Letter to Shareholders	2
LUKOIL in the World	6
Main Operating and Financial Indicators	8
EVENT S IN 2010	9
1. Oil & Gas Exploration and Produ ction	12
Licensing	17
Oil and Gas Reserves	18
Geological Exploration	21
Oil Field Development and Production	29
Gas field development and gas production	38

2. Oil Refi ning, Gas Processi ng and Petrochemi cals	42
Oil Refining	45
New catalytic cracking complex at the Nizhny Novgorod Refinery	46
Production of Lubricants	51
Gas processing	54
Petrochemicals	56
3. Pow er Generation	58
4. Produ ct Deliv eries and Mark eting	62
Crude oil deliveries	64
Gas Deliveries	66

Gas produ ction and su pply stru ctu re	67
Petroleum product marketing	68
Trade balance of LUKOIL su bsi diaries (2010)	74
5. Technology and Innovation	76
Exploration & production technologie	78
Refining Technologies	82
Information Technologies	83
6. Social Responsi bili ty	84
Protecting the Environment	86
Health and safety	89
Personnel and Social Programs	90
Sponsorship and Charity	94

7. Corporate Gov ernance and Secu rities	100
Corporate Governance	101
Board of Directors and Management Committee	102
Members of the Board of Directors of LUKOIL	104
Committees of the Board of Directors	110
Financial Committee of LUKOIL	113
Changes in Group Structure	120
Financial management	120
Internal control and Internal audit	121
Information Disclosure	122
Company securities	124
Dividends	127
Consoli dated Financial Statem ent	128
Managem ent's dis cussi on and analysis of nancial condition and resul ts of operations	173
Reference Inform ation	216

Dear Shareholders,

LUKOIL is celebrating its 20th anniversary this year. Over the past twenty years we have achieved substantial results. We have grown from a few production assets in Russia into a global energy company with operations in 37 countries on four continents. We have worked consistently for two decades to make all aspects of our business more efficient and to maximize income to our shareholders.

We have entered our third decade with confidence, and we are starting a new age which reflects the reality of today's global business environment. In the fall of 2011 we are going to present a new business development strategy. Taking into account the shrinkage of traditional hydrocarbon deposits, we will particularly focus on new technologies to make the best use of our reserve base in the future. This approach will give us new competitive advantages and increase our shareholder value.

The business of LUKOIL Group developed well in 2010 as the world economy made a gradual recovery after the global financial crisis. Ability of our Company to adapt quickly to a changing environment brought strong financial results, and we remained in the vanguard of the Russian oil & gas industry. Tight financial discipline, good decision-making, and efficient management gave a record level of free cash flow in the reporting year. We focused our efforts on priority projects and on improvement of the business efficiency, including a strong emphasis on innovation policy and business structure optimization.

Net income of LUKOIL Group increased by 28.5% in 2010 to \$9,006 million, and return on average capital employed was 14.0%. Free cash flow reached \$6,930 million. LUKOIL remains one of the most financially efficient oil companies in Russia, as shown by achievement of \$11 net income per boe in 2010.

Growth of net income helped us to increase income to shareholders. We reacted to the decision by ConocoPhillips to exit its shareholding in LUKOIL by carrying out one of the largest-ever buyback transactions on the Russian market, with value in excess of \$3.4 billion. Net profit per share increased by 32.2% in comparison with 2009 and approached \$11.

We continue to expand our dividend payouts to shareholders. On April 26, 2011 the Board of Directors recommended the General Meeting of Shareholders to approve dividends of 59 roubles per share for 2010 (\$1.94 at the exchange rate on December 31, 2010). So the share of net profits paid as dividends will be more than 18%. Dividend yield in 2010 will be 3.5%.

In the Exploration & Production segment the Company increased its hydrocarbon output thanks to strong growth of gas production, rapid development of international projects and stabilization of production levels in Western Siberia. Daily hydrocarbon production by the Group rose by 1.2% to 2.24 million barrels of oil equivalent in 2010. Output of marketable gas rose by 24.5% thanks to increase of purchases by OJSC Gazprom.

Valery Grayfer Chairman of the Board of Directors of LUKOIL

Vagit Alekperov President of LUKOIL

Launch of production in the Caspian region was a particularly important event for the Company in 2010: commissioning of the Yu. Korchagin field was the first of a series of start-ups scheduled by LUKOIL at promising areas in the Caspian, which will ensure quality growth of production in the long term.

The Company is also pursuing expansion of its international E&P business. A consortium between LUKOIL and the American company Vanco won a tender for blocks 29 and 30 in the Black Sea, held as part of a 10-year licensing round by Romania's National Agency for Mineral Resources.

A major achievement in the Company's exploration business last year was the discovery of a deepwater oil field on the continental slope of the Gulf of Guinea (Ghana). The discovery was made at the Dzata structure as part of the Cape Three Points Deep Water (CTPDW) project, and is at a depth of 2,000 meters. Well depth is about 4,500 meters below sea level.

In the Refining & Marketing segment the Company focused its attention on capacity modernization in order to achieve further increase of the rate of conversion. We have invested and continued to invest considerable sums in our oil refineries to ensure leading positions in Russia for production of high-quality and environmentally friendly fuels. In December 2010 we commissioned a catalytic cracking facility at our Nizhny Novgorod refinery, which is the largest catalytic cracking facility built in Russia for the last 25 years, enabling production of gasoline that fully meets Euro-4 standards.

Crude oil refining at Company facilities in 2010, including LUKOIL's share of refining at the ISAB and TRN complexes, rose by 5.6% to 66.2 million tonnes.

We completed creation of the Group's new Power Generation sector in 2010. LUKOIL Group now has power generating capacity of 4.4 GW and we plan to launch a further 600 MW capacity in 2011 using advanced gas turbines, which will make power and heat production significantly more efficient. Electricity output in 2010 was close to the level in 2009 and totaled 14.6 billion kWh. Heat production in 2010 was 15.3 million Gcals.

Innovation policy is becoming a key aspect of Company development, as application of new technologies increases efficiency of the business. We are now the first Russian Company with experience of work on Africa's deep-water continental shelf. We are continuing to perfect our technologies for production of heavy and high-viscosity oils in Russia and we accounted for 20% of total Russian output of oil in these categories in 2010. Testing is being carried out of extraction techniques for low-permeability reservoirs in Bazhenov strata. These strata are a close geological analogue of the well-known Bakken formations in the U.S. Their enormous potential for oil production has been held back by the lack of a

4

suitable technology. We are now working to address this task. We are also in dialogue with partners in Saudi Arabia on development of a project for extraction of nontraditional gas from reservoirs with low permeability.

In 2010 the Group created a unified corporate R&D center, LLC LUKOIL-Engineering. The task of the new LLC will be to organize and carry out R&D work in the geology, development and production spheres at all LUKOIL operating sites. A business structure has also been set up at OJSC RITEK for work with complex and unproductive fields, and will spearhead use of innovative approaches in oil production.

