Address by PJSC LUKOIL President and CEO G4-1 G4-2

“We intend to continue a constant dialogue with the stakeholders, implement programs and projects that have shown their effectiveness, and look for new approaches and ideas”.
V.Yu. Alekperov President and CEO,
Chairman of the PJSC LUKOIL Management Committee

This Sustainability Report is an opportunity for our Company to present a comprehensive view of our economic, environmental and social achievements. We are convinced that it is only through observing a balance between all these factors that we can ensure the truly harmonious development of the business. In fact, along with the creation of shareholder value, we strive to ensure that our activities contribute to maintaining the ecological balance, as well as improving the prosperity of the regions of our presence through taxation and social support programs

Observance of laws and moral standards, consideration of the expectations of stakeholders and the interests of future generations have been used for strategic decision making since the foundation of LUKOIL.

When planning our activities, we take into account the main global trends in the field of sustainable development. One of the latest initiatives our Company has supported is the United Nations Development Program, “Transforming Our World: The 2030 Agenda for Sustainable Development”. This document gives recommendations for coordinating the efforts of government and business in the field of sustainable development.

Address

2.5 trillion rubles LUKOIL capitalization as of the end of 2016 (record high)

Among the industrial achievements of the reporting period, mention should be made of the commissioning of the Pyakyakhinskoye field in the north of West Siberia and the Vladimir Filanovsky field in the Russian sector of the Caspian Sea. The high productivity and cost-effectiveness of these projects confirm the Company’s ability to successfully develop complex hydrocarbon reserves from scratch, both onshore and offshore. The competences that have been accumulated form a solid foundation for further sustainable development of the Company in the circumstances of a reduced conventional resource base.

The Vladimir Filanovsky field is the largest of our new projects. With its record breaking outputs and minimal environmental impact, it is a good illustration of the sustainable development concept in action. The ‘zero discharge’ principle has been applied here, which completely rules out the discharge of wastes into water, and a biodiversity conservation program is also being implemented. The development of this project contributes to the economic growth of the Astrakhan Region through the creation of new jobs, the use of contractors, and implementation of regional social support programs.

The Pyakyakhinskoye field is distinguished by its use of highly complex drilling and well completion technologies. In particular, we use horizontally branched wells that ensure high flow rates and enable us to minimize geological risks. The experience we have gained has opened up new possibilities for implementing oil production projects in future. It is also important to note that development of this field, like our work in the new East-Taimyr license block, contributes to the integrated development of the Russian subarctic regions.

Among our international projects, attention must be drawn to our deposits in Uzbekistan, where we have invested substantially in the construction of a gas production and treatment infrastructure. Once these projects have achieved full capacity, they will be one of the major growth factors of the Company’s hydrocarbon production in the medium term.

It is worth mentioning that we were one of the first in Russia to complete the basic modernization program for our Russian refineries. As a result, we have significantly improved the output composition of our products and have fully transitioned to the production of fuels under the Euro 5 environmental standard. Today, our refineries are in line with the best global practices.

As a result of the implementation of the Environmental Safety Program in Russian enterprises, the volume of water withdrawn from natural sources has been reduced, while the scope of land reclamation and volume of waste utilization have increased. In recent years, we have been actively implementing the Efficient APG Management Program and are approaching the target of 95% of APG utilization in all subsidiaries in Russia.

95% the planned level of APG utilization at all subsidiaries of the Group in Russia

Despite numerous economic challenges, we have managed to show strong financial results in the reporting period and have outperformed many global oil and gas companies. Thanks to our considerable cash flow, we have been able to reduce our debt burden to a record low (net debt/EBITDA – 0.6).

The outcome of our business development efforts and our balanced financial policy are reflected in the market value of the Company – LUKOIL’s capitalization reached a historic high of 2.5 trillion rubles in 2016.

In the last two years, we have increased our ruble dividends by 27% per share and, in 2016, approved new provisions on dividend policy, designed to improve the traceability and predictability of our dividend payments.

In 2015–2016, the Company paid a great deal of attention to the development of the corporate governance system. Among the important changes has been the formation of the Corporate Secretary department in accordance with the recommendations of the Bank of Russia’s Corporate Governance Code. In addition to this, further confirmation of the high value placed on environmental and industrial safety has been the introduction of a Health, Safety and Environment Committee, accountable to the President of PJSC LUKOIL.

Throughout its history, LUKOIL has maintained the status of one of Russia’s largest employers. Over 85 thousand people work for our Russian entities, and more than 100 thousand people are employed by the LUKOIL Group. They are people of various trades and ethnic backgrounds, who, together, form a highly professional and motivated team. Our relationship with our employees is focused on creating conditions conducive to a high quality of work and life, and on solving the specific social problems they and their families may have through social partnerships with trade union organizations. Much attention has been paid to safety issues, educational programs, and personnel development programs.

We are in dialogue with public environmental organizations and the indigenous minorities of the North, on whose ancestral territories our production facilities operate. As a direct result of the support the Company gives, both in Russia and abroad, significant social facilities have been built, and the initiatives of local organizations have been realized. An important area of social investment, in which the Company works together with the “Our Future” Foundation for Regional Social Programs, is the development of social entrepreneurship in the Russian regions.

We intend to continue a constant dialogue with the stakeholders, implement programs and projects that have shown their effectiveness, and look for new approaches and ideas.

In response to the growing needs of our stakeholders as regards information about the Company, we have prepared this report in accordance with the G4 Global Reporting Initiative (GRI) Guidelines. This Guidelines introduces more extensive requirements on the disclosure of information on corporate ethics and product supply chain, which are reflected in this document.

I am pleased to present to you the Sustainability Report of the LUKOIL Group and I am happy to say that, starting from 2017, we are moving to an annual reporting cycle and expanding the reporting boundaries by including foreign assets in the document.

In gratitude for your interest in our Company,

V.Yu. Alekperov President and CEO,
Chairman of the PJSC LUKOIL Management Committee

>100 thousand people are employed by LUKOIL Group. The Company is one of the largest employers in Russia
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