 3.91 3.59 3.67 3.09 (4.5) (8.3) 26.3 Our upstream EBITDA increased by 9.6% compared to the third quarter of 2020. In Russia, the increase was mainly a result of the effect of the ruble depreciation, higher crude oil prices, higher positive export duty lag effect, as well as higher crude oil production volumes, while an increase in operating expenses was a restraining factor. Outside Russia and Iraq, our EBITDA increased mainly as a result of an increased gas production volumes in Uzbekistan on the back of a recovery of demand for Uzbek gas from China. This was also supported by an increase in crude oil production volumes, the effect of the ruble depreciation and an increase in international hydrocarbon prices. Compared to 2019, our upstream EBITDA decreased by 44.1%. In Russia, the decrease was mainly due to lower crude oil prices, negative export duty lag effect, and crude oil production cut due to the new OPEC+ agreement, that was partially offset by the ruble depreciation, lower operating expenses and bigger share of high-margin volumes in crude oil production. Outside Russia and Iraq, our upstream EBITDA decreased mainly owing to a decrease in international hydrocarbon prices and gas production volumes in Uzbekistan. The weaker ruble and higher volumes of crude oil production outside Russia and Iraq partially offset the impact of these negative factors. 70 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 The dynamics of EBITDA of the West Qurna-2 project was mainly a result of changes in cost compensation. The following table summarizes our hydrocarbon production by major regions. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (thousand BOE per day) Crude oil and natural gas liquids Consolidated subsidiaries West Siberia..................................................... Timan-Pechora................................................. Ural region ....................................................... Volga region..................................................... Other in Russia................................................. Total in Russia...................................................... Iraq¹.................................................................. Other outside Russia ........................................ Total outside Russia.............................................. Total consolidated subsidiaries.......................... Our share in associates 641 250 314 209 27 1,441 34 57 91 1,532 620 255 304 212 29 1,420 42 44 86 1,506 3.4 (2.0) 3.3 (1.4) (6.9) 1.5 (19.0) 29.5 5.8 669 274 313 217 29 1,502 53 53 106 1,608 765 317 334 235 32 1,683 30 52 82 1,765 (12.5) (13.6) (6.3) (7.7) (9.4) (10.8) 76.7 1.9 29.3 (8.9) 1.7 in Russia........................................................... outside Russia .................................................. Total share in production of associates ............. Total crude oil and natural gas liquids.................. 11 30 41 10 29 39 10.0 3.4 5.1 1.8 11 32 43 13 37 50 (15.4) (13.5) (14.0) (9.0) 1,573 1,545 1,651 1,815 Natural and petroleum gas² Consolidated subsidiaries West Siberia................................................. Timan-Pechora ............................................ Ural region................................................... Volga region................................................ Other in Russia ............................................ Total in Russia ................................................. Uzbekistan................................................... Other outside Russia.................................... Total outside Russia ......................................... Total consolidated subsidiaries.......................... Share in associates 194 28 26 25 0 273 191 50 241 514 200 27 21 25 0 273 58 40 98 371 (3.0) 3.7 23.8 - - - >100 25.0 >100 38.5 203 29 23 26 0 281 128 46 174 455 201 33 23 28 1 286 228 40 268 554 1.0 (12.1) - (7.1) (100.0) (1.7) (43.9) 15.0 (35.1) (17.9) in Russia........................................................... outside Russia .................................................. Total share in production of associates ............. Total natural and petroleum gas............................ 2 10 12 2 9 11 97.8 (2.0) 9.2 1 10 11 1 10 11 28.9 (4.3) (0.3) (17.5) 526 382 37.7 466 565 Total daily hydrocarbon production (excluding the West Qurna-2 project)...................................... 2,065 2,099 1,885 1,927 9.5 8.9 2,064 2,117 2,350 2,380 (12.2) (11.1) Total daily hydrocarbon production...................... Including natural gas liquids produced at the gas processing plants ....................................................... 39 34 15.3 39 44 (11.6) ¹ Compensation crude oil related to the Group. ² Natural and petroleum gas production excluding flaring, reinjected gas and gas used in production of natural gas liquids. 71 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Crude oil production by major regions is presented in the table below. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (thousands of tonnes) West Siberia .............................................................. Timan-Pechora.......................................................... Ural region ................................................................ Volga region.............................................................. Other in Russia.......................................................... Crude oil produced in Russia .................................... 7,802 3,335 3,664 2,509 353 7,558 3,275 3,554 2,531 374 3.2 1.8 3.1 (0.9) (5.6) 2.1 32,448 14,102 14,565 10,339 1,486 36,999 16,099 15,527 11,207 1,626 (12.3) (12.4) (6.2) (7.7) (8.6) 17,663 17,292 72,940 81,458 (10.5) Iraq¹........................................................................... Other outside Russia.................................................. Crude oil produced outside Russia ............................ 463 605 1,068 565 496 1,061 (18.1) 22.0 0.7 2,843 2,256 5,099 1,616 2,110 3,726 75.9 6.9 36.8 Total crude oil produced by consolidated subsidiaries............................................................... 18,731 18,353 2.1 78,039 85,184 (8.4) Our share in crude oil produced by associates: in Russia.................................................................... outside Russia............................................................ 138 349 124 338 11.3 3.3 519 1,491 610 1,694 (14.9) (12.0) Total crude oil produced......................................... 19,218 18,815 2.1 80,049 87,488 (8.5) ¹ Compensation crude oil related to the Group. Our main oil producing region is West Siberia where we produced 41.7% and 41.6% of our crude oil in the fourth quarter and the full year 2020 (41.2% in the third quarter of 2020 and 43.4% in 2019). Our crude oil production increased by 2.1% compared to the third quarter of 2020, and decreased by 8.5% compared to 2019. The dynamics of our crude oil production volumes in Russia since the beginning of 2017 has been driven by external limitations due to an agreement of OPEC and some of the non-OPEC countries, including Russia, (the OPEC+ countries) to cap production levels in order to stabilize the global crude oil market. In December 2018, the OPEC+ countries agreed to decrease crude oil production relative to October 2018 levels until June 2019, which subsequently was prolonged until March 2020. Following these agreements, the Group limited production in its traditional regions (West Siberia, Timan- Pechora, and Ural) at the least-productive fields and fields with high water-cuts. In April 2020, OPEC+ countries entered into a new agreement to reduce their collective output by 9.7 million barrels per day starting from 1 May 2020 as a response to a dramatic contraction in demand for crude oil due to the COVID-19 pandemic. The agreement expires at the end of April 2022. Initially it provided for stepped increases in crude oil production from August 2020 and January 2021, but this schedule has been adjusted depending on the market situation. Russia committed to reduce its crude oil production to 8.5 million barrels per day from May 2020 with further increases according to the agreement. Due to the agreement, from May 2020, the Group reduced its crude oil production in Russia by approximately 310 thousand barrels per day, or by 19%, as compared to the average daily crude oil production level in the first quarter of 2020. The Group then increased crude oil production in Russia by approximately 20 thousand barrels per day in July and incrementally by approximately 60 thousand barrels per day in August. By the end of 2020 crude oil production in Russia was gradually increased by approximately 100 thousand barrels per day as compared to the May level. The new OPEC+ agreement also led to limitations on oil production by the Group at certain international projects. Despite a sharp decrease in oil prices and external limitations on production volumes, the active development of the priority projects continued. In particular, in West Siberia aggregate crude oil and gas condensate production in 2020 at the V. Vinogradov, Imilorskoye, Sredne-Nazymskoye and Pyakyakhinskoye fields increased by 20.4% year-on-year and exceeded 4.2 million tonnes. 72 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 In 2020, high viscosity oil production at the Yaregskoye field and Permian reservoir of the Usinskoye field increased by 6.2% year-on-year, to 5.2 million tonnes. Implementation of drilling programs at the V. Filanovsky and Yu. Korchagin fields in the Caspian Sea allowed to maintain production at project levels. In 2020, total oil and gas condensate production totaled 7.4 million tonnes. The V.Grayfer field development continues: jackets have been installed in the Caspian Sea for the fixed ice-resistant platform and accommodation platform, topsides of both platforms are being built at the shipyards. Gas production (excluding flaring, reinjected gas and gas used in production of natural gas liquids) by major regions is presented in the table below. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of cubic meters) West Siberia, including: ............................................ Nakhodkinskoye field ...................................... Pyakyakhinskoye field ..................................... Other fields....................................................... Timan-Pechora.......................................................... Ural region ................................................................ Volga region.............................................................. Other in Russia.......................................................... Gas produced in Russia............................................. 3,038 1,296 880 862 434 407 388 2 3,118 1,355 902 861 415 336 394 4 (2.6) (4.4) (2.4) 0.1 12,592 5,376 3,599 3,617 1,810 1,451 1,593 17 12,492 4,848 3,433 4,211 2,050 1,432 1,711 24 0.8 10.9 4.8 (14.1) (11.7) 1.3 (6.9) (29.2) (1.4) 4.6 21.1 (1.5) (50.0) - 4,269 4,267 17,463 17,709 Uzbekistan................................................................. Other outside Russia.................................................. Gas produced outside Russia..................................... 2,994 765 3,759 910 622 1,532 >100 23.0 >100 7,947 2,861 10,808 14,130 2,478 16,608 (43.8) 15.5 (34.9) Total gas produced by consolidated subsidiaries.. 8,028 5,799 38.4 28,271 34,317 (17.6) Our share in gas produced by associates: in Russia.................................................................... outside Russia............................................................ 40 157 32 138 25.0 13.8 115 619 88 641 30.7 (3.4) Total gas produced.................................................. 8,225 5,969 37.8 29,005 35,046 (17.2) In the fourth quarter and the full year 2020, LUKOIL Group's gas production was 8.2 billion cubic meters and 29.0 billion cubic meters, respectively, which was 37.8% higher quarter-on-quarter, and 17.2% lower year-on-year. In Russia, our major gas production region is West Siberia (Bolshekhetskaya depression), where gas is produced from the Nakhodkinskoe and Pyakyakhinskoe fields. Our gas production in Russia did not change significantly compared to the third quarter of 2020, and decreased by 1.4% compared to 2019 due to lower associated petroleum gas production that followed the crude oil production cut. Outside Russia, the main gas production region is Uzbekistan where we have shares in two PSAs. Our international gas production (including our share in associates’ production) increased by 134.5% quarter-on-quarter as a result of a recovery of gas production in Uzbekistan, and decreased by 33.8% year-on-year, mainly due to temporarily lower demand from China for gas produced in Uzbekistan amid the COVID-19 pandemic. West Qurna-2 project The West Qurna-2 field in Iraq is developed under the service contract, signed in January 2010. In May 2018, a Group company and Iraqi party signed a new field development plan, according to which, crude oil production is planned to increase to 800 thousand barrels per day. Starting from 1 May 2020, crude oil production at the field was reduced following the request from the Iraqi government due to the new OPEC+ agreement. As of the end of 2020, production at the field was approximately 90 thousand barrels per day below its capacity. Accounting for the cost compensation within the West Qurna-2 project in our consolidated statement of financial position and consolidated statement of profit or loss and other comprehensive income is as follows. Capital expenditures are recognized in Property, plant and equipment. Extraction expenses are recognized in Operating expenses in respect of all the volume of crude oil production at the field regardless of the volume of compensation crude oil the Group is eligible for. As the compensation revenue is recognized, capitalized costs are amortized. 73 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 There are two steps of revenue recognition: . The Iraqi party, on a quarterly basis, approves invoice for cost recovery and remuneration fee for which the Group is eligible for in the reporting period. Amount of the invoice depends on crude oil production volumes during the period and amount of costs claimed for reimbursement. Approved invoice amount for the reporting quarter is recognized in crude oil sales revenue. . Based on the approved invoices, the Iraqi party arranges schedule of crude oil shipments against its liability for cost compensation and remuneration. As this crude oil is actually shipped, its cost is recognized at current market price in Cost of purchased crude oil, gas and products. Further, revenue from sales of this crude oil, or products from its refining, is recognized in Sales. Unsold crude oil and refined products are recognized in Inventories. The following table summarizes data on capital and operating costs incurred, compensation crude oil received, costs yet unrecovered and remuneration fee. Сosts incurred¹ 9,229 Remunera- tion fee 548 Crude oil Crude oil to (millions of US dollars) received 9,242 626 be received Cumulative at 31 December 2019 ..................................................... Change in 2020 ................................................................................. Cumulative at 31 December 2020................................................... ¹ Including prepayments. 535 50 549 9,778 127 675 9,868 585 The West Qurna-2 project summary is presented below: Q4 2020 (thousand barrels) 28,783 Q3 2020 Change, % (thousand (thousand (thousand tonnes) 3,948 tonnes) 4,208 barrels) 27,002 Total production........................................................ 6.6 6.6 Production related to cost compensation and remuneration ............................................................. Shipment of compensation crude oil¹........................ 3,168 3,726 463 545 3,864 5,572 565 814 (18.1) (33.0) (18.1) (33.0) (millions (millions of (millions (millions of of rubles) US dollars) of rubles) US dollars) Cost compensation .................................................... Remuneration fee ...................................................... 10,788 1,894 12,682 142 25 167 8,441 1,409 9,850 114 19 133 27.8 34.4 28.8 24.6 31.6 25.6 Cost of compensation crude oil, received as liability settlement (included in Cost of purchased crude oil, gas and products)¹ ..................................................... Extraction expenses................................................... Depreciation, depletion and amortization.................. EBITDA.................................................................... 11,994 4,938 5,940 7,116 157 65 78 17,193 3,821 4,678 6,215 234 52 63 (30.2) 29.2 27.0 14.5 (32.9) 25.0 23.8 9.4 93 85 ¹ This crude oil is sold to third party customers or delivered to our refineries. After realization of these products, respective sales revenues are recognized. 74 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 12 months of 2020 (thousand barrels) 2019 Change, % (thousand (thousand (thousand tonnes) 20,860 tonnes) 18,172 barrels) 142,684 Total production........................................................ 124,295 (12.9) (12.9) Production related to cost compensation and remuneration ............................................................. Shipment of compensation crude oil¹........................ 19,447 18,996 2,843 2,777 11,054 9,412 1,616 1,376 75.9 >100 75.9 >100 (millions (millions of (millions (millions of of rubles) US dollars) of rubles) US dollars) Cost compensation .................................................... Remuneration fee ...................................................... 42,604 7,694 50,298 597 107 704 35,836 8,023 43,859 554 124 678 18.9 (4.1) 14.7 7.8 (13.7) 3.8 Cost of compensation crude oil, received as liability settlement (included in Cost of purchased crude oil, gas and products)¹ ..................................................... Extraction expenses................................................... Depreciation, depletion and amortization.................. EBITDA.................................................................... 