Lukoil — Governance Information 2014

Dec 31, 2014

APPROVED By the Board of Directors of Open Joint-Stock Company LUKOIL Oil Company Minutes No. 9 of 14 May 2015

2014

LUKOIL

CORPORATE GOVERNANCE REPORT

1. Compliance with the Corporate Governance Code	3
2. Board of Directors5
3. Board Committees10
4. President and the Management Committee11
5. Audit Commission12
6. Preparation of Financial Statements14
7. External Audit 17
8. Internal Control and Internal Audit 17
9. Risk Management20
10 Shareholder Relations21

1. Compliance with the Corporate Governance Code

As a Russian-registered corporation OAO LUKOIL (hereinafter, LUKOIL or the Company) conducts its business in compliance with the national corporate governance principles recommended by the regulatory authorities for the securities markets of the Russian Federation for application. Besides the above advisory principles, the Russian stock exchange where the Company's securities are traded (ZAO MICEX Stock Exchange, member of the Moscow Exchange Group), sets a number of minimum requirements to the corporate governance which are binding upon the issuers whose securities are included into the quotation list of a certain level.

2014 was extremely significant in terms of transition to new corporate governance standards in Russia.

Until the spring of 2014, the national corporate governance standards were regulated by the Corporate Governance Code, recommended in 2002 by the Federal Commission for the Securities Markets of Russia (FCSM) for application by the Russian joint-stock companies. That document was submitted for distribution and introduction to the Russian corporate environment of the basic concepts and procedures applied in the foreign best practice.

On March 21, 2014, the Board of Directors of the Bank of Russia approved the Corporate Governance Code (hereinafter - the Code) that replaced the FCSM Code and was recommended for application by the joint stock companies whose securities are admitted for trading on regulated markets. The Code is aimed at ensuring greater harmonization of the Russian corporate governance principles with the advanced corporate governance standards of other countries, which should facilitate the access to capital markets, attract investors and expand the possibilities of international business cooperation for Russian companies. The above document is available on the website of the Bank of Russia at: http://www.cbr.ru/sbrfr/files/legislation/letters/2014/Inf\_apr\_1014.pdf .

The situation for the Russian issuers, including the Company, was somewhat complicated due to the fact that earlier the Moscow Exchange commenced the reform of the listing. Specifically, the above measures resulted in the introduction of new Listing Rules of ZAO MICEX Stock Exchange (hereinafter – the Listing Rules) according to which the number of quotation lists was changed. The requirements to the companies to be included in these lists changed significantly as well. Specifically, the Listing Rules contain the corporate governance requirements to the companies that in fact should have reflected the most significant provisions of the Code that was being developed.

At that, the activities aimed at the Code development and the introduction of the new Listing Rules were not fully synchronized, which resulted in the occurrence of some discrepancies between the Code provisions and the requirements to the corporate governance contained in the 2014 Listing Rules, while in certain cases such discrepancies were significant for the Company. Specifically, there was a discrepancy between the independence criteria for directors in the Code and in the Listing Rules, as well as discrepancies in terms of the number of independent directors to make up the Board of Directors.

Since the requirements of the new Listing Rules fundamentally differ from those applied earlier, the Stock Exchange provided for a transitional period of two years during which the issuers should bring their corporate governance structure and procedures in line with the requirements of the listing level they were transferred to according to the order established by the Stock Exchange as the new Listing Rules came into effect.

At the beginning of 2015, the Bank of Russia also initiated a harmonization process of the Listing Rules and the Code in terms of the independence criteria for the directors, which resulted in the introduction of amendments to the applicable Listing Rules, part of which comes into effect with a suspension period.

The Corporate Governance Code constitutes a rather detailed document and is significantly more voluminous than similar documents of other countries. Its principles and recommendations apply not only to the BoD activities, its establishment procedure, the structure and relations with the management and shareholders, but also to the activities of the corporate secretary, the General Meeting procedures, the risk management and internal control system, information disclosure, conduct of material corporate actions, including recommendations for the contents of a number of internal documents.

It's been several years now that the Company has adhered to a considerable number of the principles contained in the Code, however, there are some deviations from the Code principles in some areas, the following being the most significant ones:

as of the end of 2014, the number of the BoD members fully compliant with the independence criteria recommended by the Code came to less than one third of the total number of the BoD members (one should bear in mind that the BoD candidates were nominated and assessed in view of the independence criteria applicable prior to the Code publication, which is due to the candidate nomination terms and implementation of measures to prepare for the Annual General Shareholder Meeting) (see also Section "Board of Directors");

Chairman of the Board is a non-executive director; the senior independent director was not defined among the independent directors;

The Audit Committee, as well as the Human Resources and Compensation Committee (combines the functions of the human resources committee and the nominations committee) consist of independent and non-executive directors, while the directors fully compliant with the respective independence criteria of the Code do not constitute the majority (see also Section "Board Committees");

until now, the Company has not conducted independent assessment of the BoD performance with engagement of an external organization;

the functions of the corporate secretary in the Company are exercised by the BoD Secretary who is also member of the Management Committee;

the Company has a structural subdivision exercising the functions of internal audit; however, its functional and administrative accountabilities are not delineated; this subdivision is subordinate to the Vice President for Control and Internal Audit.

Based on the letter of the Bank of Russia the Company includes in its Annual Report the Report on compliance with the Code principles and recommendations in the form recommended by ZAO MICEX Stock Exchange.

The Company's BoD realizes that currently the Company has a considerable potential to improve and systematize the corporate governance system in order to ensure its greater transparency.

Considering the fact that Part A of the Code contains the corporate governance principles, while Part B contains the recommendations related to the principles describing preferred ways to realize these principles at the level of certain actions of the governing bodies, corporate procedures and the content of local regulatory documents, the Company's governance bodies intend to focus their primary attention on compliance with the principles of the Code described in Part А.

At the same time, the Company finds it acceptable that the mechanisms and procedures to implement the above principles in OAO LUKOIL can differ to a certain extent from the recommendations contained in Part B of the Corporate Governance Code.

