2008

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

ConocoPhillips

Delaware (State or other jurisdiction of incorporation or organization)		01-0562944 (I.R.S. Employer Identification No.)

600 North Dairy Ashford
Houston, TX 77079
(Address of principal executive offices)

Registrant’s telephone number, including area code: 281-293-1000

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange
Title of each class		on which registered
Common Stock, $.01 Par Value		New York Stock Exchange
Preferred Share Purchase Rights Expiring June 30, 2012		New York Stock Exchange
6.375% Notes due 2009		New York Stock Exchange
6.65% Debentures due July 15, 2018		New York Stock Exchange
7% Debentures due 2029		New York Stock Exchange
9 3/8% Notes due 2011		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ Yes     o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes     þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o     Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes     þ No

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $94.39, was $143.4 billion. The registrant, solely for the purpose of this required presentation, had deemed its Board of Directors and grantor trusts to be affiliates, and deducted their stockholdings of 741,761 and 42,397,731 shares, respectively, in determining the aggregate market value.

The registrant had 1,480,240,553 shares of common stock outstanding at January 31, 2009.

Documents incorporated by reference:

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2009 (Part III)

 

 

PART IV

Explanatory Note

This Amendment No. 1 to the Annual Report on Form 10-K of ConocoPhillips for the year ended December 31, 2008, is being filed for the purpose of providing separate audited financial statements of OAO LUKOIL (LUKOIL) in accordance with Rule 3-09 of Regulation S-X. These audited financial statements, which were not available prior to the due date for filing our 2008 Form 10-K, are included in Item 15, “Exhibits, Financial Statement Schedules.” Otherwise, this amendment does not update or modify in any way the financial position, results of operations, cash flows or the disclosures in ConocoPhillips’ Annual Report on Form 10-K for the year ended December 31, 2008, and does not reflect events occurring after the original filing date of February 25, 2009.

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements and Supplementary Data
		The financial statements and supplementary information listed in the Index to Financial Statements, which appeared on page 77, were filed as part of the original 2008 Form 10-K filed on February 25, 2009.
	2.	Financial Statement Schedules
		Schedule II—Valuation and Qualifying Accounts, which appeared on page 176, was filed as part of the original 2008 Form 10-K filed on February 25, 2009. All other schedules are omitted because they are not required, not significant, not applicable or the information is shown in another schedule, the financial statements or the notes to consolidated financial statements.
		The following information is included herein in this amended Form 10-K pursuant to Rule 3-09 of Regulation S-X:
		OAO LUKOIL

	•		Independent Auditors’ Report
	•		Consolidated Balance Sheets as of December 31, 2008 and 2007
	•		Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006
	•		Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006
	•		Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
	•		Notes to Consolidated Financial Statements
	•		Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited)

	3.	Exhibits
		The exhibits listed in the Index to Exhibits, which appears on pages 52 through 55, are filed as part of this annual report.
(c)	The financial Statements of OAO LUKOIL, which appear below, are filed in accordance with Rule 3-09 of Regulation S-X.

OAO LUKOIL

CONSOLIDATED FINANCIAL STATEMENTS

(prepared in accordance with US GAAP)

As of December 31, 2008 and 2007
and for each of the years in the three-year period
ended December 31, 2008

Independent Auditors’ Report

The Board of Directors of OAO LUKOIL:

We have audited the accompanying consolidated balance sheets of OAO LUKOIL and its subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the management of OAO LUKOIL. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OAO LUKOIL and its subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ ZAO KPMG

ZAO KPMG
Moscow, Russian Federation
March 31, 2009

OAO LUKOIL
Consolidated Balance Sheets
As of December 31, 2008 and 2007
(Millions of US dollars, unless otherwise noted)

		Note				2008				2007
Assets
Current assets
Cash and cash equivalents			3				2,239				841
Short-term investments							505				48
Accounts and notes receivable, net			5				5,069				7,467
Inventories			6				3,735				4,609
Prepaid taxes and other expenses							3,566				4,109
Other current assets							519				625
Assets held for sale			10				—				70
Total current assets							15,633				17,769
Investments			7				3,269				1,086
Property, plant and equipment			8				50,088				38,056
Deferred income tax assets			13				521				490
Goodwill and other intangible assets			9				1,159				942
Other non-current assets							791				1,289
Total assets							71,461				59,632
Liabilities and Stockholders’ equity
Current liabilities
Accounts payable							5,029				4,554
Short-term borrowings and current portion of long-term debt			11				3,232				2,214
Taxes payable							1,564				2,042
Other current liabilities							750				918
Total current liabilities							10,575				9,728
Long-term debt			12, 16				6,577				4,829
Deferred income tax liabilities			13				2,116				2,079
Asset retirement obligations			8				718				811
Other long-term liabilities							465				395
Minority interest in subsidiary companies							670				577
Total liabilities							21,121				18,419
Stockholders’ equity			15
Common stock							15				15
Treasury stock, at cost							(282	)			(1,591	)
Additional paid-in capital							4,694				4,499
Retained earnings							45,983				38,349
Accumulated other comprehensive loss							(70	)			(59	)
Total stockholders’ equity							50,340				41,213
Total liabilities and stockholders’ equity							71,461				59,632

/s/ Alekperov V.Y.		/s/ Khoba L.N.
President of OAO LUKOIL		Chief accountant of OAO LUKOIL
Alekperov V.Y.		Khoba L.N.