45,428 17,212 25,630 31,996 626 239 361 450 36,225 17,010 18,950 21,690 560 263 293 334 25.4 1.2 35.3 47.5 11.8 (9.1) 23.2 34.7 ¹ This crude oil is sold to third party customers or delivered to our refineries. After realization of these products, respective sales revenues are recognized. Refining, marketing and distribution The following table summarizes key figures on our Refining, marketing and distribution segment: Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) EBITDA.................................................................... in Russia ............................................................... outside Russia....................................................... 46,649 43,573 3,076 77,638 42,357 35,281 (39.9) 2.9 (91.3) 243,322 180,753 62,569 371,642 301,136 70,506 (34.5) (40.0) (11.3) Refining expenses at the Group refineries................. in Russia ............................................................... outside Russia....................................................... 25,563 12,539 13,024 24,165 10,961 13,204 5.8 14.4 (1.4) 92,613 42,614 49,999 96,543 42,555 53,988 (4.1) 0.1 (7.4) (rubles per tonne) Unit refining expenses at the Group refineries .......... in Russia ............................................................... outside Russia....................................................... 1,945 1,295 3,760 1,628 1,074 2,845 19.5 20.6 32.2 1,580 1,062 2,703 1,404 964 2,195 12.5 10.2 23.1 (US dollars per tonne) Unit refining expenses at the Group refineries .......... in Russia ............................................................... outside Russia....................................................... 25.51 16.99 49.33 22.13 14.60 38.68 15.3 16.4 27.5 21.90 14.73 37.46 21.70 14.90 33.91 0.9 (1.2) 10.5 Our refining, marketing and distribution EBITDA was 39.9% lower than in the third quarter of 2020. At the same time, in Russia, refining, marketing and distribution EBITDA increased by 2.9% largely due to a seasonal increase in profitability of our power generation business, positive inventory effect at our refineries, better results of our petrochemical and retail businesses. This growth was restrained by a decrease in refining margins, higher operating expenses at refineries and lower refinery throughput volumes. Outside Russia, our refining, marketing and distribution EBITDA decreased by 91.3% primarily due to the accounting specifics of our international trading operations. Moreover, our results outside Russia were negatively affected by lower refinery throughput volumes, refining and trading margins and weaker results of our retail network due to COVID-19 related lockdowns in Europe. The positive inventory effect at our foreign refineries partially offset the impact of these negative factors. Compared to 2019, our refining, marketing and distribution EBITDA decreased by 34.5%. In Russia, our downstream EBITDA decreased largely due to a decline in refining margin, negative inventory effect at our refineries, weaker results of petrochemical and retail businesses, lower refinery throughput volumes, that was partially offset by optimization of refinery product slate. Outside Russia, our downstream EBITDA decreased by 11.3%. A decline in benchmark refining margin and negative inventory effect at our refineries were largely offset by an increase in trading margin, the accounting specifics of our international trading operations, as well as the ruble depreciation. 75 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Refining and petrochemicals The following table summarizes key figures for our refining and petrochemical volumes. Q4 Q3 Change, 12 months of Change, 2020 2020 % 2020 2019 % (thousands of tonnes) Refinery throughput at the Group refineries.............. in Russia ............................................................... outside Russia, including...................................... crude oil ........................................................... refined products................................................ Refinery throughput at third party refineries ............. Total refinery throughput....................................... 13,145 9,682 3,463 3,085 378 14,848 10,207 4,641 4,215 426 (11.5) (5.1) 58,608 40,109 18,499 16,888 1,611 68,746 44,154 24,592 22,673 1,919 (14.7) (9.2) (25.4) (26.8) (11.3) (31.7) (11.5) (24.8) (25.5) (16.1) (96.7) (19.7) 28 13,173 41 14,889 146 58,754 4,460 73,206 Production of the Group refineries in Russia¹ ...... diesel fuel.............................................................. motor gasoline ...................................................... fuel oil................................................................... jet fuel................................................................... lubricants and components.................................... straight-run gasoline ............................................. vacuum gas oil...................................................... bitumen................................................................. coke ...................................................................... bunker fuel............................................................ gas products.......................................................... petrochemicals...................................................... other products ....................................................... 9,234 3,760 1,479 965 487 255 636 438 145 257 576 68 9,722 4,010 2,104 839 692 202 430 131 275 265 385 90 (5.0) (6.2) (29.7) 15.0 (29.6) 26.2 47.9 >100 (47.3) (3.0) 38,090 16,084 7,076 3,142 2,182 923 2,458 589 904 1,108 2,022 307 298 997 41,831 16,532 7,864 4,657 2,843 963 2,655 332 908 1,072 1,546 317 392 1,750 (8.9) (2.7) (10.0) (32.5) (23.3) (4.2) (7.4) 77.4 (0.4) 3.4 30.8 (3.2) (24.0) (43.0) 49.6 (24.4) (35.4) (47.0) 53 115 82 217 Production of the Group refineries outside Russia ....................................................................... diesel fuel.............................................................. motor gasoline ...................................................... fuel oil................................................................... jet fuel................................................................... straight-run gasoline ............................................. coke ...................................................................... bunker fuel............................................................ gas products.......................................................... petrochemicals...................................................... other products ....................................................... Refined products produced by the Group............. Refined products produced at third party refineries .. Total refined products produced............................ 3,163 1,599 608 77 127 449 24 116 88 11 4,246 2,146 1,064 193 86 284 16 103 122 11 (25.5) (25.5) (42.9) (60.1) 47.7 58.1 50.0 12.6 (27.9) - 16,874 8,334 3,778 754 539 1,616 76 23,250 10,570 5,065 2,121 1,149 2,285 107 (27.4) (21.2) (25.4) (64.5) (53.1) (29.3) (29.0) - (21.4) 4.7 (32.0) (15.5) (96.7) (20.5) 438 462 45 832 99 588 43 64 12,397 26 221 (71.0) (11.2) (29.7) (11.3) 1,223 65,081 4,215 69,296 13,968 37 14,005 54,964 139 55,103 12,423 Reference: Net of cross-supplies of refined products between the Group refineries..................................... 158 455 (65.3) 1,397 1,561 (10.5) Products produced at petrochemical plants and facilities .................................................................... in Russia ............................................................... outside Russia....................................................... 332 253 79 283 198 85 17.3 27.8 (7.1) 1,228 898 330 1,137 790 347 8.0 13.7 (4.9) ¹ Net of cross-supplies of refined products among the Group. In the fourth quarter and the full year 2020, refinery throughput at the Group refineries was 13.1 million tonnes and 58.6 million tonnes, respectively, which is 11.5% lower quarter-on-quarter and 14.7% lower year-on-year. The decline was attributable to throughput optimization at some of the Group’s refineries on the back of lower demand for petroleum products and decline in refining margins due to the COVID-19 pandemic, as well as to scheduled maintenance works. In the fourth quarter of 2020, refinery throughput decreased by 5.1% in Russia mainly due to scheduled maintenance works at Volgograd and Nizhny Novgorod refineries, and decreased by 25.4% outside Russia, mainly due to scheduled maintenance works and throughput optimization at refineries in Italy and Bulgaria. 76 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 In 2020, refinery throughput in Russia was 9.2% lower year-on-year due to scheduled maintenance works and throughput optimization at refineries. Our refinery throughput in Europe was 24.8% lower year-on-year due to scheduled maintenance works at refineries in Bulgaria, Italy and the Netherlands, as well as throughput optimization. In the periods considered, we processed our crude oil at third party refineries in Belarus and Kazakhstan. In 2016, a Group company entered into a tolling agreement with a Canadian refinery originally valid through 2019. Subsequently, it was prolonged until 31 August 2022 with modification of certain provisions that changed its substance from a tolling agreement to a financial arrangement. Therefore, from September 2019, we ceased to recognize throughput and production costs related to this arrangement. The Group recognizes interest it earns on the financing provided and administrative fee. Marketing and trading In addition to our production, we purchase crude oil in Russia and on international markets. In Russia, we primarily purchase crude oil from associated producing companies and other producers. Then we either refine or export purchased crude oil. Crude oil purchased on international markets is used for trading activities, for supplying our international refineries or for processing at third party refineries. In Russia, we purchase refined products on occasion, primarily to manage supply chain bottlenecks. Refined products purchases outside Russia are either traded or supplied to our international refineries and our retail chains. We undertake trading operations on international markets through our 100% subsidiary LITASCO SA. We use traditional physical volumes hedging techniques to hedge our trading operations to secure trading margin. The following table shows the volumes of crude oil purchases by the Group during the periods considered. Q4 2020 Q3 Change, 12 months of Change, % 2020 % 2020 2019 (thousands of tonnes) Crude oil purchases In Russia.................................................................... For trading internationally......................................... For refining internationally ....................................... 245 10,807 2,880 85 13,728 3,761 >100 (21.3) (23.4) 704 51,678 13,241 756 52,299 21,686 (6.9) (1.2) (38.9) Shipment of the West Qurna-2 compensation crude oil..................................................................... 545 814 (33.0) 2,777 1,376 >100 Total crude oil purchased ....................................... 14,477 18,388 (21.3) 68,400 76,117 (10.1) The table below summarizes figures for our refined products and petrochemicals marketing and trading activities. Q4 Q3 Change, 12 months of Change, 2020 2020 % 2020 2019 % (thousands of tonnes) Refined products purchases In Russia.................................................................... For trading internationally......................................... For refining internationally ....................................... Total refined products purchased ......................... 227 14,820 266 114 11,840 392 99.1 25.2 (32.3) 24.0 730 49,455 1,558 920 51,179 2,095 (20.7) (3.4) (25.6) (4.5) 15,313 12,346 51,743 54,194 Petrochemical products purchases In Russia.................................................................... For trading internationally......................................... For refining internationally ....................................... Total petrochemical products purchased .............. 34 130 48 36 134 46 (5.6) (3.1) 4.6 135 606 177 918 39 863 186 >100 (29.7) (5.0) 212 216 (1.9) 1,088 (15.6) 77 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Exports of crude oil, refined and petrochemical products from Russia by our subsidiaries and export revenues (both to the Group companies and third parties) are summarized as follows: Q4 Q3 Change, 12 months of Change, 2020 2020 % 2020 2019 % (millions of rubles) Exports of crude oil to Customs Union ..................... Exports of crude oil beyond Customs Union............. Total crude oil exports ............................................ 11,675 170,215 181,890 12,633 138,690 151,323 (7.6) 22.7 20.2 29,913 584,474 614,387 1,059,975 63,879 996,096 (53.2) (41.3) (42.0) (thousands of tonnes) Exports of crude oil to Customs Union ..................... Exports of crude oil beyond Customs Union............. Total crude oil exports ............................................ 664 7,371 8,035 664 6,121 6,785 - 1,779 30,330 32,109 2,716 34,378 37,094 (34.5) (11.8) (13.4) 20.4 18.4 Exports of crude oil through Transneft, excluding ESPO pipeline........................................... ESPO pipeline........................................................... CPC pipeline ............................................................. 4,675 600 1,402 3,268 599 1,341 43.1 0.2 4.5 18,440 1,739 5,317 21,255 1,738 5,281 (13.2) 0.1 0.7 Exports of crude oil through the Group’s transportation infrastructure ...................................... 1,358 1,577 (13.9) 6,613 8,820 (25.0) Total crude oil exports ............................................ 8,035 6,785 18.4 32,109 37,094 (13.4) Supply of exported crude oil to refineries ............. 239 395 (39.5) % 3,131 3,354 (6.6) Q4 2020 Q3 Change, 2020 12 months of 2020 Change, 2019 % (millions of rubles) Refined and petrochemical products exports........ 119,827 89,799 33.4 419,665 623,632 (32.7) (thousands of tonnes) Refined products exports diesel fuel.............................................................. gasoline................................................................. fuel oil................................................................... jet fuel ................................................................... lubricants and components.................................... gas refinery products............................................. other products ....................................................... Total refined products exports ............................... 2,050 2 744 10 167 146 1,377 4,496 2,227 - 631 2 128 145 629 3,762 (7.9) - 17.9 >100 30.5 0.7 9,716 654 1,916 19 607 695 10,205 491 1,962 10 629 769 4,663 18,729 (4.8) 33.2 (2.3) 90.0 (3.5) (9.6) (7.5) (4.3) >100 19.5 4,314 17,921 Total petrochemicals exports.................................. 102 110 (7.3) 388 302 28.5 The volume of our crude oil exports from Russia increased by 18.4% compared to the third quarter of 2020 as a result of lower throughput at our domestic refineries and higher crude oil production volumes, and decreased by 13.4% compared to 2019 due to crude oil production cut resulting from the new OPEC+ agreement. In the fourth quarter and the full year 2020, we exported 45.5% and 44.0% of our domestic crude oil production (39.2% in the third quarter of 2020 and 45.5% in 2019), respectively. The volume of our refined products exports increased by 19.5% compared to the third quarter of 2020 due to a seasonal decrease in domestic demand, and decreased by 4.3% compared to 2019 due to lower production. Substantially, we use the Transneft infrastructure to export our crude oil. Nevertheless, a sizeable amount of crude oil is exported through our own infrastructure that allows us to reduce transportation costs and preserve the premium quality of crude oil and thus enables to achieve higher netbacks. All the volume of crude oil exported that bypassed Transneft was routed beyond the Customs Union. Besides our own infrastructure, we also export the light crude oil through the Caspian Pipeline Consortium and Eastern Siberia – Pacific Ocean pipelines that also allows us to preserve the premium quality of crude oil and to achieve higher netbacks compared to traditional export routes. Priority sales channels. We develop our priority sales channels aiming at increasing our margin on sale of refined products produced by the Group. In 2020, our retail sales of motor fuels and jet fuel supplies both in and outside Russia were negatively affected by a decrease in demand due to the consequences of the COVID-19 pandemic. In the fourth quarter and the full year 2020, we sold 2.3 million tonnes and 9.0 million tonnes of motor fuels via our domestic retail network, which was 10.3% less compared to the third quarter of 2020 and 9.1% less compared to 2019. Outside Russia, retail sales decreased by 7.3% compared to the third quarter of 2020 and by 12.6% compared to 2019. 78 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 In the fourth quarter and the full year 2020, our jet fuel deliveries volume net of trading operations amounted to 0.6 million tonnes and 2.5 million tonnes compared to 0.7 million tonnes in the third quarter of 2020 and 3.4 million tonnes in 2019. In the fourth quarter and the full year 2020, our bunkering volume net of trading operations amounted to 0.5 million tonnes and 2.7 million tonnes compared to 0.6 million tonnes in the third quarter of 2020 and 4.3 million tonnes in 2019. Power generation. We own commercial electricity and heat generation facilities in the Southern regions of European Russia, Romania and Italy. We also own renewable energy capacity in Russia and abroad. In the fourth quarter and the full year 2020, our total output of commercial electrical energy was 4.4 billion kWh and 17.1 billion kWh (3.7 billion kWh in the third quarter of 2020 and 18.3 billion kWh in 2019), and our total output of commercial heat energy was approximately 3.6 million Gcal and 10.0 million Gcal (0.8 million Gcal in the third quarter of 2020 and 10.1 million Gcal in 2019), respectively. 79 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Financial results The table below sets forth data from our consolidated statements of profit or loss and other comprehensive income for the periods indicated. Q4 2020 Q3 Change, 12 months of 2020 2019 (millions of rubles) Change, % 2020 % Revenues Sales (including excise and export tariffs).................... 