The Company will also be guided by the fact which of the numerous principles and recommendations of the Code will be immediately included into the requirements to the issuers set by the listing rules of the domestic stock exchanges as prerequisites for inclusion of securities into the quotation lists, since, in the Company's opinion, they will reflect the corporate governance requirements sought after by the investment community above all.

While planning its measures to improve the corporate governance system the Company will consider the transitional period provided for by ZAO MICEX Stock Exchange for the issuers in order to bring its corporate governance model in line with the requirements of the Listing Rules of ZAO MICEX Stock Exchange.

Specifically, in order to improve its corporate governance model and practice the Company intends to implement the measures aimed at designation of the functional subordination and accountability of the Service for Control and Internal Audit and its head to the Company's BoD, making amendments to the local regulations on control and internal audit and the provisions on the committees of the Company's BoD to bring them in line with the principles and recommendations of the Corporate Governance Code, and also development of the Corporate Secretary Provision.

While introducing the principles and recommendations of the Code in the future, the Company will consider which positive influence they will produce on the Company in terms of the business development strategy, economic efficiency and operational efficiency of the decision-making process by the Company's governance bodies, as well as its investment attractiveness. The Company will also consider the structure of its BoD and shareholders, the current organizational structure of the Company and distribution of competences among its key employees.

2. Board of Directors

The Board is responsible for general management of the Company's business except for the reserved matters of the General Shareholder Meeting.

The key functions of the Board include designation of the Company's priority areas of the Company's business, strategic, medium-term and annual planning, assessment of performance results, preparation of the General Shareholder Meetings, formation of the Management Committee as a collective executive body, approval of transactions in accordance with the existing legislation and the Company Charter, and other matters.

The eleven-member Board is elected at the General Shareholder Meeting by cumulative voting (the candidates for whom the largest number of votes was cast are deemed elected).

The Company must include the election of the Board members in the agenda of the annual General Shareholder Meeting (see also Shareholder Relations). Nominations to the Board may be made by holders of at least 2% of the voting shares within 30 days after the end of the fiscal year.

The Board members are elected to serve until the next annual General Shareholder Meetings and may be re-elected any number of times.

The General Shareholder Meeting may terminate the office of all Board members early.

Fees to all Board members are established by the General Shareholder Meeting. The system of fixed remuneration is applied in the Company.

The current remuneration system provides for:

• remuneration for the performance of BoD member duties (equal for all BoD members);
• remuneration for the performance of duties of the Chairman of the Board of Directors;
• remuneration for the performance of duties of the Chairman of a BoD Committee by a BoD member;
• remuneration for the attendance at meetings of a BoD Committee in presentia to the member of the Board of Directors who is also member of the Committee;
• remuneration for the attendance at meetings of the Board of Directors or a Board Committee in presentia, if the attendance requires a transcontinental flight;
• remuneration for the participation of BoD members in conferences and other events following written instructions by the Chairman of the Board of Directors.

The remuneration shall be fixed in Russian rubles.

The Annual General Shareholder Meeting held in 2014 resolved to increase the remuneration for newly elected BoD members, since it had not been changed since the Annual General Shareholder Meeting in 2011.

The list of expenses incurred by BoD members to be reimbursed shall be determined by virtue of the decision of the General Shareholder Meeting. The expenses shall be reimbursed in the amount of the actually incurred and documented expenses.

Information on the aggregate fees and compensations received by the Board members during the year in question is included in the Annual Report.

Currently, non-executive directors do not participate in any long-term remuneration programs.

As regards the composition of the Board the Company seeks to maintain the necessary balance between the experience, professional skills, knowledge of the Company's business, as well as independence and objectivity in their judgments and decisions.

In 2014, the independence of candidates to the BoD was assessed in view of the criteria of the FCSM Corporate Governance Code applicable at the moment of assessment, as well as the independence criteria of the new Listing Rules that did not come into effect but had already been published. In view of this assessment 5 independent directors were elected to the BoD.

However, in November of 2014, the aggregate tenure of Mark Mobius in the BoD exceeded 7 years thus rendering him not fully compliant with the independence criteria contained in the Corporate Governance Code and the Listing Rules.

As of the end of 2014, another director, Ivan Pictet, was fully compliant with the independence criteria determined by the Listing Rules but was not fully compliant with those of the Corporate Governance Code. This is due to the fact that he is a beneficiary owner of OAO LUKOIL shares, whose market value, as of the end of 2014, exceeded the amount of the annually fixed remuneration of a BoD member by more than 20 times.

However, the Company considers the fact that I. Picter had been beneficiary owner of this block of shares before enforcement of the Code. Besides, this block of shares constitutes a minor stake in the Company's charter capital (less than 0.01%). The Company also considers the fact that, according to the principles of the Code, long-term ownership of shares, like nothing else, brings closer together the financial interests of the BoD members and the long-term interests of the shareholders.

Based on the above, currently the BoD consists of a Chairman of the BoD (non-executive director), three executive directors (the President, the First Executive Vice President and Vice President for Strategic Development), who are independent in terms of the Corporate Governance Code and the Listing Rules, one director who is independent in terms of the Listing Rules and non-executive in terms of the Code, and three non-executive directors.

The Company is of the opinion that despite partial non-compliance of certain directors with the formal independence criteria, their vast knowledge and long-standing practical experience, as well as their generally recognized reputation among investors allow them to make unbiased, independent and bona fide judgements and make decisions that serve the interests of the Company and its shareholders.

Details on the Company's Board members, including their vitaes, are disclosed by the Company in its annual report.

The Board activities are based on the Board's Work Plan.