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

OAO LUKOIL
Consolidated Statements of Income
For the years ended December 31, 2008, 2007 and 2006
(Millions of US dollars, unless otherwise noted)

		Note				2008				2007				2006
Revenues
Sales (including excise and export tariffs)			23				107,680				81,891				67,684
Costs and other deductions
Operating expenses							(8,126	)			(6,172	)			(4,652	)
Cost of purchased crude oil, gas and products							(37,851	)			(27,982	)			(22,642	)
Transportation expenses							(5,460	)			(4,457	)			(3,600	)
Selling, general and administrative expenses							(3,860	)			(3,207	)			(2,885	)
Depreciation, depletion and amortization							(2,958	)			(2,172	)			(1,851	)
Taxes other than income taxes			13				(13,464	)			(9,367	)			(8,075	)
Excise and export tariffs							(21,340	)			(15,033	)			(13,570	)
Exploration expenses							(487	)			(307	)			(209	)
Loss on disposals and impairments of assets							(425	)			(123	)			(148	)
Income from operating activities							13,709				13,071				10,052
Interest expense							(391	)			(333	)			(302	)
Interest and dividend income							163				135				111
Equity share in income of affiliates			7				375				347				425
Currency translation (loss) gain							(1,163	)			93				169
Other non-operating expense							(244	)			(240	)			(118	)
Minority interest							(83	)			(55	)			(80	)
Income before income tax							12,366				13,018				10,257
Current income taxes							(4,167	)			(3,410	)			(2,906	)
Deferred income tax							945				(97	)			133
Total income tax expense			13				(3,222	)			(3,507	)			(2,773	)
Net income							9,144				9,511				7,484
Per share of common stock (US dollars):
Basic			15				10.88				11.48				9.06
Diluted			15				10.88				11.48				9.04

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

OAO LUKOIL
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
For the years ended December 31, 2008, 2007 and 2006
(Millions of US dollars, unless otherwise noted)

		2008								2007								2006
		Stockholders’				Comprehensive				Stockholders’				Comprehensive				Stockholders’				Comprehensive
		equity				income				equity				income				equity				income
Common stock
Balance as of January 1			15								15								15
Balance as of December 31			15								15								15
Treasury stock
Balance as of January 1			(1,591	)							(1,098	)							(527	)
Stock purchased			(219	)							(712	)							(782	)
Stock disposed			1,528								219								211
Balance as of December 31			(282	)							(1,591	)							(1,098	)
Additional paid-in capital
Balance as of January 1			4,499								3,943								3,730
Premium on non-outstanding shares issued			20								—								22
Effect of stock compensation plan			103								103								—
Proceeds from sale of treasury stock in excess of carrying amount			72								453								191
Balance as of December 31			4,694								4,499								3,943
Retained earnings
Balance as of January 1			38,349								30,061								23,586
Net income			9,144				9,144				9,511				9,511				7,484				7,484
Dividends on common stock			(1,510	)							(1,223	)							(1,009	)
Balance as of December 31			45,983								38,349								30,061
Accumulated other comprehensive loss, net of tax
Balance as of January 1			(59	)							(21	)							—
Pension benefits:
Prior service cost			(5	)			(5	)			(16	)			(16	)			—				—
Actuarial loss			(6	)			(6	)			(22	)			(22	)			—				—
Effect of initial adoption of SFAS No. 158			—								—								(21	)
Balance as of December 31			(70	)							(59	)							(21	)
Total comprehensive income for the year							9,133								9,473								7,484
Total stockholders’ equity as of December 31			50,340								41,213								32,900

		Share activity
		2008				2007				2006
		(thousands of shares)				(thousands of shares)				(thousands of shares)
Common stock, issued
Balance as of January 1			850,563				850,563				850,563
Balance as of December 31			850,563				850,563				850,563
Treasury stock
Balance as of January 1			(23,321	)			(23,632	)			(21,667	)
Purchase of treasury stock			(2,899	)			(8,756	)			(9,017	)
Disposal of treasury stock			22,384				9,067				7,052
Balance as of December 31			(3,836	)			(23,321	)			(23,632	)

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

 

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 1. Organization and environment

The primary activities of OAO 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 1403, issued on November 17, 1992. Under this decree, on April 5, 1993, the Government of the Russian Federation transferred to the Company 51% of the voting shares of fifteen enterprises. Under Government Resolution 861 issued on September 1, 1995, a further nine enterprises were transferred to the Group during 1995. Since 1995, the Group has carried out a share exchange program to increase its shareholding in each of the twenty-four founding subsidiaries to 100%.

From formation, the Group has expanded substantially through consolidation of its interests, acquisition of new companies and establishment of new businesses.

Business and economic environment

The Russian Federation has been experiencing political and economic change, that has affected and will continue to affect the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks, which do not typically exist in other markets. In addition, the recent contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment.

The accompanying financial statements reflect management’s assessment of the impact of the business environment in the countries in which the Group operates on the operations and the financial position of the Group. The future business environments may differ from management’s assessment.

Basis of preparation

These consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Note 2. Summary of significant accounting policies

Principles of consolidation

These consolidated financial statements include the financial position and results of the Company, controlled subsidiaries of which the Company directly or indirectly owns more than 50% of the voting interest, unless minority interest shareholders have substantive participating rights, and variable interest entities where the Group is determined to be the primary beneficiary. Other significant investments in companies of which the Company directly or indirectly owns between 20% and 50% of the voting interest and over which it exercises significant influence but not control, are accounted for using the equity method of accounting. Investments in companies of which the Company directly or indirectly owns more than 50% of the voting interest but where minority interest shareholders have substantive participating rights are accounted for using the equity method of accounting. Undivided interests in oil and gas joint ventures are accounted for using the proportionate consolidation method. Investments in other companies are recorded at cost. Equity investments and investments in other companies are included in “Investments” in the consolidated balance sheet.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties and other property, plant and equipment, goodwill impairment assessment, asset retirement obligations, deferred income taxes, valuation of financial instruments, and obligations related to employee benefits. Eventual actual amounts could differ from those estimates.

Revenue

Revenues from the production and sale of crude oil and petroleum products are recognized when title passes to customers at which point the risks and rewards of ownership are assumed by the customer and the price is fixed or determinable. Revenues include excise on petroleum products sales and duties on export sales of crude oil and petroleum products.

Revenues from non-cash sales are recognized at the fair market value of the crude oil and petroleum products sold.

Foreign currency translation

The Company maintains its accounting records in Russian rubles. The Company’s functional currency is the US dollar and the Group’s reporting currency is the US dollar.