LUKOIL is entering a new era of self-sufficient development in its jubilee year, 2011. Our main task in 2011 will be to configure a new development strategy based on strong cash flow, increase of oil recovery ratios, careful choice of investment projects, innovative development, maintenance of strong competitive positions, and growth of Company profitability and capitalization.

President of LUKOIL Vagit Alekperov

Chairman of the Board of Directors of LUKOIL Valery Grayfer

Dividend yield, %

Total shareholder return , %

Basic earnings per share, \$

Hydrocarbon production, million boe

oil refining

• 2.2% of global production of crude oil1

• 17.8% of Russian crude oil production and 18.2% of Russian crude

LUKOIL in the World

LUKOIL is a major international vertically-integrated oil & gas company, accounting for 2.2% of global output of crude oil

The strong position, which the Company enjoys today, is the fruit of 20 years work to expand the reserve base, increasing business scale by seeking out and executing strategic transactions.

• One of the biggest Russian oil business groups with \$100 billion revenue and net income in excess of \$9 billion • A leader among Russian companies by information openness and transparency. The first Russian company to obtain full listing for its shares on the London Stock Exchange • The only privately owned Russian oil company, in which the largest part of shares belongs to minorities • One of the biggest tax payers in the Russian Federation. Total tax payment by the Company in 2010 was \$30.2 billion 1 Figures from EIG

Main Operating and Financial Indicators

	2010	2009	Change, %
Sales, \$ million	104,956	81,083	29.4
EBITDA, \$ million	16,049	13,475	19.1
Net income, \$ million	9,006	7,011	28.5
Basic EPS, \$	10.95	8.28	32.2
ROACE, %	14.0	11.8	–
Capital expenditures, \$ million	6,844	6,534	4.7
Investments (acquisition of subsidiaries and minority stakes)1 , \$ million	1,124	2,945	-61,8
Share price (end of year, MICEX), roubles	1,732.02	1,695.47	2.16
Dividend per share, roubles	59	52	13.46
Main operating indicators
Oil reserves, million barrels	13,319	13,696	-2.75
Gas reserves, billion cubic feet	23,615	22,850	3.3
Hydrocarbon reserves, million boe	17,255	17,504	-1.4
Crude oil production, million barrels	708.1	719.6	-1.6
Production of marketable natural gas, million cubic meters	12,770	10,218	25.0
Production of marketable associated gas, million cubic meters	5,784	4,680	23.6
Production of marketable hydrocarbons, thousand boe per day	2,239	2,212	1.2
Throughputs at own refineries and at ISAB and TRN, million tonnes	66.2	62.7	5.6
Gas processing, million cubic meters	3,178	2,962	7.3
Production of petrochemicals, million tonnes	1.036	0.902	14.9
Crude oil exports, million tonnes	40.59	42.02	-3.4
Petroleum product exports, million tonnes	25.82	27.76	-6.9
Crude oil sales, million tonnes	51.38	49.97	2.8
Wholesale sales of petroleum products, million tonnes	91.02	86.68	5.0
Retail sales of petroleum products, million tonnes	14.34	14.08	1.8
Number of filling stations (owned, leased and franchises)	6,508	6,620	-1.7
Average number of employees, thousand	130.0	143.4	-9.4

¹ Including prepayments related to acquisition of subsidiaries and non-controlling interests and non-cash transactions.

Hydrocarbon reserves and production data include the Group share in equity affiliates.

EVENTS IN 2010

JANUARY

LUKOIL signs a contract for development and production at the West Qurna-2 field in Iraq. Parties to the contract are Iraq's state-owned South Oil Company and a consortium of contractors consisting the Iraqi state North Oil Company (25%), LUKOIL (56.25%) and Norwegian Statoil (18.75%). The contract is for 20 years with an option to extend for 5 years. Drilling at the field is scheduled to start in 2011, and production should begin in early 2013.

LUKOIL approves an Energy-Saving Program for Group companies in 2010 and for the period 2010–2012. The Program will focus on better use of energy, and installation of new energy-efficient technology and equipment. The Company should obtain energy savings in excess of 2.4 billion kWh and more than 970,000 Gcals in 2010- 2012 as a result of the Program. Target savings in money terms are 9.2 billion roubles (about \$300 million).

FEBRUARY

A consortium consisting of LUKOIL, the US company Vanco and the Ghana National Oil Company (GNPC) discovers substantial oil reserves at the Dzata structure, which is part of the CTPDW block, on the Ghana shelf in the Gulf of Guinea. The exploration well, Dzata-1, which made the discovery, has subsea depth of 4,500 meters. Further exploration is planned for purposes of reserve assessment and commercialization.

MARCH

LUKOIL approves a one-year R&D program for the Group in 2010 and a medium-term program of R&D work for the period 2011–2012. The one-year program includes more than 800 research, design and technology tasks relating to field development as well as provision of various technology services. Financing is over 4 billion roubles (about \$140 million). Financing for the mediumterm program is 12 billion roubles (over \$400 million). Most of spending in both programs is focused on the exploration & production segment.

APRIL

LUKOIL produces first oil at the Yu. Korchagin field in the Russian sector of the Caspian Sea. The field has 3Р reserve in excess of 250 million boe. Peak annual production will be 2.4 million tonnes of crude oil and 1 billion cubic meters of gas. Investments for development of the field in 2004-2009 were about \$1.2 billion.

LUKOIL is acclaimed best Russian company for investor relations based on a survey by Institutional Investor magazine. More than 1,000 analysts and 650 fund managers from 531 companies took part in the survey.

JUNE

LUKOIL holds its Annual General Meeting of Shareholders, which approves the Annual Report for 2009 and annual accounts. Shareholders also approved payment of dividends for 2009 in the amount of 52 roubles per ordinary share (\$1.72 at the exchange rate of 31.12.2009).

JULY

A consortium of LUKOIL and the US company Vanco wins a tender for exploration and development of the Est Rapsodia and Trident blocks in the Romanian sector of the Black Sea. The blocks have total area of 2,000 km2 , and sea depth in the region is 90–1,000 meters. 3D seismic work is planned in order to clarify geological structure at the blocks. The LUKOIL share in the project is 80%, and the remaining 20% is held by Vanco.

The Board of Directors of LUKOIL approves a Code of Business Ethics. The Code regulates relations between employees and LUKOIL shareholders and investors, business partners, state authorities and public organizations. It also specifies corporate ethics and social responsibility.

A LUKOIL organization signs a agreement to acquire 7.6% of shares of LUKOIL from ConocoPhillips at \$53.25 per share to overall value of \$3.4 billion. The transaction was completed in August 2010. The agreement also includes a sixty-day option 2010 for acquisition of up to 11.61% of LUKOIL shares in ADR form.

AUGUST

LUKOIL Group takes an unsecured \$1.5 billion credit. The facility is for one year and is to be used for share buyback from ConocPhillips.

SEPTEMBER

LUKOIL and a group of investors, with Unicredit Bank acting as organizer, acquires 42.5 million common shares of LUKOIL in ADR form. This transaction represented partial use by the Company of the options provided under the agreement with ConocoPhillips, which was signed in July 2010. The transaction sum was about \$2.4 billion. The option was exercised in the framework of a program, approved by the Board of Directors, for increase of income to shareholders by market purchase of shares.