1,530,339 1,456,650 5.1 5,639,401 7,841,246 (28.1) Costs and other deductions Operating expenses ...................................................... Cost of purchased crude oil, gas and products.............. Transportation expenses............................................... Selling, general and administrative expenses ............... Depreciation, depletion and amortization..................... Taxes other than income taxes ..................................... Excise and export tariffs............................................... Exploration expenses.................................................... Profit from operating activities ................................. (113,987) (108,953) (843,611) (790,660) 4.6 (439,973) (457,710) 6.7 (3,000,916) (4,308,073) (3.9) (30.3) 5.1 (71,893) (56,018) (61,388) (45,488) 17.1 23.1 (292,899) (278,798) (199,027) (197,172) 0.9 (90,558) (103,439) (148,479) (133,550) (104,160) (113,950) (12.5) (405,440) (415,094) 11.2 (569,078) (928,190) (8.6) (444,300) (425,763) (2.3) (38.7) 4.4 (34.6) (65.7) (2,579) (438) >100 (6,114) (9,348) 99,054 98,784 0.3 281,654 821,098 Finance income ............................................................ Finance costs................................................................ 1,930 (10,853) 3,625 (11,697) (46.8) (7.2) 13,051 (44,122) 25,134 (44,356) (48.1) (0.5) Equity share in income of associates and joint ventures ....................................................................... Foreign exchange gain (loss)........................................ Other expenses ............................................................. Profit before income taxes ......................................... 3,017 12,460 (44,790) 60,818 4,029 (27,280) (1,293) 66,168 (25.1) - >100 (8.1) 11,474 (26,110) (137,160) 98,787 18,246 923 (27,691) 793,354 (37.1) - >100 (87.5) Current income taxes.................................................... Deferred income taxes.................................................. Total income tax expense ........................................... (19,321) (11,535) (30,856) (17,325) 2,069 (15,256) 11.5 - >100 (61,362) (144,615) (20,792) (6,518) (82,154) (151,133) (57.6) >100 (45.6) Profit for the period ................................................... 29,962 50,912 (41.1) 16,633 642,221 (97.4) Profit for the period attributable to: PJSC LUKOIL shareholders ............................... Non-controlling interests..................................... 29,435 527 50,420 492 (41.6) 7.1 15,175 1,458 640,178 2,043 (97.6) (28.6) Earnings per share Profit for the period attributable to PJSC LUKOIL shareholders per share of common stock (in Russian rubles): Basic ........................................................................ Diluted..................................................................... 45.11 43.38 77.27 74.42 (41.6) (41.7) 23.31 22.46 963.28 934.73 (97.6) (97.6) The analysis of the main financial indicators of the financial statements is provided below. 80 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Sales revenues Sales breakdown Q4 2020 Q3 Change, 12 months of 2020 2019 (millions of rubles) Change, % 2020 % Crude oil Export and sales on international markets other than Customs Union ................................................ Export and sales to Customs Union ........................ Domestic sales ......................................................... 455,450 11,610 4,031 476,913 12,648 8,457 (4.5) 1,838,509 2,575,571 (28.6) (53.6) 4.4 (8.2) 30,137 23,522 64,890 22,528 (52.3) 471,091 498,018 (5.4) 1,892,168 2,662,989 (28.9) Cost compensation and remuneration at the West Qurna-2 project........................................................ 12,682 9,850 28.8 50,298 43,859 14.7 483,773 507,868 (4.7) 1,942,466 2,706,848 (28.2) Refined products Export and sales on international markets Wholesales .......................................................... Retail................................................................... Domestic sales 661,087 82,813 555,275 85,153 19.1 2,245,940 3,403,202 (34.0) (12.2) (2.7) 303,021 345,162 Wholesales .......................................................... Retail................................................................... 81,085 115,573 940,558 94,013 129,610 864,051 (13.8) (10.8) 340,320 445,343 443,667 480,048 (23.3) (7.2) (28.6) 8.9 3,334,624 4,672,079 Petrochemicals Export and sales on international markets ............... Domestic sales ......................................................... 14,921 10,474 25,395 13,244 7,356 20,600 12.7 42.4 23.3 57,036 36,386 93,422 91,687 40,971 132,658 (37.8) (11.2) (29.6) Gas Sales on international markets ................................. Domestic sales ......................................................... 30,280 8,190 7,973 8,119 >100 0.9 68,200 32,649 138,997 32,490 (50.9) 0.5 38,470 16,092 >100 100,849 171,487 (41.2) Sales of energy and related services Sales on international markets ................................. Domestic sales ......................................................... 1,923 15,903 17,826 3,796 10,010 13,806 (49.3) 58.9 29.1 10,451 53,607 64,058 14,604 53,276 67,880 (28.4) 0.6 (5.6) Other Export and sales on international markets ............... Domestic sales ......................................................... 13,923 10,394 24,317 22,741 11,492 34,233 (38.8) (9.6) (29.0) 63,813 40,169 103,982 48,024 42,270 90,294 32.9 (5.0) 15.2 Total sales............................................................... 1,530,339 1,456,650 5.1 5,639,401 7,841,246 (28.1) 81 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Sales volumes Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 (thousands of tonnes) Crude oil Export and sales on international markets other than Customs Union ................................................ Export and sales to Customs Union......................... Domestic sales......................................................... 18,687 669 190 19,546 20,670 669 449 21,788 (9.6) - (57.7) (10.3) 81,391 1,799 1,415 84,281 2,753 947 (3.4) (34.7) 49.4 84,605 87,981 (3.8) Crude oil volumes related to cost compensation and remuneration at the West Qurna-2 project ........ 463 565 (18.1) 2,843 1,616 75.9 20,009 22,353 (10.5) 87,448 89,597 (2.4) Refined products Export and sales on international markets Wholesales .............................................................. Retail....................................................................... Domestic sales 21,703 933 19,569 1,006 10.9 (7.3) 80,095 3,667 92,392 4,194 (13.3) (12.6) Wholesales .............................................................. Retail....................................................................... 2,726 2,327 27,689 3,230 2,595 26,400 (15.6) (10.3) 4.9 12,011 9,032 104,805 14,506 9,935 121,027 (17.2) (9.1) (13.4) Petrochemicals Export and sales on international markets ............... Domestic sales......................................................... 284 190 474 295 163 458 (3.7) 16.6 3.5 1,269 771 2,040 1,547 699 2,246 (18.0) 10.3 (9.2) (millions of cubic meters) Gas Sales on international markets................................. Domestic sales......................................................... 4,223 3,107 7,330 1,616 3,171 4,787 161.3 (2.0) 53.1 11,288 12,777 24,065 15,785 12,942 28,727 (28.5) (1.3) (16.2) Realized average sales prices Q4 2020 Q3 Change, 12 months of Change, % 2020 % 2020 2019 Average realized price on international markets Crude oil (beyond Customs Union)¹.. Crude oil (Customs Union) .............. Refined products (RUB/barrel) (RUB/barrel) 3,325 2,368 3,148 2,579 5.6 (8.2) 3,082 2,285 4,169 3,216 (26.1) (28.9) Wholesales.................................... Retail............................................. Petrochemicals .................................. (RUB/tonne) (RUB/tonne) (RUB/tonne) 30,461 88,760 52,539 7,170 28,375 84,645 44,895 4,934 7.3 4.9 17.0 45.3 28,041 82,635 44,946 6,042 36,834 82,299 59,268 8,806 (23.9) 0.4 (24.2) (31.4) Gas (excluding royalty) ..................... (RUB/1,000 m3) Crude oil (beyond Customs Union)¹.. Crude oil (Customs Union) .............. Refined products ($/barrel) ($/barrel) 43.62 31.06 42.79 35.06 1.9 (11.4) 42.71 31.68 64.40 49.67 (33.7) (36.2) Wholesales.................................... Retail............................................. Petrochemicals .................................. Gas (excluding royalty) ..................... ($/tonne) ($/tonne) ($/tonne) ($/1,000 m3) 400 1,164 689 386 1,151 610 3.6 1.2 12.9 40.3 389 1,145 623 569 1,271 916 (31.7) (9.9) (32.0) (38.4) 94 67 84 136 Average realized price within Russia Crude oil............................................ Refined products (RUB/barrel) 2,894 2,570 12.6 2,268 3,245 (30.1) Wholesales.................................... Retail............................................. Petrochemicals .................................. (RUB/tonne) (RUB/tonne) (RUB/tonne) 29,745 49,666 55,126 2,636 29,106 49,946 45,129 2,560 2.2 (0.6) 22.2 3.0 28,334 49,307 47,193 2,555 30,585 48,319 58,614 2,510 (7.4) 2.0 (19.5) 1.8 Gas² ................................................... (RUB/1,000 m3) ¹ Excluding cost compensation and remuneration at the West Qurna-2 project. ² The price does not include cost of transportation by Unified Gas Supply System of Gazprom, as most of our gas production in Russia is sold ex-field. 82 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 In the fourth quarter of 2020, our revenues were positively affected by higher volumes of refined products trading, recovery of gas production in Uzbekistan, an increase in crude oil production as a result of partial lifting of the external limitations on oil production under the new OPEC+ agreement, the ruble depreciation as well as an increase in international hydrocarbon prices. Among main adverse factors were lower volumes of crude oil trading and a decrease in retail sales volumes. In 2020, our revenues were negatively affected by a sharp decrease in international hydrocarbon prices, crude oil production cut in Russia due to the new OPEC+ agreement, a decrease in refinery throughput volumes, refined products trading volumes and retail sales volumes, as well as a reduction in gas production in Uzbekistan due to temporary lower demand for Uzbek gas from China. Sales of crude oil Compared to the third quarter of 2020, our crude oil sales revenue decreased by 52.3% in Russia due to lower domestic sales volumes because of their redirection to export, and by 4.5% outside Russia largely as a result of lower international trading volumes, that was partially offset by the ruble depreciation and an increase in crude oil prices. Compared to 2019, our international crude oil sales revenue decreased by 28.6% mainly as a result of a decrease in crude oil prices by 26.1%. Our domestic crude oil sales revenue increased by 4.4%, despite a decrease in crude oil prices by 30.1%, due to an increase in sales volumes by 49.4%. Sales of refined products Sales breakdown Q4 2020 Q3 Change, 12 months of 2020 2019 (millions of rubles) 19.1 2,245,939 3,403,202 Change, % 2020 % Wholesales outside Russia.......................................... diesel fuel................................................................. motor gasoline.......................................................... fuel oil...................................................................... jet fuel ...................................................................... lubricants and components....................................... gas products ............................................................. others........................................................................ 661,086 260,898 122,540 127,681 5,017 18,500 21,336 105,114 555,275 230,128 135,036 107,307 5,925 15,477 17,545 43,857 (34.0) (42.7) (30.9) (20.6) (78.5) 2.6 13.4 (9.3) 19.0 (15.3) 19.5 937,614 1,637,550 440,292 414,171 20,866 67,454 76,703 288,839 637,327 521,882 97,202 65,726 53,515 390,000 21.6 >100 43.3 (25.9) Retail outside Russia .................................................. 82,813 85,153 (2.7) 303,021 345,162 (12.2) Wholesales in Russia .................................................. diesel fuel................................................................. motor gasoline.......................................................... fuel oil...................................................................... jet fuel ...................................................................... lubricants and components....................................... gas products ............................................................. others........................................................................ 81,085 26,104 10,327 2,514 16,779 6,513 94,013 28,645 15,411 2,492 20,217 7,397 (13.8) (8.9) (33.0) 0.9 (17.0) (12.0) 9.6 340,320 110,395 43,959 8,789 77,138 25,866 11,805 62,368 443,667 116,906 48,539 33,124 128,672 25,265 10,903 80,258 (23.3) (5.6) (9.4) (73.5) (40.1) 2.4 4,038 14,810 3,683 16,168 8.3 (22.3) (8.4) Retail in Russia ........................................................... Total refined products sales ...................................... 115,573 940,557 129,610 864,051 (10.8) 445,343 480,048 (7.2) 8.9 3,334,623 4,672,079 (28.6) 83 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Sales volumes Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 (thousands of tonnes) Wholesales outside Russia ......................................... diesel fuel ................................................................ motor gasoline ......................................................... fuel oil ..................................................................... jet fuel...................................................................... lubricants and components ...................................... gas products............................................................. others....................................................................... 21,704 7,796 3,648 5,400 143 289 641 3,787 19,569 7,310 4,284 5,410 213 217 645 1,490 10.9 6.6 (14.8) (0.2) (32.9) 33.2 80,096 29,745 13,926 20,415 654 1,075 2,855 11,426 92,392 39,002 15,015 20,121 2,323 997 (13.3) (23.7) (7.3) 1.5 (71.8) 7.8 (0.6) >100 1,902 13,032 50.1 (12.3) Retail outside Russia.................................................. diesel fuel ................................................................ motor gasoline ......................................................... gas products............................................................. 933 645 251 37 1,006 676 287 43 (7.3) (4.6) (12.5) (14.0) 3,667 2,508 1,012 147 4,194 2,814 1,195 185 (12.6) (10.9) (15.3) (20.5) Wholesales in Russia.................................................. diesel fuel ................................................................ motor gasoline ......................................................... fuel oil ..................................................................... jet fuel...................................................................... lubricants and components ...................................... gas products............................................................. others....................................................................... 2,726 650 256 190 556 88 3,230 712 353 224 691 103 158 989 (15.6) (8.7) 12,011 2,720 1,091 899 2,401 373 14,506 2,733 1,257 2,184 3,138 361 (17.2) (0.5) (13.2) (58.8) (23.5) 3.3 (27.5) (15.2) (19.5) (14.6) 3.2 163 823 598 3,929 648 4,185 (7.7) (6.1) (16.8) Retail in Russia........................................................... diesel fuel ................................................................ motor gasoline ......................................................... gas products............................................................. 2,327 905 1,408 14 2,595 940 1,640 15 (10.3) (3.7) (14.1) (6.7) 9,032 3,450 5,527 55 9,935 3,715 6,161 59 (9.1) (7.1) (10.3) (6.8) Total refined products volumes................................. 27,690 26,400 4.9 104,806 121,027 (13.4) Compared to 2019, our refined products sales revenue was significantly affected by lower sales volumes and prices as a result of a sharp decrease in demand due to the COVID-19 pandemic. The fourth quarter of 2020 vs. the third quarter of 2020 . Our revenue from the wholesales of refined products outside Russia increased by 19.1% due to an increase in average realized prices by 7.3% and volumes by 10.9% as a result of an increase in volumes of trading operations. . International retail revenue decreased by 2.7% due to a decrease in sales volumes by 7.3% as a result of lower demand for refined products due to a resumption of COVID-19 related restrictions in Europe, as well as a seasonality factor. . Revenue from the wholesale and retail sales of refined products on the domestic market decreased by 13.8% and by 10.8%, respectively, mainly as a result of a seasonal decrease in sales volumes. Full year 2020 vs. full year 2019 . Our revenue from the wholesales of refined products outside Russia decreased by 34.0% as a result of a decrease in average realized prices by 23.9% and sales volumes by 13.3% due to a decrease in volumes of trading operations and production. . . . Our international retail revenue decreased by 12.2% as a result of a decrease in sales volumes and prices that was partially offset by the ruble depreciation. Our revenue from the wholesales of refined products on the domestic market decreased by 23.3% as a result of a decrease in sales volumes and our average realized prices. Our revenue from refined products retail sales in Russia decreased by 7.2% as a result of a decrease in sales volumes that was partially offset by an increase in our average realized prices. Sales of petrochemical products Compared to the third quarter of 2020, our revenue from sales of petrochemical products increased by 23.3%, as a result of higher production volumes in Russia, as well as an increase in realized prices. 