For operations in the Russian Federation and for the majority of operations outside the Russian Federation, the US dollar is the functional currency. Where the US dollar is the functional currency, monetary assets and liabilities have been translated into US dollars at the rate prevailing at each balance sheet date. Non-monetary assets and liabilities have been translated into US dollars at historical rates. Revenues, expenses and cash flows have been translated into US dollars at rates, which approximate actual rates at the date of the transaction. Translation differences resulting from the use of these rates are included in the consolidated statement of income.

For certain other operations outside the Russian Federation, where the US dollar is not the functional currency and the economy is not hyperinflationary, assets and liabilities are translated into US dollars at year-end exchange rates and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of comprehensive income.

In all cases, foreign currency transaction gains and losses are included in the consolidated statement of income.

As of December 31, 2008, 2007 and 2006, exchange rates of 29.38, 24.55 and 26.33 Russian rubles to the US dollar, respectively, have been used for translation purposes.

The Russian ruble and other currencies of republics of the former Soviet Union are not readily convertible outside of their countries. Accordingly, the translation of amounts recorded in these currencies into US dollars should not be construed as a representation that such currency amounts have been, could be or will in the future be converted into US dollars at the exchange rate shown or at any other exchange rate.

Cash and cash equivalents

Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Cash with restrictions on immediate use

Cash funds for which restrictions on immediate use exist are accounted for within other non-current assets.

Accounts and notes receivable

Accounts and notes receivable are recorded at their transaction amounts less provisions for doubtful debts. Provisions for doubtful debts are recorded to the extent that there is a likelihood that any of the amounts due will not be obtained. Non-current receivables are discounted to the present value of expected cash flows in future periods using the original discount rate.

Inventories

Inventories, consisting primarily of stocks of crude oil, petroleum products and materials and supplies, are stated at the lower of cost or market value. Cost is determined using an “average cost” method.

Investments

Debt and equity securities are classified into one of three categories: trading, available-for-sale, or held-to-maturity.

Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities in which a Group company has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in the consolidated statement of income. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Dividends and interest income are recognized in the consolidated statement of income when earned.

A permanent decline in the market value of any available-for-sale or held-to-maturity security below cost is accounted for as a reduction in the carrying amount to fair value. The impairment is charged to the consolidated statement of income and a new cost base for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method and such amortization and accretion is recorded in the consolidated statement of income.

Property, plant and equipment

Oil and gas properties are accounted for using the successful efforts method of accounting whereby property acquisitions, successful exploratory wells, all development costs, and support equipment and facilities are capitalized. Unsuccessful exploratory wells are expensed when a well is determined to be non-productive. Other exploratory expenditures, including geological and geophysical costs are expensed as incurred.

The Group continues to capitalize costs of exploratory wells and exploratory-type stratigraphic wells for more than one year after the completion of drilling if the well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project. If these conditions are not met or if information that raises substantial doubt about the economic or operational viability of the project is obtained, the well would be assumed impaired, and its costs, net of any salvage value, would be charged to expense.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Depreciation, depletion and amortization of capitalized 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.

Production and related overhead costs are expensed as incurred.

Depreciation of assets not directly associated with oil 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		5 — 20		Years

In addition to production assets, certain Group companies also maintain and construct social assets for the use of local communities. Such assets are capitalized only to the extent that they are expected to result in future economic benefits to the Group. If capitalized, they are depreciated over their estimated economic lives.

Significant unproved properties are assessed for impairment individually on a regular basis and any estimated impairment is charged to expense.

Asset retirement obligations

The Group records the fair value of liabilities related to its legal obligations to abandon, dismantle or otherwise retire tangible long-lived assets in the period in which the liability is incurred. A corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the liability is accreted for the passage of time and the related asset is depreciated using the unit-of-production method.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. It is assigned to reporting units as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test requires estimating the fair value of a reporting unit and comparing it with its carrying amount, including goodwill assigned to the reporting unit. If the estimated fair value of the reporting unit is less than its net carrying amount, including goodwill, then the goodwill is written down to its implied fair value.

Intangible assets with indefinite useful lives are tested for impairment at least annually. Intangible assets that have limited useful lives are amortized on a straight-line basis over the shorter of their useful or legal lives.

Impairment of long-lived assets

Long-lived assets, such as oil and gas properties (other than unproved properties), other property, plant, and equipment, and purchased intangibles subject to amortization, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by that group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by writing down the carrying amount to the estimated fair value of the asset group, generally determined as discounted future net cash flows. Assets to be disposed of are separately presented in the balance sheet 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 of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Income taxes

Deferred income tax assets and liabilities are recognized in respect of future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purposes of the consolidated financial statements and their respective tax bases and in respect of operating loss and tax credit carryforwards. 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 recognized in the consolidated statement of income in the reporting period which includes the enactment date.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

On January 1, 2007, the Group adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertain tax positions, which requires an entity to recognize the effect of an income tax position only if that position is more likely than not of being sustained upon examination, based on its technical merits. A recognized income tax position is measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties relating to unrecognized tax benefits in income tax expense in the consolidated statements of income.

Interest-bearing borrowings

Interest-bearing borrowings are initially recorded at the value of net proceeds received. Any difference between the net proceeds and the redemption value is amortized at a constant rate over the term of the borrowing. Amortization is included in the consolidated statement of income each year and the carrying amounts are adjusted as amortization accumulates.

If borrowings are repurchased or settled before maturity, any difference between the amount paid and the carrying amount is recognized in the consolidated statement of income in the period in which the repurchase or settlement occurs.

Pension benefits

The expected costs in respect of pension obligations of Group companies are determined by an independent actuary. Obligations in respect of each employee are accrued over the reporting periods during which the employee renders service in the Group.

Treasury stock

Purchases by Group companies of the Company’s outstanding stock are recorded at cost and classified as treasury stock within Stockholders’ equity. Shares shown as Authorized and Issued include treasury stock. Shares shown as Outstanding do not include treasury stock.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Earnings per share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the reporting period. A calculation is carried out to establish if there is potential dilution in earnings per share if convertible securities were to be converted into shares of common stock or contracts to issue shares of common stock were to be exercised. If there is such dilution, diluted earnings per share is presented.