OCTOBER

LUKOIL begins retail sales of Euro-5 diesel fuel in Russia.

The fuel is produced at Company refineries in Nizhny Novgorod, Perm and Ukhta. Euro-5 diesel has a high cetane number, which optimizes combustion of the fuel mixture, reduces noise and vibration, prevents corrosion processes, eases engine ignition and saves fuel.

NOVEMBER

LUKOIL takes 5th place among oil & gas companies in Europe, Middle East and Africa and 10th place globally in the Platts Top 250 Global Energy Company Rankings for 2010. Companies were assessed by four main criteria asset size, turnover, income, profitability and return on average capital employed. The Company took 8th and 12th places in the same Platts rankings in 2009.

LUKOIL places two Eurobond tranches with overall value of \$1 billion at 6.125 coupon rate. The first tranche of \$800 million gives 6.25% yield to maturity and matures in 2020, and the second tranche of \$200 million gives 5.80% yield to maturity and has maturity in 2020. Funds raised from the placement were used for general corporate purposes, including repayment of existing debt.

DECEMBER

LUKOIL takes second place among the country's 75 biggest companies in a ranking by levels of social responsibility, prepared for 2010 by Trud newspaper and the Agency for Political and Economic Communications. For purposes of the ranking 'social responsibility' is understood to mean creation and preservation of jobs, tax discipline, delivering on commitments to employees, and playing an active part in projects to develop social infrastructure. The ranking is based on results of a survey among representatives of trade unions, research institutes, business associations and recruitment agencies, as well as members of the Social Chamber and deputies of the Russian State Duma.

LUKOIL signs a memorandum of understanding with the Skolkovo Foundation. The document states the LUKOIL will apply its R&D capacity in such spheres as energy efficiency in oil production and refining, clean and alternative energies, IT development, etc. Signing of an agreement on participation by LUKOIL in work by the Foundation is planned for spring 2011.

LUKOIL wins the nomination for 'Company with Best Corporate Governance' in the annual competition, 'Russian Corporate Governance Leaders', organized by the Association for Protection of Investor Rights, which brings together some of the largest Russian and foreign institutional investors. Winners are determined by a three-stage secret ballot. Representatives of the investment community acclaimed LUKOIL for operating a system of corporate governance which has set standards in Russia over a number of years.

LUKOIL places \$1.5 billion of convertible bonds at 2.625% coupon rate, redeemable in June 2015. The bonds are convertible into ADRs trading on the London Stock Exchange, each of which represents one ordinary share of LUKOIL. The conversion price was set at \$73.7087 per ADR. The transaction represents the first large-scale issue of convertible debt instruments by a Russian issuer since the start of the crisis period. The LUKOIL bonds found strong among from the investment community thanks to the Company's high investment rating and positive attitude of investors towards the oil & gas sector.

LUKOIL starts production of Euro-4 automotive gasoline.

Launch of Euro-4 gasoline production was made possible by commissioning in December 2010 of a catalytic cracking complex at the Nizhny Novgorod Refinery. Investments in the project were about \$1 billion. Euro-4 automotive gasoline gives 'clean' exhaust gas, minimizing content of sulphur oxides and products of incomplete combustion of aromatic hydrocarbons, including the particularly dangerous carcinogen and mutagen, benzopyrene.

Oil & Gas Exploration 1 and Production

Strategy

Creating potential for long-term Company growth through reserve replacement in traditional production regions and accelerated development of new production regions in Russia and abroad.

Improving efficiency of geological exploration by careful selection of projects and use of the latest technologies.
Steady increase of hydrocarbon production in the medium term.
Improvement of production indicators and efficient control over lifting costs through application of the latest technologies, and through optimization of the well stock and field development systems.
Greater use of advanced technology in operations.
Application of financial criteria to assess projects and business results, and to optimize the asset portfolio.

E&P segment indicators

Indicator	2010	2009	Change, %
Revenue, \$ million	36,976	24,353	51.8
EBITDA, \$ million	11,390	10,175	11.9
Net income, \$ million	6,226	5,456	14.1
Capital expenditure, \$ million	4,933	4,687	5.2

We focused our efforts in 2010 on efficient development of the Exploration & Production segment, which generates more than 69% of Company net income, and our efforts gave substantial results.

We were able to raise average daily output of hydrocarbons by 1.2% through increase of gas production and reducing decline rates of oil output in Western Siberia. Daily production of hydrocarbons was 2.239 million boe, consisting of 1.940 million barrels for crude oil and 0.299 million boe for gas.

Start of oil production at the Yu. Korchagin field in the Caspian Sea and obtaining of tax preferences for the project are important achievements in 2010. Starting from December 2010 oil exported from the Yu. Korchagin field is subject to export duties at a special low rate, comparable to that used for oil from fields in Eastern Siberia.

Price and Tax Environment

Crude Oil Market

International prices for crude oil were higher in 2010 thanks to recovery of the world economy and soft monetary policies by central banks. Average price of Brent crude rose significantly by 28.9% in 2010 compared with 2009 to a level of \$79.5 per barrel. Most of the growth in oil prices occurred at the end of 2010.

Revenue structure of a Russian crude oil exporter, \$ per barrel

Crude oil prices in the first half of the year were in a corridor between \$67 and \$86 per barrel. Favorable macroeconomic statistics from the US and developing markets indicating the recovery in the consumer demand served as a growth driver for oil, but there was negative impact from decline of consumption in the Eurozone as a result of the debt crisis. Sentiment on commodity markets improved in the second half of the year. This was due, firstly, to the launch of 'quantitative easing' programs in a number of developed countries , which helped liquidity on goods and commodity markets and also on stock exchanges, supporting prices for oil and shares (further monetary emissions in the US weakened the dollar, which contributed to oil price growth). Secondly, steady growth of crude oil imports by China in an environment of refining volume growth and stable production roused expectations of further growth of demand in China. And, thirdly, onset of a cold winter with heavy snowfalls in Europe drove up demand for fuel oil.

The Company's main operating regions, accounting for 93% of crude oil production, are the oil & gas provinces of the Russian Federation (Western Siberia, Southern and Central Russia, and Timan-Pechora). So the price for Russian Urals export blend has direct impact on the Company's financial results. The average Urals price rose by 27.9% in 2010 compared with 2009 and was \$78.3 per barrel. The average price differential between Urals and Brent in 2010 was \$1.2 compared with \$0.5 in 2009. Weaker positions of Urals blend on the world market were due to increased output of competing types of crude by OPEC members as the world economy recovered.

For objective assessment of the market environment, in which the Company operated in 2010, it is important to take account of the tax burden on Russian oil exporters and how it changed in comparison with 2009. The main types of tax payable by oil companies in Russia, including LUKOIL, are mineral extraction tax, excises and export duties. Rates of these taxes are tied to international prices for oil and vary as a function of international price levels.

