Lukoil — Annual Report 2021

Mar 31, 2022

PJSC LUKOIL ANNUAL FINANCIAL REPORT 2021

Moscow March 2022

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................................................................................ 103
Reference information...................................................................................................................................... 116

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
2 March 2022

CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS’ REPORT

PJSC LUKOIL Consolidated Statement of Financial Position

(Millions of Russian rubles)

	Note	31 December 2021	31 December 2020
Assets
Current assets
Cash and cash equivalents	6	677,482	281,532
Accounts receivable, net	7	741,872	61,738
Other current financial assets		12,289	426,536
Inventories	8	370,271	78,822
Prepaid taxes	9	467,960	116,228
Other current assets	10	133,326	2,149,157
Total current assets		4,263,130	4,715,592
Property, plant and equipment	11	281,637	4,715,119
Investments in associates and joint ventures	12	68,692	5,991,579
Other non-current financial assets	13	22,842	4,715,592
Deferred income tax assets	28	16,298	1,276,460
Goodwill and other intangible assets	15	44,342	4,264,474
Other non-current assets		50,159	281,637
Total non-current assets		42,008	68,692
Total assets		33,859	22,842
		4,715,119	1,276,460
Liabilities and equity		5,991,579	4,715,592
Current liabilities
Accounts payable	16	786,463	597,932
Short-term borrowings and current portion of long-term debt	17	80,251	82,636
Taxes payable	19	282,191	142,458
Provisions	21, 22	24,367	27,136
Other current liabilities	20	71,408	35,497
Total current liabilities		1,244,680	885,659
Long-term debt	18	677,699	577,075
Deferred income tax liabilities	28	303,435	268,956
Provisions	21, 22	113,420	126,665
Other non-current liabilities		2,331	2,458
Total non-current liabilities		1,096,885	975,154
Total liabilities		2,341,565	1,860,813
Equity
Share capital		938	938
Treasury shares		(85,879)	(71,920)
Additional paid-in capital		39,398	39,298
Other reserves		280,351	296,641
Retained earnings		4,280,226	3,858,057
Total equity attributable to PJSC LUKOIL shareholders		4,515,034	4,123,014
Non-controlling interests		8,150	7,752
Total equity		4,523,184	4,130,766
Total liabilities and equity		6,864,749	5,991,579

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.

PJSC LUKOIL Consolidated Statement of Profit or Loss and Other Comprehensive Income

(Millions of Russian rubles, unless otherwise noted)

	Note	2021	2020
Revenues
Sales (including excise and export tariffs)	32	9,435,143	3,000,916
Costs and other deductions
Operating expenses		(5,639,401)	(292,899)
Cost of purchased crude oil, gas and products		(509,192)	(199,027)
Transportation expenses		(4,254,824)	(405,440)
Selling, general and administrative expenses		(291,135)	(569,078)
Depreciation, depletion and amortisation		(215,190)	(444,300)
Taxes other than income taxes		(425,466)	(6,114)
Excise and export tariffs		(1,308,882)
Exploration expenses		(214,433)
Profit from operating activities		(7,076)
Finance income		(439,973)
Finance costs	25	978,945	281,654
Equity share in income of associates and joint ventures	25	(37,568)	(44,122)
Foreign exchange gain (loss)	11	29,980	11,474
Other expenses		(425,466)
		(3,000,916)
Profit before income taxes		(292,899)
Current income taxes		(199,027)
Deferred income taxes	28	(405,440)
Total income tax expense		(569,078)
Profit for the year		(444,300)
		(6,114)
Profit for the year attributable to:
PJSC LUKOIL shareholders		966,964	775,513
Non-controlling interests		25	(61,362)
		281,654	(20,792)
Other comprehensive income, net of income taxes		13,051	(82,154)
Items that may be reclassified to profit or loss:
Foreign currency translation differences for foreign operations		16,519	15,175
Items that will never be reclassified to profit or loss:
Change in fair value of equity instruments at fair value through other comprehensive income	22, 28	(20,263)	268,707
Remeasurements of defined benefit liability / asset of pension plan		2,572	1,403
Other comprehensive (loss) income		(767)	(1,423)
		(16,288)
Total comprehensive income for the year		759,225	266,517
Total comprehensive income for the year attributable to:
PJSC LUKOIL shareholders		773,442	281,675
Non-controlling interests		2,071	1,475
		757,152	283,150
Earnings per share
Profit for the year attributable to PJSC LUKOIL shareholders per share of common stock (in Russian rubles):	23
Basic		1,185.60	1,129.17
Diluted	23	23.31	22.46

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

PJSC LUKOIL Consolidated Statement of Changes in Equity

(Millions of Russian rubles)

	Share capital	Treasury shares	Additional paid-in capital	Other reserves	Retained earnings	Total equity attributable to PJSC LUKOIL shareholders	Non-controlling interests	Total equity
31 December 2020	938	(71,920)	39,298	296,641	3,858,057	4,123,014	7,752	4,130,766
Profit for the year	-	-	-	-	773,442	773,442	2,071	775,513
Other comprehensive (loss) income	-	-	-	(16,290)	-	(16,290)	(16,288)	(16,290)
Total comprehensive (loss) income	-	-	-	(16,290)	773,442	757,152	(14,217)	759,223
Dividends on common stock	-	-	-	-	(360,316)	(360,316)	(13,959)	(374,275)
Stock purchased	-	(13,959)	-	-	-	(13,959)	-	(13,959)
Equity-settled share- based compensation plan	-	-	9,043	-	-	9,043	-	9,043
Changes in non-controlling interests	-	-	-	-	-	-	100	100
31 December 2021	938	(85,879)	39,398	280,351	4,280,226	4,515,034	8,150	4,523,184
31 December 2019	968	(308,160)	39,277	30,141	4,203,138	3,974,364	8,085	3,982,449
Profit for the year	-	-	-	-	968	968	1,458	2,426
Other comprehensive income	-	-	-	266,500	-	266,500	17	266,517
Total comprehensive income	-	-	-	266,500	968	267,468	1,475	268,943
Dividends on common stock	-	-	-	-	(258,389)	(258,389)	-	(258,389)

Consolidated Statement of Cash Flows

(Millions of Russian rubles)

Note	2021	2020
Cash flows from operating activities
Profit for the year attributable to PJSC LUKOIL shareholders	773,442	15,175
Adjustments for non-cash items:
Depreciation, depletion and amortisation	425,466	405,440
Equity share in income of associates and joint ventures	(29,980)	(11,474)
Dry hole write-offs	5,488	4,425
Loss on disposals and impairments of assets	19,055	191,451
Income tax expense	(2,595)	(16,519)
Non-cash foreign exchange (gain) loss	37,568	9,091
Finance income	125,535	82,154
Finance costs	26,037	(13,051)
Allowance for expected credit losses	(13,051)	44,122
Equity-settled share-based compensation plan	5,811	5,538
All other items, net	31,366	31,366
Changes in operating assets and liabilities:
Trade accounts receivable	(363,337)	(44,657)
Inventories	185,047	83,061
Accounts payable	128,139	37,868
Other taxes	(69,305)	10,200
Other current assets and liabilities	(44,010)	(161,698)
Income tax paid	25,168	(15,154)
Dividends received	(57,250)	9,448
Interests received	12,770	11,550
Net cash provided by operating activities	1,126,614	776,574
Cash flows from investing activities
Acquisition of licences	(337)	(433,042)
Capital expenditures	(495,443)	(492,769)
Proceeds from sale of property, plant and equipment	4,417	657
Purchases of financial assets	(2,630)	(8,232)
Proceeds from sale of financial assets	5,073	12,323
Sale of subsidiaries, net of cash disposed	(235)	17
Sale of associates	(495,443)
Acquisitions of interests in the projects and subsidiaries, net of cash acquired	(10,911)	(1,128)
Acquisitions of associates	(901)	(1,040)
Net cash used in investing activities	(492,769)	(492,769)
Cash flows from financing activities
Proceeds from issuance of short-term borrowings	(438,055)	1,019
Principal repayments of short-term borrowings		(11,112)
Proceeds from issuance of long-term debt	187,361	(125,382)
Principal repayments of long-term debt	(30,823)	(357,672)
Interest paid	(3,930)	(3,589)
Dividends paid on Company common shares	(13,958)	(2,026)
Dividends paid to non-controlling interest shareholders	(14)
Financing received from non-controlling interest shareholders
Purchase of Company’s stock	(532)
Purchases of non-controlling interest	(514,005)
Net cash used in financing activities	(532)	(532)
Effect of exchange rate changes on cash and cash equivalents	58,000	(172,200)
Net increase (decrease) in cash and cash equivalents	516,032	343,832
Cash and cash equivalents at beginning of year	343,832	333,650
Cash and cash equivalents at end of year	677,482	343,832

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

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 programme 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

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 these sanctions do not have a material adverse effect on the current or planned Group’s oil projects.

In recent days, due to the events in Ukraine, the US has imposed additional sanctions on the Russian government, as well as Russian entities and individuals. This includes full blocking sanctions on certain Russian state-owned financial institutions. There have been restrictions put in place on the opening and maintenance of, or transacting with, certain correspondent and payable-through accounts at foreign financial institutions. Additionally, there have been new debt and equity restrictions imposed on major state-owned and private entities and Russian sovereign debt. Similarly, the UK and EU have announced additional sanctions in recent days. The UK has imposed blocking and asset freezing sanctions on certain Russian banks, entities, and individuals operating in financial and defense sectors. The EU has designated certain Russian government officials, entities (including Russian banks), and other individuals, and imposed restrictions on capital markets, loans, and credit that target Russian sovereign debt. Moreover, there is a risk that further sanctions may be introduced. This may have significant adverse impact on Russia’s economy. These events have led to depreciation of the Russian ruble and increased volatility and uncertainty in the Russian economy. At the same time, it is a stated goal to minimise the impact of these sanctions on energy companies and consumers. The US has specifically authorised certain transactions related to the energy sector, highlighting the need for continued, legitimate energy-related trade.

The consolidated financial statements reflect management’s assessment of the impact of the business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment. Management will continue monitoring the situation closely to ensure prompt reaction to the rapidly changing environment.

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 2 March 2022.

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.# PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

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.

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.

Note 3. Summary of significant accounting policies (continued)

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.

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 non-derivative 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;
* 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.# PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

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;
* 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.

Note 3. Summary of significant accounting policies (continued)

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.

Note 3. Summary of significant accounting policies (continued)

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.# PJSC LUKOIL Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

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. 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 realisability of deferred tax assets (both recognised and unrecognised) 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.

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 2021. These amendments related to interest rate benchmark reform and did not have a significant impact on the consolidated financial statements:
* amendments to IFRS 9 Financial Instruments;
* amendments to IFRS 39 Financial Instruments: Recognition and Measurement;
* amendments to IFRS 16 Leases;
* amendments to IFRS 4 Insurance Contracts.

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 condensed interim 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 1 January 2022 and after, available for early adoption:

• Onerous contracts – Cost of Fulfilling a Contract (Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets);
• 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);
• Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements);
• Definition of Accounting Estimate (Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors);
• Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12 Income Taxes).

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 2021	31 December 2020
Cash held in RUB	70,508	16,537
Cash held in US dollars	526,807	256,841
Cash held in EUR	66,268	59,009
Cash held in other currencies	13,899	11,445
Total cash and cash equivalents	677,482	343,832

Note 7. Accounts receivable, net

	31 December 2021	31 December 2020
Trade accounts receivable (net of allowances of 36,028 million RUB and 32,762 million RUB at 31 Dec 2021/2020)	727,934	357,159
Other current accounts receivable (net of allowances of 4,485 million RUB and 4,930 million RUB at 31 Dec 2021/2020)	13,938	13,112
Total accounts receivable, net	741,872	370,271

Note 8. Inventories

	31 December 2021	31 December 2020
Crude oil and petroleum products	415,612	373,290
Materials for extraction and drilling	25,260	25,582
Materials and supplies for refining	4,008	4,681
Other goods, materials and supplies	23,080	22,983
Total inventories	467,960	426,536

Note 9. Prepaid taxes

	31 December 2021	31 December 2020
Income tax	14,735	12,940
VAT recoverable	35,804	13,512
Excise tax recoverable	8,350	8,009
Export duties	46,240	26,407
VAT	6,225	5,133
Other taxes	16,810	17,983
Total prepaid taxes	133,326	78,822

Note 10. Other current assets

	31 December 2021	31 December 2020
Advance payments	24,162	11,123
Prepaid expenses	34,942	21,622
Other assets	57,124	15,904
Total other current assets	116,228	48,649

Note 11. Investments in associates and joint ventures

Carrying value of investments in associates and joint ventures:

Name of the company	Country	Ownership	31 December 2021	31 December 2020
Joint ventures:
Tengizchevroil (TCO)	Kazakhstan	5.0%	153,918	146,611
Caspian Pipeline Consortium (CPC)	Kazakhstan	12.5%	53,183	56,027
South Caucasus Pipeline Company (SCPC)	Azerbaijan	10.0%	33,697	34,663
Associates:
Associates			40,734	44,336
Total			281,532	281,637

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.

Note 11. Investments in associates and joint ventures (continued)

	31 December 2021		31 December 2020
	Current assets	Non-current assets	Current assets	Non-current assets
TCO	253,674	3,634,400	185,179	3,398,159
CPC	53,194	263,141	49,950	153,329
SCPC	417,325	214,144	448,217	222,001
Others	34,317	30,815	17,923	22,011
Associates	351,172	4,617,041	363,283	4,432,463
Total	387,470	8,762,521	290,101	8,227,963
	Current liabilities	Non-current liabilities	Current liabilities	Non-current liabilities
Net assets (100%)	365,209	1,228,935	232,453	1,228,347
Share in net assets	153,918	100,367	146,611	109,111

	31 December 2021		31 December 2020
	Net assets (100%)	Share in net assets	Net assets (100%)	Share in net assets
TCO	1,228,935	153,918	1,228,347	146,611
CPC	2,395,998	40,734	2,201,662	44,336
SCPC	1,380,499	281,532	1,384,494	281,637
Others	425,464	53,183	202,167	16,995
Associates	3,258,803	100,367	3,105,617	109,111
Total	8,691,699	579,734	8,122,287	598,100

	2021		2020
	Revenues	Net income, 100%	Revenues	Net income (loss), 100%
TCO	1,171,624	356,088	657,608	113,342
CPC	159,904	64,411	151,648	57,684
SCPC	80,204	44,835	50,221	24,251
Others	144,753	6,982	4,627	1,402
Associates	-	-	74,160	(6,194)
Total	1,556,485	472,316	938,264	190,485
		Share in net income		Share in net income (loss)
		2,229		(2,269)

Note 12. Property, plant and equipment

	Exploration	Refining, marketing and production assets and distribution assets	Other assets	Total
Cost
31 December 2020	5,433,264	1,756,650	77,006	7,266,920
Additions	328,139	130,202	3,059	461,400
Acquisitions	-	-	-	-
Disposals	(39,402)	(35,387)	(68)	(74,857)
Foreign currency translation differences	5,702,758	1,810,645	76,237	7,589,640
Other	(2,091)	76,237	1,810,645	7,589,640
31 December 2021	5,702,758	1,810,645	76,237	7,589,640
Depreciation and impairment
31 December 2020	(2,193,734)	(802,877)	(22,368)	(3,018,979)
Depreciation for the period	(304,135)	(115,827)	(24,491)	(444,453)
Impairment loss	(1,002)	(15,361)	(3,512)	(19,875)
Impairment reversal	11,273	19,819	1,111	32,203
Disposals	32,433	53,363	88	85,884
Foreign currency translation differences	(6,524)	22,939	16,503	32,918
Other	21,655	1,266	628	23,549
31 December 2021	(2,452,648)	(871,196)	(25,605)	(3,349,449)
Carrying amounts
31 December 2020	3,249,748	959,530	55,196	4,264,474
31 December 2021	3,250,110	939,449	50,632	4,240,191

Advance payments for property, plant and equipment

	31 December 2020	31 December 2021
	Carrying amounts	Carrying amounts
Exploration	10,218	5,757
Refining, marketing and production assets and distribution assets	22,939	17,812
Other assets	558	4,854
Total	33,715	28,423

Note 12. Property, plant and equipment (continued)

	Exploration	Refining, marketing and production assets and distribution assets	Other assets	Total
Cost
31 December 2019	4,795,674	1,510,515	76,246	6,382,435
Additions	424,751	144,941	4,864	574,556
Acquisitions	-	-	-	-
Disposals	(37,156)	(23,473)	-	(60,629)
Foreign currency translation differences	(42,014)	143,409	(201)	101,194
Other	2,704	(216)	-	2,488
31 December 2020	5,143,989	1,775,176	81,109	7,000,274
Depreciation and impairment
31 December 2019	(1,766,575)	(589,636)	(58,129)	(2,414,340)
Depreciation for the period	(278,237)	(135,596)	(58,129)	(472,962)
Impairment loss	18,358	(21,153)	(3,705)	(6,500)
Impairment reversal	3,477	45	-	3,522
Disposals	(1,032)	-	-	(1,032)
Foreign currency translation differences	(144,090)	(60,206)	1,914	(202,382)
Other	25,550	-	-	25,550
31 December 2020	(2,132,549)	(796,540)	(118,049)	(3,147,137)
Carrying amounts
31 December 2019	3,035,890	934,193	55,924	4,026,007
31 December 2020	3,011,440	978,636	(36,940)	3,953,136

Advance payments for property, plant and equipment

	31 December 2019	31 December 2020
	Carrying amounts	Carrying amounts
Exploration	6,791	13,314
Refining, marketing and production assets and distribution assets	13,314	5,757
Other assets	831	558
Total	20,936	19,629

The cost of assets under construction included in property, plant and equipment was 362,623 million RUB and 458,265 million RUB at 31 December 2021 and 2020, respectively.

Exploration and evaluation assets

	2021	2020
1 January	129,951	163,251
Capitalised expenditures	32,597	283
Acquisitions through business combinations	380	-
Reclassified to development assets	(13,388)	(5,176)
Charged to expenses	(5,176)	(3,542)
Foreign currency translation differences	(5,238)	(3,624)
Other movements	380	6,244
31 December	137,106	180,946

The Company performs a regular annual impairment test of its assets. The test is based on geological models and development programmes, which are revised on a regular basis, at least annually. In the fourth quarter of 2021, the Group recognised an impairment loss in relation to property, plant and equipment in the total amount of 27.1 billion RUB, of which 18.5 billion RUR related to international refineries and resulted from a decline in the forecasted refining margins that followed the tightening of the EU decarbonisation policy. A loss of 6.0 billion RUB related to refining, marketing and distribution assets in Russia, a loss of 1.0 billion RUB related to exploration and production assets in Russia and a loss of 1.6 billion related to other assets in Russia. Also, as a result of improvement of economic parameters, the Group recognised an impairment reversal for its exploration and production assets in Russia in the amount of 10.0 billion RUB, for its international exploration and production assets in the amount of 1.3 billion RUB and for its refining, marketing and distribution assets in Russia in the amount of 15.4 billion RUB.

The recoverable amounts of CGUs subject to impairment and impairment reversal in the fourth quarter of 2021 in the amount of 41 billion RUB and 216 billion 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 and other assets in Russia – 9.0%, for international exploration and production assets – 10.0%, for refining, marketing and distribution assets in Russia – from 12.0% to 13.6%, for international refining, marketing and distribution assets – from 6.6% to 10.3%.# For impairment test purposes at 31 December 2021 the following Brent Blend price assumptions have been used: $75 per barrel in 2022, $70 per barrel in 2023 and $66 per barrel from 2024. 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 5.2 billion RUB, for its international exploration and production assets in the amount of 2.2 billion RUB and for its international refining, marketing and distribution assets in the amount of 28.8 billion RUB. The recoverable amounts of CGUs in the amount of 139 billion RUB, which relate to assets impaired in the first quarter of 2020, were determined as value in use equal to the present value of the expected cash flows. Value in use was estimated using 9.0% 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 per barrel in 2020–2021, $45 per barrel in 2022, $50 per barrel in 2023, $55 per barrel in 2024 and $60 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 38.2 billion RUB. Of this amount, 35.9 billion 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 billion RUB, which relate to assets impaired in the second quarter of 2020, 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. In the fourth quarter of 2020, the Group recognised an impairment loss for its exploration and production assets in Russia in the amount of 3.0 billion RUB, for its international exploration and production assets in the amount of 0.1 billion RUB, for its refining, marketing and distribution assets in Russia in the amount of 7.7 billion RUB and for its international refining, marketing and distribution assets in the amount of 21.6 billion RUB. The recoverable amounts of CGUs in the amount of 52 billion RUB, which relate to assets impairment in the fourth quarter of 2020, 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 – 8.0%, for refining, marketing and distribution assets in Russia – from 9.7% to 12.8% 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 per barrel in 2021, $54 per barrel in 2022, $57 per barrel in 2023, $58 per barrel in 2024 and $60 per barrel from 2025.