84 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Compared to 2019, our revenue from sales of petrochemical products decreased by 29.6%, mainly as a result of a decline in trading volumes outside Russia and realized prices. Sales of gas Compared to the third quarter of 2020, our revenue from gas sales increased by 139.1% as a result of a recovery of gas production in Uzbekistan that followed the resumption of gas exports from Uzbekistan to China. During 2020, as a result of temporary decline in demand for Uzbek gas from China, we reduced gas production. As a result, our revenue from gas sales decreased by 41.2% compared to 2019. Sales of energy and related services Our revenue from sales of energy and related services increased by 29.1% compared to the third quarter of 2020, mainly due to a seasonality factor in Russia, and decreased by 5.6% compared to 2019, mainly due to changes in energy tariffs and sales volumes in Italy. Other sales Other sales include non-petroleum sales through our retail network, transportation services, rental revenue, crude oil extraction services, and other revenue of our production and marketing companies from sales of goods and services not related to our primary activities. Compared to the third quarter of 2020, revenue from other sales decreased by 29.0% largely as a result of a decrease in non-petrol revenue of our retail network due to seasonality in Russia and Europe, as well as lower demand due to a resumption of COVID-19 related restrictions in Europe. Compared to 2019, revenue from other sales increased by 15.2% largely as a result of an increase in revenues from transportation services outside Russia due to higher tariffs and volumes, as well as an increase in non-petrol revenue of our retail network. Moreover, other sales revenue for the third quarter and the full year 2020 included 5.9 billion RUB (approximately €68 million) of loss compensation in relation to energy supplies in Sicily, Italy in 2015 (other sales revenue for 2019 included 2.2 billion RUB (approximately €30 million) of similar compensation related to 2016 supplies). Operating expenses Operating expenses include the following: Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) Hydrocarbon extraction expenses¹ ............................ Extraction expenses at the West Qurna-2 field.......... Own refining expenses .............................................. Refining expenses at third-party refineries................ Expenses for feedstock transportation to refineries.. Power generation and distribution expenses.............. Petrochemical expenses............................................. Other operating expenses .......................................... Total operating expenses......................................... 46,099 4,938 25,563 103 10,715 8,250 3,700 42,849 3,821 24,165 148 11,919 7,406 3,057 7.6 29.2 5.8 (30.4) (10.1) 11.4 21.0 (6.2) 4.6 181,699 193,857 17,010 96,543 7,175 52,884 30,432 12,463 47,346 457,710 (6.3) 1.2 17,212 92,613 524 51,693 29,991 12,731 53,510 439,973 (4.1) (92.7) (2.3) (1.4) 2.2 14,619 113,987 15,588 108,953 13.0 (3.9) ¹ Excluding extraction expenses at the West Qurna-2 field. The method of allocation of operating expenses above differs from the approach used in preparing data for Note 33 “Segment information” to our consolidated financial statements. Expenditures in the segment reporting are grouped depending on the segment to which a particular company belongs, are not divided by the type of expenses within one company and do not include adjustments related to elimination of intra-group service margin. Operating expenses for the purposes of this analysis are grouped based on the nature of the costs incurred. 85 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Hydrocarbon extraction expenses Our extraction expenses include expenditures related to repairs of extraction equipment, labour costs, expenses on artificial stimulation of reservoirs, fuel and electricity costs, cost of extraction of natural gas liquids, property insurance of extraction equipment and other similar costs. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) Hydrocarbon extraction expenses.............................. in Russia ............................................................... outside Russia¹...................................................... 46,099 39,532 6,567 42,849 37,552 5,297 7.6 5.3 24.0 181,699 158,328 23,371 193,857 170,590 23,267 (6.3) (7.2) 0.4 (rubles per BOE) Hydrocarbon unit extraction expenses....................... in Russia ............................................................... outside Russia¹...................................................... ¹ Excluding extraction expenses at the West Qurna-2 field. 249 251 240 254 241 404 (1.8) 4.0 (40.6) 247 243 282 232 237 200 6.4 2.2 41.3 Compared to the third quarter, our extraction expenses in Russia increased by 5.3% mainly due to higher production volumes and a seasonal increase in energy and transport costs. At the same time, hydrocarbon unit extraction expenses in Russia increased by only 4.0%. Our extraction expenses outside Russia increased by 24.0% due to a recovery of gas production in Uzbekistan, that also led to a decrease in our hydrocarbon unit extraction expenses outside Russia by 40.6% as gas has lower unit extraction expenses compared to crude oil. Compared to 2019, our extraction expenses in Russia decreased by 7.2% mainly due to lower production volumes and cost reduction programme. However, our hydrocarbon unit extraction expenses increased by 2.2% due to certain share of fixed costs. Outside Russia, our hydrocarbon extraction expenses were flat despite lower production volumes. A decrease in extraction expenses in Uzbekistan as a result of production cut was offset by higher expenses due to the effect of acquisition of a share in the Marine XII project in the Republic of Congo. Our hydrocarbon unit extraction expenses outside Russia increased by 41.3% mainly as a result of a decrease in share of gas in our hydrocarbon production, which has lower unit extraction expenses compared to crude oil. The ruble depreciation also contributed to the increase in extraction expenses outside Russia. Own refining expenses Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) Refining expenses at the Group refineries................. in Russia ............................................................... outside Russia....................................................... 25,563 12,539 13,024 24,165 10,961 13,204 5.8 14.4 (1.4) 92,613 42,614 49,999 96,543 42,555 53,988 (4.1) 0.1 (7.4) (rubles per tonne) Unit refining expenses at the Group refineries .......... in Russia ............................................................... outside Russia....................................................... 1,945 1,295 3,760 1,628 1,074 2,845 19.5 20.6 32.2 1,580 1,062 2,703 1,404 964 2,195 12.5 10.2 23.1 Compared to the third quarter of 2020, refining expenses at the Group refineries increased by 5.8%. In Russia, refining expenses increased by 14.4% mainly as a result of an increase in maintenance costs. Outside Russia, refining expenses decreased by 1.4% due to lower throughput volumes that was partly offset by an increase in energy and fuel costs and effect of ruble depreciation against euro. Compared to 2019, expenses at our refineries decreased by 4.1%. In Russia, refining expenses did not change, as the effect of lower throughput volumes was offset by higher maintenance cost. Outside Russia, expenses at our refineries decreased by 7.4% mainly due to lower throughput volumes, as well as a decline in fuel and energy costs, despite the ruble depreciation against euro. Refining expenses at third-party refineries Along with our own production of refined products, we process crude oil at third-party refineries. At the end of 2016, as part of our trading business development, a Group company entered into a 3-year tolling agreement with a Canadian refinery. Related refining expenses represented variable toll that was mostly the difference between the price of feedstock supplied, including various related costs, and the selling price of the refined products taken. When the refined products were sold, this toll was naturally offset by the respective refined products sales revenue. The agreed compensation was received by the Group company for execution of this agreement. 86 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 In August 2019, the agreement was extended till 2022 with modification of certain provisions. As a result, the agreement is now treated as a financing arrangement with recognizing in the profit or loss statement only interest earned on the financing provided and administrative fee. Thus, we do not recognize the tolling fee starting from September 2019. Expenses for feedstock transportation to refineries Expenses for feedstock transportation to refineries include pipeline, railway, freight and other costs related to delivery of crude oil and refined products to refineries for further processing. Our expenses for feedstock transportation to refineries decreased by 10.1% compared to the third quarter of 2020 mainly due to lower refinery throughput and decreased by 2.3% compared to 2019. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) Own feedstock transportation to our domestic refineries.................................................................... 9,618 10,910 (11.8) 41,179 40,648 1.3 Own feedstock transportation from Russia to our international refineries............................................... Other feedstock transportation costs outside Russia.. Feedstock transportation to refineries................... 460 637 10,715 155 854 11,919 >100 (25.4) (10.1) 5,175 5,339 51,693 6,182 6,054 52,884 (16.3) (11.8) (2.3) Power generation and distribution expenses Power generation and distribution expenses increased by 11.4% compared to the third quarter of 2020 mainly due to a seasonal factor, and decreased by 1.4% compared to 2019. Petrochemical expenses Compared to the third quarter of 2020, our petrochemical expenses increased by 21.0% mainly due to an increase in output in Russia. In 2020, petrochemical expenses increased by 2.2% compared to 2019, an effect of higher production volumes was nearly offset by lower maintenance costs in Russia in 2020. Other operating expenses Other operating expenses include expenses of the Group’s upstream and downstream entities that do not relate to their core activities, namely transportation and extraction services, costs of other services provided and goods sold by our production and marketing companies, and of non-core businesses of the Group. Compared to the third quarter of 2020, other operating expenses decreased by 6.2%, largely as a result of lower volumes of non-petrol sales through our retail network. Compared to 2019, they increased by 13.0%, as a result of an increase in volumes of non-petrol sales through our retail network and increase in volumes of transportation services rendered. Cost of purchased crude oil, gas and products Cost of purchased crude oil, gas and products includes cost of crude oil and refined products purchased for trading or refining, gas and fuel oil to supply our power generation entities and the result of hedging of crude oil and refined products sales. 87 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Q4 Q3 Change, % 12 months of Change, % 2020 2020 2020 2019 (millions of rubles) >100 13,788 Cost of purchased crude oil in Russia ....................... Cost of purchased crude oil outside Russia ............... 5,354 331,310 1,637 394,981 18,123 (23.9) (34.4) (16.1) 1,461,688 2,229,352 Compensation crude oil related to West Qurna-2 project........................................................................ Cost of purchased crude oil .................................... 11,994 348,658 17,193 413,811 (30.2) 45,428 36,225 25.4 (33.4) (15.7) 1,520,904 2,283,700 Cost of purchased refined products in Russia............ Cost of purchased refined products outside Russia ... Cost of purchased refined products ....................... 9,846 457,157 467,003 5,573 351,106 356,679 76.7 31,043 37,146 (16.4) (26.4) (26.3) 30.2 1,420,226 1,930,711 30.9 1,451,269 1,967,857 Other purchases......................................................... Net loss/(gain) from hedging of trading operations... 24,380 38,224 11,767 (3,690) >100 - 64,139 (79,614) 82,157 61,333 (21.9) - Change in crude oil and petroleum products inventory ................................................................... (34,654) 12,093 - 44,218 (86,974) - Total cost of purchased crude oil, gas and products.................................................................... 843,611 790,660 6.7 3,000,916 4,308,073 (30.3) In the fourth quarter and the full year 2020, cost of purchased crude oil, gas and products increased by 6.7% quarter-on- quarter and decreased by 30.3% year-on-year. An increase in domestic purchases of crude oil and refined products compared to the previous quarter was mostly related to refinery and petrochemical feedstock. Outside Russia, a decrease in crude oil purchases and an increase in refined products purchases compared to the third quarter of 2020 were both driven by the respective changes in volumes of trading. A more than two-fold quarter-on-quarter increase in other purchases was largely a result of development of our gas trading activities in Europe. A year-on-year decrease was mostly driven by the dynamics of international crude oil and refined products prices. Transportation expenses Q4 Q3 Change, % 12 months of Change, % 2020 2020 2020 2019 (millions of rubles) Crude oil transportation expenses.............................. in Russia ............................................................... outside Russia....................................................... 23,260 11,387 11,873 21,562 10,938 10,624 7.9 4.1 11.8 107,147 46,110 61,037 98,406 46,946 51,460 8.9 (1.8) 18.6 Refined products transportation expenses ................. in Russia ............................................................... outside Russia....................................................... 41,205 19,385 21,820 36,832 19,402 17,430 11.9 (0.1) 25.2 169,526 84,723 84,803 162,648 89,842 72,806 4.2 (5.7) 16.5 Other transportation expenses ................................... in Russia ............................................................... outside Russia....................................................... Total transportation expenses ................................ 7,428 836 6,592 71,893 2,994 1,310 1,684 >100 (36.2) >100 17.1 16,226 3,269 12,957 292,899 17,744 2,200 15,544 278,798 (8.6) 48.6 (16.6) 5.1 61,388 Compared to the third quarter of 2020, our expenses for transportation of crude oil and refined products increased by 7.9% and 11.9%, respectively. In Russia, our expenses for transportation of crude oil increased mainly as a result of higher export volumes, while our expenses for transportation of refined products did not change significantly. Outside Russia, our expenses increased as a result of higher volumes of refined products transportation, higher volumes of crude oil transportation by pipeline transport and the ruble depreciation, which was partly offset by lower volumes of crude oil transportation by sea. Compared to 2019, our expenses for transportation of crude oil and refined products increased by 8.9% and 4.2%, respectively. In Russia, our expenses for transportation of crude oil decreased as a result of lower export volumes, that was partly offset by tariffs indexation, negative inventory effect and higher domestic sales volumes. Our expenses for transportation of refined products in Russia decreased as a result of lower supplies, despite tariffs indexation. Outside Russia, our expenses for transportation of crude oil and refined products increased mainly as a result of higher freight rates, storage expenses increase and the ruble depreciation, despite lower volumes of supplies. 88 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 An increase in other transportation expenses compared to the third quarter of 2020 was due to commencement of gas supplies from our project in Azerbaijan to Europe and resumption of gas supplies from our projects in Uzbekistan to China. A decrease in other transportation expenses compared to 2019 resulted mainly from a decline of gas supplies from our projects in Uzbekistan to China. Selling, general and administrative expenses Selling, general and administrative expenses include payroll costs (excluding production staff costs of extraction entities, refineries and power generation entities), insurance costs (except for property insurance related to extraction, refinery and power generation equipment), costs of maintenance of social infrastructure, movement in allowance for expected credit losses and other expenses. Our selling, general and administrative expenses are roughly equally split between domestic and international operations. Q4 Q3 Change, % 12 months of Change, % 2020 2020 2020 2019 (millions of rubles) Payroll costs included in selling, general and administrative expenses............................................. Other selling, general and administrative expenses... Share-based compensation ........................................ Expenses on allowance for expected credit losses..... 18,563 22,991 7,841 18,204 21,561 7,841 2.0 6.6 - 75,257 68,380 88,086 31,366 9,340 10.1 (1.7) - 86,593 31,366 5,811 6,623 (2,118) - (37.8) Total selling, general and administrative expenses.................................................................... 