As a result of growth of oil prices in 2010 the average mineral extraction tax rate for oil rose by 39.5% in dollar terms to \$13.8 per barrel.

The Company pays export duties on crude oil exports from Russia calculated using a progressive scale based on Urals prices. Increase of export duty on Urals oil in 2010 was 52%, and the average duty rate for the year was \$37.3 per barrel.

The price of Urals oil for a Russian exporter net of taxes (the international market price without export tariffs and mineral extraction tax) was \$27.2 per barrel in 2010. The share of mineral extraction tax and export tariffs in the average annual oil price was 65.3%, which is roughly equal to the average level in the last five years.

LUKOIL pays taxes in international projects based on production sharing agreements (PSAs), concession agreements and current legislation in respective countries. For example, the concession agreement in Egypt makes the Company liable only for income tax and a tax on personnel, with exemption from other taxes, tariffs and duties. Income tax is paid for LUKOIL by the Egyptian General Petroleum Corporation from LUKOIL's share of production. In Kazakhstan a new Tax Code came into force from January 1, 2009. It includes several significant changes with respect to Company projects: taxes paid by the Company are now governed by current legislation (at the date when a contract for mineral use comes into force), making LUKOIL liable for payment of income tax, tax on super profits, mineral extraction tax and a progressive rent tax. The Government of Kazakhstan presented plans in 2009 to lower corporate income tax rates in 2010-2011. However, no decision on this issue was taken in 2010.

Taxation of projects regulated by PSAs remains as stated in the agreements.

Gas market

There was a sharp increase of European spot prices for natural gas at the end of 2010 due to growth of oil prices, industrial recovery after the global recession, and cold weather in Europe at the start of the winter. Spot prices for gas on European exchanges exceeded prices in Gazprom's long-term export contracts for the first

time in a year and a half. At the same time gas prices on the American market were almost twice lower than in Europe, and this encouraged rapid developing of shale gas production in America. However, reserves of shale gas in the US continued to grow faster than production.

The price environment on the Russian domestic gas market remained unchanged in 2010. The average price of marketable gas rose slightly by 4.5% to \$34.9 per thousand cubic meters due to rouble appreciation.

The geography of LUKOIL's gas operations (most of the Company's gas is produced in Russia) entails that most of it is sold to OJSC Gazprom and to other Russian consumers. Most of LUKOIL's Russian gas output is sold at the well and then transported through the Unified Gas Supply System, which is owned by Gazprom. LUKOIL has no opportunity to export gas, because of Gazprom's ownership of the Supply System and its monopoly on exports. Gazprom increased its purchases from independent gas producers in Russia during 2010 thanks to increase of global demand. This resulted in significant growth of Company output of marketable gas (by 27.9%). Most of the growth was at the Nakhodkinskoye field, where production in 2010 rose by 37.2% to 8,146 million cubic meters. All of this gas was sold to Gazprom.

The Company pays natural gas extraction tax, rates of which have remained unchanged since 2008 at 147 roubles per thousand cubic meters.

Production of marketable gas by LUKOIL in international projects rose by 16.2% in 2010. More than 50% of gas production outside Russia is at the Khauzak-Shady project in Uzbekistan. Gas from Khauzak-Shady is sold at an official price, fixed by agreements between Russia and Uzbekistan. The price in 2010 exceeded \$140 per 1,000 cubic meters. Royalty is paid on production at a rate of 30% as part of the PSA agreement. LUKOIL has a seven-year holiday from income tax, beginning from the start of production, at the end of which income tax will also be payable at the rate fixed in the PSA. The Uzbek Government share in profit production varies depending on the project's internal rate of return for LUKOIL Group.

Natural gas produced as part of the Karachaganak project in Kazakhstan is supplied to the Orenburg Gas-processing Plant. Taxation in this project is specified by terms of the PSA.

Gas produced at the Shakh-Deniz field is supplied to the domestic market in Azerbaijan and also via the Southern Caucasus pipeline to Georgia and Turkey, where it is sold at market prices. Under terms of the PSA in Azerbaijan, LUKOIL is exempt from payment of taxes in cash on production and export of gas. The only significant tax paid by the Company is income tax at a fixed rate (the tax is withheld as a share of production).

Inflation and exchange rates

LUKOIL Group produces most of its hydrocarbons inside Russia, so the largest part of Company costs are in roubles, while a significant share of revenues is expressed in US dollars or is tied to dollar oil prices to a significant extent. So rouble inflation and fluctuation

of the exchange rate can have substantial impact on Company results. Purchasing power of the US dollar in Russia, calculated from the \$/rouble exchange rate and the Russian inflation rate, declined by 11.6% in 2010 compared with 2009.

This development was one of the main causes of growth in lifting costs per unit of production in Russia last year: lifting costs rose from \$3.53 to \$4.11 per boe, or by 16.4%. Average unit lifting costs for the Group increased by 15.7% from \$3.56 to \$4.12 per boe in 2010. Capital expenditures in the E&P segment rose by 5.2% to \$4.9 billion.

LUKOIL pursued its strategy in 2010 for strengthening of the Company's financial position by focus on highmargin projects and increase of cash flows. As a result, most of capex growth in 2010 related to international projects, while growth of the indicator in Russia was only 0.5% (to \$3.9 billion).

Acquisitions

The Company demonstrated its commitment to growth of shareholder value and increase of shareholder income in 2010. Following the decision by ConocoPhillips to exit its shareholding in LUKOIL, our Company carried out one of the largest buy-back transactions in the history of the Russian stock market, with value of \$3.4 billion. The operation was completed in August 2010. By carrying out the buy-back, LUKOIL protected its shareholders from a sharp fall in the share price, which would have occurred, if the ConocoPhillips stake had been sold on the open market. ConocoPhillips had fully exited share capital of LUKOIL as of February 7, 2011.

Best efforts of the Company to maximize shareholder income led to increase of earnings per share from \$8.28 in 2009 to \$10.95 in 2010.

The Company continued increase of its production capacities in 2010 through acquisition of highly efficient assets. A consortium of LUKOIL and the US company Vanco won a tender for exploration and development rights at the Est Rapsodia and Trident blocks in the Romanian sector of the Black Sea. The blocks cover an areas of 2,000 km2 , with water depth of 90–1,000 meters. LUKOIL has an 80% stake in the project, and the remaining 20% is held by Vanco.

Optimization of corporate structure and consolidation

The total number of LUKOIL subsidiaries and affiliates decreased by 19 in 2010 and totalled 362 (subsidiaries and affiliates determined in accordance with US GAAP), including disposal of 13 non-core assets. Several marketing operators were augmented by their merger with subsidiaries. Consolidation of 100% of shares in CJSC LUKOIL-Neftekhim was completed and target ownership structure for petrochemical assets was approved.

The Group continued its work in 2010 to obtain new licenses for mineral use and optimize its existing license portfolio in order to raise overall quality of the mineral base. LUKOIL obtained amendments and additions to conditions of its mineral use rights, extending the period of validity of its rights in some cases, as well as clarifying commitments of Group companies to achieve specific output levels in accordance with project documentation.