26 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 12. Property, plant and equipment (continued)

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 13. Other non-current financial assets

	31 December 2021	31 December 2020
Financial assets measured at fair value through other comprehensive income
Equity instruments	5,929	2,491
Financial assets measured at amortised cost
Long-term loans	20,223	1,624
Non-current accounts and notes receivable	230	31,075
Other financial assets	1,916	15
Financial assets measured at fair value through profit or loss
Long-term loans	33,732	33,195
Total other non-current financial assets	61,738	68,692

Note 14. Acquisition of interests in the projects and joint ventures

In December 2021, a Group company concluded a sale and purchase agreement with PJSC Gazprom Neft for 50% equity share of Meretoyakhaneftegaz LLC, a Gazprom Neft wholly owned subsidiary, for 52 billion RUB, including cession of claim of Gazprom Neft’s loans worth 35 billion RUB. The contract was signed as part of creating a joint venture to develop oil and gas cluster in the Nadym-Pur-Tazovsky area of the Yamal-Nenets Autonomous District. The companies also agreed upon the programme of additional exploration of the blocks of Meretoyakhaneftegaz LLC where 8.9 billion RUB of expenditures will be financed by LUKOIL. The transaction is planned to be completed in 2022 after fulfilment of a number of conditions precedent, including all necessary corporate approvals, as well as the consent of the Federal Antimonopoly Service. After acquisition, this investment is going to be accounted by the Group using the equity method.

In October 2021, a Group company signed an agreement to purchase a 15.5% interest in the Shah Deniz natural gas project in Azerbaijan sector of the Caspian sea from PETRONAS for $2.25 billion. In December 2021, the terms of the agreement were amended as a result of negotiations with the Shah Deniz project partners on implementation of pre-emptive rights. In accordance with the new arrangement, the share acquired by the Group was reduced to 9.99% with proportional decrease in consideration to $1.45 billion. In the fourth quarter of 2021, the Group company made an advance payment under this agreement in the amount of $92.5 million (6.7 billion RUB). The transaction was closed on 17 February 2022 after all customary conditions, including approval by SOCAR, the State Oil Company of the Azerbaijan Republic, were fulfilled. Following the completion of the deal, the Group increased its share in the project from 10% to 19.99%.

In July 2021, a Group company entered into a contract to purchase the 50% operator interest in the Area 4 project in Mexico by acquiring the operator’s holding company for approximately $435 million plus expenditures incurred in 2021 and 2022 as of the transaction completion date. In the second half of 2021, the Group company made an advance payment under this contract in the amount of $43.5 million (3.2 billion RUB). The transaction was closed on 24 February 2022 after all customary conditions, including approval by the Mexican authorities, were fulfilled.

27 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 15. Goodwill and other intangible assets

	Other internally generated intangible assets	Internally generated software	Acquired intangible assets	Goodwill	Total
Cost
31 December 2020	21,821	6,573	50,995	38,576	117,965
Additions as result of internal developments	3,948	924	-	116	4,872
Acquisitions - separately acquired	5,946	-	-	-	5,946
Disposals	(1,900)	(1,37)	(37)	(2,074)	(4,257)
Foreign currency translation differences	(83)	655	267	(4,257)	(3,418)
Other	68	(456)	7,004	267	7,004
31 December 2021	26,204	5,927	58,266	31,700	125,197
Amortisation and impairment
31 December 2020	(15,755)	(1,612)	(37,490)	(9,583)	(64,440)
Amortisation for the period	(4,451)	(186)	(12,949)	(982)	(18,568)
Impairment loss	(33)	(12,949)	(67,806)	(310)	(81,098)
Impairment reversal	134	34	1,889	2,057	4,114
Disposals	(222)	-	(309)	-	(531)
Foreign currency translation differences	78	(222)	906	(309)	443
Other	-	-	-	-	-
31 December 2021	(20,091)	(14,533)	(105,765)	(8,507)	(148,996)
Carrying amounts
31 December 2020	6,066	4,961	13,505	28,993	53,525
31 December 2021	6,113	(8,606)	(47,499)	23,193	(25,799)

	Other internally generated intangible assets	Internally generated software	Acquired 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	-	-	3,773
Additions - separately acquired	5,597	-	-	-	5,597
Disposals	(190)	(23)	(11,088)	(11,301)	(22,602)
Foreign currency translation differences	281	284	4	(242)	327
Other	6,573	3,617	87	6,239	16,516
31 December 2020	21,821	6,573	50,995	38,576	117,965
Amortisation and impairment
31 December 2019	(14,797)	(917)	(40,491)	(9,924)	(66,129)
Amortisation for the period	(1,306)	(299)	(9,924)	(18)	(11,547)
Impairment loss	(1)	(4,881)	(66,518)	(19)	(71,419)
Disposals	164	-	10,950	11,114	22,228
Foreign currency translation differences	(260)	55	(4)	(2)	(209)
Other	-	-	-	-	-
31 December 2020	(15,755)	(5,711)	(95,987)	(484)	(117,937)
Carrying amounts
31 December 2019	4,735	4,058	12,291	22,413	43,497
31 December 2020	6,066	862	(45,000)	38,092	3,020

In the fourth quarter of 2021, the Group recognised an impairment loss in the amount of 9.4 billion RUB for goodwill incurred on acquisition of one of international refineries due to a decline in the forecasted refining margins that followed the tightening of the EU decarbonisation policy.

28 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 16. Accounts payable

	31 December 2021	31 December 2020
Trade accounts payable	701,864	533,598
Other accounts payable	84,599	64,334
Total accounts payable	786,463	597,932

Note 17.# PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 18. Long-term debt

	31 December 2021	31 December 2020
Short-term borrowings from third parties	18,736	7,993
Short-term borrowings from related parties	899	2,522
Current portion of long-term debt	71,359	61,378
Total short-term borrowings and current portion of long-term debt	82,636	108,796

Short-term borrowings from third parties include amounts repayable in US dollars of 6,914 million RUB and 17,510 million RUB and amounts repayable in other currencies of 1,079 million RUB and 1,226 million RUB at 31 December 2021 and 2020, respectively. The weighted-average interest rate on short-term borrowings from third parties was 3.20% and 2.63% per annum at 31 December 2021 and 2020, respectively. Short-term borrowings from third parties are unsecured at 31 December 2021.

	31 December 2021	31 December 2020
Long term loans and borrowings from third parties	58,728	112,660
6.656% non-convertible US dollar bonds, maturing 2022		36,901
4.563% non-convertible US dollar bonds, maturing 2023		74,186
4.750% non-convertible US dollar bonds, maturing 2026	37,131	111,393
2.80% non-convertible US dollar bonds, maturing 2027	110,737	73,751
3.875% non-convertible US dollar bonds, maturing 2030	85,299	111,181
3.60% non-convertible US dollar bonds, maturing 2031	74,751	85,297
Lease obligations	110,532	185,843
Total long-term debt	377,837	577,075
Current portion of long-term debt	(71,359)	(61,378)
Total non-current portion of long-term debt	306,478	515,697

Long-term loans and borrowings from third parties include amounts repayable in US dollars of 56,678 million RUB and 101,376 million RUB, amounts repayable in euros of 122 million RUB and 11,284 million RUB at 31 December 2021 and 2020, respectively, and amounts repayable in Russian rubles and other currencies of 1,928 million RUB at 31 December 2021. This debt has maturity dates from 2022 through 2028. The weighted-average interest rate on long-term loans and borrowings from third parties was 2.03% and 2.54% per annum at 31 December 2021 and 2020, respectively. A number of long-term loan agreements contain certain financial covenants which are being met by the Group. Long-term loans and borrowings from third parties are unsecured at 31 December 2021.

Non-convertible bonds

On 26 October 2021, a Group company issued two tranches of non-convertible bonds totaling $2.3 billion (170.9 billion RUB). The first tranche of $1.15 billion (85.45 billion RUB) was placed with a maturity of 5.5 years and a coupon yield of 2.80% per annum, the second tranche of $1.15 billion (85.45 billion RUB) was placed with a maturity of 10 years and a coupon yield of 3.60% per annum. All bonds were placed at face value and have a half year coupon period.

On 6 May 2020, a Group company issued non-convertible bonds totaling $1.5 billion (111.45 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 (74.3 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 (222.9 billion RUB). The first tranche totaling $1.5 billion (111.45 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 (111.45 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 (74.3 billion RUB) with a maturity of 10 years and a coupon yield of 6.125%. The first tranche totaling $800 million (59.4 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 (14.9 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 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 (74.3 billion RUB). $500 million (37.15 billion RUB) were placed with a maturity of 10 years and a coupon yield of 6.356% per annum. Another $500 million (37.15 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.

	31 December 2020	Total changes from financing cash flows	Other changes	31 December 2021
Loans and borrowings	133,918	161,042	(55,116)	239,844
Lease obligations	331,921	(45,224)	36,739	323,436
Bonds	193,872	(125,382)	11,422	80,912
Other liabilities	3,265	(30,823)	(3,245)	(27,797)
Total	662,976	(39,387)	93,790	617,395
Proceeds from issuance of short-term borrowings		1,019
Principal repayments of short-term borrowings		(11,112)
Proceeds from issuance of long-term debt		187,361
Principal repayments of long-term debt		(357,672)
Interest paid		(357,672)
Dividends paid on Company common stock		(20,931)
Total changes from financing cash flows		(509,133)
Interest accrued	741	9,893	22,361	33,095
Dividends declared on Company common stock	360,316		360,316
Changes arising from obtaining or losing control over subsidiaries	(1,449)	(1,659)	(1,454)	(3,103)
The effect of changes in foreign exchange rates	11,422		6,502	17,924
Non-cash additions to lease obligations	36,739		36,739
Other changes	25,666		29,283	54,949
Total other changes	72,419		455,140	418,174
	31 December 2020	Total changes from financing cash flows	Other changes	31 December 2021
Loans and borrowings	133,918	(815)	(73,339)	59,764
Lease obligations	331,921	108,796	54,125	386,046
Bonds	193,872	(171,980)	27,010	48,902
Other liabilities	3,265	(39,100)	(29,530)	(65,365)
Total	662,976	(103,099)	28,296	429,347
Proceeds from issuance of short-term borrowings		1,971
Principal repayments of short-term borrowings		(815)
Proceeds from issuance of long-term debt		108,796
Principal repayments of long-term debt		(407,309)
Interest paid		(62,838)
Dividends paid on Company common stock		(10,501)
Total changes from financing cash flows		(360,886)
Interest accrued	1,853	10,501	258,389	270,743
Dividends declared on Company common stock	111,905		111,905
Changes arising from obtaining or losing control over subsidiaries	50,009		5,133	55,142
The effect of changes in foreign exchange rates	3,265		16,972	20,237
Non-cash additions to lease obligations	22,666		22,666
Other changes	29,688		29,688
Total other changes	219,386		422,067	345,946

Note 19. Taxes payable

	31 December 2021	31 December 2020
Income tax	16,920	16,614
Mineral extraction tax	101,767	49,332
Tax on additional income from hydrocarbon production	43,165	35,650
VAT	2,881	2,745
Excise tax	77,109	25,284
Property tax	25,284	12,537
Other taxes	5,409	9,573
Total taxes payable	272,535	141,735

Note 20. Other current liabilities

	31 December 2021	31 December 2020
Advances received	41,643	31,142
Dividends payable	25,701	4,064
Other	1,610	2,745
Total other current liabilities	68,954	37,951

Note 21. Provisions

	31 December 2021	Incl.: Non-current	Incl.: Current	31 December 2020	Incl.: Non-current	Incl.: Current
Asset retirement obligations	100,926	100,590	336	111,614	110,916	698
Provision for unused employee compensations	12,105	9,878	2,227	13,794	11,678	2,116
Provision for environmental liabilities	6,850	6,326	524	153,801	126,665	27,136
Pension provisions	4,679	4,679	-	1,329	1,329	-
Other provisions	10,939	6,598	4,341	10,764	10,764	-
Total	135,499	128,001	7,428	291,302	250,352	29,950

Asset retirement obligations changed as follows:

	2021	2020
1 January	111,614	63,387
Provisions made during the period	3,600	39,826
Reversal of provisions	(812)	(154)
Provisions used during the period	(204)	(325)
Accretion expense	3,651	1,477
Change in discount rate	(19,188)	94
Changes in estimates	1,477	3,882
Foreign currency translation differences	8,921	(9,395)
Other	694	5,450
31 December	100,926	111,614

Note 22. 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).# Notes to Consolidated Financial Statements

Note 23. Equity

Common shares

(thousands of shares)	31 December 2021	31 December 2020
Issued common shares, par value of 0.025 RUB each	692,866	692,866
Treasury shares	(42,522)	(40,367)
Outstanding common shares	650,344	652,499

The Company has the right to issue additional 85 million 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. 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.

Dividends

At the extraordinary general shareholders’ meeting on 2 December 2021, interim dividends for 2021 were approved in the amount of 340 RUB per common share. At the annual general shareholders’ meeting on 24 June 2021, dividends for 2020 were approved in the amount of 213 RUB per common share. At the extraordinary shareholders’ meeting on 3 December 2020, interim dividends for 2020 were approved in the amount of 46 RUB per common share. Total dividends for 2020 were approved in the amount of 259 RUB per common share. Dividends on the Company’s shares payable of 25,644 million RUB and 699 million RUB are included in “Other current liabilities” in the consolidated statement of financial position at 31 December 2021 and 2020, respectively.

Earnings per share

The calculation of basic and diluted earnings per share was as follows:

	2021	2020
Profit for the year attributable to PJSC LUKOIL shareholders	773,442	634,582
Weighted average number of common shares (thousands of shares)	652,365	650,965
Dilutive effect of equity-settled share-based compensation plan (thousands of shares)	32,603	24,827
Weighted average number of common shares, assuming dilution (thousands of shares)	684,968	675,792

Profit per share of common stock attributable to PJSC LUKOIL shareholders (in Russian rubles):

	2021	2020
Basic	1,185.60	1,129.17
Diluted	23.31	22.46

Note 24. Personnel expenses

Personnel expenses were as follows:

	2021	2020
Payroll costs	166,844	156,597
Statutory insurance contributions and social taxes	37,309	35,063
Share-based compensation	31,366	31,366
Total personnel expenses	235,519	223,026

Note 25. Finance income and costs

Finance income was as follows:

	2021	2020
Interest income from deposits	9,874	6,244
Interest income from loans	4,383	4,245
Other finance income	2,262	2,562
Total finance income	16,519	13,051

Finance costs were as follows:

	2021	2020
Interest expenses	31,609	37,333
Accretion expenses	4,197	4,505
Other finance costs	1,762	2,284
Total finance costs	37,568	44,122

Note 26. Other income and expenses

Other income was as follows:

	2021	2020
Gain on disposal of assets	5,260	2,618
Reversal of impairment of assets	7,267	8,085
Other income	14,160	11,516
Total other income	26,687	22,219

Other expenses were as follows:

	2021	2020
Loss on disposal of assets	14,355	20,755
Impairment loss	36,647	114,665
Charity expenses	6,651	8,423
Other expenses	10,156	11,287
Total other expenses	67,809	155,130

Note 27. Lease

Primarily the Group leases such assets as transport (vessels, tank cars), land, storage facilities, drilling rigs and other equipment. 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.

	31 December 2021	31 December 2020
	Property, plant and equipment owned	Right-of-use assets
Exploration	3,233,821	34,101
Refining, marketing and production assets and distribution assets	812,161	132,142
Other assets	944,303	820,657
Total	4,990,285	986,900

	1 January 2021	Additions	Depreciation for the period	Other movements	31 December 2021
Right-of-use assets:
Exploration	35,567	5,449	(9,245)	2,330	34,101
Refining, marketing and production assets and distribution assets	138,873	31,275	(37,587)	(419)	132,142
Other assets	4,929	4,406	(853)	146	4,929
Total	179,369	41,130	(47,685)	2,057	171,172

	1 January 2020	Additions	Depreciation for the period	Other movements	31 December 2020
Right-of-use assets:
Exploration	31,275	15,968	(10,322)	3,354	35,567
Refining, marketing and production assets and distribution assets	131,829	45,573	(54,497)	(65,573)	35,567
Other assets	4,929	1,868	(754)	102	4,145
Total	168,033	63,409	(65,573)	(58,117)	75,279

Lease liabilities:

	31 December 2021	31 December 2020
Incl.: Non-current	185,843	193,872
Incl.: Current	29,341	34,532
Total	215,184	228,404

Within the consolidated statement of profit or loss and other comprehensive income the following expenses were recognised: interest on lease liabilities in the amount of 9,140 million RUB and 9,435 million RUB and variable lease payments not included in the measurement of lease liabilities in the amount of 9,336 million RUB and 10,853 million RUB during 2021 and 2020, 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 123,355 million RUB and 170,990 million RUB during 2021 and 2020, respectively.

Note 28. 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.

	2021	2020
Current income tax expense for the year	162,872	63,458
Adjustment for prior periods	935	(2,096)
Current income taxes	163,807	61,362
Deferred income tax	27,644	20,792
Total income tax expense	191,451	82,154

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.

	2021	2020
Profit before income taxes	966,964	98,787
Notional income tax at the Russian statutory rate	193,393	19,757
Increase (reduction) in income tax due to:
Non-deductible items, net	17,438	9,483
Domestic and foreign rate differences	(12,315)	7,907
Adjustment for prior periods	935	(2,096)
Change in recognised deductible temporary differences	47,103	191,451
Total income tax expense	246,554	137,705

The following table sets out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities.# PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 28. Income tax (continued)

31 December 2021	31 December 2020
Deferred income tax assets
Property, plant and equipment	11,154
Investments	13
Inventories	10,948
Accounts receivable	1,586
Accounts payable and provisions	9,089
Tax loss carry forward	9,691
Other	24,948
Total deferred income tax assets	59,288
Set off of tax	(36,446)
Net deferred income tax liabilities	22,842

	Foreign currency translation differences and other	Recognition in profit or loss	Acquisitions	31 December 2021
Deferred income tax liabilities
Property, plant and equipment	(281,420)	(1,810)	3,509	(279,721)
Investments	(14)	80	9	(5)
Inventories	1,581	(18)	(26)	1,537
Accounts and notes receivable	(3,076)	9,039	(7,669)	(1,706)
Accounts payable and provisions	(252,658)	22,614	(1,514)	(231,558)
Tax loss carry forward	2,357	-	-	2,357
Other	498	(27,800)	(309,154)	(336,456)
Total deferred income tax liabilities	(530,514)	(12,895)	(313,767)	(856,156)
Set off of tax	36,446	1,303	5,046	42,795
Net deferred income tax liabilities	(494,068)	(11,592)	(308,721)	(813,361)

	Foreign currency translation differences and other	Recognition in profit or loss	Acquisitions	31 December 2020
Deferred income tax liabilities
Property, plant and equipment	(270,843)	(1,457)	211	(272,089)
Investments	(306)	244	-	(62)
Inventories	3,110	(9)	(13)	3,088
Accounts and notes receivable	(6,968)	9,534	(1,406)	1,160
Accounts payable and provisions	(235,486)	3,490	(178)	(232,174)
Tax loss carry forward	4,032	-	-	4,032
Other	(962)	(47)	(1,307)	(2,316)
Total deferred income tax liabilities	(501,425)	11,155	(2,693)	(497,344)
Set off of tax	29	(1,307)	(3,149)	(4,427)
Net deferred income tax liabilities	(501,396)	9,848	(5,842)	(501,771)

31 December 2021	31 December 2020
Deferred tax assets have not been recognised in respect of the temporary differences related to the following items:
Property, plant and equipment	15,980
Tax loss carry forward	35,297
Other	655
Total unrecognised deferred tax assets	51,932

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 2021:

	Before tax	Tax	Net of tax
Foreign currency translation differences for foreign operations	(20,263)	-	(20,263)
Change in fair value of financial assets at fair value through other comprehensive income	2,572	1,601	971
Remeasurements of defined benefit liability / asset of pension plan	(198)	(198)	-
Total	(17,889)	1,403	(19,292)

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)	(2,447)
Remeasurements of defined benefit liability / asset of pension plan	257	257	-
Total	268,200	(1,423)	266,260

Retained earnings of foreign subsidiaries for which deferred taxation has not been provided included 1,013,402 million RUB and 1,361,368 million RUB at 31 December 2021 and 2020, 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 29. Commitments and contingencies

Capital commitments
Capital commitments of the Group relating to construction and acquisition of property, plant and equipment amount to 552,506 million RUB and 501,550 million RUB at 31 December 2021 and 2020, 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.

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 programmes, 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.

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 former 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 (163.4 billion RUB) to $1.5 billion (111.4 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 (111.4 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 the 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. The hearings took place on 23 September and 21 October 2021. On 25 November 2021 the Ploesti Court of Appeals issued a decision to return the case for a new examination in the court of the first instance. The hearing on the main court case was originally scheduled to 23 February 2022 but was postponed to 12 April 2022. 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 dispute 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 with respect to cost recovery in 2010-2017. Currently, within the framework of the dispute the parties are making efforts to resolve the existing controversies by way of negotiations and management believes that the amounts of claim, as well as calculations of potential losses arising from the dispute to be preliminary and should not be disclosed in order to avoid any adverse impact on the process. Management also believes that the ultimate outcome of this dispute will not have a material adverse effect on the financial position of the Group.