There is a number of matters reviewed by the Board on an annual basis in line with the Russian laws and the Company's customary practices:

• in January the Board pulls together the preliminary operational results of LUKOIL Group for the past year and sets the goals for the current year and short-term goals, and in the course of this exercise it identifies the priority areas of business for the current year and performs a comparative review of the Company's operational performance for the recent years;
• in April the Board resolves on the preparation of the General Shareholder Meeting, and, in particular, it approves the agenda, designates the compilation date of the list of persons entitled to participate in the meeting, the text and the forms of voting ballots, performs a preliminary review of draft resolutions on the agenda items, and handles other organizational issues;
• at its meeting in May the Board issues a preliminary approval of the Annual Report of OAO LUKOIL for the past year which is then submitted to the General Shareholder Meeting for approval, and summarizes the results of its operations, hears the reports on the committees' annual performance and on execution of the Board's instructions, and assesses its own performance during the year;
• in May the Board also approves the OAO LUKOIL Corporate Governance Report;
• in June at its first meeting the newly elected Board elects the Chairman from among its members, and based on the recommendation of the Board Chairman appoints the Secretary of the Board and elects committee members;
• in July the Board forms the Management Committee of OAO LUKOIL and determines the key terms and conditions of contracts to be entered into with its members. In furtherance of the Federal Law On Joint-Stock Companies the Board establishes the maximum remuneration of the Auditor of LUKOIL for the audit of the financial statements in line with the Russian standards for the current year; and at the same meeting approves the work plan of the Board for the period until the next annual General Shareholder Meeting;
• in August it summarizes the preliminary results of LUKOIL Group's business for the first six months of the year and reviews budget and investment programs performance in the current year;

In addition to the above issues, in October of 2014, the Board of Directors resolved to hold an extraordinary General Meeting of Shareholders to resolve on the payment of interim dividends based on the performance over the 9 months of 2014 fiscal year.

In November of 2014, the Board also approved the major budgetary indicators of LUKOIL Group for 2015 in base-case and anti-crisis scenarios.

In 2014, the approval of the LUKOIL Group Strategic Development Program for the next 10 years was suspended due to the abrupt oil price drop in the autumn of 2014 accompanied by the unfavorable changes in the macroeconomic environment (the economic sanctions imposed by the USA and the EU produced an additional negative effect) and the need for adjustment of operational plans and investment programs.

In 2014, the Board also approved a number of important documents to improve corporate governance:

• Amendments and addenda to the Regulations on Dividend Policy of OAO LUKOIL (Minutes No.9 of April 24, 2014) reflecting the changes in dividend payment by jointstock companies in view of the applicable Russian legislation;
• The Post-audit Methodology for Investment Projects (in the business segments of Petroleum Product Supply in Russia and of Petroleum Product Supply Abroad) (Minutes No. 17 of August 25, 2014);

Internal Control Procedures that were practically tested during control and audit inspections of the LUKOIL Group Organizations in 2013 and 2014 (Minutes No. 27 of December 29, 2014);

as well as updated the previously adopted documents by making respective amendments.

The Board also reviewed in more detail and developed an action plan for development of certain LUKOIL Group business units. This work was performed with a focus on the following issues:

• On comparative data of the corporate performance in the recent years: the Downstream Segment in Leading Russian Companies (Minutes No. 1 of January 13, 2014);
• On commissioning of the West Qurna-2 field. On new promising projects in the Republic of Iraq (Minutes No. 9 of April 24, 2014);
• On replenishment of oil reserves by means of geological exploration and implementation of measures to enhance the oil recovery (Minutes No. 11 of May 14, 2014);
• On implementation of priority oil and gas production projects in the Russian Federation. On new promising projects in Russia (Minutes No. 11 of May 14, 2014);
• On West Qurna-2 implementation progress (Minutes No. 23 of November 21, 2014).

To better familiarize the Board members with the regions of the Company's operation, the Company has introduced the practice of offsite Board meetings. The meeting dedicated to the development of the Oil Refining, Petrochemistry and Gas Refining Block was held in 2014 in Burgas (Republic of Bulgaria). The Board members were familiarized with the LUKOIL Neftochim Burgas AD activities. A study trip to the V. Grib diamond field located in Arkhangelsk was organized for the BoD members in November.

The procedure for convening and holding the meetings of the Board is governed by the LUKOIL Board Regulations.

The Board meetings may be held in person and by absentee voting/ballot. In 2014 the BoD held 7 in-person meetings, and 20 meetings by ballot. The information on attendance of the BoD in-person meetings and meetings by ballot is specified in the below table.

Each in-person BoD meeting is attended by the members of the Company's Management Committee. They present their reports dedicated to the agenda items.

The visiting sessions are also attended by the heads of the organizations operating in the regions where the sessions are held.

Biannually, in January and August, extended BoD meetings are held attended by the members of the Management Committee and other key employees of the Company, as well as heads of the LUKOIL Group Organizations; at the same time some of them act as co-speakers on the issues of plan, budget and investment program execution.

In line with the Regulations on the Performance Assessment of the Board of Directors of the Open Joint-Stock Company LUKOIL Oil Company approved by BoD on April 16, 2012 (Minutes No. 7), the amended version approved by BoD on December 4, 2012 (Minutes No. 24), the employees of OAO LUKOIL Office polled the BoD members who assessed the activities of the Board of Directors and its Committees in 2013-2014.

The informal approach of the BoD members to performance assessment of the said body enabled them to trace the issues requiring greater attention on the part of the Board of Directors.

During the meeting held on May 14, 2014 (Minutes No. 11) the BoD summarized the polling results. Given the 2013-2014 BoD Performance Report and the 2013-2014 BoD performance assessment results, the BoD positively assessed its activities in the reporting period.

OAO LUKOIL Office supported the activities of the BoD and the Board Committees in 2014. Head of the Office simultaneously acts as the BoD Secretary and also performs the functions of the corporate secretary. He is also member of LUKOIL's Management Committee.

The Office of OAO LUKOIL is responsible for preparation of the meetings of the Board and the Board Committees, collection and preliminary analysis of the materials relating to the matters on the agenda of the meetings, their classification and preparation of the draft resolutions. Based on the proposals of the Board members and the Management Committee members, the employees of LUKOIL's Board Office prepared and submitted the action plans of the Board to the Board and the work plans of the Board Committees in view of their competence to the Board for approval.

The employees of LUKOIL's Board Office made sure that the reference materials required for voting on the items of the agenda were provided to the Board members, including translation into the English language.