LUKOIL Group companies had 421 licenses on their balance sheets at the end of 2010, of which 340 were for exploration & production of hydrocarbons, 18 were for geological study, including prospecting and evaluation of mineral fields, and 63 were forgeological study, exploration and production of hydrocarbons.

The Company obtained 11 new licenses for use of mineral resources in 2010, of which 2 were based on proof of a field discovery, 8 were obtained as a result of auctions and competitions, and one was obtained through application for geological study. Spending on license acquisitions was \$15 million.

LUKOIL obtained reissue of 71 licenses for use of mineral resources in 2010 in connection with further restructuring of oil & gas production companies within the Group.

The Group registered 16 additions to licenses in 2010 in order to extend their period of validity. Work also continued on amendments and additions to current license agreements. A total of 35 additions were obtained to reflect changes in geological exploration schedules, clarification of borders of license areas, confirmation of ownership rights to production from license areas, and clarifications concerning obligations to achieve specific production levels in accordance with project documentation, as well as other issues.

Oil and Gas Reserves

Proved Oil & Gas Reserves of LUKOIL Group by Regions in 2010

Reserve replacement is fundamental to long-term, sustainable development of the Company. LUKOIL Group carries out extensive geological exploration work in Russia and abroad in order to increase its reserves, and also monitors new projects and assets, which could represent acquisition targets, on a constant basis.

According to data audited by Miller and Lents (USA), the Company's proved reserves of hydrocarbons as of January 1, 2011 were 17.255 billion boe, consisting of 13.319 billion barrels of oil and 23.615 trillion cubic feet of gas.

The audit was carried out to the standards of the US Securities and Exchange Commission (SEC). The Company decided in 2009 to adopt SEC standards for measurement of reserves in order to ensure greater transparency and comparability of Group reserve figures with those of competitors.

In accordance with SEC requirements, proved reserves that are not in development can only be recognized if there is an approved development plan. The plan must stipulate that development of the relevant reserves will start within five years, unless specific circumstances justify a longer period before the start of development. The audit of LUKOIL reserves took account of changes in development plans contained in the Group's Strategic Development Program.

LUKOIL also completed an evaluation of contingent resources under PRMS classification in 2010. Unaudited figures as of January 1, 2011 showed 3C contingent resources of 10.7 billion barrels of oil equivalent. These oil and gas volumes will be moved from resources to reserves in the future as the time for their development approaches, as the Company's associated gas utilization program moves forward, and as new technologies make production of hard-to-recover reserves commercially viable.

The greater part of the Company's proved reserves of oil are in Western Siberia, Timan-Pechora and the Urals region. The main part of proved gas reserves are in the Bolshekhetskaya Depression (Western Siberia), Uzbekistan and the Caspian region. 60% of Company proved reserves are in development (66% of oil reserves and 38% of gas reserves). This reserve structure reflects large potential of the Company to increase production in the medium term, particularly production of gas.

Most of the Company's proved hydrocarbon reserves are conventional. Only about 4% of the total represent highviscosity oil and 4% are at offshore fields. This reserve structure enables the Company to control development costs in an efficient manner and to bring new fields into production rapidly.

Growth of proved hydrocarbon reserves in 2010 as a result of geological exploration work, production drilling and acquisitions was 687 million boe, representing 82% of production during the year. Growth due to geological exploration work and production drilling was 625 million boe, and 62 million boe were added as a result of acquisitions. So organic growth of hydrocarbon reserves compensated 75% of production (81% for oil and 44% for gas). Most of the organic growth of proved oil reserves was obtained in Western Siberia (68% of the total) and the Komi Republic (12% of the total). Organic growth of proved gas reserves was also obtained in Western Siberia (61% of the total, including 35% at Bolshekhetskaya Depression) and in international projects: Kandym-Khauzak-Shady and Karachaganak (30% of the total for gas).

Proved reserves were lowered by 102 million boe in 2010 due to revision of earlier evaluations. One cause of the revision was worsening of economic parameters following increase of mineral extraction tax on oil and free gas.

Inclusion of the Company's stake in proved reserves at the West Qurna-2 field, amounting to 62 million barrels of oil, did not have significant impact on total reserve levels for the Company, since the preliminary development plan only takes account of volumes brought into the first stage of development ('early oil'). However, significant increase of reserves is expected in the future as drillingover of the field continues in the second development stage.

Overall, the figures for 2010 show that LUKOIL remains among Russian and international leaders by volume of proved hydrocarbon reserves. The Group's ratio of proved hydrocarbon reserves to production is 21 years (19 years for oil and 31 years for gas).

3P hydrocarbon reserves and contingent resources, billion boe

3P crude oil reserves, billion boe

3P gas reserves, trillion cubic feet

Oil & Gas Reserves of LUKOIL Group

January 1, 2011	Oil	Gas	Oil + gas 1
	million barrels	billion cubic feet	million boe
Proved reserves	13,319	23,615	17,255
of which:
Developed	8,790	8,882	10,270
Undeveloped	4,529	14,733	6,985
Probable reserves	6,474	11,888	8,455
Possible reserves	2,780	2,318	3,167

The ratio used for recalculation of cubic feet as barrels of oil equivalent (boe) is: 1 boe = 6,000 cubic feet

Geological Exploration

Main Geological Exploration Regions of LUKOIL Group

Exploration drilling by regions (2010), %

Geological exploration work by companies of LUKOIL Group in 11 countries around the world is focused on replacement of production with new commercial reserves of hydrocarbons, and preparation of reserves for rapid launch and expansion of production in promising regions, both in Russia and abroad (Timan-Pechora, the Northern Caspian, the Bolshekhetskaya Depression, Ghana). The Company uses the latest technologies in order maximize efficiency of its geological exploration.

The most notable achievement of LUKOIL's geological exploration work in 2010 was the first-ever discovery by a Russian oil company of a deepwater oil & gas field. The discovery was made on the continental slope in the Gulf of Guinea, off the coast of Ghana, as part of the CTPDW project. The field is a part of the Dzata structure, and is at a sea depth of 2,000 meters. The well, which discovered the field, was drilled to a depth of 4,500 meters below sea level.

Most of the Company's geological oil & gas exploration work in 2010 was concentrated in Western Siberia, the Timan-Pechora oil province and international projects. The Company's largest prospecting projects in 2010 were further study of the Tsentralno-Astrakhanskoye gas and condensate field and work in the offshore Caspian to assess oil & gas prospects in Neocomian sediments at the Rakushechnoye field and Lower-Chalk and Jurassic sediments at the Ukatnaya structure. Prospecting work also continued in 2010 to study geological structure and oil & gas potential at the Denisovskaya Depression in the Komi Republic. Outside Russia we carried out studies of prospects on the West African shelf, in the Aral region and also as part of the Riyadh project in Saudi Arabia. Geological exploration work in other regions was focused on preparation and reconnaissance of prospective new geological targets and additional exploration at fields, which were discovered earlier.