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 15 April 2022. 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. 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. Loans and borrowings mostly represent lease obligations.

Outstanding balances with related parties were as follows:

	31 December 2021	31 December 2020
Accounts receivable and other current assets	5,295	2,474
Other financial assets	32,903	32,403
Total assets	38,198	34,877
Accounts payable	9,364	6,902
Short term borrowings and long-term debt	17,623	17,649
Total liabilities	26,987	24,551

Related party transactions were as follows:

	2021	2020
Sales of oil and oil products	15,351	2,707
Other sales	33,191	3,303
Purchases of oil and oil products	75,342	21,374
Other purchases	2,321	57,915
Proceeds from sale of other financial assets, net	18,342	5,075
(Principal repayments) proceeds from issuance of short term borrowings and long-term debt, net	(1,490)	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 1,768 million RUB and 1,728 million RUB during 2021 and 2020, respectively. Also, a provision under the compensation plan (disclosed in Note 31 “Compensation plan”) was accrued in relation to the Company’s key management personnel in the amount of 3,137 million RUB during 2021 and 2020.

Note 31. 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 2021 and 2020.

41 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 32. 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.

Operating segments	Refining, marketing and distribution	Exploration and production	Corporate and other	Elimination	Consolidated
2021
Sales and other operating revenues
Third parties	261,725	2,594,151	9,158,150	77,382	15,268
Inter-segment	(2,707,920)
Total revenues	2,855,876	279,074	9,235,532	276,170	51,655
Operating expenses
Selling, general and administrative expenses	41,611	135,140	67,841	(29,402)	215,190
Profit (loss) for the year attributable to PJSC LUKOIL shareholders	773,442	572,284	986,255	284,333	487,294
EBITDA	1,404,411	(191,451)	16,519	(37,568)	2,731
Income tax expense
Finance income
Finance costs
Foreign exchange gain
Equity share in income of associates and joint ventures	29,980
Other expenses	(23,643)
Depreciation, depletion and amortisation	(425,466)	(2,071)
Profit for the year attributable to non-controlling interests
Profit for the year attributable to PJSC LUKOIL shareholders	773,442

42 PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 32.# PJSC LUKOIL Notes to Consolidated Financial Statements (Millions of Russian rubles, unless otherwise noted)

Note 32. Segment information (continued)

2020 Production and Operating Expenses

	Refining, Exploration and marketing	Production and distribution	Corporate and other	Elimination	Consolidated
Sales and other operating revenues
Third parties	164,993	1,377,246	5,455,680	70,300	18,728
Inter-segment	(1,488,438)
Total revenues	1,542,239	262,343	5,525,980	195,558	59,620
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)
EBITDA	243,322	(16,931)	687,094	(82,154)	13,051
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	(405,440)
Profit for the year attributable to non-controlling interests	(1,458)
Profit for the year attributable to PJSC LUKOIL shareholders	15,175

Geographical segments

	2021	2020
Sales of crude oil within Russia	86,338	23,522
Export of crude oil and sales of crude oil by foreign subsidiaries	3,529,957	1,043,067
Sales of petroleum products within Russia	4,261,684	1,918,944
Export of petroleum products and sales of petroleum products by foreign subsidiaries	58,685	36,386
Sales of chemicals within Russia	101,491	29,714
Export of chemicals and sales of chemicals by foreign subsidiaries	57,036	32,649
Sales of gas within Russia	142,692	57,227
Sales of gas by foreign subsidiaries	68,200
Sales of energy and related services within Russia	53,607	14,316
Sales of energy and related services by foreign subsidiaries	10,451	48,597
Other sales within Russia	40,169
Other export sales and other sales of foreign subsidiaries	61,375	63,813
Total sales	9,435,143	5,639,401

2021

	Russia	International	Elimination	Consolidated
Sales and other operating revenues
Third parties	1,429,116	1,779,341	3,208,457	352,409
Inter-segment	4,288	-	(1,783,629)	(1,783,629)
Total revenues	8,010,315	144,499	119,625	57,366
Operating expenses	509,192	215,190	773,442	1,404,411
Selling, general and administrative expenses	99,605	(4,040)
Profit for the year attributable to PJSC LUKOIL shareholders	738,170	(22,094)
EBITDA	1,180,553	247,044
				43

2020

	Russia	International	Elimination	Consolidated
Sales and other operating revenues
Third parties	1,041,967	994,845	2,036,812	314,341
Inter-segment	1,670	-	(996,515)	(996,515)
Total revenues	4,599,104	91,499		5,639,401
Operating expenses	199,027
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
EBITDA	687,094

In the International segment the Group receives the most substantial revenues in Switzerland, the USA and Singapore.

	2021	2020
Sales revenues in Switzerland	4,606,978	1,197,085
in the USA	621,637	2,449,415
in Singapore	680,033	357,647

These amounts are attributed to individual countries based on the jurisdiction of subsidiaries making the sale.

Note 33. Subsidiaries

The most significant subsidiaries of the Group are presented below:

Country of incorporation	Subsidiary	31 December 2021 Total shares	31 December 2021 Voting shares	31 December 2020 Total shares	31 December 2020 Voting shares
Russia	LUKOIL-West Siberia LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-PERM LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-Komi LLC	100.00%	100.00%	100.00%	100.00%
Russia	RITEK LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-Permnefteorgsintez LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-Nizhegorodnefteorgsintez LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-Nizhnevolzhskneft LLC	100.00%	100.00%	100.00%	100.00%
Russia	LUKOIL-Volgogradneftepererabotka LLC	100.00%	100.00%	100.00%	100.00%
Switzerland	LITASCO SA	100.00%	100.00%	100.00%	100.00%
Cyprus	SOYUZNEFTEGAZ VOSTOK LIMITED	100.00%	100.00%	100.00%	100.00%
Austria	LUKOIL INTERNATIONAL GmbH	100.00%	100.00%	100.00%	100.00%
Netherlands	LUKOIL International Upstream Holding B.V.	100.00%	100.00%	100.00%	100.00%
Bulgaria	LUKOIL Neftohim Burgas AD	100.00%	100.00%	100.00%	100.00%
Cyprus	LUKOIL Overseas Karachaganak B.V.	100.00%	100.00%	100.00%	100.00%
Netherlands	LUKOIL Overseas Shah Deniz Ltd.	100.00%	100.00%	100.00%	100.00%
Cyprus	LUKOIL Overseas Uzbekistan Ltd.	100.00%	100.00%	100.00%	100.00%
Netherlands	LUKOIL Securities B.V.	99.85%	99.85%	99.85%	99.85%
USA	LUKOIL Pan Americas LLC	100.00%	100.00%	100.00%	100.00%

Note 34. 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 2021 and 2020.

Fair value 31 December 2021

	Carrying amount	Level 1	Level 2	Level 3	Total
Financial assets:
Commodity derivative contracts	1,553	33,732	5,929	-	1,553
Financial assets at fair value through profit or loss	-	33,732	-		33,732
Financial assets at fair value through other comprehensive income	-	-	5,929		5,929
Financial liabilities:
Commodity derivative contracts	1,377	-	1,377	-	1,377
Loans and borrowings	749,058	514,279	243,070		757,349

Fair value 31 December 2020

	Carrying amount	Level 1	Level 2	Level 3	Total
Financial assets:
Commodity derivative contracts	316	33,195	2,491	-	316
Financial assets at fair value through profit or loss	-	33,195	-		33,195
Financial assets at fair value through other comprehensive income	-	-	2,491		2,491
Financial liabilities:
Commodity derivative contracts	418	-	418	-	418
Loans and borrowings	638,453	362,818	307,832		670,650

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 2021 and 2020.

Note 35. 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 characterised 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 organisations.

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 utilises 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 centralised 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.## Note 35. Capital and risk management (continued)

Trade and other receivables

Analysis of the aging of receivables:

	31 December 2021	31 December 2020
Not past due	679,265	342,930
Past due less than 45 days	24,879	10,895
Past due from 45 to 180 days	7,204	4,315
Past due from 181 to 270 days	5,463	635
Past due from 271 to 365 days	8,790	11,053
Past due more than 365 days	16,271	443
Total trade and other receivables	741,872	370,271

Not past due accounts receivable are not considered of high credit risk.

Allowance for expected credit losses changed as follows during 2021:

	31 December 2020	31 December 2021
Increase in allowance charged to profit or loss	9,085	37,692
Write-off	(5,172)	(492)
Foreign currency translation differences	(600)	(4,057)
Other	(1,171)	40,513
31 December 2021	37,692	40,513

Allowance for expected credit losses changed as follows during 2020:

	31 December 2019	31 December 2020
Increase in allowance charged to profit or loss	5,771	31,287
Write-off	(2,379)	(666)
Foreign currency translation differences	3,679	(492)
Other	(1,016)	37,692
31 December 2020	31,287	37,692

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 centralised 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.

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):

31 December 2021

	Contractual Carrying amount (undiscounted)	Less than 12 months	1-2 years	2-5 years	Over 5 years
Loans and borrowings, including interest expense	67,925	98,303	14,972	5,897	41,626
Bonds, including interest expense	507,821	185,843	783,778	1,377	609,355
Lease obligations	56,535	38,635	781,949	1,377	126,378
Trade and other payables	710	113,472	71,025	800	312,970
Derivative financial liabilities	1,546,744	1,732,231	893,468	163,088	226,923

31 December 2020

	Contractual Carrying amount (undiscounted)	Less than 12 months	1-2 years	2-5 years	Over 5 years
Loans and borrowings, including interest expense	134,092	173,227	50,966	23,218	47,289
Bonds, including interest expense	334,313	193,872	597,406	418	407,958
Lease obligations	15,295	44,232	595,465	418	50,764
Trade and other payables	1,437	135,780	67,514	141	206,119
Derivative financial liabilities	1,260,101	1,436,542	706,376	102,848	250,724

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 centralised 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 2021 and 2020 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 2021

	USD	EUR	Other currencies
Financial assets:
Cash and cash equivalents	16,921	2,574	3,135
Trade and other receivables	179,599	63,201	4
Loans	326,739	17,061	3,185
Other financial assets	27,161	88	168,486
Financial liabilities:
Loans and borrowings	(350,565)	(53,893)	(22,919)
Trade and other payables	(6,782)	(28,667)	(12,229)
Net exposure	(16,438)	(23,057)	159,477

31 December 2020

	USD	EUR	Other currencies
Financial assets:
Cash and cash equivalents	2,014	1,698	778
Trade and other receivables	79,401	56,041	4,516
Loans	260,894	181	2
Other financial assets	3,452	90	(22,961)
Financial liabilities:
Loans and borrowings	(354,100)	(39,443)	(8,470)
Trade and other payables	(29,350)	(41,051)	(19,875)
Net exposure	(85,599)	(26,575)	(35,510)

The following exchange rates applied:

	31 December 2021	31 December 2020
USD	74.29	73.88
EUR	84.07	90.68

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 2021 and 2020 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) 2021	Profit (loss) 2020
US Dollar (increase by 10%)	16,473	(5,262)
Euro (increase by 10%)	(60)	1,121
Russian ruble (increase by 10%)	(14,873)	3,873

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 2021

	Financial assets	Financial liabilities	Net exposure
Fixed rate instruments	36,099	(691,309)	(655,210)
Variable rate instruments	35,603	(527,063)	(491,460)
Net exposure	36,304	(66,641)	(30,337)

31 December 2020

	Financial assets	Financial liabilities	Net exposure
Fixed rate instruments	39,523	(132,648)	(93,125)
Variable rate instruments	-	-	-
Net exposure	-	-	-

Sensitivity analysis for variable rate instruments

A reasonably possible change of 100 basis points in interest rates at 31 December 2021 and 2020 would have increased (decreased) profit (loss) before taxes by the amounts shown below. This analysis assumes that all other variables remain constant.

	100 bp increase	100 bp decrease
2021
Net financial liabilities	(303)	303
2020
Net financial liabilities	(931)	931

Capital management

The Group’s capital management objectives are to secure the ability to continue as a going concern and to optimise 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 2021	31 December 2020
Total debt	757,950	659,711
Less cash and cash equivalents	(677,482)	(343,832)
Net debt	80,468	315,879
Equity	4,523,184	4,130,766
Net debt to equity ratio	1.78%	7.65%

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

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

(Millions of Russian rubles, unless otherwise noted)

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 2021
	International	Russia	Total
Unproved oil and gas properties	123,833	128,120	251,953
Proved oil and gas properties	5,450,805	389,168	5,839,973
Accumulated DD&A	(2,452,648)	(130,590)	(2,583,238)
Net capitalised costs	3,122,990	386,698	3,509,688

Total Group's share in consolidated companies equity method companies	31 December 2020
	International	Russia	Total
Unproved oil and gas properties	105,907	123,493	229,400
Proved oil and gas properties	37,901	1,645,275	1,683,176
Accumulated DD&A	(120,843)	(980,878)	(1,101,721)
Net capitalised costs	22,965	787,890	810,855

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

Total Group's share in consolidated companies equity method companies
	2021
	International	Russia	Total
Acquisition of properties - Proved	1,097	629	1,726
Acquisition of properties - Unproved	12,899	51,634	64,533
Exploration costs	1,333	18,100	19,433
Development costs	305,621	339,050	644,671
Total costs incurred	320,950	409,413	730,363

Total Group's share in consolidated companies equity method companies
	2020
	International	Russia	Total
Acquisition of properties - Unproved	1,443	237	1,680
Exploration costs	8,151	30,862	39,013
Development costs	311,355	343,660	655,015
Total costs incurred	320,949	374,759	695,708

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
	2021
	International	Russia	Total
Revenue:
Sales	211,112	1,128,834	1,339,946
Transfers	-	1,290,175	1,290,175
Total revenues	211,112	2,419,009	2,630,121
Production costs (excluding production taxes)	(42,104)	(162,453)	(204,557)
Exploration expenses	(4,093)	(2,983)	(7,076)
Depreciation, depletion and amortisation	(104,077)	(1,069)	(105,146)
Taxes other than income taxes	(12,822)	(1,352,412)	(1,365,234)
Related income taxes	46,947	(297,188)	(250,241)
Total results of operations for producing activities	88,799	602,904	691,709

Total Group's share in consolidated companies equity method companies
	2020
	International	Russia	Total
Revenue:
Sales	123,966	645,991	769,957
Transfers	-	572,660	572,660
Total revenues	123,966	1,218,651	1,342,617
Production costs (excluding production taxes)	(40,583)	(158,328)	(198,911)
Exploration expenses	(3,163)	(2,951)	(6,114)
Depreciation, depletion and amortisation	(77,736)	(755)	(78,491)
Taxes other than income taxes	(1,218)	(611,640)	(612,858)
Related income taxes	1,218	(57,618)	(56,400)
Total results of operations for producing activities	2,016	387,959	389,975

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.

Management has included within proved reserves significant quantities which the Group expects to produce after the expiry dates of certain of its current production licences in the Russian Federation. The Subsoil Law of the Russian Federation states that, upon expiration, a licence is subject to renewal at the initiative of the licence holder provided that further exploration, appraisal, production or remediation activities are necessary and provided that the licence holder has not violated the terms of the licence. Since the law applies to both newly issued and old licences and the Group has currently renewed 66% of its licences, management believes that licences 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 2021 and 2020 are shown in the tables set out below.

Group's share in equity method companies

Millions of barrels

Crude oil	31 December 2019	Revisions of previous estimates	Extensions and discoveries	Production	31 December 2020	Revisions of previous estimates	Purchase/sale of hydrocarbons in place*	Extensions and discoveries	Production	31 December 2021
Consolidated subsidiaries
International	11,358	(268)	373	(549)	10,914	175	16	433	(568)	10,956
Russia	384	140	28	(39)	473	36	11	444	(30)	863
Total	11,742	(128)	401	(588)	11,387	211	27	877	(598)	11,819
Proved developed reserves
31 December 2020	7,210				7,493
31 December 2021	7,429				7,658

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

The non-controlling interest share included in the above total proved reserves was 60 million barrels and 61 million barrels at 31 December 2021 and 2020, respectively. The non-controlling interest share included in the above proved developed reserves was 37 million barrels and 38 million barrels at 31 December 2021 and 2020, 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	31 December 2019	Revisions of previous estimates	Extensions and discoveries	Production	31 December 2020	Revisions of previous estimates	Purchase/sale of hydrocarbons in place*	Extensions and discoveries	Production	31 December 2021
Consolidated subsidiaries
International	16,426	73	204	(381)	16,322	305	2	297	(546)	16,380
Russia	5,868	277	350	(617)	5,878	(5)	13	307	(565)	5,628
Total	22,294	350	554	(998)	22,200	300	15	604	(1,111)	22,008
Proved developed reserves
31 December 2020	5,746				9,864
31 December 2021	5,603				9,450

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

The non-controlling interest share included in the above total proved reserves was 23 billion cubic feet at 31 December 2021 and 2020. The non-controlling interest share included in the above proved developed reserves was 14 billion cubic feet and 15 billion cubic feet at 31 December 2021 and 2020, respectively. All non-controlling interests relate to reserves in the Russian Federation.

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

Consolidated companies

	2021	2020
Discounted present value at 1 January	2,550,693	4,227,145
Net changes due to purchases and sales of minerals in place	5,385	23
Sales and transfers of oil and gas produced, net of production costs	(1,065,007)	10,666,754
Net changes in prices and production costs estimates	(7,609,605)	198,810
Net changes in mineral extraction taxes	(525,197)	(4,640,038)
Extensions and discoveries, less related costs	2,622,343	86,574
Previously estimated development cost incurred during the year	291,048	360,474
Revisions of previous quantity estimates	20,422	105,832
Net change in income taxes	(583,505)	267,681
Accretion of discount	381,202	461,076
Other changes	(443,331)	2,550,693
Discounted present value at 31 December	4,999,366	171,280

Group's share in equity method companies

	2021	2020
Discounted present value at 1 January	86,230	125,573
Net changes due to purchases and sales of minerals in place	-	(60)
Sales and transfers of oil and gas produced, net of production costs	(38,442)	339,838
Net changes in prices and production costs estimates	(146,612)	(76,904)
Net changes in mineral extraction taxes	4,227	(18,659)
Extensions and discoveries, less related costs	(116,411)	74,626
Previously estimated development cost incurred during the year	24,887	(10,861)
Revisions of previous quantity estimates	(24,492)	13,491
Net change in income taxes	(3,678)	244,588
Accretion of discount	26,199	2,013
Other changes	14,268	17,621
Discounted present value at 31 December	86,230	55

Total Group's share in consolidated companies equity method companies 31 December 2021

International	2,796,202	(1,468,599)	(164,013)	1,163,590	(499,839)
Russia	51,116,716	(40,375,139)	(1,815,645)	8,925,932
Future cash inflows	53,912,918	(41,843,738)	(1,979,658)	10,089,522	(5,090,156)
Future production and development costs					1,095,313
Future income tax expenses					(584,612)
Future net cash flows					394,271
Discount for estimated timing of cash flows (10% p.a.)				(4,590,317)	4,335,615
Discounted future net cash flows				244,588
Non-controlling share in discounted future net cash flows		-	27,545	27,545	-
Total Group's share in consolidated 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)
companies	30,898,729	(24,907,850)	(788,085)	639,463	(392,022)
Future cash inflows				170,537	(84,307)
Future production and development costs				4,412,345
Future income tax expenses				5,202,794
Future net cash flows				(2,345,485)	2,066,860
Discount for estimated timing of cash flows (10% p.a.)				2,550,693
Discounted future net cash flows
Non-controlling share in discounted future net cash flows		-	12,861	12,861	-

54 PJSC LUKOIL Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited) (Millions of Russian rubles, unless otherwise noted)

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 2021 and the results of its operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020, 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 equity affiliates. 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 characterising 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 102 for a discussion of some factors that could cause actual results to differ materially.