The Russian and the foreign members of the Board enjoy equal access to the Company's information. Simultaneous interpreting into English is provided at all meetings.

The preparation, distribution and storage procedure for the BoD and BoD Committees meeting materials was implemented in electronic form as well. Specialized software was developed to make it possible for the BoD members to download the meeting materials to their mobile devices.

	Board of Directors
		in-person meetings1	meetings by ballot2
	N	A	N*	A*
V.I. Grayfer	7Ch	6	20	20
V.Yu. Alekperov	7	7	11	10
V.V. Blazheev	7	7	20	20
I.S. Ivanov	7	6	20	20
R.U. Maganov	7	5	11	11
R. Matzke	7	7	20	20
S.A. Mikhailov	7	7	20	19
M. Mobius	7	6	20	18
G. Moscato	7	5	20	18
I. Pictet	7	7	20	20
L.A. Fedun	7	7	14	14

Table of Participation of BoD Members in In-person Meetings and Meetings by Ballot of BoD in 2014

• Ch Chairman
• N Number of in-person meetings held
• A Actual number of in-person meetings attended by the Director
• N* Number of held meetings by ballot with mandatory participation of the director in the voting procedure
• A* Actual number of meetings by ballot where the director participated in the voting procedure

1 In line with the applicable Regulations on OAO LUKOIL Board of Directors, participation in the meetings held in the form of joint attendance, by telephone or video conference communication shall be regarded as bodily presence at the meeting.

2 The number of meetings by ballot with mandatory participation of directors differ since meetings by ballot are often dedicated to the consideration of related party transactions, and certain directors are regarded as an interested party thus they are not participating in the voting procedure.

3. Board Committees

For the purposes of preliminary analysis of certain crucial issues and preparation of recommendations for the Board for passing of resolutions in respect of such matters, three Board committees have been established that act pursuant to the relevant committee regulations approved by Board. The Committee members are elected at the meeting of the new Board for the period until the next Board is elected by the General Shareholder Meeting. Information on the Committee structure is provided by the Company in its annual report.

The Audit Committee analyzes the efficiency of internal control and audit in LUKOIL and LUKOIL's financial statements. Among other things, it is responsible for nominating the Company's auditor, evaluating the auditor's opinion, evaluating the objectivity and independence of the Company's auditor.

The members of the Audit Committee are elected from among the non-executive directors. The Committee has at least three members. At least one member of the Committee must be an independent director.

As of the end of 2014, the Audit Committee consisted of one director considered independent according to the Code and the Listing Rules (Committee Chairman), one non-executive director and one director considered independent according to the Listing Rules and non-executive according to the Code.

In 2014, the Audit Committee held 6 meetings in person and 2 meetings by ballot; recommendations were given with regard to preliminary approval of the Company's 2013 Annual Report, as well as approval of the internal documents of the Company on risk management and internal control and audit. The Committee also analyzed the Auditor's Report on OAO LUKOIL Financial Statements, developed recommendations on the selection of the Company's Auditor and its remuneration.

The Human Resources and Compensation Committee determines the policy and standards of selection of candidates for the Board members, Management Committee and the Company's President and prepares the preliminary evaluation of the nominated members of the Management Committee and the Company's President.

This Committee also provides recommendations for the Board of Directors on priority areas related to human resources and the remuneration of the Company's management bodies and the Audit Commission.

The members of the Human Resources and Compensation Committee are elected from among the non-executive directors. The Committee has at least three members. At least one member of the Committee must be an independent director.

As the Committee was created in June of 2014, it consisted of one director considered independent according to the Code and the Listing Rules (Committee Chairman) and two non-executive directors. However, by the end of 2014 the tenure of Mark Mobius in the BoD exceeded 7 years and he ceased to be fully compliant with the independence criteria of the Code and the Listing Rules (see also Section "Board of Directors").

In 2014, the Human Resources and Compensation Committee held 3 meetings in person and 2 meetings by ballot. The Committee provided the Board with the recommendations with regard to the size and membership of the Company's Management Committee, principal terms and conditions of the agreements with the Management Committee members, the remuneration of the Board members and the Audit Commission, approval of the local regulations on long-term incentives as well as the other issues within the scope of the Committee's competence.

The Strategy and Investment Committee prepares proposals for the Board to establish priorities in the Company's activities and develop the Company's long-term development strategy.

It is responsible, among other things, for preparation of recommendations for the Board regarding the amount of dividend to be paid on the shares and the procedure for payment thereof.

A minimum of three Board members are elected as the members of the Strategy and Investment Committee. At least one member of the Committee must be an independent director.

As of the end of 2014, the Strategy and Investment Committee consisted of five directors, two of them were considered independent according to the Code and the Listing Rules, one was nonexecutive and the other two were executive. The Committee is headed by an independent director.

In 2014, the Strategy and Investment Committee held 4 meetings in person and 1 meeting by ballot. The Committee considered the vital issues of the Company's strategic development, provided recommendations as to allocation of profit, the amount of annual dividends, as well as interim dividends based on the results of the corresponding reporting period.

The information on attendance of the in-person meetings of the Board Committees is specified in the table below:

Table of Participation of BoD Members in In-person Meetings of Board Committees in 2014

	Audit Committee		Human Resources and Compensation Committee		Strategy and Investment Committee
	N	A	N	A	N	A
V.I. Grayfer
V.Yu. Alekperov
V.V. Blazheev	6	6 Ch
I.S. Ivanov					4	3 Ch
R.U. Maganov					4	3
R. Matzke			3	2
S.A. Mikhailov	6	6	3	3
M. Mobius			3	2 Ch	4	4
G. Moscato					4	4
I. Pictet	6	6
L.A. Fedun					4	4

Ch Chairman

N Number of in-person meetings held

A Actual number of in-person meetings attended by the Director

4. President and the Management Committee

The President is appointed by the General Shareholder Meeting for a five-year term and also serves as the Chairman of the Management Committee. The President is responsible for the day-to-day management of the Company and acts within his/her scope of responsibility, as determined by LUKOIL's Charter. Alekperov was appointed Company's President in 2011 by the Annual General Meeting of Shareholders.