56,018 45,488 23.1 199,027 197,172 0.9 Our selling, general and administrative expenses increased by 23.1% compared to the third quarter of 2020 mainly as a result of a change in an allowance for expected credit losses, as well as the ruble depreciation. Compared to 2019, our selling, general and administrative expenses did not change significantly. A decrease in expenses on allowance for expected credit losses was partially offset by an increase in payroll costs of our international subsidiaries due to the ruble depreciation. Depreciation, depletion and amortization Compared to the third quarter of 2020, our depreciation, depletion and amortization expenses decreased by 12.5% mainly due to positive effect of an increase in proved developed hydrocarbon reserves at Group’s certain fields as at the end of 2020 and consequent recalculation of depletion of respective fixed assets for the full year. This was partially offset by an increase in depletion expenses in Uzbekistan following the recovery of gas production volumes. Compared to 2019, our depreciation, depletion and amortization expenses decreased by 2.3% Equity share in income of associates and joint ventures The Group has investments in equity method associates and corporate joint ventures. These companies are primarily engaged in crude oil exploration, production, marketing and distribution operations in the Russian Federation, crude oil production and marketing in Kazakhstan. Currently, our largest associates are Tengizchevroil, an exploration and production company, operating in Kazakhstan, Bashneft-Polus, an exploration and production company that develops the Trebs and Titov oilfields in Timan-Pechora, Russia, South Caucasus Pipeline Company and Caspian Pipeline Consortium, midstream companies in Azerbaijan and Kazakhstan, respectively. In the fourth quarter of 2020, our share in income of associates and joint ventures decreased by 25.1%. In 2020, our share in income of associates and joint ventures decreased by 37.1%, compared to 2019, mainly due to a decrease in hydrocarbon prices. 89 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Taxes other than income taxes Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 (millions of rubles) In Russia Mineral extraction taxes........................................... 129,118 2,985 6,471 6,189 491 115,938 1,026 7,072 6,110 671 11.4 >100 (8.5) 1.3 (26.8) 11.0 495,877 849,445 16,229 27,308 22,663 2,515 (41.6) (59.1) 4.1 9.4 (16.0) (39.2) Tax on additional income ........................................ Social security taxes and contributions.................... Property tax ............................................................. Other taxes............................................................... Total in Russia............................................................ 6,645 28,437 24,800 2,112 145,254 130,817 557,871 918,160 International Mineral extraction taxes........................................... Social security taxes and contributions.................... Property tax ............................................................. Other taxes............................................................... Total internationally .................................................. 4 1,849 331 1,041 3,225 7 1,674 235 817 2,733 (42.9) 10.5 40.9 27.4 18.0 23 6,626 1,005 3,553 11,207 22 6,109 906 2,993 10,030 4.5 8.5 10.9 18.7 11.7 Total taxes other than income taxes.......................... 148,479 133,550 11.2 569,078 928,190 (38.7) Our taxes other than income taxes increased by 11.2% compared to the third quarter of 2020 mainly as a result of an increase in mineral extraction tax expense on the back of an increase in the tax rate by 6.4% due to higher crude oil prices and the ruble depreciation, as well as due to higher crude oil extraction volumes, which was partially compensated by inventory effect. TAI expenses increased due to higher crude oil prices. Also, TAI expenses for the third quarter of 2020 include a downward adjustment related to 2019 in the amount of 1.5 billion RUB. Compared to 2019, our taxes other than income taxes decreased by 38.7% mainly as a result of a decrease in mineral extraction tax expense on the back of a decrease in the tax rate by 33.1% due to lower crude oil prices and lower crude oil extraction volumes. TAI expenses decreased due to a decline of crude oil prices. The following table summarizes data on application of reduced and zero mineral extraction tax rates for crude oil produced in Russia (excluding special tax regimes). Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 127,018 2,157 (millions of rubles) Decrease in extraction taxes from application of reduced rates for crude oil production ..................... 23,235 21,322 9.0 79,146 (37.7) (thousands of tonnes) Volume of crude oil production subject to: reduced rates (ultra-high viscosity).......................... 599 624 (4.0) 2,427 12.5 reduced rates (tax holidays for specific regions and high viscosity oil)..................................................... reduced rates (low permeability deposits)................ reduced rates (Tyumen deposits) ............................. reduced rates (depleted fields) ................................. reduced rates (other) ................................................ 1,146 434 174 4,358 595 1,074 409 168 4,339 482 6.7 6.1 3.6 0.4 23.4 4,289 1,628 736 18,456 2,216 4,221 1,422 725 19,050 2,503 1.6 14.5 1.5 (3.1) (11.5) Total volume of production subject to reduced rates ............................................................................. 7,306 7,096 3.0 29,752 30,078 (1.1) A special tax regime is applied for crude oil production at certain Group’s offshore fields and deposits. In the fourth quarter and the full year 2020, volumes of production subject to such regimes amounted to 1,533 thousand tonnes and 6,389 thousand tonnes, respectively (compared to 1,659 thousand tonnes in the third quarter of 2020 and 6,436 thousand tonnes in 2019). 90 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 The table below summarizes our production from license areas subject to TAI in the respective periods. Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 (millions of rubles) Mineral extraction tax for crude oil and gas condensate on license areas under TAI..................... 5,483 5,084 7.8 18,521 25,429 (27.2) (thousands of tonnes) Group 1......................................................................... Group 3......................................................................... Group 4......................................................................... 496 748 23 525 747 25 (5.5) 0.1 (8.0) 2,071 3,030 95 2,011 2,896 41 3.0 4.6 >100 Total volume of crude oil and gas condensate production at license areas subject to TAI ............... 1,267 1,297 (2.3) 5,196 4,948 5.0 Excise and export tariffs Q4 2020 Q3 Change, 2020 12 months of Change, % % 2020 2019 (millions of rubles) In Russia Excise tax on refined products................................. Excise tax on oil feedstock (excluding damper) ...... Damper .................................................................... Crude oil еxport tariffs............................................. Refined products еxport tariffs ................................ Total in Russia............................................................ 31,438 (9,781) 11,807 14,895 7,781 39,168 (10,515) 18,334 9,162 4,720 60,869 (19.7) (7.0) (35.6) 62.6 64.9 (7.8) 132,303 140,659 (31,212) (57,237) 141,622 46,058 (5.9) 21.4 - (49.9) (42.6) 10.4 (37,881) 73,086 70,885 26,460 264,853 56,140 239,890 International Excise tax and sales taxes on refined products ........ Crude oil еxport tariffs............................................. Refined products еxport and import tariffs, net ....... Total internationally .................................................. 47,875 15 130 48,020 53,002 14 65 53,081 (9.7) 7.1 100.0 (9.5) 179,179 48 220 179,447 186,078 51 (256) 185,873 (3.7) (5.9) - (3.5) Total excise and export tariffs ................................... 104,160 113,950 (8.6) 444,300 425,763 4.4 Compared to the third quarter of 2020, crude oil export tariffs increased mainly due to an increase in crude oil export volumes beyond Customs Union and a simultaneous decrease in the share of crude oil subject to export duty incentives in overall export volume, and also due to inventory effect. An increase in refined products export tariffs was influenced by an increase in total export volume of refined products beyond Customs Union and an increase in the share of exports of heavy refined products with a higher export duty rate. In the fourth quarter of 2020, excise tax on refined products in Russia and internationally decreased compared to the previous quarter mainly due to lower sales volumes subject to excise taxes as a result of a seasonal decrease in demand. Internationally, this effect was partially compensated by the ruble depreciation. Compared to 2019, crude oil and refined products export tariffs declined mainly due to a decline in crude oil prices and a decrease in export duty rates as a result of ongoing tax manoeuvre, which was partially offset by the export duty lag effect, inventory effect and the ruble depreciation. Export tariffs also declined due to a decrease in volumes of crude oil and refined products export beyond Customs Union. Compared to 2019, excise tax in Russia and internationally decreased due to lower sales volumes. In Russia this effect was partially offset by excise tax rates increase. Internationally, a decrease was partially compensated by the ruble depreciation. Proceeds from excise tax on feedstock, excluding damper, decreased by 7.0% compared to the third quarter of 2020 as a result of decreased volumes of refined products output and changes in refined products slate, which was partially compensated by excise tax rate increase due to higher crude oil prices and the ruble depreciation. Compared to 2019, proceeds from excise tax on feedstock, excluding damper, increased by 21.4% due to ongoing tax manoeuvre and as a result of improvements in refined products slate and the ruble depreciation, which was almost entirely offset by a decline in crude oil prices. In 2020, the damper became negative as a result of a decrease in export netbacks for gasoline and diesel fuel below respective fixed benchmarks and was paid to the budget. In the fourth quarter of 2020, damper expenses decreased as a result of higher gasoline and diesel fuel export netback and a decrease in sales volumes in Russia due to a decrease in demand. 91 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Negative values of international refined products export and import tariffs in 2019 are a result of the compensation of import tariffs in the USA. Exploration expenses In 2020, we charged to expense the costs of dry exploratory wells in Romania, Norway and Timan-Pechora region of Russia. In 2019, we charged to expense approximately 5.8 billion RUB related to dry exploratory well in Romania. Foreign exchange gain (loss) Foreign exchange gains or losses are mostly related to revaluation of US dollar and euro net monetary position of the Group entities that largely consists of accounts receivables of our international subsidiaries and loans, mostly intra-group, given or received in currencies other than the entities’ functional currencies (“other currencies”). Foreign exchange gains in the fourth quarter and foreign exchange losses in 2020 resulted mostly from the ruble appreciation in the fourth quarter and the ruble depreciation in 2020. That was amplified by an increase in negative net monetary position in other currencies due to a decrease in accounts receivables after the crude oil price drop and an increase in indebtedness in US dollars. A foreign exchange loss in the third quarter of 2020 was a result of the ruble depreciation during that period. In 2019, the Group’s net monetary position in other currencies was more balanced and the ruble exchange rate was less volatile that both resulted in a relatively insignificant foreign exchange gains. Other expenses Other income (expenses) include the financial effects of disposals of assets, impairment losses, revisions of estimates and other non-operating gains and losses. In the fourth quarter of 2020, the Group recognized an impairment loss for its exploration and production assets in Russia in the amount of 3.0 billion RUB and abroad in the amount of 0.1 billion RUB. The Group also recognized an impairment loss for its refining, marketing and distribution assets in Russia and abroad in the amount of 7.7 billion RUB and 21.6 billion RUB, respectively. In the third quarter of 2020, the Group recognized a reversal of impairment of receivables related to our project in Egypt in the amount of 5.3 billion RUB. In the second quarter of 2020, the Group recognized an impairment loss for its international exploration and production assets in the amount of 38 billion RUB, 36 billion RUB of which related to the projects in Uzbekistan, and a reversal of impairment of receivables related to our project in Egypt in the amount of 2 billion RUB. In the first quarter of 2020, the Group recognized an impairment loss for its exploration and production assets in Russia and abroad in the amount of 8 billion RUB, as well as fixed assets and other non-current assets for its refining, marketing and distribution assets outside Russia in the amount of 36 billion RUB. In the fourth quarter of 2019, the Group recognized an impairment loss for its exploration and production assets in Russia and abroad in the amount of 21.4 billion RUB, as well as for its refining, marketing and distribution assets in Russia and abroad in the amount of 1.3 billion RUB. At the same time, the Group recognized an impairment reversal of 9.7 billion RUB in 2019, which was mainly a result of improvement of economic parameters of our production projects in West Siberia and European part of Russia. Income taxes The maximum statutory income tax rate in Russia is 20%. Nevertheless, the actual effective income tax rate may be higher due to non-deductible expenses or lower due to certain non-taxable gains and application of reduced regional income tax rates in Russia. Our total income tax expense increased by 16 billion RUB, or by 102.3%, compared to the third quarter of 2020, and decreased by 69 billion RUB, or by 45.6%, compared to 2019. High effective income tax rate in 2020 resulted from write-offs of deferred tax assets related to tax loss carry forwards in certain international downstream subsidiaries as it is not probable that taxable profit will be available against which these temporary differences can be utilized, and changes in tax rates of certain regional income tax incentives. 92 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Non-GAAP items reconciliation EBITDA reconciliation EBITDA is not defined under IFRS. We define EBITDA as profit from operating activities before depreciation, depletion and amortization. We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital expenditures, acquisitions and other investments and to raise and service debt. EBITDA should not be considered in isolation as an alternative to profit or any other measure of performance under IFRS. Q4 Q3 12 months of 2020 2020 2020 2019 (millions of rubles) Profit for the period attributable to PJSC LUKOIL shareholders ............. Add back 29,435 50,420 15,175 640,178 Profit for the period attributable to non-controlling interests......................... Income tax expense........................................................................................ Financial income............................................................................................ Financial costs................................................................................................ Foreign exchange (gain) loss ......................................................................... Equity share in income of associates and joint ventures ................................ Other expenses............................................................................................... Depreciation, depletion and amortization ...................................................... EBITDA............................................................................................................. 527 30,856 (1,930) 10,853 (12,460) (3,017) 44,790 90,558 189,612 492 15,256 (3,625) 11,697 27,280 (4,029) 1,293 1,458 82,154 (13,051) 44,122 2,043 151,133 (25,134) 44,356 (923) (18,246) 27,691 26,110 (11,474) 137,160 405,440 103,439 202,223 415,094 687,094 1,236,192 EBITDA by operating segments Exploration and production segment Sales (including excise and export tariffs) ..................................................... Operating expenses ........................................................................................ Cost of purchased crude oil, gas and products ............................................... Transportation expenses................................................................................. Selling, general and administrative expenses................................................. Taxes other than income taxes ....................................................................... Excise and export tariffs ................................................................................ Exploration expenses ..................................................................................... EBITDA of Exploration and production segment ......................................... 448,851 (65,934) (12,546) (19,893) (16,297) 403,379 1,542,239 2,364,184 (62,166) (262,343) (274,934) (19,819) (13,375) (9,009) (52,784) (63,364) (48,670) (40,350) (69,589) (47,964) (149,506) (135,366) (540,587) (891,051) (15,529) (2,579) (11,227) (438) (68,309) (136,998) (6,101) (9,348) 166,567 151,979 500,081 893,950 Refining, marketing and distribution segment Sales (including excise and export tariffs) ..................................................... 1,491,819 1,434,361 5,525,980 7,624,198 Operating expenses ........................................................................................ (55,063) (51,013) (195,558) (228,576) Cost of purchased crude oil, gas and products ............................................... (1,203,280) (1,110,035) (4,302,803) (6,362,401) Transportation expenses................................................................................. Selling, general and administrative expenses................................................. Taxes other than income taxes ....................................................................... Excise and export tariffs ................................................................................ EBITDA of Refining, marketing and distribution segment .......................... EBITDA of Corporate and other segment...................................................... Elimination........................................................................................................ EBITDA............................................................................................................. (60,222) (31,593) (6,508) (56,781) (269,656) (229,007) (28,590) (120,607) (121,383) (6,538) (25,908) (25,323) (88,504) (103,766) (368,126) (285,866) 46,649 (10,629) (12,975) 189,612 77,638 (12,619) (14,775) 202,223 243,322 (39,378) (16,931) 371,642 (39,962) 10,562 687,094 1,236,192 Free cash flow reconciliation Q4 Q3 12 months of 2020 2020 2020 2019 (millions of rubles) 227,449 776,574 1,151,844 (135,161) (112,826) (495,443) (449,975) Net cash provided by operating activities............................................................ Capital expenditures............................................................................................ Free cash flow .................................................................................................... 220,643 85,482 114,623 281,131 701,869 93 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Liquidity and capital resources Q4 2020 Q3 2020 Change, % 12 months of 2020 2019 Change, % (millions of rubles) Net cash provided by operating activities.................. including decrease (increase) in working capital .. Net cash used in investing activities.......................... Net cash used in financing activities ......................... 220,643 24,230 (139,024) (109,703) (156,988) (343,008) 227,449 26,305 (3.0) (7.9) 26.7 776,574 1,151,844 83,177 (6,781) (492,769) (510,126) (32.6) - (3.4) (11.7) (54.2) (514,005) (582,344) Changes in operating assets and liabilities: Q4 2020 Q3 2020 Change, 12 months of Change, % % 2020 2019 (millions of rubles) Decrease (increase) in accounts receivable ............... (Increase) decrease in inventory................................ Increase (decrease) in accounts payable.................... 33,137 (48,398) 57,014 (56,609) 4,509 65,549 - - 128,139 37,868 (69,305) (48,023) (69,171) 88,977 - - - (13.0) (Decrease) increase in net taxes other than on income payable.......................................................... Change in other current assets and liabilities............. Total decrease (increase) in working capital......... (9,639) (7,884) 24,230 26,789 (13,933) 26,305 - 10,200 (23,725) 83,177 24,053 (2,617) (6,781) (57.6) >100 - (43.4) (7.9) Operating activities Our primary source of cash flow is funds generated from our operations. Our cash generated from operations decreased by 3.0% and by 32.6% compared to the third quarter of 2020 and full year 2019, respectively, as a result of a decrease in profitability of our core operations. Moreover, our operating cash flow was positively impacted by the dynamics in working capital. Investing activities Compared to the previous quarter, our cash used in investing activities increased by 26.7% largely as a result of an increase in capital expenditures. Compared to 2019, our cash used in investing activities decreased by 3.4%, an increase in capital expenditures was more than offset by lower spending on acquisitions of subsidiaries. Our capital expenditures increased by 19.8% compared to the third quarter of 2020, and by 10.1% compared to 2019. 94 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) Capital expenditures Exploration and production West Siberia.......................................................... Timan-Pechora...................................................... Ural region............................................................ Volga region ......................................................... Other in Russia ..................................................... Total in Russia........................................................... 31,921 19,103 9,280 25,974 2,803 31,614 19,844 9,374 16,649 2,962 1.0 (3.7) (1.0) 56.0 (5.4) 10.7 150,167 141,266 66,808 37,243 43,798 10,778 299,893 6.3 22.7 6.7 41.0 (10.1) 14.5 81,967 39,733 61,739 9,686 89,081 80,443 343,292 Iraq........................................................................ Other outside Russia............................................. Total outside Russia .................................................. Total exploration and production .......................... 6,565 6,732 13,297 102,378 4,620 5,166 9,786 42.1 30.3 35.9 13.5 26,379 29,882 56,261 399,553 22,833 42,214 65,047 364,940 15.5 (29.2) (13.5) 9.5 90,229 Refining, marketing and distribution Russia ................................................................... refining............................................................. retail ................................................................. other ................................................................. International.......................................................... refining............................................................. retail ................................................................. other ................................................................. Total refining, marketing and distribution ........... Corporate and other................................................... Total capital expenditures ...................................... 25,277 16,152 1,883 7,242 6,298 4,753 1,216 329 17,090 12,563 562 3,965 4,882 4,121 695 66 21,972 625 47.9 28.6 >100 82.6 29.0 15.3 75.0 >100 43.7 93.3 19.8 72,486 51,566 4,528 16,392 20,558 16,506 3,479 573 93,044 2,846 62,740 39,912 4,189 18,639 18,400 12,327 4,318 1,755 81,140 3,895 15.5 29.2 8.1 (12.1) 11.7 33.9 (19.4) (67.4) 14.7 (26.9) 10.1 31,575 1,208 135,161 112,826 495,443 449,975 Compared to the third quarter of 2020, an increase in our upstream capital expenditures in Russia was mainly due to development of V. Grayfer field in the Caspian Sea. Quarter-on-quarter dynamics of capital expenditures of our refining and marketing segment in Russia was mainly defined by construction schedule of delayed coker unit at our refinery in Nizhny Novgorod. Year-on-year increase in exploration and production capital expenditures in Russia was mainly due to active development of fields in Timan-Pechora and of V. Grayfer field in the Caspian Sea. Year-on-year increase in capital expenditures of our refining and marketing segment in Russia was mainly a result of construction of delayed coker unit at our refinery in Nizhny Novgorod. Outside Russia, the increase in capital expenditures of our refining and marketing segment was due to modernization works and overhauls at our refineries. Dynamics of our capital expenditures was also affected by the ruble depreciation. The table below presents exploration and production capital expenditures at our growth projects. Q4 2020 Q3 2020 Change, % 12 months of Change, % 2020 2019 (millions of rubles) West Siberia (Yamal) ................................................ Caspian region (Projects in Russia)........................... Timan-Pechora (Yaregskoye field) ........................... Iraq (West Qurna-2 project) ...................................... Iraq (Block-10).......................................................... Uzbekistan................................................................. Total ......................................................................... 3,547 24,265 390 6,028 537 2,112 15,450 3,660 4,163 457 67.9 57.1 (89.3) 44.8 17.5 >100 38.8 16,920 56,083 9,871 24,235 2,144 3,890 21,383 36,362 7,756 19,967 2,866 (20.9) 54.2 27.3 21.4 (25.2) (66.5) 13.2 1,126 35,893 19 25,861 11,605 99,939 113,143 Financing activities In the fourth quarter of 2020, net movements of short-term and long-term debt generated an outflow of 108 billion RUB, compared to an outflow of 96 billion RUB in the third quarter of 2020. In 2020, net movements of short-term and long- term debt generated an outflow of 62 billion RUB, compared to an outflow of 113 billion RUB in 2019. 95 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 On 6 May 2020, a Group company raised new debt via issuance of non-convertible bonds totaling $1.5 billion. The bonds were placed with a maturity of 10 years and a coupon yield of 3.875% per annum. All bonds were placed at face value and have a half year coupon period. LUKOIL intends to use the net proceeds of the issuance for general corporate purposes. The bonds have been assigned a rating of BBB+ by Fitch and BBB by Standard & Poor's. In November 2020, a Group company repaid the bonds issued in 2010 in the amount of $1 billion. In August 2018, we announced the start of an open market buyback programme, which was completed on 20 August 2019. In 2019, a Group company spent 243,691 million RUB in relation to this programme. From the start of the programme and also taking into account tender offers that took place in July–August 2019 and December 2019–January 2020, 57.1 million ordinary shares and depositary receipts of the Company were purchased in aggregate. All of the purchased shares were cancelled. Credit rating Standard & Poor’s Ratings Services set the Company’s issuer credit rating to BBB. Moody’s set the Company’s long-term issuer rating to Baa2. Fitch Ratings set the Company’s long-term issuer default rating to BBB+. Debt maturity The following table displays the breakdown of our total debt obligation by maturity dates. Total 2021 2022 2023 2024 2025 After (millions of rubles) Short term debt ..................................... Long-term bank loans and borrowings . 21,258 112,660 21,258 26,846 - - - - - 21,082 15,499 15,452 12,708 21,073 6.656% Non-convertible US dollar bonds, maturing 2022 ........................... 36,901 110,737 73,751 - - - 36,901 - 110,737 - - - - - - - - - 4.563% Non-convertible US dollar bonds, maturing 2023 ........................... 4.750% Non-convertible US dollar bonds, maturing 2026 ........................... - - 73,751 3.875% Non-convertible US dollar bonds, maturing 2030 ........................... Lease obligation¹ .................................. Total..................................................... 110,532 193,872 659,711 - 34,532 82,636 - 19,609 77,592 - 17,744 143,980 - 17,029 32,481 - 15,699 28,407 110,532 89,259 294,615 ¹ Discounted amounts. Undiscounted cash flows are presented in Note 36 «Capital and risk management» to our consolidated financial statements. Litigation and claims The Group is involved in various 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. See Note 30 “Commitments and contingencies” to our consolidated financial statements for detailed information on claims and legal proceedings involving the Group. Critical accounting policies The preparation of financial statements in conformity with IFRS requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 3 “Summary of significant accounting policies” to our consolidated financial statements for descriptions of the Company’s major accounting policies. Certain of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. 96 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Other information Sectoral sanctions against the Russian companies In July–September 2014, the United States (“US”), the European Union (“EU”) and several other countries imposed a set of sanctions on Russia, including sectoral sanctions, which affect several Russian oil and gas companies. The US Department of the Treasury has placed the Company onto the Sectoral Sanctions Identifications List subject to Directive 4 of the Office of foreign assets control (OFAC). Directive 4 prohibits US companies and individuals from providing, exporting, or re-exporting directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area spreading from the Russian territory and claimed by the Russian Federation. From January 2018 (based on acts adopted in August–October 2017), the US expanded abovementioned sanctions to include certain categories of international oil projects initiated on or after 29 January 2018 in any part of the world, in which companies placed on the Sectoral Sanctions Identifications List subject to Directive 4 (including the Company) have an ownership interest of 33% or more, or ownership of a majority of the voting interests. Management believes that current sanctions do not have a material adverse effect on the current or planned Group’s oil projects. At the same time, the Company continues to monitor and evaluate potential risks for its operations in connection with sanctions. Operations in Iraq The Group is exposed to political, economic and legal risks due to its operations in Iraq. Management monitors these risks and believes that there is no adverse effect on the Group’s financial position that can be reasonably estimated at present. 97 PJSC LUKOIL Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2020 and for the years 2020 and 2019 Forward-looking statements Certain statements in this document are not historical facts and are “forward-looking.” We may from time to time make written or oral forward-looking statements in reports to shareholders and in other communications. Examples of such forward-looking statements include, but are not limited to: . . . statements of our plans, objectives or goals, including those related to products or services statements of future economic performance statements of assumptions underlying such statements. Forward looking statements that may be made by us from time to time (but that are not included in this document) may also include projections or expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios. Words such as “believes,” “anticipates,” “expects,” “estimates,” “intends” and “plans” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. You should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include: . . . . . . . . . inflation, interest rate and exchange rate fluctuations the price of oil the effects of, and changes in, Russian government policy the effects of competition in the geographic and business areas in which we conduct operations the effects of changes in laws, regulations, taxation or accounting standards or practices our ability to increase market share for our products and control expenses acquisitions or divestitures technological changes our success at managing the risks of the aforementioned factors. This list of important factors is not exhaustive. When relying on forward-looking statements, you should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which we operate. Such forward-looking statements speak only as of the date on which they are made, and, subject to any continuing obligations under the Listing Rules of the U.K. Listing Authority, we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. 98 INFORMATION ABOUT MAJOR BUSINESS RISKS AND UNCERTAINTIES OF PJSC LUKOIL The Company’s business is predominantly affected by the following risk groups: . . . . . . . . Macroeconomic Risks Industry-Specific Risks Country Risks Financial Risks Legal Risks Loss of Goodwill Risk (Reputational Risk) Strategic Risks Other Risks related to Issuer’s Business Realization of any of the below risks may have an adverse impact on the business, performance and value of the issuer’s securities. PJSC LUKOIL continuously monitors and takes measures to mitigate risks. However, if such risks materialize, LUKOIL will take measures to mitigate them immediately and minimize loss to the Company. Given the probabilistic nature of risks, as well as the fact that most of them are external for the Company, LUKOIL is unable to provide a 100% guarantee that its risk management measures will reduce their negative impact to zero. Macroeconomic Risks Risk Description Macroeconomic changes resulting from the volatility of global prices for energy carriers, foreign exchange rate fluctuations, inflation processes, the global trend of shifting to low carbon economy, the declining world demand for energy resources, changes in fiscal and monetary policies, as well as in the balance and structure of energy demand and supply may have an adverse effect on the Company’s financial performance. Risk Management The Company has been employing a scenario approach to forecast macroeconomic indicators. One of the scenarios is defined as a base-case scenario and describes the most likely macroeconomic development trends according to the Company’s management. In addition, the Company develops worst-case scenarios to respond to adverse changes in the external environment. The application of the worst-case scenario makes it possible to identify assets and investment projects that are most vulnerable to negative macroeconomic changes. Following this analysis, top management decisions are made. Production and business plans are adjusted on a regular basis to fit the changing market conditions. The Company is planning to change production volumes, first of all seeking to achieve economic efficiency. Industry-Specific Risks Price Risks Risk Description The Company has limited influence over its output prices that depend for the most part on the market environment and (or) measures taken by the regulatory authorities. The oil and petroleum product price drop may have an adverse impact on the Company’s financial performance. Risk Management LUKOIL is a vertically integrated oil company that embraces production, refining and distribution assets. This structure serves as a natural hedging mechanism, in which multidirectional risk factors compensate one other. A high share of investments in the Russian Federation ensures the Company’s stability due to the compensation mechanism of the tax system in place in the Russian Federation, an extensive share of the Company's ruble investments enabling it to keep costs down compared to the proceeds denominated predominantly in US dollars. In addition to this, the Company uses a number of measures to reduce the negative price risk impact: . applies a price scenario while developing long-term programmes, 99 . . . shapes the investment project portfolio in view of the tolerance analysis of the project performance figures to the changing price parameters; uses a commodity supply management system which makes it possible to quickly respond to market changes and conduct arbitrary shipments; hedges its operations while conducting international trading. Risks Associated with Well Construction and Hard-to-Recover Hydrocarbon Field Development Risk Description A considerable share of the materials and equipment required for well construction is purchased by the Company and its contractors from the EU and US manufacturers. Restrictions prohibiting