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 .................................. 69
Reserves base .......................................................................................................................................... 71
Segments highlights ................................................................................................................................ 73
Exploration and production................................................................................................................. 73
West Qurna-2 project.......................................................................................................................... 76
Refining, marketing and distribution .................................................................................................. 78
Financial results ...................................................................................................................................... 83
Sales revenues..................................................................................................................................... 84
Operating expenses ............................................................................................................................. 88
Cost of purchased crude oil, gas and products .................................................................................... 90
Transportation expenses...................................................................................................................... 91
Selling, general and administrative expenses...................................................................................... 92
Depreciation, depletion and amortisation............................................................................................ 92
Equity share in income of associates and joint ventures ..................................................................... 92
Taxes other than income taxes ............................................................................................................ 93
Excise and export tariffs...................................................................................................................... 94
Foreign exchange gain (loss) .............................................................................................................. 95
Other expenses .................................................................................................................................... 95
Income taxes ....................................................................................................................................... 96
Non-GAAP items reconciliation ............................................................................................................. 97
EBITDA reconciliation....................................................................................................................... 97
Free cash flow reconciliation .............................................................................................................. 97
Liquidity and capital resources ............................................................................................................... 98
Operating activities .............................................................................................................................# 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 2021 and for the years 2021 and 2020

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 15.3 billion BOE at 1 January 2022 and comprised of 11.6 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 2021 amounted to 2.2 million BOE, with liquid hydrocarbons representing approximately 76% 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 the full year 2021 amounted to 1.3 million barrels per day, and we produced 1.1 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 the full year 2021 amounted to 13.9 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 the full year 2021, our total output of commercial electrical energy was 15.8 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 2020 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 2020. 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 resulted in crude oil price growth, with the price of Brent reaching its peak of $86 per barrel at the end of October 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.

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 2020, we have recovered our gas production in Uzbekistan on the back of growing demand for gas from China. 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 minimise the negative impact of this production cut on our financial performance the cut was implemented at the least profitable fields. Since May 2020, our crude oil production in Russia stepped up sequentially and in the fourth quarter of 2021 was approximately 270 thousand barrels per day higher as compared to the May 2020 level. As a result, our domestic average daily crude oil production in 2021 exceeded the level of 2020.

Due to the OPEC+ agreement, crude oil production was also cut at some of our international projects. For example, average daily production at the West Qurna-2 project in Iraq was approximately 20 thousand barrels per day below its capacity in the fourth quarter of 2021.

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 optimised utilisation rates at our refineries starting from the second quarter of 2020 in order to efficiently react to the adverse macro changes. As a result, in the second quarter of 2020, our average daily refinery throughput volumes were 21% lower than in 2019. Gradual improvement of macro conditions resulted in the recovery of utilisation rates at our refineries with the average daily refinery throughput volumes in 2021 being 16% higher as compared to the second quarter of 2020.

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 level. However, from May 2020, retail sales volumes started recovering and in the fourth quarter of 2021 were approximately 12% higher compared to the fourth quarter of 2020.

The impact of the pandemic on the Group’s financial performance in 2021 is discussed in detail in the below discussion and analysis. Management believes that the Group is in a solid financial condition and has adequate liquidity with the net financial debt position (excluding lease obligations) of minus 105 billion RUB at the end of 2021. 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.

Key financial and operational results

	Q4 2021	Q3 2021	Change, %	12 months of 2021	12 months of 2020	Change, %
Sales revenue.................	6,995,435,143	5,639,401,984

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Profit for the period attributable to LUKOIL shareholders...	233,790	192,475	21.5	773,442	15,175	>100
Capital expenditures ...	127,281	94,328	34.9	495,443	433,042	14.4
Free cash flow² ...	190,074	227,670	(16.5)	693,572	281,131	146.7
Free cash flow before changes in working capital ...	244,236	233,522	4.6	877,468	189,383	>100
EBITDA¹, including ...	2,768,031	2,588,745	6.9	9,378,558	4,367,879	114.8
Exploration and production segment...	1,404,411	1,361,080	3.2	5,499,729	2,395,580	129.6
Refining, marketing and distribution segment ...	1,361,080	1,227,665	11.0	3,878,829	1,972,299	96.7
EBITDA¹ net of West Qurna-2 project...	395,013	377,440	4.7	1,645,723	986,255	66.9

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Production of hydrocarbons, including our share in associates and joint ventures................	2,335	2,197	6.3	8,173	7,924	3.2
crude oil and natural gas liquids............................................................	1,782	1,678	6.2	6,391	6,101	4.8
gas............................................................................................	553	519	6.6	1,782	1,823	(2.2)
Refinery throughput at the Group refineries ...................................................	2,152	2,117	1.6	8,205	7,619	7.7

¹ Profit from operating activities before depreciation, depletion and amortisation.
² Cash flow from operating activities less capital expenditures.

In the fourth quarter of 2021, compared to the previous quarter, our financial results were positively impacted by an increase in international hydrocarbon prices, higher domestic crude oil and international gas production volumes, as well as higher positive export duty lag effect and the accounting specifics of our international trading operations. At the same time, these positive factors were partially offset by weaker results of our international refining, retail and trading businesses. Compared to the full year 2020, our financial results were driven up by higher hydrocarbon prices, an increase in hydrocarbon production volumes, positive inventory effect at our refineries, higher refining margins in Russia, positive export duty lag effect, as well as the ruble depreciation. Elimination of tax incentives for high- viscous crude oil and weaker results of retail business in Russia were the main restraining factors. As a result, our EBITDA increased by 11.2% and by 104.4% compared to the third quarter of 2021 and the full year 2020, respectively.

In the fourth quarter of 2021, a foreign exchange gain amounted to 5.8 billion RUB, as compared to a 0.7 billion RUB loss in the previous quarter. In the full year 2021, a foreign exchange gain amounted to 2.7 billion RUB, while in the full year 2020 sharp ruble depreciation resulted in a foreign exchange loss of 26.1 billion RUB.

Compared to the third quarter of 2021, our depreciation, depletion and amortisation expenses decreased by 8.9% mainly due to a positive effect of an increase in proved developed hydrocarbon reserves at Group’s certain fields at the end of 2021 and consequent recalculation of depletion of respective fixed assets for the full year, despite an increase in crude oil production in Russia and an increase in cost compensation related to the West Qurna-2 project. Compared to the full year 2020, our depreciation, depletion and amortisation expenses increased by 4.9% mainly as a result of higher cost compensation related to the West Qurna-2 project, as well as an increase in gas production in Uzbekistan.

Due to a significant deterioration in the macroeconomic environment in 2020, the Group recognised an impairment loss of property, plant and equipment and other non-current assets in the total amount of 107 billion RUB in 2020 (net of impairment reversals). In 2021, a net impairment loss in relation to property, plant and equipment, goodwill and other non-current assets amounted to 10 billion RUB.

In the fourth quarter and the full year 2021, profit attributable to LUKOIL shareholders amounted to 234 billion RUB and 773 billion RUB, respectively, compared to profit in the amount of 192 billion RUB in the third quarter of 2021 and profit in the amount of 15 billion RUB in the full year 2020. Our capital expenditures increased by 33 billion RUB, or by 34.9%, compared to the third quarter of 2021, and decreased by 62 billion RUB, or by 12.6%, compared to the full year 2020.

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 2021 and for the years 2021 and 2020

In the fourth quarter of 2021, our free cash flow amounted to 190 billion RUB, a decrease of 16.5% compared to the third quarter of 2021, and in the full year 2021, it amounted to 694 billion RUB, an increase of 146.7% compared to the full year 2020. A quarter-on-quarter decrease in our free cash flow was mainly due to dynamics of working capital and an increase in capital expenditures, while a year-on-year increase was mainly a result of improved profitability of our core operations and lower capital expenditures that was partially offset by working capital dynamics.

Compared to the third quarter of 2021 and the full year 2020, the Group’s average daily hydrocarbon production increased by 8.5% and by 3.8%, respectively, mainly due to the dynamics of the external limitations on crude oil production due to the OPEC+ agreement, as well as higher international gas production volumes.

Compared to the previous quarter, average daily throughput volumes at our refineries decreased by 10.5% mainly due to scheduled maintenance works at the refineries outside Russia, as well as seasonal throughput optimisation in Russia. Compared to the full year 2020, average daily throughput volumes at our refineries increased by 7.7% mainly due to higher refineries utilisation rates due to better market environment in 2021, as well as scheduled maintenance works in 2020.

Changes in the Group structure

In December 2021, a Group company concluded a sale and purchase agreement with PJSC Gazprom Neft for 50% equity share of Meretoyakhaneftegaz LLC, a Gazprom Neft wholly owned subsidiary, for 52 billion RUB, including cession of claim of Gazprom Neft’s loans worth 35 billion RUB. The contract was signed as part of creating a joint venture to develop oil and gas cluster in the Nadym-Pur-Tazovsky area of the Yamal-Nenets Autonomous District. The companies also agreed upon the programme of additional exploration of the blocks of Meretoyakhaneftegaz LLC where 8.9 billion RUB of expenditures will be financed by LUKOIL. The transaction is planned to be completed in 2022 after fulfilment of a number of conditions precedent, including all necessary corporate approvals, as well as the consent of the Federal Antimonopoly Service.

In October 2021, a Group company signed an agreement to purchase a 15.5% interest in the Shah Deniz natural gas project in Azerbaijan sector of the Caspian Sea from PETRONAS for $2.25 billion. In December 2021, the terms of the agreement were amended as a result of negotiations with the Shah Deniz project partners on implementation of pre-emptive rights. In accordance with the new arrangement, the share acquired by the Group was reduced to 9.99% with proportional decrease in consideration to $1.45 billion. The transaction was closed on 17 February 2022 after all customary conditions, including approval by SOCAR, the State Oil Company of the Azerbaijan Republic, were fulfilled.

In July 2021, a Group company entered into a contract to purchase the 50% operator interest in the Area 4 project in Mexico by acquiring the operator’s holding company for approximately $435 million plus expenditures incurred in 2021 and 2022 as of the transaction completion date. The transaction was closed on 24 February 2022 after all customary conditions, including approval by the Mexican authorities, 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 2021 and for the years 2021 and 2020

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 realised 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 2021, the price for Brent crude oil increased from $50.0 per barrel in January to $86.1 per barrel in the end of October owing to gradual recovery of global demand for crude oil and the effect of the OPEC+ agreement. As a result, average price increased by 8.1% compared to the third quarter of 2021, and by 69.1% compared to the full year 2020.

The following tables show the average crude oil and refined product prices.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(US dollars per barrel)
Brent FOB dated..................................	79.48	73.55	8.1	70.69	41.79	69.1
Urals (average MED and Rotterdam)........................	78.17	71.19	9.8	69.10	41.39	66.9
(US dollars per tonne)
Diesel fuel 10 ppm (FOB Rotterdam) .......................	679.48	667.69	1.8	622.18	464.39	33.9
Premium gasoline (FOB Rotterdam).........................	758.36	741.17	2.3	693.68	534.99	29.7
Naphtha (FOB Rotterdam) ........................................	612.32	601.00	1.9	562.02	412.60	36.2
Jet fuel (FOB Rotterdam)..........................................	774.60	764.81	1.3	704.21	558.68	26.0
Vacuum gas oil (FOB Rotterdam).............................	731.66	717.00	2.0	664.87	493.71	34.7

The table below represents average domestic wholesale prices for refined products for the respective periods.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per tonne)
Diesel fuel ..............................	49,000	45,007	8.9	43,625	10,990	17.0
Regular gasoline..........................	44,694	48,681	(8.2)	37,292		16.0
Premium gasoline..........................	45,653	50,556	(9.7)	39,727		14.3
Fuel oil .................................	26,014	23,139	12.4	41,866		>100
Source: InfoTEK (excluding VAT).				46,083	47,858	22,611

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 2021	Q3 2021	12 months of 2021	2020
Ruble inflation (CPI), % .....................................	2.9	1.1	8.4	4.9
Ruble to US dollar exchange rate
Average for the period..........................................	72.61	72.76	74.29	73.47
At the beginning of the period ................................	72.37	72.76	73.65	73.88
At the end of the period .......................................	74.29	72.15	61.91	73.88
Ruble to euro exchange rate
Average for the period..........................................	83.07	84.88	84.07	86.66
At the beginning of the period ................................	86.20	84.88	87.19	90.68
At the end of the period .......................................	84.07	82.45	69.34	90.68
Source: Bank of Russia, 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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(US dollars per tonne)
Mineral extraction tax¹ ........................	308.02	276.00	11.6	261.66	120.87	>100
Export duty on crude oil........................	70.49	64.63	9.1	59.15	45.87	29.0
¹ Translated from rubles using average exchange rate for the period.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per tonne)
Mineral extraction tax ..........................	22,364	20,279	10.3	19,273	8,720	>100
Export duty on crude oil¹........................	5,118	4,749	7.8	4,357	3,309	31.6
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. From 2019, crude oil export duty rate is being gradually reduced and will be nulled in 2024. Simultaneously, the mineral extraction tax rate for crude oil is being equivalently increased. 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 an increase in mineral extraction tax rate.

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:

Rate = 919 × (Price − 15 × Exchange Rate ( )) + 428 + Tax manoeuvre Factor 261 + Damper Factors – Incentive + 428

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, in addition to the fixed factors a new variable Damper Factor, which is linked to the export netbacks for gasoline and diesel fuel, was added to the formula. In 2021, the formula was amended by increasing the variable Damper Factor, which was synchronised with an increase in the damper coefficient in the formula of negative excise tax on refinery feedstock.

The table below sets out key fixed components of the extraction tax formula for crude oil.

	2021	2022	2023	2024 and further
Export duty reduction factor.	0.333	0.500	0.667	0.833
(rubles)
Damper Factor for gasoline....	105	105	105	105
Damper Factor for diesel fuel.	92	92	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 was applied to our Yu. Korchagin field located in the Caspian offshore until the end of 2021, and is applied 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 licence areas into Group 3 of tax on additional income 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 licence areas with TAI regime. For Groups 1 and 4 of TAI a discount to the special tax rate is applied depending on the duration of commercial production at the particular licence area.# 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 2021 and for the years 2021 and 2020

For highly depleted licence areas in Group 3 of TAI a 20% discount will be applied to the 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 (hereinafter TAI) from the crude oil and gas condensate production has been implemented for certain licence 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 licence area. For crude oil production subject to TAI, a special mineral extraction tax rate (in US dollars per barrel) is applied which equals to 50% of the difference between Urals oil price and $15 less the enacted export duty rate. From September 2021, Damper Factors are added to this special mineral extraction tax rate.

TAI is implemented for five groups of licence areas. In Group 1, LUKOIL has nineteen licence 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 licence areas with brownfields in West Siberia that adopted TAI regime as of 1 January 2019, as well as 105 licence areas with depleted reserves in different regions transferred to TAI regime in 2021. In Group 4, LUKOIL has two licence areas with greenfields in West Siberia and five licence areas in Timan-Pechora added in 2021. LUKOIL has licence areas neither in Group 2 nor in Group 5 of the TAI regime.

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)

Year	2024 and 2020	2021	2022	2023
Adjusting factor	0.667	0.500	0.333	0.167

The rate for a 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 lead to sizeable impact on our financial results in the periods of high oil price volatility. As a result of the tax manoeuvre, the lag effect is migrating from the export duty to the mineral extraction tax.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(US dollars per barrel)
Urals price (Argus)........................................	78.17	69.10	9.8	5.3	69.10	-
Export duty on crude oil ...................................	9.66	8.10	9.2	11.6	8.10	11.6
Mineral extraction tax on crude oil.........................	42.19	35.84	7.3	6.3	35.6	-
Net Urals price¹...........................................	26.32	25.16	5.3	6.3	29.0	-
Export duty lag effect......................................	0.31	0.50	>100	25.70	0.50	24.16
Mineral extraction tax lag effect...........................	71.19	41.39	>100	24.39	1.778	28.8
Net Urals price¹ assuming no lag ..........................	0.07	0.07	-	0.50	-	-
(rubles per barrel)²
Urals price (Argus)........................................	5,676	5,089	8.5	70.4	597	-
Export duty on crude oil ...................................	701	453	7.7	31.8	1,380	-
Mineral extraction tax on crude oil.........................	3,064	2,986	10.3	18.55	1,792	28.8
Net Urals price¹...........................................	1,911	1,802	6.0	(0.39)	1,380	-
Export duty lag effect......................................	23	5	>100	(0.20)	1,792	-
Mineral extraction tax lag effect...........................	5,231	651	>100	25.70	1,865	28.8
Net Urals price¹ assuming no lag ..........................	6.31	5.63	12.2	6.97	-	-

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 licence 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 greenfields located in the Caspian Sea, the offshore greenfields in the Baltic Sea as well as licence areas included into 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.

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-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
2021 tax formulas
Standard ..............................................	23.5	5.7	29.2	58.3
Yu. Korchagin field ...................................	13.2	5.7	18.9	37.8
V. Filanovsky field ...................................	7.5	5.7	15.0	30.0
D41 field...............................................	15.0	5.7	20.9	41.9
V. Vinogradov and Imilorskoye fields...................	5.7	0.0	11.4	22.8
New fields with reserves below 5 million tonnes........	0.0	0.0	0.0	0.0
Tyumen deposits........................................	15.0	7.5	22.5	45.0

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 licence 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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(US dollars per thousand cubic meters)¹
Nakhodkinskoye field ....................	6.50	6.42	1.2	6.31	5.63	12.2
Pyakyakhinskoye field ...................	5.40	5.23	3.3	6.56	6.97	(5.9)

¹ Translated from rubles using average exchange rate for the period.# Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per thousand cubic meters)
Nakhodkinskoye field ..........................................................	472	392	-	465	503	(4.0)
Pyakyakhinskoye field .........................................................	472	384	2.1	483	406	14.5

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.

	2020 and further
Multiplier for:
Gasolines, diesel fuel and other light and middle distillates........................................	0.30
Straight-run gasoline .................................................................................	0.55
Fuel oil ..............................................................................................	1.00

Refined products exported to member countries of the Customs Union are not subject to export duties.

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.

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 2021 and for the years 2021 and 2020

In other countries where the Group operates, excise taxes are paid by either producers or retailers depending on the local legislation. Excise tax 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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per tonne)
Gasoline (below Euro-5) ........................	13,624	13,624	-	13,624	13,100	4.0
Gasoline (Euro-5)...............................	13,262	13,262	-	13,262	12,752	4.0
Diesel fuel ....................................	9,188	9,188	-	9,188	8,835	4.0
Motor oils......................................	5,841	5,841	-	5,841	5,616	4.0
Middle distillates*.............................	9,938	9,938	-	10,595	14,524	(27.1)

*Excise tax rates for middle distillates after 1 April 2020 are calculated by formula.

Established excise tax rates are listed below.

	2021	2022	2023	2024
(rubles per tonne)
Gasoline (below Euro-5) ........................	14,169	13,793	14,736	14,345
Gasoline (Euro-5)...............................	13,624	13,262	12,921	12,569
Diesel fuel ....................................	9,938	9,556	10,336	9,900
Motor oils......................................	6,571	6,318	6,075	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 product 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 it also includes an investment factor. The damper coefficient is calculated by multiplying the respective Compensation Coefficients and a difference between gasoline and diesel fuel export netbacks at North-Western Russia delivery basis and Fixed benchmarks. When the damper coefficient is positive, it is payable by the Government to the refinery, and vice versa. In 2021, the damper coefficient formula was amended which resulted in an increase in damper coefficient for gasoline from 1 May 2021 and for diesel fuel from 1 January 2022. 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 multiplier depends on the refinery’s geography. In March 2021, the Company signed an agreement with the Government according to which it is eligible for the investment factor in relation to the project for construction of a delayed coker unit at Nizhny Novgorod refinery starting from 2021. In August 2021, the Company signed similar agreement in relation to the project for construction of a catalytic cracker unit at Perm refinery, the investment factor is applied starting from December 2021. For both projects the investment factor will be applied until 1 January 2031.

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 2021 and for the years 2021 and 2020

The Fixed benchmarks and Compensation Coefficients are presented in the tables below:

	January - April 2020	May - December 2021	2021	2022	2023	2024
(rubles per tonne)
Fixed benchmark for gasoline...............................	53,600	56,300	52,300	55,200	56,900	58,650
Fixed benchmark for diesel fuel ...........................	48,300	50,700	50,700	52,250	53,850	55,500

	2020 and further
Compensation coefficient for gasoline .....................	0.68
Compensation coefficient for diesel fuel ....................	0.65

The following tables present the average enacted damper coefficients for the respective periods:

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(US dollars per tonne)¹
Gasoline .................................	240.53	214.26	12.3	165.83	(89.65)	-
Diesel fuel ..............................	151.87	94.10	61.4	81.39	(78.06)	-

¹ Translated from rubles using average exchange rate for the period.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per tonne)
Gasoline .................................	17,464	15,743	10.9	12,214	(6,468)	-
Diesel fuel ..............................	11,027	6,914	59.5	5,995	(5,632)	-

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.

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 2021 and for the years 2021 and 2020

The following table sets forth the changes in the average tariffs charged by the state-controlled transportation service providers in Russia.

	Q4 2021 to Q3 2021	2021 to 2020
Transneft (crude oil)..............................................
Russian Railways (crude oil and refined products)..................

Reserves base

The tables below summarise 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 2021 and 2020.