The Management Committee chaired by the Chairman of the Management Committee is an executive body of the Company responsible for the Company's day-to-day management.

The members of the Management Committee are appointed annually by the Board. Within one month following election of the Board by the General Shareholder Meeting, the Company's President submits to the Board for approval of a proposal concerning the number of the Management Committee members and the nominated persons. The Board may decline specific Management Committee nominees, but may only approve those members of the Management Committee which have been nominated by the President.

The term of office of the Management Committee members runs from the time of their approval by the Board and until the Board has approved the new members of the Management Committee. Any member of the Management Committee may, at any time, be dismissed by the Board upon the President's proposal. The President may in the course of the year nominate other members of the Management Committee for the Board approval.

Currently, the Management Committee consists of 14 persons: the Company's President, the First Executive Vice President (Exploration and Production), two First Vice Presidents (Refining and Marketing, Economics and Finance), two Senior Vice Presidents and Vice Presidents responsible for certain business lines.

The President convenes the Management Committee meetings as required. As a rule, they are held on a weekly basis. The agenda of the Management Committee meeting is determined by the President, including on the basis of the agenda proposals submitted by the Management Committee members.

The Management Committee's competence is set forth in the Company's Charter.

The principal terms and conditions of the contracts entered into with the President and the Management Committee members are determined by the Board. For this purpose, the votes of the Board members who are also the President and/or the members of the Company's Management Committee are disregarded.

In its annual reports the Company includes information on the aggregate fees and compensations received by the Management Committee members during the year in question.

5. Audit Commission

The Audit Commission audits the accuracy of the data in the Company's annual report, OAO LUKOIL's financial statements in accordance with the Russian laws and generally controls the Company's financial and business activities. The members of the Audit Commission are elected on an annual basis at each Annual General Shareholder Meeting to serve until the next General Shareholder Meeting. The Commission has three members. The General Shareholder Meeting may early terminate the office of all or any of the Audit Commission members.

OAO "LUKOIL" Corporate Governance Structure

A shareholder or any person nominated by a shareholder may be member of the Audit Commission. A member of the Audit Commission may not concurrently serve on the Board or the Management Committee or be the Company's President.

The Audit Commission may require that an extraordinary General Shareholder Meeting be convened and may at any time audit the Company's financial and business operations. In addition, the Audit Commission must conduct an audit pursuant to a resolution of the General Shareholder Meeting, the Board or on request of any shareholder (shareholders) holding in the aggregate at least 10% of the Company's voting stock.

The remuneration payable to the members of the Audit Commission is approved by the General Shareholder Meeting. The remuneration shall be fixed in Russian rubles. The Annual General Shareholder Meeting held in 2014 made a decision to increase the remuneration amount for the newly elected members of the Audit Commission, since it had not been changed since the Annual General Shareholder Meeting in 2011. Currently, the remuneration paid to the member of the Audit Commission is equal to nearly 60% of the remuneration amount paid for the performance of the duties of a BoD member.

6. Preparation of Financial Statements

LUKOIL regularly prepares and discloses US GAAP annual and interim consolidated financial statements (see also Shareholder Relations).

In addition, OAO LUKOIL, as a Russian company, and its Russian subsidiaries prepare financial statements in accordance with the Russian Accounting Standards ("RAS").

The Company implements various internal controls at all stages of the accounting process and preparation of its consolidated financial statements. Such practice ensures accuracy of the published financials and the information on which Company's management relies. The key internal controls and procedure of the Company include the following.

Distribution of Authority and Responsibility

Preparation of US GAAP consolidated financial statements is challenging since the Russian companies in LUKOIL Group (hereinafter - the Group) do not themselves prepare the US GAAP statements. These companies of the Group prepare RAS financial statements, whereas such RAS statements are converted to US GAAP on a centralized basis by LUKOIL's Accounting Service. The foreign subsidiaries do prepare the US GAAP statements which are used for the purposes of consolidated financial statements.

At all stages of preparation of the financial statements (for individual subsidiaries and consolidated statements), the responsibilities in the LUKOIL Group are clearly delineated:

LUKOIL Group Organizations	Financial Statements	Responsibility
Russian companies that prepare RAS statements themselves	RAS	CEO, Chief Accountant
	US GAAP	OAO LUKOIL Accounting Service
Russian companies that do not prepare RAS statements themselves and are	RAS	CEO, Head of Regional Accounting Center
serviced by the Regional Accounting Centers	US GAAP	OAO LUKOIL Accounting Service
Foreign entities that prepare US GAAP statements themselves	US GAAP	CEO, Chief Accountant
Foreign entities that do not prepare US GAAP statements themselves serviced in the European Accounting Center	US GAAP	CEO, Head of the European Accounting Center
OAO LUKOIL	US GAAP, consolidated	OAO LUKOIL President, Vice President, Chief Accountant of OAO LUKOIL

We believe that such distribution of responsibilities ensures the adequate accuracy of the financial and operational data used.

Disclosure of Consolidated Financial Statements. The Company prepares its consolidated financial statements on a quarterly basis. Interim financial statements (as of March 31, June 30 and September 30) are published jointly with the independent Auditor's Reviews. The annual financial statements (as of December 31, each year) are published along with the auditor's opinion and contain additional information on geological exploration and oil and gas production. The Company publishes both the interim and annual financial statements along with its MD&As.

There is a tendency observed towards successive reporting term reduction. Currently the Company publishes its interim consolidated financial statements not later than two months after the end of the reporting period.

Internal Audits. The Company has an Internal Control and Audit Service (see also Internal Control and Internal Audit) which, among other things, audits the accuracy of the financial statements of the LUKOIL Group Organizations. Further, the Company's Accounting Service has its own procedures ensuring additional control over adequate preparation of the financial statements by the subsidiaries. Such procedures include:

• field inspections with a view to confirming that the financial statements of the Group companies are correct and accurate;
• regular advice to the Group companies on accounting issues (RAS and US GAAP), attention to complicated accounting issues. Annual field workshops for the accountants of the Group companies at which the Company's approved application practices of certain standards (including newly adopted) are communicated to them;
• The Company's Accounting Service has developed review and reconciliation procedures for various items of financial statements of the Group companies, and it controls the accuracy of the Group companies' financial statements (under RAS and US GAAP);
• with a view to minimizing the human factor effect the supplied financial and performance data is rechecked, both for individual Group companies and at the consolidated level.