The Company substantially increased 2D seismic work in 2010 to locate and detail geological structures and to prepare for drilling of prospecting and exploration wells, shooting a total of 6,178 km of 2D in comparison with 2,446 km in 2009. International projects accounted for 17% of the total, reflecting expansion of the Company's operations outside Russia. 3D seismic volumes also increased, reaching 5,840 km2 , of which 30% was as part of international projects. Quality of our seismic work and speed of processing and interpretation have improved in recent years, due particularly to application of new computer technologies.

High standards of the Group's seismic work are demonstratedby consistent success rates above 70% in prospecting and exploration drilling

LUKOIL companies are in the process of switching to denser and wider-amplitude observation systems in order to obtain more informative data and achieve more accurate forecasting of filtration-volume characteristics

3D seismic, km2 2D seismic, km

of reservoirs, and of their fracturing qualities. Surveys at the Tsentralno-Astrakhanskoye, Rossokhinskoye, Severo-Vozeiskoye and Sredne-Nazymskoye fields are using high-amplitude 3D techniques.

LUKOIL completed 793 km of electrical exploration in 2010. Vertical seismic profiling, which enables detailing of geological structure around an existing well, was carried out at eight wells. Total exploration drilling in 2010 amounted to 118,800 meters, and efficiency was 1,143 tonnes of conditional fuel per meter. A total of 32 prospecting and exploration wells were completed in 2010 of which 22 were productive.

Group companies discovered six fields in 2010 (Olginskoye in Tatarstan, Dulepovskoye in Perm Territory, South-East Kyzylbairak and West Aral in Uzbekistan, Arcadia in Egypt and Dzata in Ghana), as well as 25 new oil deposits at fields in Western Siberia and Perm Territory.

Increase of proved reserves under SEC standards during 2010 through geological exploration and additional information obtained in the course of production drilling amounted to 625 million boe. Most of the organic growth of proved oil reserves was obtained in Western Siberia (68% of the total) and the Komi Republic (12% of the total). Organic growth of proved gas reserves was also obtained in Western Siberia (61% of the total, including 35% at Bolshekhetskaya Depression) and in international projects: Kandym-Khauzak-Shady and Karachaganak (30% of the total for gas). Spending by LUKOIL Group on geological exploration work in 2010 was \$435 million.

Electric exploration, km Spending on geological exploration, \$ million

russia

Exploration drilling in Russia in 2010 totalled 102,000 meters, 2D seismic exploration was 5,076 km and 3D seismic was 4,116 km2 . Spending on geological exploration in Russia was \$236 million.

Western Siberia

Khanty-Mansiysk Autonomous District (Yugra)

The Khanty-Mansiysk Autonomous District (Yugra) is the main oil production base of LUKOIL Group. The chief aim of geological exploration work there is replacement of reserves in order to maintain the Group's current production levels in the region. Although reserves in the region have been extensively explored, geological exploration work there is particularly efficient and productive.

Exploration drilling in the District totalled 44,900 meters in 2010 and nine wells were completed, of which seven were productive. The success rate of exploration drilling was 78%. The main task in the reporting year was study of oil & gas potential of Neocomian, Achimian and Jurassic sediments in the vicinity of earlier discoveries. The Company shot 499 km of 2D seismic and 2,415 km2 of 3D seismic in the course of the year. Most of the work was in peripheral areas of large fields, and was aimed at detailing oil & gas contours and identifying oil saturation in strata prior to production drilling. Some 275 km2 of 3D surveying was carried out at the Vostochno-Kayumovskiye areas, which were acquired in 2009.

LUKOIL identified 14 new deposits at previously discovered fields in the region during 2010. Largest growth of oil reserves was at the Mishaevskoye, Pokachevskoye and Vateganskoye fields, thanks to 3D work and exploration drilling. Proved hydrocarbon reserves of the Company in Khanti-Mansiysk Autonomous District to SEC standards were 7.6 billion boe by the end of the year. Significant oil flows were obtained at a number of fields.

Testing of Achimian sediments gave a daily oil flow of 180 barrels and a daily flow of 160 barrels was obtained at the Yuzhno-Pokachevskoye field. Geological work led to a water-free daily flow of 1,010 barrels at the Kozhevskoye field. Drilling and well-testing was also carried out at the Vostochno-Perevalny, Zapadno-Kotukhtinsky, Aprelsky, and Bolshoi license areas. Oil flows were obtained at all wells and daily flow rate at the Vostochno-Perevalny field was up to 320 barrels.

Hydrocarbon reserve extensions and discoveries, million boe

Exploration drilling, thousand meters

Yamal-Nenets Autonomous District

LUKOIL is developing gas reserves at the Bolshekhetskaya Depression in Yamal-Nenets Autonomous District as part of its program for accelerated growth of gas production. The Company is also working at the Severo-Gubkinskoye, Prisklonovoye, and Yuzhno-Tarasovskoye oil, gas and condensate fields, as well as the Urabor-Yakhinsky and Vansko-Namyssky areas.

2D seismic work amounting to 700 km was carried out at the Nakhodkinsky license area in order to identify nonanticlinal traps in chalk sediments.

Proved hydrocarbon reserves at Company fields in the Bolshekhetskaya Depression grew by 5.5% in 2010 compared with 2009 to 2.2 billion boe (more than 13% of LUKOIL's total proved hydrocarbon reserves).

Timan-Pechora

Timan-Pechora (the Nenets Autonomous District and Komi Republic) is a promising region for oil production by the Company. The region is little studied, with high potential for new discoveries, and the Company carried out extensive geological exploration work there during 2010. Volumes of 2D and 3D seismic work during 2010, for clarification of geological models, were 1,066 km and 813 km2 , respectively, and exploration drilling was 9,400 meters.

Total 9,400 km of prospecting and exploration drilling was carried out during 2010 in the Komi Republic and two wells were completed at the Bayandyskoye field, both of which were productive. The drilling success rate was thus 100%. Well-testing gave daily flows of 200 and 1000 barrels of oil, respectively. Both wells have been brought into production.

Testing of an exploration well was completed at the Oshskoye field in Nenets Autonomous District, and daily oil flow of 2,700 barrels was obtained. 2D seismic surveying was carried out on 710 km at the Yuzhno-Tedinsky and Predtimansky areas, and 776 km2 of 3D seismic was shot at the Yuzhno-Khoreiverskoye, Vostochno-Tedinsky and Vangureyakhinskaya areas. A 3D survey of 128 km2 was in progress during 2010 at the Denisovskaya Depression.

Geological work and additional information obtained in the course of production drilling added 78 million barrels of proved reserves to international standards in Timan-Pechora during 2010.

Naryanmarneftegaz, the joint venture between LUKOIL Group and ConocoPhillips began secondary testing of an exploration well to investigate production potential of a high-viscosity oil deposit in Carbonaceous sediments. Initial daily oil flow was 200 barrels.

Urals

The Urals is a traditional production region for the Company, and reserves in the region have been extensively explored. LUKOIL carried out 61 km of 2D seismic and 768 km2 of 3D work in the region for geological purposes during 2010. Exploration drilling totaled 13,900 meters. Exploration drilling to discover new fields and increase reserves was carried out mainly in the vicinity of sites with established commercial oil presence.