	Changes in 2021 Extensions, discoveries and changes in structure	Revision of previous estimates	31 December 2021	31 December 2020	Production(1)
(hydrocarbons, millions of BOE)
West Siberia ........................	2,156	163	7,884	7,796	(323)
Timan-Pechora .......................	1,116	208	2,403	2,461	(116)
Ural region .........................	163	1,484	2,156	2,187	(127)
Volga region ........................	99	15,268	1,116	1,132	(89)
Other in Russia .....................	223	6,057	208	208	(11)
Outside Russia ......................	70	2,851	1,484	1,484	(136)
Proved oil and gas reserves ......	223	15,268	15,385	15,268	(802)
Probable oil and gas reserves .......	75	6,057	5,581	5,581	(136)
Possible oil and gas reserves .......	61	2,851	2,802	2,802	(136)

¹ Gas production shown before own consumption.

	Changes in 2021 Extensions, discoveries and changes in structure	Revision of previous estimates	31 December 2021	31 December 2020	Production(2)
(crude oil, millions of barrels)
West Siberia ........................	756	207	5,789	5,722	(258)
Timan-Pechora .......................	504	207	2,278	2,329	(105)
Ural region .........................	191	11,572	2,030	2,044	(118)
Volga region ........................	92	4,544	756	766	(80)
Other in Russia .....................	19	1,663	207	207	(10)
Outside Russia ......................	64	504	504	504	(41)
Proved oil reserves ...............	191	11,572	11,572	11,692	(612)
Probable oil reserves ...............	40	4,544	4,105	4,105	(146)
Possible oil reserves ...............	12	1,663	679	679	(31)

	Changes in 2021 Extensions, discoveries and changes in structure	Revision of previous estimates	31 December 2021	31 December 2020	Production(1)
(gas, billions of cubic feet)
West Siberia ........................	12,444	194	12,572	12,572	(391)
Timan-Pechora .......................	(391)	41	750	750	(66)
Ural region .........................	(66)	34	858	858	(53)
Volga region ........................	(53)	39	2,198	2,198	(55)
Other in Russia .....................	(55)	-	6	6	(3)
Outside Russia ......................	(3)	69	67	67	13
Proved gas reserves ...............	194	792	16,451	16,451	(568)
Probable gas reserves ...............	6	2,198	5,879	5,905	(1,136)
Possible gas reserves ...............	13	858	2,159	2,927	(568)

¹ Gas production shown before own consumption.

The Company’s proved hydrocarbon reserves at 31 December 2021 amounted to 15.3 billion BOE and comprised of 11.6 billion barrels of crude oil and 22.2 trillion cubic feet of gas. The proved reserves replacement ratio at the Company's projects in Russia totaled 109% in 2021, including 109% for liquids and 108% for gas.

As a result of geological exploration and production drilling conducted in 2021, LUKOIL added 501 million BOE to proved reserves, which is 8% higher year-on-year. The largest contribution was made by the assets in West Siberia, Ural region, Timan-Pechora, as well as in the Baltic and Caspian Seas. The conversion of contingent resources to reserves added 40 million BOE to proved reserves. The reserves dynamics was negatively affected by reserves revision for the international projects which are based on production sharing agreements or service contracts due to an increase in annual average crude oil price.

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 32 “Segment information” to our consolidated financial statements.

Exploration and production

The following table summarises key figures on our Exploration and production segment:

	Q4 2021	Q3 2021	Change, %	12 months of 2021	Change, %	2020
(millions of rubles)
EBITDA...............................................................	296,522	245,036	21.0	986,255	97.2	821,914
in Russia............................................................	234,633	206,932	13.4	500,081	95.0	121,010
outside Russia and Iraq .............................................	44,316	30,366	45.9	421,573	>100	43,331
in Iraq..............................................................	17,573	7,738	>100	46,512	35.4	4,178
Hydrocarbon extraction expenses......................................	54,073	51,235	5.5	204,557	2.8	198,911
in Russia............................................................	43,457	40,817	6.5	162,453	2.6	158,328
outside Russia and Iraq .............................................	6,438	6,231	3.3	25,616	9.6	23,371
in Iraq..............................................................	51,235	40,817	25.2	16,488	(4.2)	17,212
(rubles per BOE)
Hydrocarbon unit extraction expenses (excluding Iraq)................	242	245	(1.2)	244	(1.2)	247
in Russia............................................................	249	248	0.4	246	1.2	243
outside Russia and Iraq .............................................	203	203	0.0	235	(16.8)	282
(US dollars per BOE)
Hydrocarbon unit extraction expenses (excluding Iraq)................	3.33	3.32	0.3	3.31	3.2	3.36
in Russia............................................................	3.43	3.37	1.8	3.33	3.9	3.91
outside Russia and Iraq .............................................	2.79	3.1	(10.0)	3.19	(18.5)	3.91

Our upstream EBITDA increased by 21.0% compared to the third quarter of 2021. In Russia, EBITDA increased by 13.4% quarter-on-quarter mainly as a result of higher crude oil prices and production volumes, higher positive export duty lag effect, as well as prior periods’ extraction tax recalculation. Outside Russia and Iraq, our EBITDA increased by 45.9% mainly as a result of an increase in hydrocarbon prices and higher gas production volumes.

Compared to the full year 2020, our upstream EBITDA increased almost two-fold. In Russia, the increase was mainly a result of higher crude oil prices, positive export duty lag effect, higher crude oil production volumes, and the ruble depreciation, although these factors were partially offset by elimination of tax incentives for high-viscous crude oil. Outside Russia and Iraq, our upstream EBITDA increased mainly due to higher hydrocarbon prices, higher natural gas production volumes and the ruble depreciation. The dynamics of EBITDA of the West Qurna-2 project was mainly a result of changes in incurred costs and their compensation.

The following table summarises our daily hydrocarbon production by major regions.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	Change, %	2020
(thousand BOE per day)
Crude oil and natural gas liquids
Consolidated subsidiaries
West Siberia.....................
## Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

Crude oil production by major regions is presented in the table below.

	Q4 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	2020 (thousands of tonnes)	Change, %
West Siberia ...	9,300	8,658	7.4	34,157	32,448	5.3
Timan-Pechora...	3,732	3,673	1.6	14,287	14,102	1.3
Ural region ...	4,038	3,825	5.6	15,094	14,565	3.6
Volga region...	2,578	2,686	(4.0)	10,467	10,339	1.2
Other in Russia...	351	358	(2.0)	1,424	1,486	(4.2)
Crude oil produced in Russia ...	20,000	19,199	4.2	75,429	72,940	3.4
Iraq¹...	488	271	80.1	1,828	2,843	(35.7)
Other outside Russia...	596	430	38.6	2,088	2,256	(7.4)
Crude oil produced outside Russia ...	1,084	701	54.6	3,916	5,099	(23.2)
Total crude oil produced by consolidated subsidiaries...	21,083	19,901	5.9	79,345	78,039	1.7
Our share in crude oil produced by associates and joint ventures:
in Russia...	120	104	15.4	503	519	(3.1)
outside Russia...	382	269	42.0	1,328	1,491	(10.9)
Total crude oil produced...	21,585	20,274	6.5	81,176	80,049	1.4

¹ Compensation crude oil related to the Group.

Our main oil producing region is West Siberia where we produced 44.1% and 43.0% of our crude oil in the fourth quarter and the full year 2021 (43.5% in the third quarter of 2021 and 41.6% in the full year 2020). Our crude oil production increased by 6.5% compared to the third quarter of 2021 and by 1.4% compared to the full year 2020. The dynamics of our crude oil production volumes in Russia since the beginning of 2017 has been driven by external limitations due to agreements of OPEC and some of the non-OPEC countries, including Russia, (the OPEC+ countries) to cap production levels in order to stabilise the global crude oil market. 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 2022 and its parameters are adjusted depending on the market situation. Due to the agreement, in 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. Subsequently, our crude oil production in Russia has been gradually recovering. As a result, in the fourth quarter of 2021, crude oil production by the Group in Russia was approximately 270 thousand barrels per day higher than the May 2020 level and in 2021 it exceeded the level of 2020. The new OPEC+ agreement also led to limitations on oil production by the Group at certain international projects. Despite external limitations on production volumes, development of the priority projects continued. In particular, in West Siberia total crude oil and gas condensate production at the V. Vinogradov, Imilorskoye, Sredne-Nazymskoye and Pyakyakhinskoye fields increased in 2021 by 8.1% year-on-year, to 4.5 million tonnes.

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 2021 (millions of cubic meters)	Q3 2021 (millions of cubic meters)	Change, %	12 months of 2021 (millions of cubic meters)	2020 (millions of cubic meters)	Change, %
West Siberia, including: ...	2,691	2,659	1.2	11,082	12,592	(12.0)
Nakhodkinskoye field ...	1,025	1,026	(0.1)	4,334	5,376	(19.4)
Pyakyakhinskoye field ...	740	750	(1.3)	3,113	3,599	(13.5)
Other fields...	926	883	4.9	3,635	3,617	0.5
Timan-Pechora...	477	463	3.0	1,826	1,810	0.9
Ural region ...	400	331	20.8	1,502	1,451	3.5
Volga region...	375	402	(6.7)	1,549	1,593	(2.8)
Other in Russia...	3	3	-	11	17	(35.3)
Gas produced in Russia...	3,946	3,858	2.3	15,970	17,463	(8.5)
Uzbekistan...	3,655	2,944	24.2	12,420	7,947	56.3
Other outside Russia...	851	713	19.4	3,053	2,861	6.7
Gas produced outside Russia...	4,506	3,657	23.2	15,473	10,808	43.2
Total gas produced by consolidated subsidiaries..	8,452	7,515	12.5	31,443	28,271	11.2
Our share in gas produced by associates and joint ventures:
in Russia...	30	28	7.1	135	115	17.4
outside Russia...	177	123	43.9	598	619	(3.4)
Total gas produced...	8,659	7,666	13.0	32,176	29,005	10.9

² Natural and petroleum gas production excluding flaring, reinjected gas and gas used in production of natural gas liquids.

In the fourth quarter and the full year 2021, LUKOIL Group's gas production was 8.7 billion cubic meters and 32.2 billion cubic meters, which was 13.0% higher quarter-on-quarter, and 10.9% higher year-on-year. In Russia, our major gas production region is Bolshekhetskaya depression in West Siberia, where gas is produced mainly from the Nakhodkinskoye and Pyakyakhinskoye fields. Our gas production in Russia increased by 2.3% compared to the third quarter of 2021, and decreased by 8.5% compared to the full year 2020 mainly as a result of natural production decline at our Nakhodkinskoye field.

Other Production Data

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Consolidated subsidiaries
West Siberia...........................................................	761	704	7.9	3,000	2,800	7.1
Timan-Pechora ...........................................................	300	281	6.8	1,130	1,050	7.6
Ural region ...............................................................	344	323	6.5	1,280	1,180	8.5
Volga region.............................................................	214	219	(2.3)	800	780	2.6
Other in Russia ...........................................................	27	28	(3.6)	100	110	(9.1)
Total in Russia ...........................................................	1,646	1,555	5.9	6,310	5,920	6.6
Iraq¹..................................................................	36	34	5.9	140	130	7.7
Other outside Russia ........................................	57	50	14.0	210	200	5.0
Total outside Russia..............................................	93	84	10.7	350	330	6.1
Total consolidated subsidiaries..........................	1,739	1,639	6.1	6,660	6,250	6.6
Our share in associates and joint ventures
in Russia...........................................................	710	669	6.1	2,840	2,700	5.2
outside Russia ...................................................	284	274	3.6	1,136	1,096	3.7
Total share in production of associates and joint ventures..	325	323	0.6	1,273	1,251	1.8
Total crude oil and natural gas liquids..................	2,064	1,962	5.2	7,933	7,501	5.8
Natural and petroleum gas²
Consolidated subsidiaries
West Siberia.................................................	172	170	1.2	688	669	2.8
Timan-Pechora ............................................	31	30	3.3	124	116	6.9
Ural region...................................................	26	21	23.8	104	80	30.0
Volga region...................................................	24	26	(7.7)	96	104	(7.7)
Other in Russia .............................................	0	0	-	0	0	-
Total in Russia ....................................................	253	247	2.4	1,012	969	4.4
Uzbekistan...................................................	234	188	24.5	936	576	62.5
Other outside Russia....................................	54	46	17.4	216	176	22.7
Total outside Russia .........................................	288	234	23.1	1,152	752	53.2
Total consolidated subsidiaries..........................	541	481	12.5	2,164	1,721	25.7
Share in associates and joint ventures
in Russia...........................................................	1	1	-	4	4	-
outside Russia ..................................................	11	8	37.5	44	40	10.0
Total share in production of associates and joint ventures..	12	9	33.3	52	44	18.2
Total natural and petroleum gas............................	553	490	12.9	2,216	1,765	25.5
Total daily hydrocarbon production (excluding the West Qurna-2 project)	2,197	2,117	3.8	8,876	7,991	11.1
Total daily hydrocarbon production......................	2,197	2,117	3.8	8,876	7,991	11.1
Including natural gas liquids produced at the gas processing plants	39	35	11.4	155	130	19.2

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.# Management’s Discussion and Analysis of Financial Condition and Results of Operations

Outside Russia, the main gas production region is Uzbekistan where we have shares in two PSAs. Quarter-on-quarter, our international gas production (including our share in associates’ production) increased by 23.9%. The increase was mainly attributable to higher production volumes in Uzbekistan. Our international gas production increased by 40.6% year-on-year mainly as a result of recovery of gas production in Uzbekistan after temporary decline in 2020 due to 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 is limited due to the OPEC+ agreement. In the fourth quarter of 2021, average daily production at the field was approximately 20 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 recognised in Property, plant and equipment. Extraction expenses are recognised 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 recognised, capitalised costs are amortised.

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Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

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 recognised 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 recognised 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 recognised in Sales. Unsold crude oil and refined products are recognised in Inventories.

The following table summarises data on capital and operating costs incurred, compensation crude oil received, costs yet unrecovered and remuneration fee.

	Costs incurred¹ (millions of US dollars)	Remuneration fee (millions of US dollars)	Crude oil received (millions of US dollars)	Crude oil to be received (millions of US dollars)
Cumulative at 31 December 2020	9,778	675	9,868	585
Change in 2021	1,057	240	915	938
Cumulative at 31 December 2021	10,835	915	10,783	1,523

¹ Including prepayments.

The West Qurna-2 project summary is presented below:

	Q4 2021 (thousand barrels)	Q3 2021 (thousand tonnes)	Change, %	Q4 2021 (thousand tonnes)	Q3 2021 (thousand barrels)	Change, %
Total production	35,196	4,663	10.4	5,146	31,899	10.4
Production related to cost compensation and remuneration	1,988	488	80.1	291	1,853	80.1
Shipment of compensation crude oil¹	3,343	542	(46.3)	3,709	2,777	(46.3)

	Q4 2021 (millions of rubles)	Q4 2021 (millions of US dollars)	Q3 2021 (millions of rubles)	Q3 2021 (millions of US dollars)	Change, %	Change, %
Cost compensation	20,136	277	9,561	130	>100	10.8
Remuneration fee	2,219	30	2,002	27	>100	11.1
Cost of compensation crude oil, received as liability settlement (included in Cost of purchased crude oil, gas and products)¹	22,355	307	11,563	157	>100	>100
Extraction expenses	11,422	158	20,314	276	(42.8)	1.8
Depreciation, depletion and amortisation	4,178	58	4,187	57	(0.2)	>100
EBITDA	16,000	221	7,738	104	>100	>100

¹ This crude oil is sold to third party customers or delivered to our refineries. After realisation of these products, respective sales revenues are recognised.

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Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

	12 months of 2021 (thousand barrels)	2020 (thousand tonnes)	Change, %	12 months of 2021 (thousand tonnes)	2020 (thousand barrels)	Change, %
Total production	124,295	18,172	2.2	18,566	126,991	2.2
Production related to cost compensation and remuneration	13,439	1,828	(35.7)	1,965	19,447	(35.7)
Shipment of compensation crude oil¹	18,996	2,843	(29.2)	2,777	19,447	(29.2)

	12 months of 2021 (millions of rubles)	12 months of 2021 (millions of US dollars)	2020 (millions of rubles)	2020 (millions of US dollars)	Change, %	Change, %
Cost compensation	52,119	709	60,170	818	22.3	4.6
Remuneration fee	8,051	109	7,694	107	1.9	16.2
Cost of compensation crude oil, received as liability settlement (included in Cost of purchased crude oil, gas and products)¹	10,754	146	8,859	121	21.4	20.7
Extraction expenses	69,237	939	45,428	626	52.4	50.0
Depreciation, depletion and amortisation	16,488	224	17,212	239	(4.2)	(6.3)
EBITDA	35,728	487	31,996	450	11.7	15.5

¹ This crude oil is sold to third party customers or delivered to our refineries. After realisation of these products, respective sales revenues are recognised.

Refining, marketing and distribution

The following table summarises key figures on our Refining, marketing and distribution segment:

	Q4 2021 (millions of rubles)	Q3 2021 (millions of rubles)	Change, %	12 months of 2021 (millions of rubles)	2020 (millions of rubles)	Change, %
EBITDA	114,380	125,757	(9.0)	487,294	243,322	>100
in Russia	111,181	107,875	3.1	370,683	180,753	>100
outside Russia	3,199	17,882	(82.1)	116,611	62,569	86.4
Refining expenses at the Group refineries	39,825	32,171	23.8	129,093	92,613	39.4
in Russia	14,836	13,383	10.9	52,751	42,614	23.8
outside Russia	24,989	18,788	33.0	76,342	49,999	52.7
Unit refining expenses at the Group refineries (rubles per tonne)	2,573	1,860	38.4	2,050	1,580	29.8
in Russia	1,359	1,188	14.4	1,238	1,062	16.5
outside Russia	5,483	3,116	76.0	3,753	2,703	38.8
Unit refining expenses at the Group refineries (US dollars per tonne)	35.44	25.31	40.0	27.84	21.90	27.1
in Russia	18.71	16.16	15.8	16.81	14.73	14.1
outside Russia	75.51	42.41	78.1	50.95	37.46	36.0

Our refining, marketing and distribution EBITDA was 9.0% lower compared to the third quarter of 2021. At the same time, in Russia, refining, marketing and distribution EBITDA increased by 3.1% quarter-on-quarter largely due to better results of refineries, as well as a seasonal increase in profitability of our power generating business. Outside Russia, our refining, marketing and distribution EBITDA decreased by 82.1% mainly due to maintenance works and higher energy costs at our refineries, lower profitability of our trading business, as well as seasonally weaker results of our retail business. Negative impact of these factors was partially offset the accounting specifics of our international trading operations and higher positive inventory effect at our refineries.

Compared to the full year 2020, our refining, marketing and distribution EBITDA increased more than two-fold. In Russia, our downstream EBITDA increased largely due to higher refining margins and throughput volumes, bigger positive inventory effect at our refineries and stronger results of petrochemical business. This was partially offset by weaker results of our retail business. Outside Russia, our downstream EBITDA increased significantly owing to a change in inventory effect at our refineries, better results of our retail business, higher refinery throughput volumes, as well as the accounting specifics of our international trading operations.

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Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

Refining and petrochemicals

The following table summarises key figures for our refining and petrochemical volumes.

	Q4 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	2020 (thousands of tonnes)	Change, %
Refinery throughput at the Group refineries	24,798	25,207	(1.6)	98,093	92,408	6.2
in Russia	15,537	15,696	(1.0)	61,109	57,209	6.8
outside Russia	9,261	9,511	(2.6)	36,984	35,199	5.1

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 purchased 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 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	12 months of 2020 (thousands of tonnes)	Change, %
Crude oil purchases
In Russia...	331	318	4.1	1,233	704	75.1
For trading internationally...	15,248	17,964	(15.1)	57,462	51,678	11.2
For refining internationally ...	3,265	4,489	(27.3)	16,002	13,241	20.9
Shipment of the West Qurna-2 compensation crude oil...	291	542	(46.3)	1,965	2,777	(29.2)
Total crude oil purchased...	19,135	23,313	(17.9)	76,662	68,400	12.1

The table below summarises figures for our refined products and petrochemicals marketing and trading activities.