the supply of such equipment and materials may have an adverse impact on the Company’s performance. Risk Management The Company’s projects have stocked spare parts, equipment and supplies for one year ahead. A set of measures has been developed to replace the chemical agents for drill mud preparation and processing supplied from Europe and the US with those manufactured in Russia and other countries. The Company also seeks to promote domestic technologies and consistently reduces the share of imported equipment. As part of the Company’s projects, R&D operations are being conducted to test new samples of domestic equipment, while domestic multi-zone hydrofracturing techniques are being introduced on a stage-by-stage basis. Risks Associated with the Growth of Tariffs and Suppliers’ Prices Risk Description In its day-to-day business the Company uses goods and services provided by third parties, including energy and transportation services. The expenses related to the acquisition of goods and services from third parties directly affect the Company’s financial performance. The Company uses the services of such transportation monopolies as OAO RZhD, PAO Transneft, PAO Gazprom and other similar majors in the countries of the Group’s presence, while the prices for their services grow on a regular basis. There is also a risk of price growth for the services and goods coming from other suppliers, including motor transportation, customs broker services, warehouse storage expenses, etc. Risk Management In order to minimize the risks associated with tariff growth of monopolies in the countries of its presence, as well as the risk of price growth for the services of other suppliers, the Company: . . diversifies ways of product transportation, also by establishing alternative supply routes; participates in the joint operations aimed at the prevention of advanced tariff growth of monopolies together with other consumers; . . holds bidding procedures when selecting long-term suppliers; uses a tool to freeze the transportation terms given long-term cooperation. To mitigate the risk of price growth on the part of the suppliers of goods and services, the Company improves its bidding procedures and extends its competitive environment (list of suppliers of goods and services). The Risk of Failure to Discover Geological Reserves or Discovery of the Reserves below the Initially Expected Level Risk Description The Company’s business is exposed to the following risk: while implementing new projects and conducting exploratory drilling, it might not discover any productive (commercially efficient) oil and gas reserves, and/or the discovered reserves may be considerably below the initially expected level. Given the above, the Company may be forced to write off the respective expenses, which may affect its financial results. Risk Management The Company continuously improves its geologic exploration techniques and employs a staged approach to its operations according to which the next stages are planned with due consideration of the results obtained at the previous stage. Due to its cooperation with major international oil and gas companies the Company is able to explore and successfully employ their expertise in geologic exploration across the Company's facilities. 100 The Risk of Partial Confirmation of the Anticipated Efficiency of Well Operations and Production Drilling Risk Description The Company’s operations are characterized by the presence of risk of failure to ensure the anticipated efficiency of its well operations, as well as that of production drilling, which may result in reconsidering its target hydrocarbon production level and affect the Company’s financial performance. Risk Management PJSC LUKOIL strives to manage this risk at the level sufficient for prompt risk response, by means of proactive implementation of additional measures to ensure efficiency of its geological and engineering operations and drilling back- up production wells. The main types of well operations are designed by developing targeted well operation plans that are aimed at achieving hydrocarbon production and field development targets. Well operations are prepared using modern reservoir analysis and flow simulation tools. In addition to that, for some fields the Company also applies integrated simulation that considerably improves the quality of field management due to the balanced assessment of the interaction between various production elements, such as the reservoir, the well and the surface infrastructure. Well operations and production drilling are adjusted in view of the actual results on a monthly and quarterly basis. Risks Associated with Subsurface Use and Licensing Risk Description The applicable Russian legislation on subsurface use and licensing of exploration and production activities, as well as their practical application hold a number of risks. The major ones are listed below: . a risk of early termination of a subsoil license or a risk of penalties for failure to comply with the terms of license agreements; . a risk of a legal entity that discovered a field of federal significance or a field located in the subsurface area of federal significance, including foreign subsurface users in the authorized capital, of not obtaining the right to subsurface use; . a risk of refusal to accept bidding documents for participation in competitive sales/biddings. Risk Management To mitigate the risks associated with subsurface use and licensing, the Company: . monitors legislation as well as subsurface use and licensing changes, forwards proposals to update the applicable regulatory framework; . . . checks the list of sites associated with the open acreage, which are of interest to the Company, on a regular basis; prepares bidding documents to participate in the bidding procedures and re-register licenses; holds annual advanced training workshops for licensing and subsoil use experts, ensures their participation in key workshops in the respective areas of operations; . . monitors the current subsoil use situation via a special information system; interacts with the regulatory authorities in order to mitigate the risk of early subsoil license termination. Geological and process risks the Company is exposed to during the start-up of wells that have been shut down to limit oil production in order to meet the obligations assumed by the Russian Federation under the agreement with OPEC Risk Description The start-up of wells that have been shut down to meet the obligations under the OPEC agreement is associated with geological and process risks of delayed recovery of oil production that depends, among other things, on the shutdown period, seasonality and production region. Risk Management The wells that had to be shut down were selected, among other things, also to mitigate the negative impact on the development. The wells that had to be shut down (production and injection wells) are mainly located in the same reservoir of the development target, one element or the entire field, which minimizes the risks of disproportion in the development system. If the well is shut down for a longer period, including winter, the Company takes organizational and technical measures to prevent the well and the pipeline from freezing. 101 Country Risks Risk Description Among other things, PJSC LUKOIL has operations in a number of high risk countries (Iraq, Egypt, Uzbekistan, West African countries). Should they be materialized, such risks may significantly complicate the Company’s business or even force the Company to suspend its operations. The main factors which are capable of affecting LUKOIL’s activities these countries include: . . . . . instability of the political situation; escalation of military conflicts; macroeconomic instability; expropriation of the Company’s assets; inefficiency of the legislation and judicial system. Risk Management The major part of the Group’s development and refining assets is located in the Russian Federation; for this reason the impact of this risk is limited. At the same time the Company seeks to diversify its international operations. When implementing high risk projects, the Company applies more stringent return level requirements. Besides, should the political or social and economic situation deteriorate in a region of the Company’s presence, PJSC LUKOIL shall implement a set of crisis response measures, including cost saving, optimization of the investment programme, equity drawdown, and partner engagement. Financial Risks Liquidity Risks Risk Description Volatility of prices on hydrocarbons, hydrocarbon derivatives and foreign exchange rates, troubled recovery of demand for energy resources and other external factors may create a disproportion in the figures included into plans, budgets and investment programmes of LUKOIL Group, thus leading to the shortage of liquidity and sources of funding. Risk Management LUKOIL Group’s liquidity is managed on a centralized basis. Its principal tool is the global liquidity management system, which includes an automated system of concentration and re-distribution of funds, as well as corporate dealing. LUKOIL Group’s operational and strategic management of consolidated cash balance includes regular medium and long-term forecasts of consolidated cash flows and cash balance, control of liquidity indicators, and assessment of the sensitivity of the performance figures included into plans, budgets and investment programmes to macroeconomic changes. Should it be necessary, the Company shall amend its plans, sequester the expenses associated with the transition to the worst-case scenario, reschedule deadlines and project implementation dates or include optional projects into the plan in case of improvements in the macroeconomic situation, and promptly finance its business activities. Currently, PJSC LUKOIL has investment ratings from three largest international rating agencies, including: S&P (BBB rating), Fitch (BBB+ rating) and Moody's (Baa2 rating). On a regular basis, the Company monitors and ensures compliance of its financial indicators with the rating agencies’ requirements, while the Treasury maintains revolving credit lines to guarantee sufficient liquidity in the environment of volatile markets. Foreign Exchange Risks Risk Description The Company’s proceeds are mainly shaped by the US dollar proceeds from the oil and petroleum product sales, while operating and capital expenses are denominated in rubles. In this connection currency exchange fluctuations may have an adverse impact on the Company’s financial results. Risk Management The Company uses an integrated approach to manage its currency risks, including the application of natural hedging mechanisms, which encompass management of the currency structure of its monetary assets and liabilities. 102 Risk of Contractor’s Default, Failure to Pay on the part of the Contractor Risk Description Default events of the Company’s contractors may result in failure to collect or delayed collection of proceeds from supplied goods, or, as applied to financial contractors, failure to repay or partial non-repayment of funds placed on their accounts, which may have an adverse impact on the Company’s financial performance and call for additional funds to fulfill the Company’s obligations. Risk Management To mitigate the default risk and that of counterparties’ payment default, the Company makes settlements with third parties outside of LUKOIL Group on a pre-paid basis or uses security instruments (letters of credit or bank guarantees) provided by end buyers. A list of counterparty banks recommended for cooperation is compiled, based on a regular comprehensive analysis by applying tools to rank banks and financial institutions, including those recommended for trade finance transactions. Legal Risks Risk Description Changes in regulations that cover subsurface use, power engineering, environmental protection, climate change, industrial safety and corporate governance among other areas may have an adverse impact on the Company’s financial performance. There are some uncertainties: . . . associated with the amendments to the Tax Code of the Russian Federation pertaining to the taxation of profits generated by controlled foreign companies and to compliance practices; associated with transfer pricing laws pertaining to the global efforts taken to prevent base erosion and profit shifting by multinational companies; associated with the introduction of tax measures in the jurisdictions of LUKOIL Group’s presence aimed at stimulating and ensuring financial recovery of national economies, in particular, by imposing additional taxes and dues and revising double taxation agreements, including the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Risk Management The Company is constantly monitoring legislative changes, changes in compliance practices and case laws and takes measures to collect information on possible changes at the stage of their preliminary discussion. The Company’s representatives participate in such discussions in order to provide a detailed explanation of the Company’s standpoint on these issues, risks and uncertainties which may arise as a result of the proposed legislative initiatives. The Company’s representatives also participate in the expert reviews held to discuss and develop workable solutions in terms of practical application of the effective legislative innovations. Loss of Goodwill Risk (Reputational Risk) Risk Description PJSC LUKOIL faces various factors capable of causing realization of the reputational risk, which may have an adverse impact on its financial performance and the value of its shares. Realization of the said risk may be brought about by both internal and external factors, including failure to meet statutory requirements, those of constituent documents, in-house policies and procedures, non-performance of contractual obligations, poor quality of finished products, or negative perception of the financial stability and financial standing of the Company. Risk Management To manage such risks, the Company is taking efforts to ensure the following: . . engage regularly with its stakeholders; provide updated and unbiased data on its financial and operating performance, corporate governance and sustainable development; . . continuously monitor statutory and contractual compliance, effect timely payments to its counterparties. The Company maintains oversight over the quality of its products and provided services: in particular, a hotline is in place to ensure prompt feedback to the matters related to filling stations. 103 Much attention has been paid to safety and environment issues. In its operations the Company follows the highest health, safety, and environment standards. The Company attaches great importance to issues relating to the working environment and social responsibility. The Company implements the programmes aimed at support and improvement of the efficient labor and social protection system. Strategic risks Risk Description At the end of 2017 the Company’s Board of Directors approved the 2018–2027 Strategic Development Programme encompassing the major risks which the Company may encounter during Programme implementation. The list of these risks also includes the risk of failure to meet the deadline in terms of investment project implementation; the risk of failure to reimburse for the expenses associated with implemented projects; the risk of increased tax burden; accident risks. Risk Management Strategic risks are always taken into consideration while drafting the Company’s strategy. Strategic planning involves assessment of the risks and efficiency of various strategic initiatives, as well as development of a set of strategic decisions that are most preferable in terms of risk to return ratio. To mitigate its strategic risks, the Company’s management monitors the macroeconomic environment, major industry drivers and analyzes performance of the Company’s subsidiaries and that of its competitors on a regular basis. While developing its Strategy and Investment Programme, the Company relies heavily on the scenario-based and probabilistic modelling tools making it possible to assess various risks. Other Risks related to Issuer’s Business Risks to Public Health and those Associated with the Spread of Epidemics Risk Description 2020 proved the global economy exposed to a considerable negative impact in terms of public health and epidemics. The declining demand for energy resources and reduced oil prices following exposure to such risks can make business less efficient and impair the Company’s financial performance, and even lead to partial depreciation of the Company's assets. Risk Management As the coronavirus infection was spreading, the Company took the following measures to ensure safety of its employees and maintain operational efficiency: . . The Company has set up headquarters for prompt response to the spread of the virus; The Company introduced regular testing for coronavirus for employees returning to offices after remote work or leaves; . The Company has made it obligatory to wear masks and gloves in its offices and has modified working areas and common facilities so that employees could follow the social distancing requirement and stay 1.5 meters away from each other; . . The Company has introduced an attendance schedule for food service areas; The Company has made arrangements for office employees of LUKOIL Group entities to work from home, with the exception of critically important specialists who had to stay at their workplaces; . . . . The Company implements all measures required to ensure industrial safety and fail-safe operation taking into account the HSE requirements; The Company has organized development and training activities for employees through a distance learning system; Working schedule has been changed for rotational employees (all social security obligations have been complied with); Additional measures are taken in the Company’s offices and entities to prevent the pandemic: body temperature checks have been introduced for employees, offices have been equipped with additional disinfectants, and employees are provided with disposable medical masks. 