Contingencies

Certain conditions may exist as of the balance sheet 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.

If a Group company’s assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is accrued and charged to the consolidated statement of income. If the assessment indicates that a potentially material loss is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, is disclosed in the notes to the consolidated financial statements. Loss contingencies considered remote or related to unasserted claims are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed.

Environmental expenditures

Estimated losses from environmental remediation obligations are generally recognized 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. Costs of expected future expenditures for environmental remediation obligations are not discounted to their present value.

Use of derivative instruments

The Group’s derivative activity is limited to certain petroleum products marketing and trading outside of its physical crude oil and petroleum products businesses and hedging of commodity price risks. Currently this activity involves the use of futures and swaps contracts together with purchase and sale contracts that qualify as derivative instruments. The Group accounts for these activities under the mark-to-market methodology in which the derivatives are revalued each accounting period. Resulting realized and unrealized gains or losses are presented in the consolidated statement of income on a net basis. Unrealized gains and losses are carried as assets or liabilities on the consolidated balance sheet.

Share-based payments

The Group accounts for liability classified share-based payment awards to employees at fair value on the date of grant and as of each reporting date. Expenses are recognized over the vesting period. Equity classified share-based payment awards to employees are valued at fair value on the date of grant and expensed over the vesting period.

Comparative amounts

Certain prior period amounts have been reclassified to conform with current period presentation.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

Recent accounting pronouncements

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures about Transfers of Financial Assets and Interest in Variable Interest Entities.” This FSP amends FASB Statement No. 140, “Accounting for transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires additional disclosures about transfers of financial assets. It also amends FASB Interpretation No. 46 (R), “Consolidation of Variable Interest Entities,” and requires public entities, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This FSP is effective for the first reporting period ending after December 15, 2008. The adoption of the provisions of FSP FAS 140-4 and FIN 46(R)-8 did not have any impact on the Group’s results of operations, financial position or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This Statement improves financial reporting about derivative instruments and hedging activities by enhanced disclosures of their effects on an entity’s financial position, financial performance and cash flows. The Group is required to adopt the provisions of SFAS No. 161 no later than in the first quarter of 2009 and does not expect any material impact on its results of operations, financial position or cash flows upon adoption.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business combinations.” This Statement will apply to all transactions in which an entity obtains control of one or more businesses. SFAS No. 141 (Revised) requires an entity to recognize the fair value of assets acquired and liabilities assumed in a business combination; to recognize and measure the goodwill acquired in the business combination or gain from a bargain purchase and modifies the disclosure requirements. The Group is required to prospectively adopt the provisions of SFAS No. 141 (Revised) for business combinations for which the acquisition date is on or after January 1, 2009. Early adoption of SFAS No. 141 (Revised) is prohibited.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement will apply to all entities that prepare consolidated financial statements (except not-for-profit organizations) and will affect those which have an outstanding noncontrolling interest (or minority interest) in their subsidiaries or which have to deconsolidate a subsidiary. This Statement changes the classification of a non-controlling interest; establishing a single method of accounting for changes in the parent company’s ownership interest that does not result in deconsolidation and requires a parent company to recognize a gain or loss when a subsidiary is deconsolidated. The Group is required to prospectively adopt the provisions of SFAS No. 160 in the first quarter of 2009, except for the presentation and disclosure requirements which shall be applied retrospectively. Early adoption of SFAS No. 160 is prohibited.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement expands the possibility of using fair value measurements and permits enterprises to choose to measure certain financial assets and financial liabilities at fair value. Enterprises shall report unrealized gains and losses on items for which the fair value option has been elected in earnings in each subsequent period. The Group adopted the provisions of SFAS No. 159 in the first quarter of 2008. The Group elected not to use the fair value option for its financial assets and financial liabilities not already carried at fair value in accordance with other standards. Therefore the adoption of SFAS No. 159 did not have any impact on the Group’s results of operations, financial position or cash flows.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB issued Staff Position FSP No. 157-2, “Effective date of FASB Statement No. 157,” which defers the effective date of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities to the first quarter of 2009. The Group elected to adopt SFAS No. 157 with deferral permitted by FSP No. 157-2. The deferral applies to nonfinancial assets and liabilities measured in a business combination; long-lived assets, intangible assets and goodwill measured at fair value upon impairment and liabilities for asset retirement obligations. The Group does not expect any material impact on its results of operations, financial position or cash flows on adoption of SFAS No. 157 for these assets and liabilities. The initial adoption of SFAS No. 157 is limited to commodity derivative instruments (refer to Note 16. Financial and derivative instruments).

The initial adoption of the provisions of SFAS No. 157 did not have a material impact on the Group’s results of operations, financial position or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This Statement requires an employer that sponsors one or more single-employer defined benefit plans to: (a) Recognize the funded status of a benefit plan in its statement of financial position; (b) Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; (c) Measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions); (d) Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The provisions of this Statement were effective December 31, 2006, except for the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end, which is effective December 31, 2008. The adoption of the provisions of SFAS No. 158 did not have a material impact on the Group’s results of operations, financial position or cash flows.