	Q4 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	12 months of 2020 (thousands of tonnes)	Change, %
Refined products purchases
In Russia...	278	305	(8.9)	1,083	730	48.4
For trading internationally...	12,222	11,526	6.0	46,260	49,455	(6.5)
For refining internationally ...	276	542	(49.1)	1,686	1,558	8.2
Total refined products purchased ...	12,776	12,373	3.3	49,029	51,743	(5.2)
Petrochemical products purchases
In Russia...	35	29	20.7	134	97	38.1
For trading internationally...	134	196	(31.6)	662	771	(14.1)
For refining internationally ...	45	45	-	175	135	29.6
Total petrochemical products purchased ...	214	270	(20.7)	971	1,003	(3.2)

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 summarised as follows:

	Q4 2021 (millions of rubles)	Q3 2021 (millions of rubles)	Change, %	12 months of 2021 (millions of rubles)	12 months of 2020 (millions of rubles)	Change, %
Exports of crude oil to Customs Union ...	13,336	18,032	(26.0)	62,052	29,913	>100
Exports of crude oil beyond Customs Union...	329,486	263,044	25.3	584,474	614,387	(4.9)
Total crude oil exports ...	342,822	281,076	22.0	646,526	644,300	0.3

	Q4 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	12 months of 2020 (thousands of tonnes)	Change, %
Exports of crude oil to Customs Union ...	375	559	(32.9)	1,988	1,779	11.7
Exports of crude oil beyond Customs Union...	8,078	6,926	16.6	29,009	30,330	(4.4)
Total crude oil exports ...	8,453	7,485	12.9	30,997	32,109	(3.5)

	Q4 2021	Q3 2021	Change, %	12 months of 2021	12 months of 2020	Change, %
Exports of crude oil through Transneft, excluding ESPO pipeline........................	4,998	3,998	25.0	16,806	18,440	(8.9)
ESPO pipeline............................................................................	699	600	16.5	2,857	1,739	64.3
CPC pipeline .............................................................................	1,461	1,537	(4.9)	5,889	5,317	10.8
Exports of crude oil through the Group’s transportation infrastructure .................	1,295	1,350	(4.1)	5,445	6,613	(17.7)
Total crude oil exports ............................................................	8,453	7,485	12.9	30,997	32,109	(3.5)
Supply of exported crude oil to refineries .............	422	711	(40.6)	1,924	3,131	(38.5)

	Q4 2021 (millions of rubles)	Q3 2021 (millions of rubles)	Change, %	12 months of 2021 (millions of rubles)	12 months of 2020 (millions of rubles)	Change, %
Refined and petrochemical products exports...	200,335	176,388	13.6	731,955	419,665	74.4

	Q4 2021 (thousands of tonnes)	Q3 2021 (thousands of tonnes)	Change, %	12 months of 2021 (thousands of tonnes)	12 months of 2020 (thousands of tonnes)	Change, %
Refined products exports diesel fuel...
gasoline...
fuel oil...
jet fuel ...
outside Russia, including... crude oil ... refined products... Refinery throughput at third party refineries ... Total refinery throughput...	15,478	10,920	(24.4)	62,959	58,608	7.4
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 ...	10,345	4,386	(3.5)	40,423	38,090	6.1
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 ...	4,466	2,015	(22.2)	19,592	16,874	16.1
Refined products produced by the Group... Refined products produced at third party refineries .. Total refined products produced...
Reference: Net of cross-supplies of refined products between the Group refineries...	559	456	22.6	1,760	1,397	26.0
Products produced at petrochemical plants and facilities ... in Russia ... outside Russia...	236	168	(19.5)	1,134	825	37.5

¹ Net of cross-supplies of refined products among the Group.

In the fourth quarter and the full year 2021, refinery throughput at the Group refineries was 15.5 million tonnes and 63.0 million tonnes, respectively, which is 10.5% lower compared to the third quarter of 2021 and 7.4% higher compared to the full year 2020. Compared to the previous quarter, refinery throughput volumes decreased by 3.1% in Russia due to seasonal throughput optimisation and by 24.4% outside Russia mainly due to scheduled maintenance works. Compared to the full year 2020, refinery throughput volumes increased by 6.3% in Russia and by 10.0% outside Russia mainly as a result of higher refineries utilisation rates due to better market environment in 2021, as well as scheduled maintenance works in 2020. In 2020, we processed our crude oil at third party refineries in Belarus and Kazakhstan.# Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2021 (millions of rubles)	Q3 2021 (millions of rubles)	Change, %	12 months of 2021 (millions of rubles)	12 months of 2020 (millions of rubles)	Change, %
Revenues
Sales (including excise and export tariffs)	2,768,031	2,588,745	6.9	9,435,143	5,639,401	67.3
Costs and other deductions
Operating expenses	(1,667,146)	(1,574,170)	5.9	(5,484,824)	(3,000,916)	82.8
Cost of purchased crude oil, gas and products	(139,915)	(128,314)	9.0	(291,135)	(292,899)	(0.6)
Transportation expenses	(509,192)	(439,973)	15.7	(1,308,882)	(569,078)	130.0
Selling, general and administrative expenses	(215,190)	(199,027)	8.1	(425,466)	(405,440)	4.9
Depreciation, depletion and amortisation	(77,099)	(70,906)	8.6	(392,326)	(351,395)	11.6
Taxes other than income taxes	(59,323)	(55,466)	7.0	(214,433)	(444,300)	(51.7)
Excise and export tariffs	(97,835)	(107,403)	(8.9)	(405,440)	(425,466)	(4.7)
Exploration expenses	(33,195)	(4,014)	>100	(52,142)	(1,176)	>100
Profit from operating activities	297,178	247,773	19.9	978,945	281,654	247.6
Finance income	7,013	4,641	51.1	16,519	13,051	26.6
Finance costs	(9,682)	(9,246)	4.7	(37,568)	(44,122)	(14.9)
Equity share in income of associates and joint ventures	10,146	6,722	50.9	29,980	11,474	161.5
Foreign exchange gain (loss)	5,812	(661)	>100	2,731	(26,110)	>100
Other expenses	(14,640)	(7,061)	>100	(23,643)	(137,160)	(82.8)
Profit before income taxes	295,827	242,168	22.2	966,964	98,787	879.4
Current income taxes	(41,980)	(48,928)	(14.2)	(163,807)	(61,362)	167.0
Deferred income taxes	(19,816)	(121)	>100	(20,792)	(82,154)	(74.7)
Total income tax expense	(61,796)	(49,049)	26.0	(184,600)	(143,516)	28.6
Profit for the period	234,031	193,119	21.2	775,513	16,633	>100
Profit for the period attributable to:
PJSC LUKOIL shareholders	233,790	192,475	21.5	773,442	15,175	>100
Non-controlling interests	241	644	(62.6)	2,071	1,458	42.0

Earnings per share

	Q4 2021 (in Russian rubles)	Q3 2021 (in Russian rubles)	Change, %	12 months of 2021 (in Russian rubles)	12 months of 2020 (in Russian rubles)	Change, %
Profit for the period attributable to PJSC LUKOIL shareholders per share of common stock:
Basic	358.59	294.98	21.6	1,185.60	23.31	>100
Diluted	340.38	280.63	21.3	1,129.17	22.46	>100

The analysis of the main financial indicators of the financial statements is provided below.

Sales Revenues

	Q4 2021 (millions of rubles)	Q3 2021 (millions of rubles)	Change, %	12 months of 2021 (millions of rubles)	12 months of 2020 (millions of rubles)	Change, %
Crude oil
Export and sales on international markets other than Customs Union	1,026,888	960,495	6.9	3,407,562	1,838,509	85.3
Export and sales to Customs Union	18,083	25,735	(26.6)	62,225	86,338	(27.9)
Domestic sales	13,275	25,089	(47.1)	30,137	23,522	28.1
Cost compensation and remuneration at the West Qurna-2 project	22,355	11,563	93.3	60,170	50,298	19.6
Total crude oil	1,070,501	1,022,882	4.7	3,560,094	1,998,667	78.1
Refined products
Export and sales on international markets
Wholesales	1,133,224	1,018,830	11.2	3,849,715	2,245,940	71.4
Retail	110,394	114,436	(3.5)	411,969	303,021	35.9
Domestic sales
Wholesales	161,924	138,311	17.1	534,789	340,320	57.1
Retail	162,489	141,528	14.8	508,278	445,343	14.1
Total refined products	1,568,031	1,413,105	11.0	5,304,751	3,334,624	59.1
Petrochemicals
Export and sales on international markets	18,997	14,458	31.4	43,362	36,386	19.2
Domestic sales	15,235	28,127	(45.8)	57,036	58,685	(2.8)
Total petrochemicals	34,232	42,585	(19.6)	100,398	95,071	5.6
Gas
Sales on international markets	2,205	2,274	(3.0)	9,232	9,716	(5.0)
Domestic sales	65	3	>100	166	654	(74.6)
Total gas	2,270	2,277	(0.3)	9,398	10,370	(9.4)
Other products	822	962	(14.6)	3,265	1,916	70.4
Total refined products exports	4,237	4,092	3.5	17,572	17,921	(1.9)
Total petrochemicals exports	445	388	14.7	1,480	1,592	(7.0)

The volume of our crude oil exports from Russia increased by 12.9% compared to the third quarter of 2021 as a result of higher production and lower domestic refinery throughput volumes, and decreased by 3.5% compared to the full year 2020 due to an increase in domestic refinery throughput. In the fourth quarter and the full year 2021, we exported 42.3% and 41.1% of our domestic crude oil production, respectively (39.0% in the third quarter of 2021 and 44.0% in the full year 2020). The volume of our refined products exports increased by 3.5% compared to the third quarter of 2021 and decreased by 1.9% compared to the full year 2020. The quarter-on-quarter increase was a result of lower domestic sales volumes owing to a seasonal decrease in domestic demand. 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. 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 2021, we sold 2.6 million tonnes and 9.9 million tonnes of motor fuels, respectively, via our domestic retail network, which was 3.4% lower compared to the third quarter of 2021, and 9.3% higher compared to the full year 2020. Outside Russia, retail sales decreased by 6.4% compared to the third quarter of 2021 and increased by 9.5% compared to the full year 2020. The decrease in sales volumes compared to the third quarter of 2021 was due to a seasonality factor, while the increase compared to the full year 2020 was due to lower demand in 2020 because of the consequences of the COVID-19 pandemic.

In the fourth quarter and the full year 2021, our jet fuel deliveries volume net of trading operations amounted to 1.0 million tonnes and 3.1 million tonnes, respectively, compared to 0.9 million tonnes in the third quarter of 2021 and 2.5 million tonnes in the full year 2020.

In the fourth quarter and the full year 2021, our bunkering volume net of trading operations amounted to 0.5 million tonnes and 2.1 million tonnes, respectively, compared to 0.6 million tonnes in the third quarter of 2021 and 2.7 million tonnes in the full year 2020.

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 2021, our total output of commercial electrical energy was 4.6 billion kWh and 15.8 billion kWh, respectively (3.4 billion kWh in the third quarter of 2021 and 17.1 billion kWh in the full year 2020), and our total output of commercial heat energy was approximately 3.5 million Gcal and 10.2 million Gcal (0.8 million Gcal in the third quarter of 2021 and 10.0 million Gcal in the full year 2020).# 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 2021 and for the years 2021 and 2020

Sales volumes

Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(thousands of tonnes)
Crude oil
Export and sales on international markets other than Customs Union ................................................	23,682	24,778	(3.3)	89,295	81,391
Export and sales to Customs Union.........................	375	559	(32.9)	1,992	1,799
Domestic sales.........................................................	721	798	(9.6)	2,715	1,415
Crude oil volumes related to cost compensation and remuneration at the West Qurna-2 project ........	576	358	60.9	1,750	2,843
Total crude oil	25,354	26,195	(3.2)	95,752	87,448
Refined products
Export and sales on international markets
Wholesales ..............................................................	21,288	21,020	1.3	83,081	80,095
Retail.......................................................................	1,030	1,101	(6.4)	4,016	3,667
Domestic sales
Wholesales ..............................................................	3,803	3,990	(4.7)	13,702	12,011
Retail.......................................................................	2,625	2,717	(3.4)	9,870	9,032
Total refined products	28,746	28,828	(0.3)	110,669	104,805
Petrochemicals
Export and sales on international markets ...............	200	183	9.3	1,211	1,269
Domestic sales.........................................................	156	141	10.6	707	771
Total petrochemicals	356	324	9.9	1,918	2,040
(millions of cubic meters)
Gas
Sales on international markets.................................	4,489	3,928	14.3	16,398	11,288
Domestic sales.........................................................	2,721	2,758	(1.3)	11,109	12,777
Total gas	7,210	6,686	7.8	27,507	24,065

Realised average sales prices

Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Average realised price on international markets
Crude oil (beyond Customs Union)¹..	(RUB/barrel)	5,916	5,353	10.5	5,206
Crude oil (Customs Union) ..............	(RUB/barrel)	4,829	4,413	9.4	4,262
Refined products (RUB/barrel)
Wholesales....................................	53,233	48,470	9.8	46,337	28,041
Retail.............................................	107,179	103,938	3.1	82,635	44,946
Petrochemicals ..................................	(RUB/tonne)	94,985	83,961	13.1	102,582
Gas (excluding royalty) .....................	(RUB/1,000 m3)	10,256	10,376	(1.1)	8,702
Crude oil (beyond Customs Union)¹..	($/barrel)	81.48	72.85	11.8	70.68
Crude oil (Customs Union) ..............	($/barrel)	66.52	60.06	10.7	57.86
Refined products ($/barrel)
Wholesales....................................	733	660	11.1	629	389
Retail.............................................	1,476	1,415	4.4	1,393	1,145
Petrochemicals ..................................	($/tonne)	1,308	1,143	14.5	1,138
Gas (excluding royalty) .....................	($/1,000 m3)	141	141	-	118

Average realised price within Russia | | | | |
Crude oil............................................ | (RUB/barrel) | 4,747 | 4,400 | 7.9 | 4,338 | 2,268 | 91.3
Refined products (RUB/barrel) | | | | |
Wholesales.................................... | 42,578 | 40,724 | 4.6 | 39,030 | 28,334 | 37.7
Retail............................................. | 52,690 | 52,090 | 1.2 | 51,497 | 49,307 | 4.4
Petrochemicals .................................. | (RUB/tonne) | 92,679 | 83,251 | 11.3 | 83,006 | 47,193 | 75.9
Gas² ................................................... | (RUB/1,000 m3) | 2,748 | 2,725 | 0.8 | 2,675 | 2,555 | 4.7

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.

Compared to the third quarter of 2021, our revenues were positively impacted by higher international hydrocarbon prices, an increase in crude oil production volumes as a result of further partial lifting of the external limitations under the OPEC+ agreement, an increase in refined products trading volumes and international gas production volumes. The revenue growth was restrained by a decrease in refinery throughput volumes, crude oil trading and retail sales volumes. Compared to the full year 2020, our revenues were positively impacted by an increase in international hydrocarbon prices and production volumes, refinery throughput and hydrocarbons trading volumes, the ruble depreciation, as well as higher retail sales volumes.

Sales of crude oil

Compared to the third quarter of 2021, our crude oil sales revenue in Russia decreased by 2.5%, despite of an increase in crude oil prices, mainly due to a decrease in sales volumes. Our crude oil sales revenue outside Russia increased by 6.9%, largely as a result of an increase in crude oil prices and production volumes. Compared to the full year 2020, our international crude oil sales revenue increased by 85.3%, mainly as a result of an increase in realised crude oil prices by 68.9%, as well as higher sales volumes. Our domestic crude oil sales revenue increased more than three-fold owing to an increase in realised crude oil prices by 91.3% and sales volumes by 91.9%.

Sales of refined products

Sales breakdown	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Wholesales outside Russia..........................................	1,133,224	1,018,830	11.2	3,849,715	2,245,939	71.4
diesel fuel.................................................................	392,482	373,786	5.0	1,413,726	937,614	50.8
motor gasoline..........................................................	244,924	223,935	9.4	440,292	414,171	6.3
fuel oil......................................................................	123,278	87,536	40.8	91,001	84,895	7.2
jet fuel ......................................................................	29,061	32,814	(11.4)	288,839	237,249	21.7
lubricants and components.......................................	21,143	21,754	(2.8)	192,443	110,395	74.3
gas products .............................................................	85,087	63,390	34.2	826,964	76,703	>100
others........................................................................	373,786	215,615	73.3	655,047	451,812	45.1
Retail outside Russia ..................................................	110,394	114,436	(3.5)	411,969	303,021	36.0
Wholesales in Russia ..................................................	161,924	162,489	(0.3)	534,789	340,320	57.1
diesel fuel.................................................................	53,549	48,242	11.0	162,178	110,395	46.9
motor gasoline..........................................................	21,906	25,297	(13.4)	80,873	43,959	84.0
fuel oil......................................................................	4,398	4,966	(11.4)	17,698	8,789	>100
jet fuel ......................................................................	41,802	36,410	14.8	122,467	77,138	58.8
lubricants and components.......................................	8,771	11,619	(24.5)	38,205	25,866	47.7
gas products .............................................................	162,489	5,639	>100	11,805	62,368	(81.0)
others........................................................................	3,930	27,568	(85.8)	16,763	12,567	33.4
Retail in Russia ...........................................................	138,311	141,528	(2.3)	508,278	445,343	14.1
Total refined products sales ......................................	1,543,853	1,437,283	7.4	5,304,751	3,334,623	59.1

Sales volumes

Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(thousands of tonnes)
Refined products
Wholesales outside Russia .........................................	21,288	21,020	1.3	83,081	80,096
diesel fuel ................................................................	7,202	7,461	(3.5)	29,192	29,745
motor gasoline .........................................................	4,203	3,949	6.4	15,063	13,926
fuel oil .....................................................................	3,351	2,724	23.0	13,638	20,415
jet fuel......................................................................	536	679	(21.1)	1,898	654
lubricants and components ......................................	182	168	8.3	744	1,075
gas products.............................................................	1,089	1,259	(13.5)	2,855	11,426
others.......................................................................	4,725	4,780	(1.2)	19,078	19,595
Retail outside Russia..................................................	1,030	1,101	(6.4)	4,016	3,667
motor gasoline .........................................................
gas products.............................................................
		Q4 2021	Q3 2021	Change, %	12 months of 2021
	:-----------------------------	:------	:------	:--------	:----------------
	diesel fuel ....................	1,030	1,101	(6.4)	4,016
	motor gasoline .................	715	745	(4.0)	2,759
	gas products....................	277	311	(10.9)	1,106
		38	45	(15.6)	151

Wholesales in Russia..................................................
| | Q4 2021 | Q3 2021 | Change, % | 12 months of 2021 | 2020 | Change, % |
| :----------------------------- | :------ | :------ | :-------- | :---------------- | :--- | :-------- |
| diesel fuel .................... | 3,803 | 3,990 | (4.7) | 13,702 | 12,011 | 14.1 |
| motor gasoline ................. | 1,131 | 1,076 | 5.1 | 3,633 | 2,720 | 33.6 |
| fuel oil ....................... | 474 | 521 | (9.0) | 1,737 | 1,091 | 59.2 |
| jet fuel........................ | 174 | 220 | (20.9) | 812 | 899 | (9.7) |
| lubricants and components ...... | 865 | 825 | 4.8 | 2,917 | 2,401 | 21.5 |
| gas products.................... | 76 | 93 | (18.3) | 337 | 373 | (9.7) |
| others.......................... | | 163 | (25.8) | | 121 | (10.5) |
| | | 1,092 | (11.9) | | 962 | (5.0) |

Retail in Russia...........................................................
| | Q4 2021 | Q3 2021 | Change, % | 12 months of 2021 | 2020 | Change, % |
| :----------------------------- | :------ | :------ | :-------- | :---------------- | :--- | :-------- |
| diesel fuel .................... | 2,625 | 2,717 | (3.4) | 9,870 | 9,032 | 9.3 |
| motor gasoline ................. | 1,015 | 937 | 8.3 | 3,622 | 3,450 | 5.0 |
| gas products.................... | 1,594 | 1,761 | (9.5) | 6,185 | 5,527 | 11.9 |
| | 16 | 19 | (15.8) | 63 | 55 | 14.5 |

Total refined products volumes.................................
| | Q4 2021 | Q3 2021 | Change, % | 12 months of 2021 | 2020 | Change, % |
| :----------------------------- | :------ | :------ | :-------- | :---------------- | :--- | :-------- |
| | 28,746 | 28,828 | (0.3) | 110,669 | 104,806 | 5.6 |

Compared to the third quarter of 2021 and the full year 2020, our refined products sales revenue was positively impacted by higher sales prices. Moreover, the dynamics of our revenues compared to the full year 2020 were positively impacted by the ruble depreciation.

The fourth quarter of 2021 vs. the third quarter of 2021 . . . . Our revenue from the wholesales of refined products outside Russia increased by 11.2% largely due to an increase in average realised prices by 9.8% and sales volumes by 1.3%. International retail revenue decreased by 3.5% primarily due to a seasonal decrease in sales volumes by 6.4%, despite of an increase in average realised prices by 3.1%. Revenue from the wholesales of refined products on the domestic market didn’t change significantly, an increase in average realised prices was offset by a decrease in sales volumes. Revenue from the retail sales of refined products on the domestic market decreased by 2.3%, mainly as a result of a seasonal decrease in sales volumes by 3.4%.

The full year 2021 vs. the full year 2020 . . . . Our revenue from the wholesales of refined products outside Russia increased by 71.4% mostly as a result of an increase in average realised prices by 65.2% and sales volumes by 3.7%. Our international retail revenue increased by 36.0% as a result of an increase in realised prices and sales volumes. Our revenue from the wholesales of refined products on the domestic market increased by 57.1% as a result of higher average realised prices, as well as an increase in sales volumes. Our revenue from refined products retail sales in Russia increased by 14.1% as an increase in sales volumes was amplified by an increase in average realised prices.