Interaction between the units. Preparation of consolidated US GAAP statements requires cooperation between the Department for International Accounting of OAO LUKOIL and various subdivisions in the Company itself and the Group companies. A regular exchange and additional review of information form part of such cooperation. The factual data prepared by the Accounting Service is also used by various subdivisions of the Company for purposes of adjusting the preliminary operating results and determining the key operational parameters for the Group's subsidiaries and other goals.

The staff of the Accounting Service together with the staff of the Service for Control and Internal Audit, as well as those of the other Company's subdivisions and its subsidiaries are involved in the activities of the audit commissions of the subsidiaries that can be referred to joint-stock companies in terms of their legal organizational form. This ensures additional control by the Company's Accounting Service over the accuracy of the information supplied by the subsidiaries.

Unified Accounting Policy of the Group. The Company has the US GAAP accounting policy approved by the Management Committee. The US GAAP accounting policy is reviewed at least once a year; the amendments are made by the order of OAO LUKOIL. Adoption of a new accounting policy requires its approval by the Company's Management Committee. The US GAAP accounting policy is binding on all LUKOIL Group Organizations that prepare independent US GAAP statements.

Since the Company itself and its major subsidiaries are domiciled in Russia, the President annually approves the RAS accounting policy which is applied internally, and the requirements towards the accounting policies of the Russian subsidiaries of the Company.

The centralized development of the accounting policies (under RAS and US GAAP) ensures unified principles of accounting and reporting similar transactions, and facilitates the comparability of subsidiaries and other entities in which LUKOIL Group Organizations own more than 20% of their charter capital.

Centralized Decision-Making Process. The Company has a system in place that ensures centralized decision-making where necessary and delegation of powers to optimize the Group management processes. The same applies to the accounting services of the Group. Centralized decision-making process of the Group applies to the following accounting related matters:

• organization of the accounting processes in subsidiaries (a subsidiary may maintain its accounts independently or have them maintained by a specialized subsidiary);
• auditor selection matters (for significant subsidiaries of the Company);
• timeline for preparation of annual and quarterly statements of the Group companies, date of the financial statements audit completion;
• RAS and US GAAP accounting policies;
• appointment of subsidiaries' chief accountants;
• automation of accounting processes.

Employee training. All employees of the Company's Accounting Service engaged in preparation of US GAAP consolidated financial statements have a degree in accounting or finance. Many of them are certified accountants (under Russian and international standards) and are members of the professional accounting societies in Russia, UK and USA. Some employees have academic degrees in accounting and finance.

The Company is striving to provide additional training to its Accounting Service employees. Employees involved in the preparation of the US GAAP consolidated financial statements regularly receive advanced training, sponsored both by the Company that organizes training and workshops, and by themselves.

Transition to the IFRS. Starting from financial statements for 2015, according to Federal Law No. 208-FZ "On Consolidated Financial Statements" of July 27, 2010, the Company will prepare its consolidated financial statements based on the IFRS rather than the US GAAP. Currently the Company is preparing its 2014 consolidated financial statements according to the IFRS.

7. External Audit

The auditor of the Company's RAS statements is annually approved by the General Shareholder Meeting as required by the Russian laws. In the course of preparations to the annual General Shareholder Meeting the Audit Committee of the Board makes a nomination of the recommended auditor to be subsequently approved by the General Shareholder Meeting.

When entering into an agreement with the auditor of its US GAAP and IFRS consolidated financial statements the Company's management also considers the recommendations made by the Audit Committee.

To ensure enhanced control over the business of the Group companies and higher accuracy of the received information, the auditor of the financial statements of the major Group companies (under RAS – for major Russian Group companies; under US GAAP – for major foreign Group companies) is now the same auditor as the auditor of the Company's US GAAP consolidated financial statements.

The Company's auditor is independent. The auditor's independence is determined by the International Auditing Standards, the US Auditing Standards, the Federal Auditing Rules (Standards) approved by the resolution of the RF Government.

In order to maintain its independence and pursuant to the audit standards the Company's auditor regularly replaces the main audit partner at least once every seven years. The audit partner was last replaced in 2014.

The scope of advisory and other non-audit services performed by the Company's auditor is insignificant as compared to the scope and fees for the work related to the audit of financial statements of LUKOIL Group Organizations. The remuneration share paid to the Auditor for the services not related to audits in the total remuneration amount does not exceed 20%.

8. Internal Control and Internal Audit

The Company has in place a system of internal controls and internal audit designed to protect the interests and rights of the Company shareholders, safekeeping of the Company's assets by preventing, tracing and eliminating the cases of violation of the applicable requirements and their reasons.

The key documents setting forth the structure, purpose, parties involved and functions of the system of internal controls of the Company are the Regulations on Internal Control and Internal Audit at OAO LUKOIL and the Regulations on the organization and conduct of control and audit reviews at OAO LUKOIL, the Regulations on Internal Audit in OAO LUKOIL for the consulting purpose approved by the Board of Directors of OAO LUKOIL.

The following bodies are involved in the control functions at various levels as part of the internal control system:

Board and its Audit Committee,

• the President of the Company,
• Control and Internal Audit Service of OAO LUKOIL,
• specialized control and internal audit subdivisions of LUKOIL Group Organizations (SSCIA),
• structural subdivisions of LUKOIL,
• Audit commissions of LUKOIL Group Organizations.

The internal control system embraces the LUKOIL Group Organizations and their structural subdivisions.

The Board of Directors of OAO LUKOIL approves and amends the key internal documents of the Company (if applicable) regulating the internal control activities, including the internal control rules, methods and procedures, as well as the criteria and procedures for internal control system efficiency assessment.