Note 3. Cash and cash equivalents

		As of December				As of December
		31, 2008				31, 2007
Cash held in Russian rubles			444				285
Cash held in other currencies			1,425				417
Cash of a banking subsidiary in other currencies			132				47
Cash held in related party banks in Russian rubles			182				80
Cash held in related party banks in other currencies			56				12
Total cash and cash equivalents			2,239				841

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 4. Non-cash transactions

The consolidated statement of cash flows excludes the effect of non-cash transactions, which are described in the following table:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Non-cash investing activity			29				36				123
Non-cash acquisition of a subsidiary and minority shareholding interest			1,969				—				314
Settlement of stock-based compensation plan liability			—				537				—
Settlement of bond liability with the Company’s common stock			—				—				91
Total non-cash transactions			1,998				573				528

The following table shows the effect of non-cash transactions on investing activity:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Net cash used in investing activity			13,559				9,715				7,515
Non-cash acquisition of a subsidiary and minority shareholding interest			1,969				—				314
Non-cash investing activity			29				36				123
Total investing activity			15,557				9,751				7,952

Note 5. Accounts and notes receivable, net

		As of December				As of December
		31, 2008				31, 2007
Trade accounts and notes receivable (net of provisions of $133 million and $69 million as of December 31, 2008 and 2007, respectively)			3,466				5,962
Current VAT and excise recoverable			855				1,196
Other current accounts receivable (net of provisions of $38 million and $48 million as of December 31, 2008 and 2007, respectively)			748				309
Total accounts and notes receivable			5,069				7,467

Note 6. Inventories

		As of December				As of December
		31, 2008				31, 2007
Crude oil and petroleum products			2,693				3,609
Materials for extraction and drilling			439				477
Materials and supplies for refining			35				24
Other goods, materials and supplies			568				499
Total inventories			3,735				4,609

Note 7. Investments

		As of December				As of December
		31, 2008				31, 2007
Investments in equity method affiliates and joint ventures			2,988				836
Long-term loans given by non-banking subsidiaries			251				232
Other long-term investments			30				18
Total long-term investments			3,269				1,086

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 7. Investments (continued)

Investments in “equity method” affiliates and corporate joint ventures

The summarized financial information below is in respect of equity method affiliates and corporate joint ventures. The companies are primarily engaged in crude oil exploration, production, marketing and distribution operations in the Russian Federation, crude oil production and marketing in Kazakhstan, and refining operations in Europe.

		Year ended								Year ended								Year ended
		December 31, 2008								December 31, 2007								December 31, 2006
						Group’s								Group’s								Group’s
		Total				share				Total				share				Total				share
Revenues			4,590				2,144				2,930				1,382				2,367				1,251
Income before income taxes			1,602				807				1,398				650				1,315				690
Less income taxes			(869	)			(432	)			(605	)			(303	)			(529	)			(265	)
Net income			733				375				793				347				786				425

		As of December 31, 2008								As of December 31, 2007
						Group’s								Group’s
		Total				share				Total				share
Current assets			2,023				982				1,320				618
Property, plant and equipment			5,872				2,841				2,082				1,082
Other non-current assets			544				269				181				88
Total assets			8,439				4,092				3,583				1,788
Short-term debt			158				47				204				89
Other current liabilities			1,188				557				682				329
Long-term debt			890				392				1,005				511
Other non-current liabilities			220				108				47				23
Net assets			5,983				2,988				1,645				836

In June 2008, a Group company signed an agreement with ERG S.p.A. to establish a joint venture to operate the ISAB refinery complex in Priolo, Italy. In December 2008, the Group completed the acquisition of a 49% stake in the joint venture for €1.45 billion (approximately $1.83 billion). In December 2008, the Group company paid €600 million (approximately $762 million). The remaining amount was paid in February 2009. The seller has a put option, the effect of which would be to increase the Group’s stake in the company operating the ISAB refinery complex up to 100%. As of December 31, 2008, the fair value of this option for the Group is zero. The agreement states that each partner will be responsible for procuring crude oil and marketing refined products in line with its equity stake in the joint venture. The ISAB refinery complex has the flexibility to process Urals blend crude oil, and the Group intends to fully integrate its share of the ISAB refinery complex capacity into its crude oil supply and refined products marketing operations. The ISAB refinery complex has an annual refining capacity of 16 million tonnes. The ISAB refinery complex also includes three jetties and storage tanks totaling 3,700 thousand cubic meters.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 8. Property, plant and equipment and asset retirement obligations

		At cost								Net
		As of December				As of December				As of December				As of December
		31, 2008				31, 2007				31, 2008				31, 2007
Exploration and Production:
Western Siberia			21,663				19,424				12,784				10,811
European Russia			21,842				18,776				15,881				13,303
International			5,910				4,360				5,009				3,716
Total			49,415				42,560				33,674				27,830
Refining, Marketing, Distribution and Chemicals:
Western Siberia			122				22				107				16
European Russia			11,021				9,216				8,051				6,292
International			6,462				5,008				4,633				3,367
Total			17,605				14,246				12,791				9,675
Other:
Western Siberia			178				156				89				69
European Russia			3,618				399				3,385				338
International			200				181				149				144
Total			3,996				736				3,623				551
Total property, plant and equipment			71,016				57,542				50,088				38,056

In June 2008, the Company performed impairment testing of certain exploration and production assets located in oil fields in the Timan-Pechora region of Russia, due to a revision of geological models. The revision resulted in a reduction of planned development activities on these oil fields. The fair value of these assets was determined using the present value of the expected cash flows. As a result, the Company recognized an impairment loss of $156 million. In December 2008, the Group recognized an impairment loss of $58 million relating to retail petrol stations in the USA.

As of December 31, 2008 and 2007, the asset retirement obligations amounted to $728 million and $821 million, respectively, of which $10 million was included in “Other current liabilities” in the consolidated balance sheets as of each balance sheet date. During 2008 and 2007, asset retirement obligations changed as follows:

		2008				2007
Asset retirement obligations as of January 1			821				618
Accretion expense			78				60
New obligations			54				91
Changes in estimates of existing obligations			(88	)			20
Spending on existing obligations			(8	)			(10	)
Property dispositions			(3	)			(7	)
Foreign currency translation and other adjustments			(126	)			49
Asset retirement obligations as of December 31			728				821

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 9. Goodwill and other intangible assets

The carrying value of goodwill and other intangible assets as of December 31, 2008 and 2007 was as follows:

		As of December				As of December
		31, 2008				31, 2007
Amortized intangible assets
Software			500				410
Licenses and other assets			335				56
Goodwill			324				476
Total goodwill and other intangible assets			1,159				942

All goodwill amounts relate to the refining, marketing and distribution segment. In December 2008, the Group recognized an impairment loss of $100 million relating to goodwill on acquisition of Beopetrol due to the change in the economic environment. Beopetrol is a marketing and distribution company operating a chain of retail petrol stations in Serbia. The fair value of Beopetrol was determined using the present value of the expected cash flows.