In Perm Territory construction of three wells was completed, two wells were drilled, and testing work began at the Enapaevskaya and Zabrodovskaya areas. All of the wells gave flows from productive strata at daily rates of 100-200 barrels, so the prospecting success rate was 100%. One new field was discovered in 2010 the Dulepovskoye field, at which testing gave an oil flow of 200 barrels per day.

Volga (onshore)

The Volga is another traditional hydrocarbon production region for LUKOIL and its geology has been extensively studied. Exploration drilling in 2010 was 19,500 meters and 1,385 km of 2D seismic was carried out in Volgograd Region (the administrative territory). LUKOIL companies also completed 593 km of electric exploration work and 100 km of geochemical studies. Drilling of an exploration well was begun at the Beshkulskoye field.

An exploration well was completed at the Nemirovskoye field and gave a commercial flow of 400 barrels per day when tested. The well has been brought into production. Drilling of an exploration well began at the Tsentralno-Astrakhanskoye field to clarify field structure, so that reserves can be transferred to the industrial category and 3D seismic work began in the northern part of the field (45 km2 were shot during 2010).

Drilling and well testing were carried out at the Agryzsky, Menzelinsky and Ozerny areas in the Republic of Tatarstan. One prospecting well was completed at the Yuzhno-Izhevskaya structure and a new field —

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the Olginskoye field — was discovered. Testing of a Zavolzhsky horizon in the Upper Devonian gave a daily oil flow of 610 barrels using a choke. С1 recoverable oil reserves are 1.4 million tonnes.

2D seismic work (301.3 km) was carried out at the Menzelinsky license area.

Northern Caspian

The Northern Caspian is one of the key regions for increase of oil & gas production by LUKOIL in the medium term and the Company attaches great importance to development of resource potential in the region.

In the offshore Caspian Well-7 was completed at the Rakushechnoye field, and results suggest С1 reserve increase of 621 billion cubic feet and additional 2.7 million boe of gas condensate. 2D seismic work was completed at the Tsentralno-Kaspiisky license area (500 km), and 200 km of electrical exploration was also carried out.

The Caspian Oil Company, in which a subsidiary of LUKOIL owns 49.89% (another 49.89% is owned by a subsidiary of Rosneft and remaining shares belong to Gazprom), drilled a prospecting well at the Ukatnaya structure and discovered oil & gas strata in Mid-Jurassic sediments. The deposit is in thin-layered, medium-to-fine grained sandstone. Strata testing gave flows of oil, gas and water, and discovery of a commercial hydrocarbon deposit was confirmed.

Azov Sea

Priazovneft, in which LUKOIL Group has a 42.5% stake (42.5% is owned by a subsidiary of Rosneft and 15% belongs to the State Property Fund of Krasnodar Territory) carried out 414 km of 2D seismic during 2010. The material has been processed and interpretation has begun.

Priazovneft discovered the Novoye field in the offshore Azov Sea in 2007 and has taken a joint decision with Rosneft to carry out further geological work at the central part of the license area.

Kaliningrad Region

LUKOIL companies carried out geological work in 2009 in Kaliningrad Region both onshore and in the offshore Baltic Sea. Offshore work was in preparation for drilling of a first prospecting well.

International projects

In accordance with LUKOIL's strategy for intensive development of its international business in the E&P segment, the main task of geological exploration by the Company outside Russia is to prepare the resource base for rapid launch of production. Exploration drilling in international projects with LUKOIL participation was 17,300 meters in 2010. The Group's share of 2D seismic work in international projects in 2010 totaled 1,102 km and its share of 3D work was 1,724 km2 . Spending on geological exploration outside Russia was \$199 million.

LUKOIL was involved in geological exploration projects in nine countries outside Russia by the end of 2010: Colombia, Kazakhstan, Saudi Arabia, Uzbekistan, Cote d'Ivoire, Ghana, Egypt, Venezuela and Iraq (preparation for production). Seven exploration wells were drilled as part of these projects in the course of the year, of which four were productive (a success rate of 57%).

Drilling of Well Dzata-1 with depth of 4,500 meters was completed in 2010 at the CTPDW block in the Republic of Ghana (Company share in the project is 56.66%). The well discovered an oil and gas condensate field and confirmed presence of an oil & gas bearing system at the block. The main sandstone reservoir contains gas and light crude oil. the well was drilled using a semi-submersible rig with a dynamic positioning system. A plan of field evaluation was approved in 2010 in order to clarify filtration-volume features of reservoirs, the nature of saturation and geometry of deposits. The calculations, which

have been carried out, suggest that the field is commercially viable. Main risks are associated with confirmation of reserves and obtaining commercial flows. The Company is preparing for reconnaissance of other geological targets on the block territory, evaluation of which could increase the resource base and improve financial criteria of the project.

The Cape Three Points discovery makes LUKOIL the first Russian company to locate an oil & gas field on a deepwater continental slope, and proves that use of new technologies is helping the Company to remain in the oil & gas industry vanguard.

The Dzata structure confirms good prospects of Ghana's deepwater shelf and provides an excellent opportunity to deploy the latest production technology to best effect.

Drilling of Well Orca-1 to depth of 4,000 meters was completed at Block Cl-401 in Cote d'Ivoire, and drilling gave evidence of oil & gas saturation in Campanian and Turonian stages, including a sample of water-free oil. The drilling results point to presence of lithologic and stratigraphic deposits in the Turonian complex at block CI-401.

A technical description was prepared for the Kakao site at Block 205 in Cote d'Ivoire. Hydrocarbon resources amounting to 147.3 million tonnes of oil and 31.3 billion cubic feet of gas have been confirmed. Drilling of a well is planned in 2011.

At the Riyadh (Block A) project in Saudi Arabia drilling of Well Tukhman-4 was completed to sediments at the Sharavra formation, and a modest flow of gas and condensate was obtained from testing of the Unaiza formation. The well has been suspended until a technology can be applied to increase the flow rate. Additional testing of the middle and upper interval of the Sara formation was carried out at Well Faidakh-2. Current daily gas flow rate is 53,000 cubic meters. The well has been suspended pending choice of a technology, which can enhance the rate of flow.

3D survey work totaling 674 km2 was carried out at Condor project in Colombia during 2010 in the region of the East-Guavio and Cumoral structures.

The first stage of preparatory work began at the end of 2009 for drilling of Well Amarilo-1, and a co-investor for well drilling is being sought. Preparation of an environmental impact assessment and the procedure of obtaining an environment license are also underway.

The investment consortium working on the Aral project in the Uzbek sector of the Aral Sea (LUKOIL has a 20% stake in the project) completed drilling of the first well, WAEx-1. Bottom-hole is at a depth of 3.3 km. The well has

found a multi-bed field with gas-condensate deposits in Mid-Jurassic sediments. Maximum daily gas flow is 319,500 cubic meters.

Preparatory work was carried out at the Kungrad block in Uzbekistan for drilling of Well Shege-1.