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 2021 and for the years 2021 and 2020

Sales of petrochemical products

Compared to the third quarter of 2021, our revenue from sales of petrochemical products decreased by 22.8%, despite of an increase in average international realised prices, mainly as a result of a decrease in trading volumes. Compared to the full year 2020, our revenue from sales of petrochemical products increased by 71.5%, mainly due to higher average realised prices.

Sales of gas

Compared to the third quarter of 2021, our revenue from gas sales increased by 10.9%, as a result of higher international production volumes. An increase in international gas production volumes and prices along with a ramp up of our gas trading activities in Europe resulted in an increase in revenue by 71.0% compared to the full year 2020. At the same time, domestic sales decreased due to lower gas production.

Sales of energy and related services

Our revenue from sales of energy and related services increased by 46.6% compared to the third quarter of 2021, mainly due to a seasonality factor in Russia, as well as an increase in electricity tariffs in Italy. Our revenue from sales of energy and related services increased by 11.7% compared to the full year 2020 due to an increase in volumes of electricity trading. Lower electricity output in Italy was offset by an increase in electricity tariffs.

Other sales

Other sales include non-petroleum sales through our retail network, transportation services, rental revenue, crude oil extraction and refining 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 2021, revenue from other sales decreased by 5.0% largely as a result of lower non-petrol revenue of our retail network due to a seasonality factor that was partially offset by higher revenue from transportation services. Compared to the full year 2020, revenue from other sales increased by 5.8% largely as a result of an increase in non-petrol revenue of our retail network that was partially offset by lower volumes of transportation services provided. Moreover, other sales revenue for 2020 included 5.9 billion RUB (approximately €68 million) of loss compensation in relation to energy supplies in Sicily, Italy in 2015.

Operating expenses

Operating expenses include the following:

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Hydrocarbon extraction expenses¹ ....................	49,895	47,048	6.1	188,069	181,699	3.5
Extraction expenses at the West Qurna-2 field..........	4,178	4,187	(0.2)	17,212	16,488	4.2
Own refining expenses .................................	39,825	32,171	23.8	92,613	50,513	83.3
Expenses for feedstock transportation to refineries..	12,464	13,971	(10.8)	51,693	31,877	62.2
Power generation and distribution expenses..............	8,813	7,553	16.7	29,991	16,587	80.8
Petrochemical expenses..................................	5,243	4,388	19.5	12,731	7,656	66.3
Other operating expenses ...............................	19,497	18,996	2.6	54,034	50,919	6.1
Total operating expenses................................	139,915	128,314	9.0	439,973	300,159	46.6

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 32 “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.

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 2021 and for the years 2021 and 2020

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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Hydrocarbon extraction expenses..........	49,895	47,048	6.1	188,069	181,699	3.5
in Russia ................................	43,457	40,817	6.5	162,453	158,328	2.6
outside Russia¹...........................	6,438	6,231	3.3	25,616	23,371	9.6

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(rubles per BOE)
Hydrocarbon unit extraction expenses.......	242	249	(1.2)	244	243	0.4
in Russia ................................	203	203	0.0	203	203	0.0
outside Russia¹...........................	245	244	0.4	245	243	0.8

¹ Excluding extraction expenses at the West Qurna-2 field.

Compared to the third quarter of 2021, our extraction expenses in Russia increased by 6.5% due to crude oil production growth, a seasonal increase in energy consumption and technological transport cost. At the same time, unit extraction expenses increased by 1.9%. Outside Russia, our extraction expenses increased by 3.3%. An increase in expenses related to gas production growth in Uzbekistan, was partly offset by decrease in maintenance costs in Kazakhstan. At the same time, hydrocarbon unit extraction expenses outside Russia decreased by 18.1% due to higher gas production volumes in Uzbekistan and an increase in crude oil production in Kazakhstan after completion of maintenance works.

Compared to the full year 2020, our extraction expenses in Russia increased by 2.6% mainly due to higher energy tariffs, as well as a general increase in production costs. At the same time, our hydrocarbon unit extraction expenses increased by 1.2%. Outside Russia, our hydrocarbon extraction expenses increased by 9.6% largely as a result of higher gas production in Uzbekistan and Azerbaijan, as well as the ruble depreciation.## Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended 31 December and 30 September 2021 and for the years 2021 and 2020

Own refining expenses

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Refining expenses at the Group refineries...........	39,825	32,171	23.8	129,093	92,613	39.4
in Russia ..........................................	14,836	13,383	10.9	52,751	42,614	23.8
outside Russia......................................	24,989	18,788	33.0	76,342	49,999	52.7
(rubles per tonne)
Unit refining expenses at the Group refineries ......	2,573	1,860	38.4	2,050	1,580	29.8
in Russia ..........................................	1,359	1,188	14.4	1,238	1,062	16.5
outside Russia......................................	5,483	3,116	76.0	3,753	2,703	38.8

Compared to the third quarter of 2021, refining expenses at the Group refineries increased by 23.8%. Our refining expenses in Russia increased by 10.9% due to an increase in maintenance and fuel costs. Outside Russia, refining expenses increased by 33.0%, despite lower throughput volumes, as a result of an increase in fuel and energy costs, as well as an increase in expenses related to scheduled maintenance.

Compared to the full year 2020, expenses at our refineries increased by 39.4%. In Russia, refining expenses increased by 23.8%, mainly as a result of an increase in throughput volumes and corresponding increase in consumption of purchased additives to substitute lower own production, as well as an increase in fuel, energy and other production costs. Outside Russia, expenses at our refineries increased by 52.7% mainly due to an increase in fuel and energy costs, maintenance expenses, the ruble depreciation to euro, and an increase in throughput.

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 2021 and for the years 2021 and 2020

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 10.8% compared to the third quarter of 2021 and by 2.3% compared to the full year 2020 largely as a result of changes in feedstock supply structure. Quarterly dynamics were also affected by a decrease in refinery throughput volumes.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Own feedstock transportation to our domestic refineries.........................................	10,912	11,569	(5.7)	42,858	41,179	4.1
Own feedstock transportation from Russia to our international refineries........................	372	587	(36.6)	2,157	5,175	(58.3)
Other feedstock transportation costs outside Russia..	1,180	1,815	(35.0)	5,498	5,339	3.0
Feedstock transportation to refineries...................	12,464	13,971	(10.8)	50,513	51,693	(2.3)

Power generation and distribution expenses

Power generation and distribution expenses increased by 16.7% compared to the third quarter of 2021 due to seasonality, and by 6.3% compared to the full year 2020 due to an increase in volumes of energy trading in Russia that was partly offset by a decrease in electricity output in Italy.

Petrochemical expenses

In the fourth quarter and the full year 2021, our petrochemical expenses increased by 19.5%, compared to the previous quarter, and by 30.3% compared to the full year 2020 as a result of higher costs of purchased raw materials and maintenance expenses.

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 2021 and the full year 2020, our other operating expenses increased by 2.6% and by 41.7%, respectively. Quarter-on-quarter increase was largely a result of higher volumes of transportation services provided, that was partially offset by lower cost of non-petrol goods sold via our retail network. The increase to the full year 2020 was mainly due to higher cost of non-petrol goods sold via our retail network, as well as higher operating costs of transportation services rendered outside Russia.

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 our trading activities.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Cost of purchased crude oil in Russia ...................................	12,910	11,460	12.7	43,399	13,788	>100
Cost of purchased crude oil outside Russia ..............................	808,709	877,074	(7.8)	2,790,192	1,461,688	90.9
Compensation crude oil related to West Qurna-2 project...................	11,422	20,314	(43.8)	69,237	45,428	52.4
Cost of purchased crude oil .............................................	833,041	908,848	(8.3)	2,902,828	1,520,904	90.9
Cost of purchased refined products in Russia............	13,824	14,205	(2.7)	49,246	31,043	58.6
Cost of purchased refined products outside Russia ...	716,583	605,444	18.4	2,321,093	1,420,226	63.3
Cost of purchased refined products .......................	730,407	619,649	17.9	2,370,339	1,451,269	63.4
Other purchases..........................................................	36,335	37,785	(3.8)	132,810	64,139	>100
Net loss/(gain) from hedging of trading operations...	9,950	21,238	(53.2)	87,928	(79,614)	>100
Change in crude oil and petroleum products inventory ....................	57,413	(13,350)	-	44,218	-	-
Total cost of purchased crude oil, gas and products......................	1,667,146	1,574,170	5.9	5,484,824	3,000,916	82.8

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 2021 and for the years 2021 and 2020

In the fourth quarter and the full year 2021, cost of purchased crude oil, gas and products increased by 5.9% and by 82.8%, respectively. An increase in refined products purchases compared to the previous quarter was mostly due to higher prices and trading volumes. A decrease in crude oil purchases was largely a result of lower trading volumes. Compared to the full year 2020, cost of purchased crude oil and refined products increased mostly due to higher prices. An increase in other purchases compared to the full year 2020 was mostly related to a growth in gas trading activities in Europe. Moreover, dynamics of cost of purchased crude oil, gas and products were impacted by the ruble depreciation.

Transportation expenses

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Crude oil transportation expenses........	27,254	21,147	28.9	93,287	107,147	(12.9)
in Russia ...............................	15,745	12,640	24.6	52,433	46,110	13.7
outside Russia...........................	11,509	8,507	35.3	40,854	61,037	(33.1)
Refined products transportation expenses .	42,552	41,054	3.6	167,388	169,526	(1.3)
in Russia ...............................	22,631	22,205	1.9	85,364	84,723	0.8
outside Russia...........................	19,921	18,849	5.7	82,024	84,803	(3.3)
Other transportation expenses ...........	7,293	8,705	(16.2)	30,460	292,899	87.7
in Russia ...............................	1,019	1,110	(8.2)	4,115	3,269	25.9
outside Russia...........................	6,274	7,595	(17.4)	26,345	12,957	>100
Total transportation expenses ...........	77,099	70,906	8.7	291,135	292,899	(0.6)

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 2021 and for the years 2021 and 2020

Compared to the third quarter of 2021, our expenses for transportation of crude oil and refined products increased by 28.9% and by 3.6%, respectively. In Russia, our expenses for transportation of crude oil and refined products increased mainly as a result of higher export sales volumes beyond Custom Union. Outside Russia, an increase in crude oil transportation expenses was due to an increase in freight rates, despite a decrease in sales volumes. An increase in refined products transportation expenses was in line with dynamics of freight rates and sales volumes.

Compared to the full year 2020, our expenses for transportation of crude oil and refined products decreased by 12.9% and 1.3%, respectively. In Russia, our expenses for transportation of crude oil increased as a result of tariffs indexation, an increase in domestic sale volumes and changes in export routes from Russia that was partly offset by inventory effect. Our expenses for transportation of refined products in Russia did not change significantly, despite tariffs indexation and an increase in domestic sales volumes, as a result of change in sales structure and inventory effect.# 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 2021 and for the years 2021 and 2020

Outside Russia, our expenses for transportation of crude oil and refined products decreased mainly as a result of a decrease in freight rates, despite an increase in sales volumes and the ruble depreciation. An increase in other transportation expenses compared to 2020 was due to commencement of gas supplies from our project in Azerbaijan to Europe.

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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Payroll costs included in selling, general and administrative expenses...	19,901	22,016	(1.1)	80,268	75,257	6.7
Other selling, general and administrative expenses...	29,809	7,841	35.4	75,257	86,593	(13.4)
Share-based compensation ........................................	7,841	-	-	31,366	31,366	0.0
Expenses on allowance for expected credit losses.....	19,689	-	-	9,091	1,772	415.6
Total selling, general and administrative expenses..................	59,323	55,466	7.0	215,190	199,027	8.1

Our selling, general and administrative expenses increased by 7.0% compared to the third quarter of 2021 mainly as a result of an increase in other expenses that was partially offset by a decrease in expenses on allowance for expected credit losses. Compared to the full year 2020, our selling, general and administrative expenses increased by 8.1% mainly as a result of an increase in other expenses and payroll costs due to salary indexation, as well as a result of an increase in expenses on allowance for expected credit losses and the ruble depreciation.

Depreciation, depletion and amortisation

Compared to the third quarter of 2021, our depreciation, depletion and amortisation expenses decreased by 8.9%, mainly due to a positive effect of an increase in proved developed hydrocarbon reserves at Group’s certain fields at the end of 2021 and consequent recalculation of depletion of respective fixed assets for the full year, despite an increase in crude oil production in Russia and cost compensation related to the West Qurna-2 project. Compared to the full year 2020, our depreciation, depletion and amortisation expenses increased by 4.9%, mainly as a result of higher cost compensation related to the West Qurna-2 project, as well as an increase in gas production volumes in Uzbekistan.

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 and joint ventures 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.

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 2021 and for the years 2021 and 2020

Compared to the third quarter of 2021 and the full year 2020, our share in income of associates and joint ventures increased two- and three-fold, respectively, mainly due to an increase in profits of our upstream projects in Kazakhstan and Russia.

Taxes other than income taxes

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
In Russia
Mineral extraction taxes....................................	331,756	43,716	>100	1,088,928	495,877	119.2
Tax on additional income ...................................	6,813	6,341	7.4	41,899	49,587	(15.5)
Statutory insurance contributions and social taxes..........	721	291	147.8	7,728	6,606	16.9
Property tax ...............................................	13,702	12,036	13.8	54,145	48,711	11.2
Other taxes.................................................	2,664	2,354	13.2	7,125	6,248	13.7
Total in Russia...........................................	355,656	64,737	>100	1,209,825	606,929	99.3
International
Mineral extraction taxes....................................	1,805	1,585	13.9	7,472	6,626	12.8
Statutory insurance contributions and social taxes..........	317	285	11.2	1,103	1,005	9.8
Property tax ...............................................	851	1,033	(17.6)	3,727	3,553	4.9
Other taxes.................................................	2,979	2,910	2.4	12,328	11,207	10.0
Total internationally ......................................	5,952	5,813	2.4	24,630	22,391	10.0
Total taxes other than income taxes..........................	361,608	70,550	>100	1,234,455	629,320	96.2

Our taxes other than income taxes increased by 11.6% compared to the third quarter of 2021, mainly as a result of an increase in mineral extraction tax expense on the back of an increase in the tax rate by 10.3% due to higher crude oil prices, as well as an increase in crude oil extraction volumes and an increase in mineral extraction tax rate for license areas with TAI regime from September 2021 which was partially compensated by a gain on extraction tax recalculation based on revised tax declarations for 2018–2020. TAI expenses increased as a result of higher crude oil prices and crude oil extraction volumes at licence areas subject to TAI. Compared to the full year 2020, our taxes other than income taxes increased by 130.0% mainly as a result of an increase in mineral extraction tax expense on the back of an increase in the tax rate by 121.0% due to higher crude oil prices and ongoing tax manoeuvre and also as a result of elimination of tax incentives for high- viscous crude oil and an increase in crude oil extraction volumes. This was partially compensated by inventory effect and time lag effect. TAI expenses increased due to transfer of licence areas with depleted reserves to TAI regime since 1 January 2021 and higher 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 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Decrease in extraction taxes from application of reduced rates for crude oil production .....	12,114	11,256	7.6	40,751	79,146	(48.5)
(thousands of tonnes)
Volume of crude oil production subject to:
reduced rates (ultra-high viscosity).................................	-	-	-	2,427	18,456	(86.8)
reduced rates (tax holidays for specific regions)...................	260	273	(4.8)	4,289	2,216	93.5
reduced rates (low permeability deposits)............................	558	548	1.8	1,628	1,114	46.1
reduced rates (Tyumen deposits) .....................................	140	136	2.9	736	2,136	(65.5)
reduced rates (depleted fields) .....................................	-	-	-	-	541	(100.0)
reduced rates (other) ...............................................	-	-	-	832	789	5.4
Total volume of production subject to reduced rates .......................................	1,790	1,746	2.5	6,825	29,752	(77.1)

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 2021 and for the years 2021 and 2020

Also, 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 2021, volumes of production subject to such regimes amounted to 1,497 thousand tonnes and 6,303 thousand tonnes, respectively (compared to 1,610 thousand tonnes in the third quarter of 2021 and 6,389 thousand tonnes in the full year 2020).

The table below summarises our production from licence areas subject to TAI in the respective periods.

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
Mineral extraction tax for crude oil and gas condensate on licence areas under TAI ...	65,609	51,684	26.9	210,784	18,521	>100
(thousands of tonnes)
Group 1..............................................................................	506	540	(6.3)	2,101	2,071	1.4
Group 3..............................................................................	4,992	4,752	5.1	18,741	3,030	>100
Group 4..............................................................................	46	47	(2.1)	152	95	60.0
Total volume of crude oil and gas condensate production at licence areas subject to TAI ...............	5,544	5,339	3.8	20,994	5,196	>100

Excise and export tariffs

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
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.................................

	Q4 2021	Q3 2021	% Change	12 months of 2021	12 months of 2020	% Change
International Excise tax and sales taxes on refined products ........	46,531	(38,655)	(59,565)	29,272	11,486	(10,931)
Crude oil еxport tariffs.............................................	47,425	(33,352)	(49,203)	21,755	9,814	(1.9)
Refined products еxport and import tariffs, net .......	15.9	21.1	34.6	17.0	>100	166,658
Total internationally ..................................................	132,303	(37,881)	73,086	70,885	26,460	26.0
Total excise and export tariffs ...................................	>100	-	20.8	42.8	(93.4)	(124,173)

Compared to the third quarter of 2021, crude oil export tariffs increased mainly due to higher crude oil export volumes beyond Customs Union and higher export duty rates as a result of increased crude oil prices, which was partially compensated by higher positive export duty lag effect and inventory effect. Refined products export tariffs increased also as result of higher export duty rates for gas products. In the fourth quarter of 2021, excise tax on refined products in Russia and internationally decreased compared to the previous quarter mainly due to lower sales volumes. Compared to the full year 2020, crude oil and refined products export tariffs increased due to higher export duty rates as a result of an increase in crude oil prices, which was partially compensated by inventory and export duty lag effects, a decrease in crude oil export volumes beyond Customs Union, as well as the effect of the ongoing tax manoeuvre. Refined products export tariffs increased also due to an increase in the share of export of heavy refined products with a higher export duty rate. Compared to the full year 2020, excise tax in Russia increased due to higher sales volumes and excise taxes rates. Internationally, an increase in excise tax expenses was due to the ruble depreciation, higher sales volumes and an increase in excise taxes rates in some jurisdictions.

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 2021 and for the years 2021 and 2020

Proceeds from excise tax on feedstock, excluding damper, increased by 15.9% compared to the third quarter of 2021 as a result of higher crude oil prices. Compared to the full year 2020, the excise tax on feedstock increased more than three-fold as a result of excise tax rates increase due to ongoing tax manoeuvre, higher crude oil prices, the ruble depreciation and also as a result of higher refinery throughput volumes. Excise tax on feedstock in 2021 was increased by the investment factor in relation to Nizhny Novgorod refinery and Perm refinery. In 2021, damper was positive as export netbacks for gasoline and diesel fuel stayed above respective fixed benchmarks. In the fourth quarter of 2021, damper increased compared to the previous quarter levels in spite of lower sales volumes of motor gasoline on the domestic market due to ongoing increase in export netbacks for gasoline and diesel fuel.

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”). During 2021, the Group’s net monetary position in other currencies was varying from a net liability at the beginning of the year to a net asset at the year-end that, together with rather stable exchange rate, resulted in relatively insignificant quarterly currency exchange gains and losses during the year, totaling a gain of 2.7 billion RUB for the full year 2021. A sharp ruble depreciation during 2020 resulted in a foreign exchange loss in the amount of 26 billion RUB in the full year 2020.

Other expenses

Other (expenses) income 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 2021, the Group recognised an impairment loss in relation to property, plant and equipment and goodwill in the total amount of 36.5 billion RUB, of which 27.9 billion RUB related to two international refineries and resulted from a decline in the forecasted refining margins that followed the tightening of the European Union decarbonisation policy. A loss of 6.0 billion RUB related to refining, marketing and distribution assets in Russia, a loss of 1.0 billion RUB related to exploration and production assets in Russia and a loss of 1.6 billion related to other assets in Russia. We also recognised an impairment loss of intangible assets in the total amount 0.2 billion RUB. At the same time, as a result of an improvement of certain economic parameters, the Group recognised an impairment reversal for its exploration and production assets in Russia in the amount of 10.0 billion RUB, for its international exploration and production assets in the amount of 1.3 billion RUB, and for its refining, marketing and distribution assets in Russia in the amount of 15.4 billion RUB. In the fourth quarter of 2020, the Group recognised an impairment loss for its exploration and production assets in Russia in the amount of 3.0 billion RUB and abroad in the amount of 0.1 billion RUB. The Group also recognised 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 recognised 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 recognised 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 recognised an impairment loss for its exploration and production assets in Russia and abroad in the amount of 8 billion RUB, as well as for its refining, marketing and distribution fixed assets and other non-current assets outside Russia in the amount of 36 billion RUB.

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 2021 and for the years 2021 and 2020

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 13 billion RUB, or by 26.0%, compared to the third quarter of 2021, and by 109 billion RUB, or by 133.0%, compared to the full year 2020. 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 utilised, and changes in tax rates of certain regional income tax incentives.