Note 10. Dispositions of subsidiaries and assets

In December 2007, a Group company committed to a plan to sell 162 petrol stations, located in Pennsylvania and southern New Jersey, USA, previously acquired from ConocoPhillips in 2004. In February 2008, this company entered into an agreement to sell these petrol stations to a third party investor. In June 2008, the agreement between the Group company and the investor was cancelled. Therefore these petrol stations were classified out of assets held for sale as of December 31, 2007.

In December 2005, the Company made a decision to sell ten tankers. A Group company finalized the sale of eight tankers in May 2006, for a price that approximated their carrying value of $190 million. The sale of the remaining two tankers was finalized in April 2008, for a price that approximated their carrying value of $70 million. As of December 31, 2007, the Group classified these tankers as assets held for sale in the consolidated balance sheet.

In April 2007, a Group company completed the sale of 50% of its interest in Caspian Investment Resources Ltd. (formerly Nelson Resources Limited), which has exploration and production operations in western Kazakhstan, to Mittal Investments S.A.R.L. for $980 million. In addition, Mittal Investments S.A.R.L. paid a liability in the amount of approximately $175 million, which represented 50% of Caspian Investment Resources Ltd. outstanding debt to Group companies.

Note 11. Short-term borrowings and current portion of long-term debt

		As of December				As of December
		31, 2008				31, 2007
Short-term borrowings from third parties			2,301				938
Current portion of long-term debt			931				1,276
Total short-term borrowings and current portion of long-term debt			3,232				2,214

Short-term borrowings are substantially unsecured and primarily payable in US dollars. The weighted-average interest rate on short-term borrowings from third parties was 5.15% and 5.97% per annum as of December 31, 2008 and 2007, respectively.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 12. Long-term debt

		As of December				As of December
		31, 2008				31, 2007
Long-term loans and borrowings from third parties (including loans from banks in the amount of $3,333 million and $2,391 million as of December 31, 2008 and 2007, respectively)			3,384				2,439
Long-term loans and borrowings from related parties			2,165				1,745
6.356% Non-convertible US dollar bonds, maturing 2017			500				500
6.656% Non-convertible US dollar bonds, maturing 2022			500				500
7.25% Russian ruble bonds, maturing 2009			204				244
7.10% Russian ruble bonds, maturing 2011			272				326
8.00% Russian ruble bonds, maturing 2012			8				—
7.40% Russian ruble bonds, maturing 2013			204				244
Capital lease obligations			271				107
Total long-term debt			7,508				6,105
Current portion of long-term debt			(931	)			(1,276	)
Total non-current portion of long-term debt			6,577				4,829

Long-term loans and borrowings

Long-term loans and borrowings include amounts repayable in US dollars of $3,844 million and $3,157 million and amounts repayable in Russian rubles of $3,187 million and $2,607 million as of December 31, 2008 and 2007, respectively. Long-term loans and borrowings have maturity dates from 2009 through 2038. Approximately 6% of this debt is secured by export sales and property, plant and equipment. The weighted-average interest rate on long-term loans and borrowings from third parties was 4.09% and 5.77% per annum as of December 31, 2008 and 2007, respectively. A number of long-term loan agreements contain certain financial covenants due levels of which are being maintained by the Group.

A Group company has an unsecured syndicated loan agreement with an outstanding amount of $1,000 million as of December 31, 2008, with maturity dates up to 2013. The loan was arranged by ABN AMRO Bank, Banco Bilbao Vizcaya Argentaria, BNP Paribas, The Bank of Tokyo-Mitsubishi UFJ, ING Bank, Mizuho Corporate Bank and WestLB. Borrowings under this agreement bear interest from three month LIBOR plus 0.85% to three months LIBOR plus 0.95% per annum.

A number of the Group companies have unsecured loan agreements with an outstanding amount of $530 million as of December 31, 2008, maturing up to 2011. The loan was arranged by ABN AMRO Bank, The Bank of Tokyo-Mitsubishi UFJ, Barclays Capital, BNP Paribas, Citibank, Dresdner Kleinwort, ING Bank and WestLB. Borrowings under this agreement bear interest at three month LIBOR plus 3.25% per annum.

The Company has an unsecured syndicated loan agreement with European Bank for Reconstruction and Development with an outstanding amount of $286 million as of December 31, 2008, maturity dates up to 2017. Borrowings under this agreement bear interest from six month LIBOR plus 0.45% to six month LIBOR plus 0.65% per annum.

A Group company has an unsecured syndicated loan agreement with CALYON and ABN AMRO Bank with an outstanding amount of $205 million as of December 31, 2008, maturing up to 2010. Borrowings under this agreement bear interest at one month LIBOR plus 0.85% per annum.

A Group company has a secured loan agreement, arranged by Credit Suisse, supported by an Overseas Private Investment Corporation guarantee, with an outstanding amount of $190 million as of December 31, 2008. Borrowings under this agreement bear interest at six month LIBOR plus 4.8% per annum and have maturity dates up to 2015.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 12. Long-term debt (continued)

The Company has an unsecured syndicated loan agreement, arranged by ABN AMRO Bank and CALYON with an outstanding amount of $175 million as of December 31, 2008, maturing up to 2012. Borrowings under this agreement bear interest at three month LIBOR plus 0.40% per annum.

A Group company has a secured loan agreement with European Bank for Reconstruction and Development with an outstanding amount of $110 million as of December 31, 2008, maturing up to 2017. Borrowings under this agreement bear interest at six month LIBOR plus 0.35% per annum.

As of December 31, 2008, the Group has a number of other loan agreements with fixed rates with a number of banks and organizations totaling $204 million, maturing from 2009 to 2021. The weighted average interest rate under these loans was 6.02% per annum.

As of December 31, 2008, the Group has a number of other floating rate loan agreements with a number of banks and organizations totaling $684 million, maturing from 2009 to 2019. The weighted average interest rate under these loans was 5.58% per annum.