The Audit Committee of LUKOIL's Board of Directors is responsible for efficiency assessment of the Control and Internal Audit Service. The Committee also considers the draft in-house documents relating to internal control and internal audit prior to their approval by the Board of Directors and provides recommendations as to their approval. A number of meetings of LUKOIL's Audit Committee dedicated to consideration of the above draft documents were held in 2014; subsequently they were recommended to the Board of Directors for approval based on the meeting outcomes.

The Control and Internal Audit Service is a structural subdivision of OAO LUKOIL responsible for impartial and independent control of the financial and economic activities of the LUKOIL Group Organizations. Control and audit of the performance of all the bodies involved in the control (other than Company's President, the Audit Committee and LUKOIL's Board) are among its key tasks. The Control and Internal Audit Service also develops the internal control procedures to be approved by the Board of Directors, applies the approved procedures to its practical activities and ensures their consistent application on the part of the above bodies involved in internal control. It exercises functional control over the activities of the specialized subdivisions for control and internal audit of LUKOIL Group Organizations and coordinates the control activities of other bodies involved in internal control (other than the Board, the Audit Committee and President of OAO LUKOIL).

The Vice President for Control and Internal Audit also acts as Head of the Control and Internal Audit Service. He reports directly to the Company's President covering all issues of its activities. He is also a member of the Management Committee.

Based on the results of the work underway, the Vice President for Control and Internal Audit informs the Company's President and, on the President's instruction, also the governance bodies and structural subdivisions of LUKOIL on any identified material violations in the operations of the Group companies, the reasons and circumstances of such violations and the proposed remedies. He also reports on the violations identified to the Audit Committee of OAO LUKOIL Board.

The Vice President for Control and Internal Audit reports annually on the state of the internal control and internal audit system in the LUKOIL Group companies at a meeting of the Audit Committee of OAO LUKOIL Board and subsequently at OAO LUKOIL Board meeting.

The specialized control and internal audit subdivisions of the LUKOIL Group Organizations are functionally subordinate to the Vice President for Control and Internal Audit of OAO LUKOIL and fulfill their functions in view of the work plans agreed upon by the Vice President for Control and Internal Audit of OAO LUKOIL, which allows them to coordinate their control and auditing activities, ensure that the risk-oriented approach to planning of controls and audits is used.

In order to enhance the efficiency of the LUKOIL Group Internal Control System in Q1 2014, in line with the order of ОАО LUKOIL President, LUKOIL Group implemented measures to reorganize the specialized subdivisions for control and internal audit in the Russian organizations of LUKOIL Group, that resulted in the establishment of Regional Control and Audit subdivisions in 8 most significant LUKOIL Group Organizations which conduct control and audit in the respective organizations, as well as provide internal control and audit services to 16 other LUKOIL Group Organizations as part of service agreements.

The implemented reform contributed to centralization of the functions of the scarce and isolated specialized subdivisions for control and internal audit, to their better performance and also allowed them to reduce the total number of the Russian SSCIA from 33 to 15 as of the end of 2014.

Internal control and audit cover all areas of the Company's business, including: LUKOIL Group's compliance with the laws of the jurisdictions in which the LUKOIL Group Organizations conduct their business; implementation of resolutions of the Company's governance bodies and its local regulations; procuring safekeeping of assets (property) of the LUKOIL Group Organizations and their efficient use, ensuring accuracy of managerial reporting and financial statements.

The controls and audits reveal the current state of the internal control systems of the LUKOIL Group Organizations, identify their functional drawbacks and help develop measures to eliminate them.

The specialized control and internal audit subdivisions of the Company and its subsidiaries monitor the measures taken by the LUKOIL Group Organizations to eliminate the identified violations and drawbacks.

Internal control of finance operations is implemented at all levels of document processing, from source documents to financial (accounting) statements. In addition, the Control and Internal Audit Service on a regular basis monitors compliance of the LUKOIL Group Organizations with the requirements of the applicable laws, accounting policies and other local regulations of the Company relating to financial reporting.

To protect the corporate interests of OAO LUKOIL and enhance the efficiency of the internal control system, the LUKOIL Group Organizations organize and perform regular audits.

The audit commissions of the Russian companies of LUKOIL Group audit annually the financial (accounting) statements before submitting the same to the general shareholders (members) meetings. The Control and Internal Audit Service coordinates audit commissions activities.

In 2014, audits of the financial and economic activities were conducted in 59 LUKOIL Group Organizations and 5 joint ventures.

At the same time, in view of the decision by the Company's Management Committee of January 20, 2014 to abolish audit commissions in limited liability companies if they are members of LUKOIL Group, audit commissions in 50 LUKOIL Group Organizations have been dissolved. Today, audit commissions are functioning in 5 joint-stock companies and in 4 joint ventures.

The control and internal audit programs and procedures implemented by the Company are fairly efficient, but the Company is constantly striving to improve them.

In 2014 LUKOIL's Board also approved important internal control and internal audit regulating documents and amended the previously approved documents (see also Board of Directors).

The Regulations on Assessment of Internal Audit at OAO LUKOIL provide for annual in-house assessment of internal audit in the Company. OAO LUKOIL President, and Heads of the LUKOIL Group Organizations with the specialized internal control and audit subdivisions participated in the above assessment that was conducted at the beginning of 2014.

As part of the service agreement the Non-commercial Partnership "The Institute of Internal Auditors" conducted activities aimed at independent external approval of the performance evaluation of the Service for Control and Internal Audit in terms of its compliance with the principles set in the International Internal Audit Professional Standards, as well as the expectations and needs of the Company's top management.

Based on the outcomes of the evaluation conducted by the Non-commercial Partnership "The Institute of Internal Auditors" a positive opinion on the activities of the Service for Control and Internal Audit was formulated. The above partnership also submitted structural recommendations aimed at more efficient activities by specialized subdivisions for control and internal audit of the Company and its subsidiaries.