104 Risk of Terrorist Attacks, Wrongful Acts by Third Parties Risk Description PJSC LUKOIL has operations in a number of countries with a heightened risk of terrorist attacks and other crimes against the Company’s assets. The Company’s employees and assets may be jeopardized, especially against the backdrop of various destabilizing factors, including deterioration in social conditions as a result of the pandemic. There are also risks related to wrongdoings on the part of LUKOIL’s competitors (specifically, risks of unfair competition), risks of financial and other abuses on the part of the employees, as well as those related to theft of financial resources and commodity stocks. Risk Management Depending on a country where it operates, the Company takes various measures to manage the risk: . acting in compliance with the national laws, the Company seeks to ensure engineering, special and physical protection of personnel and facilities on the required and reasonable level, and interacts with competent authorities to prevent possible terror or criminal acts against the Company. In the Russian Federation, the Company participates in the National Antiterrorism Committee campaigns to improve counter-terrorist protection of its assets; . . the Company takes actions to identify those employees who can – either through act or omission – inflict harm on the Company’s interests; schedules and arranges activities aimed at information security improvement; Health, Safety and Environment (HSE) Risks Risk Description The Company’s facilities are characterized by risks related to the shutdown of engineering processes, discharges of hazardous substances, environmental damage, emergency, accidents, fires, which in its turn may cause shutdown of the Company’s production facilities. Risk Management To mitigate these risks, the Company has established and implemented an effective HSE Management System certified to comply with the international standards ISO 14001 and ISO 45001. The following tasks are being fulfilled: . assignment of responsibility for ensuring compliance with occupational health, safety and environmental requirements at all management levels; . . target corporate HSE programmes developed based on best available technology; production control over the operation of hazardous production facilities and facilities producing a negative impact on the environment; . . . . diagnostics (non-destructive inspection) and monitoring of equipment parameters; repairs and timely replacement of equipment; ensuring that all contractor entities fulfill HSE requirements at all interaction stages; developing leadership tools and improving safety culture: conducting leadership safety visits and Safety Days, adhering to key safety rules, and introducing best HSE practices; . . . ensuring high qualification of employees at all levels; dedicated working environment assessment, improved labor conditions for employees; elaboration of Emergency Response Plans at Hazardous Production Facilities, Oil Spill Response Plans, creation of a pool of rescue teams and reserves for emergency response, service personnel training at hazardous production facilities and rescue teams in terms of emergency prevention and response; . other measures to reduce the occupational accident and injury rate in LUKOIL Group entities. Climate Change Risk Risk Description The Company’s business is associated with climate change risks that include: . Market risks – risks, associated with demand shifts and customer preferences; 105 . Political, legal, regulatory risks – risks, associated with the transition of the global economy to low carbon development and measures taken by countries, where the Company operates, to introduce more stringent regulations on GHG emissions; . . . Reputational risks – risks, associated with how stakeholders perceive the Company’s willingness or its unwillingness to be involved in the transition to the low carbon economy; Technology risks – risks, associated with the world’s more rapid transition to the low carbon economy as a result of the development of low carbon technologies and their increased efficiency; Physical risks – risks, associated with climate change and other environmental properties in the regions, where the Company operates, and that might affect reliability of equipment or people’s health (these risks include natural calamities and permafrost thawing). These risks may have an adverse impact on LUKOIL’s business as a major producer of fossil fuels and greenhouse gas emitter thus leading to increased costs, lower profitability and limited potential of the future growth. Risk Management To mitigate the risks, the Company takes relevant actions that include as follows: . Re: market risks – The Company applies a scenario approach to forecast macroeconomic indicators, various climate scenarios and internal carbon price among them. These tools help identify the most sensitive assets and investment projects in terms of negative changes of macroeconomic parameters and make management decisions; . Re: political, legal, regulatory risks – The Company continuously monitors changes in the climate legislation, strives to collect information on such changes at the stage of preliminary discussion, and to ensure participation of the Company’s representatives in such discussions in order to provide a detailed explanation of the Company’s standpoint on these issues, risks and uncertainties which may arise as a result of the proposed legislative initiatives; . Re: reputational risks – The Company commits itself to regular disclosure of climate management data and greenhouse gases emissions in line with the GHG Protocol, both direct and indirect emissions included; . . Re: technological risks – The Company follows and develops new solutions to increase energy efficiency; Re: physical risks – The company considers effects of climate changes when designing and constructing facilities, including those in the most sensitive areas (the Arctic, scarce-water regions and offshore facilities), and performs environmental monitoring against a relevant range of parameters that guarantees a timely response. Risks of Failure to Implement the Investment Programme Risk Description While implementing investment projects, the Company has to face the risk of higher costs and untimely commissioning of production assets. Delays in project implementation, including those caused by failure to meet the deadlines for preparing design and estimate documents, obtaining approvals, concluding contracts, work execution periods, as well as changes in field development plans based on additional geological information may undermine future performance and impair investment project efficiency. If the macroeconomic situation should worsen and the pandemic persist, additional risks associated with failure to implement the investment programme include a possible financial descent or bankruptcy of contractors, and failure to engage contractors for the performance of particular types of work due to pandemic-related restrictions. Besides, since the Company is part of a global supply chain, a prolonged epidemiological crisis may lead to delays in the supply of equipment and materials required for project implementation. Risk Management The Company manages this risk by monitoring project implementation progress on a quarterly basis. While developing its investment programme, it makes sure that the initial licenses, permits, and authorizations for the next year are valid and in place. The Company has introduced and is developing an Integrated Project Management System aimed to improve the quality of decision-making and enhance the predictability of large-scale capital projects. It employs flexible approaches to investment management. In view of the unstable macroeconomic situation, there is a possibility to change the approved investment programme as the year progresses. 106 Competitive Risk Risk Description The oil and gas industry exists in a highly competitive environment. The Company competes with other major Russian and international oil and gas companies in the following major areas: . . . . . . . . obtaining licenses to upstream operations in the course of auctions or biddings; acquisition of assets and equipment, participation in new projects; engaging specialized third party service organizations; hiring competent and experienced employees; access to key transportation infrastructure; development, search for, acquisition and integration of technologies; sales of end products; access to capital. Besides, PJSC LUKOIL faces restless competition on the part of suppliers of alternative energy sources, including eco- friendly renewable energy sources. Risk Management LUKOIL is one of the largest vertically integrated oil companies both in Russia and abroad. Over a long period, the Company has been demonstrating its efficiency, which turns it into one of the industry’s leaders and strengthens its competitive positions. The Company has gained a reputation of a reliable partner with strong financial standing. The Company conducts strategic planning to reduce potential risks of increased competition. As part of long-term market situation development the Company selects the most efficient assets and forms of respective participation interests. The Company monitors the market situation on a regular basis and promptly responds to its changes. Development of personnel professional and managerial competences and introduction of new technologies help the Company to improve its competitive advantages. Risk Associated with the Lack of Qualified Personnel Risk Description The competence and expertise of the employees may prove insufficient for them to adequately fulfill their duties, which, in its turn, may have a negative impact on the Company’s financial performance indicators. Risk Management To mitigate the negative impact of this risk, the Company focuses on integrated development of the talent pool potential. The staffing strategy is based on the Company’s Development Strategy and depends on the business segments’ needs personnel, with plans and budgets being created for this purpose to help the Company organize efficient manpower redistribution by insourcing, ensure recruitment of employees in due time, and provide for their professional training and development. Risks of Cyberattacks Risk Description Information and technological support and hence the automated processes affecting the Company’s financial standing and performance, the reliability of its financial and accounting information, as well as the Company’s ability to fulfill its obligations, function in an inter-related information environment and are inevitably exposed to the risks of external and internal cyberattacks, which may affect information confidentiality, integrity and accessibility as part of the IT systems. The Company considers not only its information and processing tools as assets that have to be protected from exposure to cyberattacks but also the information that has been entrusted to it by the state authorities, shareholders, business partners and personal data owners. Risk Management The Company adheres to the generally accepted global standards and best practices in terms of information security, seeks to use the previously introduced protection tools more efficiently, and continuously improves its internal information security services; however, evolving cyber threats require continuous preparedness to be able to respond to the previously unknown cyberattacks. The success of these activities depends on early detection of new cyber threats before they can affect the Company, and immediate counteraction to cyberattacks, which makes it possible to prevent or minimize potential consequences. 107 Special attention is given to being able to respond to the changing cyber threat landscape: the information security architecture is restructured, additional security tools are purchased and deployed, and monitoring is intensified in a prompt manner. The Company has successfully initiated and is expanding the computer farm capacity, thus providing users with remote access to their automated workstations and corporate business applications. Information Technology Support Risks Risk Description Besides the risks of cyberattacks which affect the confidentiality, integrity and availability of the information within the IT systems used by the issuer, information and technological support of its managerial and financial activities is exposed to the risks whose nature is not related to impaired information security. Such risks comprise the risks of failure to implement the projects focused on the setup and upgrade of IT systems, their breakdowns and failures, failure to obtain IT services from third party suppliers by the Company (also due to the escalation of international sanctions), as well as the risk of market position loss due to delayed application of innovative digital technologies. Risk Management As for the risks related to implementation of the projects focused on creation and upgrade of IT systems, the Company applies and improves modern development management practices, adheres to proven engineering solutions with reliable engineering support. Along with the preventive measures taken to minimize the risks that imply the setup of fail-resistant IT infrastructure, testing of IT systems prior to their commissioning and control of proposed changes, the Company also seeks to plan proactive measures to be taken in case the risk is materialized aimed at reactivation of critical business operations and managerial process before the consequences of their interruption reach the unacceptable limit. Minimization of risks related to participation of third party IT service providers is ensured both by careful selection of suppliers, control over their activities and support of internal competences related to the provision of IT services that are most critical for the Company. The Company implements measures to control sanction risks; it has also developed a plan to respond to possible respective risks. Digitalization initiatives are included into LUKOIL Group Information Strategy. Risks Associated with Circulation of the Company’s Securities Risk Description The Company’s securities circulate in regulated markets in Russia and abroad. Changes in the requirements to the issuers on the part of the regulatory authorities and stock exchanges may induce the Company to amend its corporate governance procedures and assume extra obligations as to information disclosure and shareholder relations. Should the Company fail to ensure compliance with these requirements and fulfill the required obligations, it may result in transfer of the Company’s securities to lower listing segments and delisting, which may have an adverse impact on the liquidity and price of the securities. Risk Management The Company monitors changes in the listing rules and other requirements of stock exchanges and regulatory authorities. The Company’s representatives participate in the working meetings and other issuer events arranged by stock exchanges and other organizations that provide consulting and educational services to the issuers. The Company also seeks to introduce the best global practice in corporate governance. Risks Associated with Disclosure Obligations Risk Description In order to maintain its securities listing the Company adheres to certain obligatory information disclosure procedures within the timelines set by the requirements of the regulatory authorities and stock exchanges. The information is disclosed in digital form by transferring it to the organizations authorized to disclose information in stock markets by regulatory authorities (hereinafter also, information disclosure services), via websites of the said organizations and e- mails. Should websites of the information disclosure organizations be unreachable (due to hacker attacks, technical failures, etc.), as well as in case of malfunction of the Company’s own computer systems and other resources used for the employees’ forced transition to remote work, the necessary information cannot to be disclosed within the set time limits, which may be considered as a violation of the Company’s obligations and result in administrative fines for the Company and/or its executive employees by the securities regulatory authorities. 108 Risk Management In order to mitigate these risks the Company shall conclude information disclosure agreements with several information disclosure services, seek to submit the information prior to the agreed schedule thus ensuring enough time to tackle possible technical failures. If the need be, the Company’s authorized employees can promptly contact the assigned employees of the information disclosure services. During remote work, the Company’s IT departments provide essential technical and consulting support to employees, and the Company monitors compliance with regulations and requirements applicable during this remote work period. Risk Management Procedures PJSC LUKOIL Management pays great attention to risk management issues in order to ensure reasonable assurance of the set goals in the conditions characterized by uncertainties and adverse factors. PJSC LUKOIL is constantly identifying, describing, estimating and monitoring the potential events that may affect the Company’s activities, and is elaborating measures to prevent them or mitigate their negative impact to the greatest extent possible if such events do take place. The Company seeks to actively promote risk management and is presently focusing its efforts on the improvement of an enterprise-wide risk management system (ERM) based on the best international practices. The Company is constantly improving the applicable regulatory methodological risk management base which establishes uniform requirements for all LUKOIL Group entities aimed at arranging the risk management process at all stages, and defines management standards for certain risk types of utmost importance. The Risk Committee, a dedicated body under the President of PJSC LUKOIL, was set up and began its work in 2011. In order to enhance the efficiency of the corporate-wide governance system through the establishment of a unified information environment, an information risk management system has been established and is being constantly improved across LUKOIL Group entities. 109

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