A Group company has a number of loan agreements with ConocoPhillips, the Group’s related party, with an outstanding amount of $2,165 million as of December 31, 2008. This amount includes $1,842 million landed by ConocoPhillips to a joint venture OOO Narianmarneftegaz (“NMNG”) (refer to Note 18. Consolidation of Variable Interest Entity). Borrowings under these agreements bear interest at fixed rates ranging from 6.8% to 8.2% per annum and have maturity dates up to 2038. These agreements are a part of the Company’s broad-based strategic alliance with ConocoPhillips and this financing is used to develop oil production and distribution infrastructure in the Timan-Pechora region of the Russian Federation.

US dollar bonds

In June 2007, a Group company issued non-convertible bonds totaling $1 billion. $500 million were placed with a maturity of 10 years and a coupon yield of 6.356% per annum. Another $500 million were placed with a maturity of 15 years and a coupon yield of 6.656% per annum. All bonds were placed at nominal value and have a half year coupon period.

Russian ruble bonds

In January 2007, OAO UGK TGK-8 (“TGK-8”), a newly acquired subsidiary (refer to Note 17. Business combinations) issued 3.5 million non-convertible bonds with a face value of 1,000 Russian rubles each. These bonds were placed at their face value with a maturity of 5 years, with a coupon yield of 8.0% per annum and they have a half year coupon period. In June 2008, after the acquisition, TGK-8 redeemed approximately 3.26 million bonds in accordance with the conditions of the bonds issue.

In December 2006, the Company issued 14 million non-convertible bonds with a face value of 1,000 Russian rubles each. Eight million bonds were placed with a maturity of 5 years and a coupon yield of 7.10% per annum and six million bonds were placed with a maturity of 7 years and a coupon yield of 7.40% per annum. All bonds were placed at the face value and have a half year coupon period.

In November 2004, the Company issued 6 million non-convertible bonds with a face value of 1,000 Russian rubles each, maturing on November 23, 2009. The bonds have a half year coupon period and bear interest at 7.25% per annum.

Maturities of long-term debt

Annual maturities of total long-term debt during the next five years, including the portion classified as current, are $931 million in 2009, $939 million in 2010, $1,292 million in 2011, $455 million in 2012, $542 million in 2013 and $3,349 million thereafter.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 13. Taxes

The Group is taxable in a number of jurisdictions within and outside of the Russian Federation and, as a result, is subject to a variety of taxes as established under the statutory provisions of each jurisdiction.

The total cost of taxation to the Group is reported in the consolidated statement of income as “Total income tax expense” for income taxes, as “Excise and export tariffs” for excise taxes, export tariffs and petroleum products sales taxes and as “Taxes other than income taxes” for other types of taxation. In each category taxation is made up of taxes levied at various rates in different jurisdictions.

Until January 1, 2009, operations in the Russian Federation were subject to a Federal income tax rate of 6.5% and a regional income tax rate that varied from 13.5% to 17.5% at the discretion of the individual regional administration. Starting on January 1, 2009, the Federal income tax rate is 2.0% and regional income tax rate varies from 13.5% to 18.0%. The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate.

As of January 1, 2008 and 2007, and during 2008 and 2007, the Group did not have any unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were accrued. The Group’s policy is to record interest and penalties related to unrecognized tax benefits as components of income tax expense. In addition, the Group does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

The Company and its Russian subsidiaries file standalone income tax returns in Russia. With a few exceptions, income tax returns in Russia are open to examination by the Russian tax authorities for the tax years beginning in 2006.

There are not currently, and have not been during the three years ended December 31, 2008, any provisions in the taxation legislation of the Russian Federation to permit the Group to reduce taxable profits in a Group company by offsetting tax losses in another Group company against such profits. Tax losses of a Group company in the Russian Federation may, however, be used fully or partially to offset taxable profits in the same company in any of the ten years following the year of loss.

Domestic and foreign components of income before income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Domestic			12,004				11,702				9,215
Foreign			362				1,316				1,042
Income before income taxes			12,366				13,018				10,257

Domestic and foreign components of income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Current
Domestic			3,614				2,940				2,419
Foreign			553				470				487
Current income tax expense			4,167				3,410				2,906
Deferred
Domestic			(754	)			135				(40	)
Foreign			(191	)			(38	)			(93	)
Deferred income tax (benefit) expense			(945	)			97				(133	)
Total income tax expense			3,222				3,507				2,773

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 13. Taxes (continued)

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 to income before income taxes to total income taxes:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Income before income taxes			12,366				13,018				10,257
Notional income tax at Russian statutory rate			2,968				3,124				2,462
Increase (reduction) in income tax due to:
Non-deductible items, net			667				477				481
Foreign rate differences			159				84				47
Effect of enacted tax rate changes			(299	)			—				—
Domestic regional rate differences			(261	)			(237	)			(232	)
Change in valuation allowance			(12	)			59				15
Total income tax expense			3,222				3,507				2,773

Taxes other than income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2008				December 31, 2007				December 31, 2006
Mineral extraction tax			12,267				8,482				7,281
Social taxes and contributions			512				442				356
Property tax			405				313				247
Other taxes and contributions			280				130				191
Taxes other than income taxes			13,464				9,367				8,075

Deferred income taxes are included in the consolidated balance sheets as follows:

		As of December				As of December
		31, 2008				31, 2007
Other current assets			92				73
Deferred income tax assets — non-current			521				490
Other current liabilities			(49	)			(147	)
Deferred income tax liabilities — non-current			(2,116	)			(2,079	)
Net deferred income tax liability			(1,552	)			(1,663	)

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 13. Taxes (continued)

The following table sets out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities:

		As of December				As of December
		31, 2008				31, 2007
Accounts receivable			22				12
Long-term liabilities			230				267
Inventories			17				14
Property, plant and equipment			226				238
Accounts payable			10				39
Long-term investments			97				3
Operating loss carry forwards			489				464
Other			194				136
Total gross deferred income tax assets			1,285				1,173
Less valuation allowance			(196	)			(208	)
Deferred income tax assets			1,089				965
Property, plant and equipment			(2,226	)			(2,206	)
Accounts payable			(4	)			(5	)
Accounts receivable			(21	)			(1	)
Long-term liabilities			(237	)			(199	)
Inventories			(57	)			(65	)
Long-term investments			—				(4	)
Other			(96	)			(148	)
Deferred income tax liabilities			(2,641	)			(2,628	)
Net deferred income tax liability			(1,552	)			(1,663	)

As a result of acquisitions and business combinations during 2008 and 2007, the Group recognized a net deferred tax liability of $891 million and $158 million, respectively.