The Company believes that the applicable local regulations, methods and procedures of internal control, the activities of the specialized subdivisions for control and internal audit, prompt remedial actions in relation to the identified violations and deficiencies indicate that the Company has an efficient system of internal controls and audits in place.

9. Risk Management

OAO LUKOIL governance bodies pay great attention to the risk management issues in order to ensure reasonable achievement of the set goals in the conditions characterized by uncertainties and adverse factors.

The Company's risk management practices primarily focus on mitigation of key risks, including the risk of loss, the risk of failure to achieve the targets, and the risk of other substantial adverse factors.

The Company 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.

Risk management is considered an integral part of the economic and production activities and the corporate governance system exercised by the Company's employees at all management levels.

Key Participants of the Enterprise Risk Management in OAO LUKOIL

The Company 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 the LUKOIL Group Organizations.

In order to enhance the efficiency of the general corporate risk-management system, an automated information risk-management system was brought into commercial operation in the LUKOIL Group companies in Q4 2014, which will allow to:

• create a unified information environment for all participants of the corporate riskmanagement process (at all managerial levels);

• automate the processes of collection, due diligence, approval and storage of risk information, thus increasing the risk-response rate and risk-management efficiency in general;

• develop a general presentation format for risk data;
• develop a risk-management knowledge base.

LUKOIL is constantly identifying, describing, estimating and monitoring the possible 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.

In 2014 the LUKOIL Group Organizations implemented a full set of risk management measures in line with the standards set by the Company, the 2015 Enterprise-wide Risk Register was developed. Based on its consideration results the Risk Committee made managerial decisions provided for by the applicable local regulations.

The corporate risk management system is effective enough but it is being improved on an ongoing basis in view of the ever changing external factors and development of the world's best practice.

10 Shareholder Relations

The Company annually holds the annual General Shareholder Meeting which pursuant to the Russian laws must be held not earlier than two months and not later than six months after the end of the fiscal year.

The agenda of the annual General Meeting must include the election of members of the Board and the Audit Commission; the approval of the Company's Auditor; the approval of the annual report, annual accounting (financial) statements, including the profit and loss statement of the Company; the distribution of profit and loss based on the results of the fiscal year, including dividend distribution. The annual General Shareholder Meeting may pass resolutions on any other matters within its competence.

Proposals to the agenda of the annual General Shareholder Meeting and nominations to the Board, the Audit Commission of the Company, and the position of the Company's President may be made by the holders in aggregate of at least 2 percent of the voting shares of the Company within 30 days after the end of the fiscal year. In addition to the matters proposed to be included in the agenda by shareholders, and in the absence of such proposals, in the absence or lack of nominations made by shareholders to form the relevant body of the Company the Board may expand the agenda and make nominations at its own discretion. The Company's Charter identifies the matters in respect of which a decision may only be adopted by the General Meeting on the Board's submission.

The annual General Shareholder Meeting is generally held in the form of joint attendance of shareholders, with preliminary distribution (dispatch) of ballots before the meeting is held (in a combined form), enabling the shareholders to personally attend and vote at the meeting or to mail completed voting ballots.

In addition to the annual general meetings the Company can also hold extraordinary general meetings. Such meetings can be held by virtue of the decision of the Company's Board at its own initiative, the request by the Audit Commission, the Company's Auditor and the shareholders (shareholder), who hold in aggregate at least 10 percent of the voting shares of the Company.

On December 12, 2014, at the initiative of the Board of Directors of OAO LUKOIL the Company held the Extraordinary General Shareholder Meeting in the form of absentee voting/ballot. A decision was made during this meeting to pay dividends on LUKOIL's ordinary shares based on the outcomes for the nine months of 2014 fiscal year.

To facilitate the shareholders' access to the reference materials for the meeting such reference materials are posted on the Company's websites in Russian and in English. In preparation for the General Shareholder Meeting the Company grants equal access to information for Russian and non-Russian shareholders, including the holders of depositary receipts.

The Company considers its relations with all categories of shareholders equally important. These functions are performed by the Investor Relations Department which maintains relations with both institutional and individual shareholders.

The Company seeks to promptly inform its shareholders and other stakeholders about any developments in its business.

OAO LUKOIL regularly discloses its US GAAP consolidated financial statements and publishes MD&As (see also Preparation of Financial Statements). Disclosure of financial statements is generally accompanied by a presentation by senior managers of the Company and executives of the Accounting Service directly involved in the preparation thereof. Such presentations are broadcasted on the Company's website, with questions to the participants of the presentation taken, inter alia, via the Internet.

The Company has a special compliance office in charge of procuring compliance with the disclosure requirements of the Russian and applicable international laws. The information required to be disclosed is posted on the Company's websites in Russian and in English.

Along with disclosure of the documents compliant with the mandatory requirements of the regulatory authorities, the Company annually releases and publishes on its website Analyst Databooks and LUKOIL Fact Books. These books provide summary information about the Company for a 5-year period. The former book contains numerical information in the form of tables and diagrams and the latter contains more data of descriptive and historical nature. The Company also biannually prepares a Sustainable Development Report in the Russian Federation.

The Company's representatives also take part in conferences and other events arranged for institutional investors and analysts. Priority investment projects of the LUKOIL Group in the Komi Republic were presented in June of 2014 to the representatives of the investment communities and the Company's shareholders. As part of the Presentation activities attended by more than 30 analysts and representatives of investment funds the attendees were familiarized with the operation of the production assets of OOO LUKOIL-Komi, the experience of OOO LUKOIL-Komi in the area of environmental protection and compliance with the environmental legislation; they also visited the headquarters of OOO LUKOIL-Komi in Usinsk and the Museum of Oil Industry History of the Timan-Pechora Province.

Information on various aspects of the Company's business is also distributed through the press service.

As a result of 1990s privatization of the Company and the companies which subsequently became its subsidiaries a large number of individual minority holders residing in all constituent entities of the Russian Federation have been entered in the shareholder register of LUKOIL. The Investor Relations Department, inter alia, interacts with such minority shareholders and, in particular, advises them on exercise of their shareholder rights, equity transactions and provides the necessary information regarding the Company and relations with its registrar.