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 2021 and for the years 2021 and 2020

Non-GAAP items reconciliation

EBITDA reconciliation

EBITDA is not defined under IFRS. We define EBITDA as profit from operating activities before depreciation, depletion and amortisation. 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.

(millions of rubles)	Q4 2021	Q3 2021	12 months of 2021	12 months of 2020
Profit for the period attributable to PJSC LUKOIL shareholders	233,790	192,475	773,442	15,175
Profit for the period attributable to non-controlling interests	241	644	2,071	1,458
Income tax expense	61,796	49,049	191,451	82,154
Finance income	(7,013)	(4,641)	(16,519)	(13,051)
Finance costs	9,682	9,246	37,568	44,122
Foreign exchange (gain) loss	(5,812)	661	(2,731)	26,110
Equity share in income of associates and joint ventures	(10,146)	(6,722)	(29,980)	(11,474)
Other expenses	14,640	7,061	23,643	137,160
Depreciation, depletion and amortisation	97,835	2,071	82,154	405,440
EBITDA	395,013	191,451	687,094	1,404,411

EBITDA by operating segments

Exploration and production segment

Revenues and other operating income............................................................```markdown

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 2021 and for the years 2021 and 2020

Liquidity and capital resources

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Net cash provided by operating activities..................................	317,355	321,998	(1.4)	1,126,614	776,574	45.1
including (increase) decrease in working capital ..	(54,162)	(5,852)	>100	91,748	(183,896)	>100
Net cash used in investing activities..........................................	(133,195)	(97,286)	36.9	(438,055)	(492,769)	(11.1)
Net cash used in financing activities .........................................	(145,227)	(152,131)	(4.5)	(354,377)	(514,005)	(31.1)

Changes in operating assets and liabilities:

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
(Increase) decrease in accounts receivable ................	(86,161)	(48,982)	75.9	(363,337)	(44,657)	-
Decrease (increase) in inventory ...............................	51,501	(21,978)	-	128,139	185,047	-
Increase (decrease) in accounts payable....................	26,086	20,336	28.3	37,868	83,061	-
Increase in net other taxes .........................................	(122)	18,262	-	(69,305)	(44,010)	-
Change in other current assets and liabilities.............	(45,466)	26,510	-	10,200	(18,930)	-
Total (increase) decrease in working capital.........	(54,162)	(5,852)	>100	91,748	(183,896)	>100

Operating activities

Our primary source of cash flow are funds generated from our operations. Compared to the third quarter of 2021 and the full year 2020, our cash generated from operations decreased by 1.4% and increased by 45.1%, respectively. The decrease compared to the previous quarter was mainly due to the dynamics of working capital, while the increase compared to 2020 was mainly a result of improved profitability of our core operations. This was negatively affected by the working capital dynamics.

Investing activities

Compared to the third quarter of 2021 and the full year 2020, our cash used in investing activities increased by 36.9% and decreased by 11.1%, respectively, that was largely defined by the dynamics in capital expenditures. Our capital expenditures increased by 34.9% and decreased by 12.6% compared to the third quarter of 2021 and the full year 2020, respectively.

Capital expenditures

	Q4 2021	Q3 2021	Change, %	12 months of 2021	2020	Change, %
(millions of rubles)
Exploration and production
West Siberia..........................................................	35,078	33,553	4.5	150,167	48,310	(13.6)
Timan-Pechora......................................................	10,063	9,439	6.6	81,967	30,788	(41.1)
Ural region............................................................	7,654	7,600	0.7	39,733	34,618	(22.5)
Volga region .........................................................	8,655	8,446	2.5	61,739	12,103	(43.9)
Other in Russia .....................................................	6,466	2,109	>100	9,686	255,637	25.0
Total in Russia...........................................................	67,916	61,147	11.1	343,292	399,553	(13.6)
Iraq........................................................................	12,694	3,844	>100	36,430	26,379	38.1
West Qurna-2 project .......................................	12,572	3,667	>100	35,720	24,235	47.4
Block-10...........................................................	122	177	(31.1)	710	2,144	(66.9)
Other outside Russia.............................................	10,907	5,796	88.2	28,167	29,882	(5.7)
Total outside Russia ..................................................	23,601	9,640	29.3	64,597	56,261	14.8
Total exploration and production ..........................	91,517	70,787	29.3	407,889	455,814	(10.5)
Refining, marketing and distribution
Russia ...................................................................	28,236	16,796	68.1	77,987	72,486	7.6
refining.............................................................	15,505	10,296	50.6	48,535	51,566	(5.9)
retail .................................................................	2,681	860	>100	5,912	4,528	30.6
other .................................................................	10,050	5,640	78.2	23,540	16,392	43.6
International..........................................................	6,635	5,787	14.7	31,665	20,558	54.0
refining.............................................................	4,710	4,441	6.1	26,320	16,506	59.5
retail .................................................................	1,604	791	>100	4,314	3,479	24.0
other .................................................................	321	555	(42.2)	1,031	573	79.9
Total refining, marketing and distribution ...........	34,871	22,583	54.4	109,652	93,044	17.8
Corporate and other...................................................	893	958	(6.8)	3,156	2,846	10.9
Total capital expenditures ......................................	127,281	94,328	34.9	520,737	551,704	(5.6)

Compared to the third quarter of 2021, an increase in our upstream capital expenditures in Russia was mainly due to development of our fields in West Siberia and the Baltic Sea, as well as uneven payment schedule. An increase in our international upstream capital expenditures was due to further development of West Qurna-2 project. Quarter-on-quarter dynamics of capital expenditures of our refining and marketing segment were mainly defined by planned upgrade of Russian refineries, as well as uneven payment schedule. Year-on-year decrease in exploration and production capital expenditures in Russia was mainly driven by external limitations on crude oil production due to the OPEC+ agreement. Year-on-year dynamics of capital expenditures of our refining and marketing segment were mainly defined by payments made in the first half of 2021 in relation to the planned overhauls at our refinery in Italy performed in the end of 2020. In Russia capital expenditures of our refining and marketing segment was primarily defined by construction schedule of delayed coker unit at our refinery in Nizhny Novgorod. An increase in other downstream capital expenditures in Russia was due to modernisation of our power generation assets.

Financing activities

In the fourth quarter and the full year 2021, net movements of short-term and long-term debt generated an inflow of 91 billion RUB and 52 billion RUB, compared to an outflow of 1 billion RUB in the third quarter of 2021 and an outflow of 62 billion RUB in the full year 2020.

Refining, marketing and distribution segment

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
Revenues and other operating income................	2,702,891	2,541,730	9,235,532	5,525,980
Operating expenses .................................	(80,232)	(70,797)	(276,170)	(195,558)
Cost of purchased crude oil, gas and products ....	(2,398,556)	(2,214,631)	(7,941,507)	(4,302,803)
Transportation expenses................................	(59,446)	(37,119)	(232,152)	(269,656)
Selling, general and administrative expenses.......	(6,454)	(7,098)	(27,672)	(25,908)
Taxes other than income taxes .......................	(6,704)	(7,078)	(32,521)	(135,597)
Excise and export tariffs ...........................	114,380	(12,167)	125,757	(12,709)
EBITDA of Refining, marketing and distribution segment	(3,722)	395,013	(50,208)	(18,930)

Exploration and production segment

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
Revenues and other operating income................	834,988	744,799	2,855,876	1,542,239
Operating expenses ....................................	(73,301)	(70,922)	(279,074)	(262,343)
Cost of purchased crude oil, gas and products ........	(13,101)	(279,074)	(262,343)	(33,381)
Transportation expenses................................	(23,552)	(262,343)	(33,381)	(21,620)
Selling, general and administrative expenses...........	(11,781)	(33,381)	(21,620)	(9,137)
Taxes other than income taxes .......................	744,799	(97,947)	(97,947)	(84,717)
Excise and export tariffs ...........................	2,855,876	(84,717)	(84,717)	(41,611)
EBITDA of Exploration and production segment ..........	1,542,239	(41,611)	(41,611)	(52,784)

EBITDA of Corporate and other segment

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
EBITDA of Corporate and other segment	(6,101)	(7,078)	(384,644)	(342,991)

Elimination

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
Elimination................	(6,101)	296,522	687,094	355,176

EBITDA

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
EBITDA..........	1,404,411	500,081	1,276,133	540,587

Free cash flow reconciliation

	Q4 2021	Q3 2021	12 months of 2021	2020
(millions of rubles)
Net cash provided by operating activities	317,355	321,998	1,126,614	776,574
Capital expenditures.......................	(127,281)	(94,328)	(433,042)	(495,443)
Free cash flow ............................	190,074	227,670	693,572	281,131
```# Management’s discussion and analysis of financial condition and results of operations

On 26 October 2021, a Group company issued two tranches of non-convertible bonds totalling $2.3 billion. The first tranche of $1.15 billion was placed with a maturity of 5.5 years and a coupon yield of 2.80% per annum, the second tranche of $1.15 billion was placed with a maturity of 10 years and a coupon yield of 3.60% per annum. All bonds were placed at face value and have a half year coupon period. In November 2020, a Group company repaid the bonds issued in 2010 in the amount of $1 billion. On 6 May 2020, a Group company issued non-convertible bonds totalling $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.

Debt maturity

The following table displays the breakdown of our total debt obligation by maturity dates.

	Total	2022	2023	2024	2025	2026	After
(millions of rubles)
Short term debt .....................................................	8,892	4,809	29,528	4,822	5,438	9,244
Long-term bank loans and borrowings .	58,728	4,887				6.656%
Non-convertible US dollar bonds, maturing 2022 ......................	37,131
4.563% Non-convertible US dollar bonds, maturing 2023 ...............	111,393		74,186	37,131
4.750% Non-convertible US dollar bonds, maturing 2026 ...............	111,393					111,393
2.80% Non-convertible US dollar bonds, maturing 2027 ................	74,186				74,186		85,299
3.875% Non-convertible US dollar bonds, maturing 2030 ...............	111,181						111,181
3.60% Non-convertible US dollar bonds, maturing 2031 ................	85,297						85,299
Lease obligation¹ ...................................................	185,843	29,341	80,251	23,374	139,576	21,617	51,145
Total................................................................	757,950	18,921	23,743	16,473	96,097	76,117	367,138

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 29 “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.

Other information

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.

In recent days, due to the events in Ukraine, the US has imposed additional sanctions on the Russian government, as well as Russian entities and individuals. This includes full blocking sanctions on certain Russian state-owned financial institutions. There have been restrictions put in place on the opening and maintenance of, or transacting with, certain correspondent and payable-through accounts at foreign financial institutions. Additionally, there have been new debt and equity restrictions imposed on major state-owned and private entities and Russian sovereign debt. Similarly, the UK and EU have announced additional sanctions in recent days. The UK has imposed blocking and asset freezing sanctions on certain Russian banks, entities, and individuals operating in financial and defense sectors. The EU has designated certain Russian government officials, entities (including Russian banks), and other individuals, and imposed restrictions on capital markets, loans, and credit that target Russian sovereign debt. Moreover, there is a risk that further sanctions may be introduced. This may have significant adverse impact on Russia’s economy. These events have led to depreciation of the Russian ruble and increased volatility and uncertainty in the Russian economy. At the same time, it is a stated goal to minimise the impact of these sanctions on energy companies and consumers. The U.S. has specifically authorised certain transactions related to the energy sector, highlighting the need for continued, legitimate energy-related trade. Management will continue monitoring the situation closely to ensure prompt reaction to the rapidly changing environment.

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.

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.# 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 LUKOIL’s securities. The Company continuously monitors and takes measures to mitigate risks. However, if such risks materialize, LUKOIL will take measures to mitigate them immediately and minimize loss. 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.

1. Macroeconomic Risks

Risk Description

Macroeconomic changes resulting from the volatility of global prices for energy carriers, foreign exchange rate fluctuations, inflation processes, changes in fiscal and monetary policies, the global trend for shifting to low carbon economy, the possible decline in the global demand for energy resources, changes 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 develops plans to change production volumes and types of its products, first of all seeking to achieve economic efficiency.

2. Industry-Specific Risks

2.1. 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. Major production assets of the Company are located in the Russian Federation which provides for the additional stability due to the specific taxation provisions applicable to the oil and gas sector and the correlation existing between the national currency exchange rate and oil prices. 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 programs;
- 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.

2.2. 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 entities of the Group and their 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 Group’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 Group’s projects, R&D operations are being conducted to test new samples of domestic equipment.

2.3. 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 monopolies 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;
- introduces resource-saving technologies.

To mitigate the risk of price growth on the part of the suppliers of goods and services, the Company also improves its bidding procedures and extends its competitive environment (list of suppliers of goods and services).

2.4. 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 feasible) 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 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 Group's facilities.

2.5. 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

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.

2.6. 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 its 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 of not obtaining the right to subsurface use;
- a risk of refusal to accept bidding documents for participation in competitive sales/biddings for subsurface use rights.# Risk Management

2.7. Geological and process risks the Company is exposed to during the restart of wells that have been shut down to limit oil production as a result of external production limitations

Risk Description

External limitations can necessitate the shutdown of wells the restart of which is associated with geological and process risks of delayed recovery of oil production that depends, among other things, on the shutdown period, season and production region.

Risk Management

The choice of wells to be shut down is based, among other things, on mitigating the negative impact on the development. The wells that have 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.

3. Country Risks

Risk Description

The Company understands that existing and new challenges of the escalating relationship between Russia and other countries may produce a negative impact on the Russian economy and have an adverse effect on the Group’s operations and financial performance. Pursuing a systemic approach to risk management, the Company utilizes tools of scenario and probabilistic modelling that allow assessment of various risks, continuous monitoring and timely response, resulting in risk mitigation and remedial actions taken to minimize damage produced on the Group’s operations by political circumstances either in the country or in some of its regions. However, considering that the risks the Company faces are exogenous and potential events are multifaceted, the Company can neither in advance determine the full scope of actions to be taken in case these risks or events happen, nor guarantee that its response will reduce their impact to zero. 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 activities of the LUKOIL Group in these countries include:
* unstable 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 production 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 requirements to the level of return. Besides, should the political or social and economic situation deteriorate in the regions of the Group’s presence, LUKOIL may implement a set of crisis response measures, including cost saving, optimization of the investment program, equity drawdown, and partner engagement.

4. Financial Risks

4.1 Liquidity Risks

Risk Description

Volatility of prices on hydrocarbons, hydrocarbon derivatives and foreign exchange rates and other external factors may create a disproportion in the figures included into plans, budgets and investment programs 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 programs 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, LUKOIL has investment ratings from the 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. The optimal level of revolving credit lines is maintained to guarantee sufficient liquidity in the environment of volatile markets.

4.2. Foreign Exchange Risks

Risk Description

The Company’s revenues 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 a material 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.

4.3. 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/partial collection of proceeds from supplied goods, or, as applied to financial counterparties, 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 and arranges for insurance of accounts receivable. In addition, the Company also carries out regular reliability checks on its counterparties using a dedicated integrity due diligence information system. 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.

5. Legal Risks

Risk Description

Changes in legislation may have an adverse impact on the Company’s financial performance. In particular, there are a number uncertainties related to the subsurface use legislation, namely, to creating decommissioning funds by subsoil users to cover future costs for decommissioning of mines, wells and other facilities as well as restoration of disturbed soil. Instruction No.Pr-2576 dated December 31, 2021 was issued by the President of the Russian Federation on this topic and related legislative activities are in progress at the level of the Government of the Russian Federation.

Risk Management

The Company is constantly monitoring legislative changes 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.

6. Loss of Goodwill Risk (Reputational Risk)

Risk Description

LUKOIL faces various factors capable of causing realization of the reputational risk, which may have an adverse impact on the value of its shares and its financial performance. 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. Much attention is 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 programs aimed at support and improvement of the efficient labor and social protection system.

7. Strategic Risks

Risk Description

At the end of 2021 the Company’s Board of Directors approved the 2022-2031 Strategic Development Program of the LUKOIL Group encompassing the major risks which the Company may encounter during the Program implementation. Along with the price risks described above, these risks also include the risk of failure to meet the schedule of investment projects; the risk of failure to reimburse for the expenses associated with implemented projects; the risk of increased tax burden; risks of accidents.

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 Program, the Company relies heavily on the scenario-based and probabilistic modelling tools making it possible to assess various risks.

8. Other Risks related to Issuer’s Business

8.1. Risks to Public Health and those Associated with the Spread of Epidemics

Risk Description

The global economy as well as economies of specific countries are exposed to a considerable negative impact in terms of public health, pandemics and epidemics. The declining demand for energy resources and reduced oil prices resulting from the exposure to such risks can 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 continuous operations:
- The Company has set up headquarters for the prompt response to the spread of the virus;
- Testing and vaccination of employees has been organized;
- A requirement to wear masks in the offices and operational sites of the Company was introduced and social distancing measures have been taken;
- The Company has introduced an attendance schedule for food service areas;
- A flexible shift to distance work has been organized;
- Working schedule has been changed for rotational employees;

Additional measures are being taken in the Company’s offices and Group's 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 masks and gloves.

8.2. Risk of Terrorist Attacks, Wrongful Acts by Third Parties

Risk Description

LUKOIL Group has operations in a number of countries with a high risk of terrorist attacks and other crimes against the Group’s assets. 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

With account of national legislative requirements and depending on a country where it operates, the Company takes various measures to manage the risk:
- seeks to ensure engineering, special and physical protection of personnel and facilities on the required and reasonable level, and interacts with local 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;
- 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 of assets.

8.3. Health, Safety and Environment (HSE) Risks

Risk Description

Production facilities of the Group are characterized by risks related to the shutdown of production processes, discharges of hazardous substances, environmental damage, emergencies, accidents, fires and incidents, which may have an adverse impact on the financial performance of the Company.

Risk Management

To mitigate these risks, the Company has established and implemented an effective HSE Management System certified to comply with international standards ISO 14001 and ISO 45001 and takes the following actions:
- distribution of responsibility for ensuring compliance with occupational health, safety and environmental requirements at all management levels;
- target corporate HSE programs 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 the appropriate 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.

In addition, LUKOIL Group entities are insured for risks threatening life and health of their personnel and property.

8.4. Climate Change Risks

Risk Description

The Company’s business is associated with climate change risks that include:
- market risks – risks, associated with shifts in demand and consumer preferences;
- political, legal, regulatory risks – risks, associated with the transition of the global economy to low carbon development and measures taken by countries, where the Group 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 conditions in the regions, where the Group operates, and that might affect the 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 the following:
- Re: market risks – The Company applies a scenario approach to forecast macroeconomic indicators, including various climate scenarios that account for charges for greenhouse gas emissions. These tools help identify assets and investment projects that are most sensitive to negative changes in 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 international standard, including on direct and indirect emissions and its goals to reduce greenhouse gas emissions;
- 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 making it possible to take prompt measures.

The Company continues integrating climate risks and opportunities into its risk management system which enhances the efficiency of the climate risk management and transparency of information on this issue.

8.5. Risks of Failure to Implement the Investment Program

Risk Description

While implementing investment projects, the Company has to face the risk of higher costs and untimely commissioning of production assets.## 8.6. 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 for subsurface use rights;
• 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, LUKOIL Group may face 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 capabilities and introduction of new technologies help the Company to improve its competitive advantages.

8.7. 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 for 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.

8.8. 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 provided 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. 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.

8.9. 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 Company, 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.

8.10. 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 changing the listing level of the Company’s securities 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.

8.11. 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 by regulatory authorities to disclose information in stock markets (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’ temporary transition to distance 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.# Risk Management

In order to mitigate these risks the Company, if required, shall conclude information disclosure agreements with several information disclosure services. If the need be, the Company’s authorized employees can promptly contact the assigned employees of the information disclosure services. In case of distance work, the Company’s IT departments provide essential technical and consulting support to employees.

Risk Management Procedures

Management bodies of LUKOIL pay great attention to risk management issues in order to ensure the reasonable assurance of the set goals in the conditions characterized by uncertainties and adverse factors. 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 its regulations and methodologies applicable to risk management which establish the uniform requirements for all LUKOIL Group entities aimed at arranging the risk management process at all stages, and define management standards for certain risk types of utmost importance. With a view to improve the risk management system in the Company and to further integrate the risk management system into the investment planning process, in October 2021 the Management Committee of LUKOIL made a decision to expand the scope of competence of the Committee for Investments and Plan Coordination in the LUKOIL Group by giving it functions of the Risk Committee (a collegiate body under the President of the Company). In addition, the name of the Committee was changed to the Committee for Investments, Coordination of Plans and Risks in the LUKOIL Group. 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.

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REFERENCE INFORMATION

Legal address and head office
Postal address: 11, Sretensky Blvd, Moscow, 101000, Russia
Website: www.lukoil.ru (Russian), www.lukoil.com (English)

Central Information Service
Tel.: +7 495 627 4444, +7 495 628 9841
Fax: +7 495 625 7016

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