As of December 31, 2008, retained earnings of foreign subsidiaries included $15,664 million for which deferred taxation has not been provided because remittance of the earnings has been indefinitely postponed through reinvestment and, as a result, such amounts are considered to be indefinitely invested. It is not practicable to estimate the amount of additional taxes that might be payable on such undistributed earnings.

In accordance with SFAS No. 52, “Foreign currency translation,” and SFAS No. 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are not recognized for the changes in exchange rate effects resulting from the translation of transactions and balances from the Russian rubles to the US dollar using historical exchange rates. Also, in accordance with SFAS No. 109, no deferred tax assets or liabilities are recognized for the effects of the related statutory indexation of property, plant and equipment.

Based upon the levels of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management believes it is more likely than not that Group companies will realize the benefits of the deductible temporary differences and loss carry forwards, net of existing valuation allowances as of December 31, 2008 and 2007.

As of December 31, 2008, the Group had operating loss carry forwards of $2,104 million of which $12 million expire during 2009, $8 million expire during 2010, $1 million expire during 2011, $27 million expire during 2012, $77 million expire during 2013, $5 million expire during 2014, $22 million expire during 2015, $304 million expire during 2016, $328 million expire during 2017, $660 million expire during 2018, $1 million expire during 2019, $67 million expire during 2026, $77 million expire during 2027, $135 million expire during 2028, $2 million expire during 2029 and $378 million have indefinite carry forward.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 14. Pension benefits

The Company sponsors a postretirement benefits program. The primary component of the post employment and post retirement benefits program is a defined benefit pension plan that covers the majority of the Group’s employees. This plan is administered by a non-state pension fund, LUKOIL-GARANT, and provides pension benefits primarily based on years of service and final remuneration levels. The Company also provides several long-term employee benefits such as death-in-service benefit and lump-sum payments upon retirement of a defined benefit nature and other defined benefits to certain old age and disabled pensioners who have not vested any pensions under the pension plan.

The Company’s pension plan primarily consists of a defined benefit plan enabling employees to contribute a portion of their salary to the plan and at retirement to receive a lump sum amount from the Company equal to all past contributions made by the employee up to 7% of their annual salary. Employees also have the right to receive upon retirement the benefits accumulated under the previous pension plan that was replaced in December 2003. These benefits have been fixed and included in the benefit obligation as of December 31, 2008 and 2007. The amount was determined primarily based on a formula including past pensionable service and relative salaries as of December 31, 2003.

On December 31, 2006, the Group adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post retirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires employers to recognize the funded status of all postretirement defined benefit plans in the statement of financial position with corresponding adjustments to accumulated other comprehensive income. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial gains and unrecognized prior service costs, both of which were previously netted against the plan’s funded status in the statement of financial position. These amounts will be subsequently recognized as net periodic benefit cost. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. These amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS No. 158.

The Company uses December 31 as the measurement date for its post employment and post retirement benefits program. An independent actuary has assessed the benefit obligations as of December 31, 2008 and 2007.

The following tables provide information about the benefit obligations and plan assets as of December 31, 2008 and 2007. The benefit obligations below represent the projected benefit obligation of the pension plan.

		2008				2007
Benefit obligations
Benefit obligations as of January 1			328				258
Effect of exchange rate changes			(56	)			20
Service cost			22				15
Interest cost			19				16
Plan amendments			21				29
Actuarial loss			(5	)			30
Acquisitions			1				—
Benefits paid			(42	)			(40	)
Benefit obligations as of December 31			288				328

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 14. Pension benefits (continued)

		2008				2007
Plan assets
Fair value of plan assets as of January 1			108				94
Effect of exchange rate changes			(18	)			7
Return on plan assets			6				10
Employer contributions			35				37
Acquisitions			(1	)			—
Benefits paid			(42	)			(40	)
Fair value of plan assets as of December 31			88				108
Funded status			(200	)			(220	)
Amounts recognized in the consolidated balance sheet as of December 31, 2008 and 2007
Accrued benefit liabilities included in “Other long-term liabilities”			(164	)			(220	)
Accrued benefit liabilities included in “Other current liabilities”			(36	)			—

Weighted average assumptions used to determine benefit obligations as of December 31, 2008 and 2007:

		2008				2007
Discount rate			9.00	%			6.34	%
Rate of compensation increase			8.61	%			8.12	%

Weighted average assumptions used to determine net periodic benefit costs for the year ended December 31, 2008 and 2007:

		2008				2007
Discount rate			6.34	%			6.60	%
Rate of compensation increase			8.12	%			7.10	%
Expected rate of return on plan assets			10.49	%			9.34	%

Included in accumulated other comprehensive loss as of December 31, 2008 and 2007, are the following before-tax amounts that have not yet been recognized in net periodic benefit cost:

		2008				2007
Unamortized prior service cost			92				82
Unrecognized actuarial gain			(5	)			(4	)
Total costs			87				78

Amounts recognized in other comprehensive loss during the year ended December 31, 2008 and 2007:

		2008				2007
Additional loss arising during the period			(1	)			29
Re-classified gain amortization			—				1
Additional prior service cost from plan amendment			21				29
Re-classified prior service cost amortization			(11	)			(8	)
Net amount recognized for the period			9				51

The real returns on bonds and equities are based on what is observed in the international markets over extended periods of time. In the calculation of the expected return on assets no use is made of the historical returns LUKOIL-GARANT has achieved.

OAO LUKOIL
Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)