In the South-West Gissar project in Uzbekistan a well was drilled to 2,521 meters at the western dome of the South-East Kyzylbairak structure and penetrated prospective Upper Jurassic sediments obtaining a daily gas flow of 442,000 cubic meters. Prospecting and exploration Well Shamoltegmas-4 is to be drilled in 2011 in order to transfer reserves from С2 to С1 at the Kyzylbairak field. Planned well depth is 350 meters.

Preparations were made for drilling of a well in the Kazakh sector of the Caspian Sea as part of the Tyub-Karagan project. Geological resources at the structure are 317.6 million tonnes of conditional fuel under Russian classification.

In February 2009 the Group became the operator at the WEEM Extension, adjacent to the WEEM block in Egypt. More than 60% of the WEEM Extension was already studied by LUKOIL in 2006 using high-definition 3D seismic. A slanted well, WEEM E-A-1, drilled to a depth of 1,829 meters found more than 30 meters of oilsaturated reservoirs and obtained daily oil flow of 1,100 barrels from the Nubia structure. The well has reached the contour zone of the deposit. Drilling of Well WAE-2 has been completed: planned depth was 2,324 meters, but bottom-well is at 2,658 meters. The well penetrated the Matulla and Nubia horizons in a lowered section of the block, but was unproductive. The well has been suspended pending a decision based on results of 3D seismic work.

LUKOIL won a tender in 2010 for exploration and development rights at the Est Rapsodia and Trident offshore blocks in the Black Sea off the coast of Romania. 3D seismic exploration work is planned to clarify geological structure of the blocks. A concession agreement is being prepared for signing with Romania's National Agency for Mineral Resources. An office of LUKOIL Overseas Holding Ltd will be opened for project management purposes.

Oil Field Development and Production

Oil production by regions

Production drilling by regions (2010)

Crude oil production by LUKOIL Group in 2010 (including share of production by equity affiliates) was 95.922 milliontonnes (1.940 million barrels per day).

Average daily output fell by 1.6% in comparison with 2009. Lower oil output in 2010 reflects a production decline at fields in Western Siberia, where the Company produces 53% of its crude, and was due primarily to objective changes in the structure of recoverable reserves. However, use of the latest enhanced recovery technologies and horizontal drilling enabled LUKOIL to reduce the rate of crude output decline in Western Siberia from 5.7% in 2009 to 3.8% in 2010. LUKOIL has also successfully addressed the problem of electricity supply shortages for production operations, which arose in recent years in Western Siberia. The Company is building and commissioning its own power generating capacities at fields, and the shortages have now been almost completely overcome.

The main achievement in the Company's production business during 2010 was launch of production at the Yu. Korchagin field where annual oil extraction will reach 2.4 million tonnes and gas output will be 1 billion cubic meters at peak production. Yu. Korchagin is the first of a group of LUKOIL fields in Russian territorial waters of the Caspian Sea to have been brought into operation. Development of the field will use a system of long horizontal wells (over 5 km in length) representing a unique solution for the Russian industry. Logging will be carried out as part of the horizontal-well drilling process. Radial distribution of wells will enable simultaneous penetration of all productive layers.

The Company continued its work on improvement of field development efficiency and reduction of operating costs in the reporting year. LUKOIL production companies carried out a range of measures to raise well productivity and oil recovery rates in order to achieve oil production targets for 2010. As a result field development spending rose by 4.0% in 2010 compared with 2009 to a level of \$4.599 billion, despite increase of inflation to 8.7% and real strengthening of the rouble by 11.6%.

LUKOIL subsidiaries and equity affiliates produced hydrocarbons at 355 fields in Russia and 11 projects abroad in 2010. A total of 11 new fields were brought into development during the year, as follows: Severo-Pokamasovskoye, Mishaevskoye, Svobodnoye, Timerovskoye, Olginskoye and Lenzitskoye (Western Siberia); Yu. Korchagin (Volga); Sharonovskoye, Preobrazhenskoye (Urals); Olginskoye and Yu. Rossikhina (Timan-Pechora). The largest production increases (more than 200,000 tonnes) were achieved at four fields: Bayadynskoye and Usinskoye in Timan-Pechora; and Kechimovskoye and Urevskoye in Western Siberia.

The Company had 30,340 oil production wells as of January 1, 2011, of which 25,990 were actually in use, and the number of water injection wells was 10,320, of which 8,120 were under pressure. The number of oil production

New fields commissioned, fields

Oil production drilling, thousand meters

wells was 2.0% higher than in 2009. The share of idle wells was almost unchanged from the end of 2009 at 14.3% of the total number. Average daily oil flow from wells in projects with Group participation was 14.5 tonnes.

Volumes of production drilling were nearly unchanged, totaling 2,732,000 meters, which is 0.3% less than in 2009. The number of new production wells brought into operation was 1,077, of which 101 were horizontal. High efficiency of horizontal well drilling has persuaded the Company to increase numbers of such wells in the medium term. Average daily flow from new wells in projects, in which the Group is a participant, was 35.8 tonnes, including 156.6 tonnes from horizontal wells. Flow rates at new wells were 3% higher than in 2009 thanks to improvement in geological and hydrodynamic models and greater application of such models in planning of drilling work, and also as a result of further work to improve well completion technologies and initial and secondary penetration of productive formations.

Use of new drilling and well completion technologies, selection of optimal borehole trajectory with clarification of the geological model during drilling, use of bottom-hole control systems and real-time drilling management to maximize borehole contact with the reservoir gave an increase of average output from horizontal wells by 2.3 times compared with 2009.

The Company increased efficiency of sidetracks by 17.3% in 2010, despite a 15.2% reduction of this work in Russian operations compared with 2009. The improvement was mainly due to more accurate forecasting of geological structure and the structure of reserves at areas where sidetracks were used. Sidetrack drilling is carried out mainly at wells, which have been taken out of operation, in order to extract residual oil reserves. Sidetracks were drilled at 224 wells in 2010 and gave average daily flow of 19.7 tonnes.

Oil production well launches, wells

Efficiency of hydrofracturing operations at Company wells in 2010 was comparable with the result in 2009. Positive effect from hydrofracturing was maintained thanks to effective planning work, selection of wells using full-time hydrodynamic models, and tighter control over the quality of materials and reagents used by service companies.

A total of 4,869 operations were carried out on productive formations using physical, chemical, hydrodynamic and heat techniques (see 'Exploration and Production Technologies' on page 78). Additional oil output in Russia thanks to application of enhanced oil recovery techniques was 22.1 million tonnes, or 25% of total oil production by the Group in Russia.

Russia

Oil production by LUKOIL in Russia during 2010 was 89.767 million tonnes, of which 89.431 million tonnes were produced by Group subsidiaries.

Subsidiaries and equity affiliates of LUKOIL produced hydrocarbons at 355 fields in Russia in 2010. Production drilling in Russia declined slightly to 2,286,000 meters. The Group owned 28,610 production wells at the end of 2010, of which 24,420 were actually in use.