PJSC LUKOIL

ANNUAL FINANCIAL REPORT

2021

Moscow

March 2022

TABLE OF CONTENTS

Responsibility statement....................................................................................................................................... 3

Consolidated financial statements with independent auditors’ report.................................................................. 4

Management’s discussion and analysis of financial condition and results of operations .................................. 56

Information about major business risks and uncertainties................................................................................ 103

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

RESPONSIBILITY STATEMENT

I hereby confirm that to the best of my knowledge:

(a) the financial statements, prepared in accordance with the International Financial Reporting Standards, give

a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the

undertakings included in the consolidation taken as a whole,

(b) the management report includes a fair review of the development and performance of the business and the

position of the Company and the undertakings included in the consolidation taken as a whole, together with a

description of the principal risks and uncertainties that they face.

Alekperov V. Y.

President of PJSC LUKOIL

2 March 2022

CONSOLIDATED FINANCIAL STATEMENTS

WITH INDEPENDENT AUDITORS’ REPORT

PJSC LUKOIL

Consolidated Statement of Financial Position

(Millions of Russian rubles)

Note

31 December 2021

31 December 2020

Assets

Current assets

Cash and cash equivalents

Accounts receivable, net

Other current financial assets

Inventories

6

7

677,482

741,872

12,289

343,832

370,271

8,350

8

9

467,960

133,326

116,228

2,149,157

4,263,130

281,532

61,738

426,536

78,822

Prepaid taxes

Other current assets

10

48,649

Total current assets

Property, plant and equipment

Investments in associates and joint ventures

Other non-current financial assets

Deferred income tax assets

Goodwill and other intangible assets

Other non-current assets

Total non-current assets

Total assets

1,276,460

4,264,474

281,637

68,692

12

11

13

28

15

22,842

16,298

44,342

50,159

42,008

33,859

4,715,592

6,864,749

4,715,119

5,991,579

Liabilities and equity

Current liabilities

Accounts payable

16

17

786,463

80,251

597,932

82,636

Short-term borrowings and current portion of long-term debt

Taxes payable

19

282,191

24,367

142,458

27,136

Provisions

21, 22

20

Other current liabilities

Total current liabilities

Long-term debt

71,408

35,497

1,244,680

677,699

303,435

113,420

2,331

885,659

577,075

268,956

126,665

2,458

18

28

Deferred income tax liabilities

Provisions

21, 22

Other non-current liabilities

Total non-current liabilities

Total liabilities

1,096,885

2,341,565

975,154

1,860,813

23

Equity

Share capital

938

(85,879)

39,398

938

(71,920)

39,298

Treasury shares

Additional paid-in capital

Other reserves

280,351

4,280,226

4,515,034

8,150

296,641

3,858,057

4,123,014

7,752

Retained earnings

Total equity attributable to PJSC LUKOIL shareholders

Non-controlling interests

Total equity

4,523,184

6,864,749

4,130,766

5,991,579

Total liabilities and equity

President of PJSC LUKOIL

Alekperov V.Y.

Chief accountant of PJSC LUKOIL

Verkhov V.A.

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

9

PJSC LUKOIL

Consolidated Statement of Profit or Loss and Other Comprehensive Income

(Millions of Russian rubles, unless otherwise noted)

Note

2021

2020

Revenues

Sales (including excise and export tariffs)

Costs and other deductions

Operating expenses

32

9,435,143

5,639,401

(509,192)

(5,484,824)

(291,135)

(215,190)

(425,466)

(1,308,882)

(214,433)

(7,076)

(439,973)

(3,000,916)

(292,899)

(199,027)

(405,440)

(569,078)

(444,300)

(6,114)

Cost of purchased crude oil, gas and products

Transportation expenses

Selling, general and administrative expenses

Depreciation, depletion and amortisation

Taxes other than income taxes

Excise and export tariffs

Exploration expenses

Profit from operating activities

Finance income

978,945

281,654

13,051

25

11

16,519

Finance costs

(37,568)

29,980

(44,122)

11,474

Equity share in income of associates and joint ventures

Foreign exchange gain (loss)

Other expenses

2,731

(26,110)

(137,160)

98,787

26

(23,643)

966,964

Profit before income taxes

Current income taxes

(163,807)

(27,644)

(191,451)

775,513

(61,362)

(20,792)

(82,154)

16,633

Deferred income taxes

28

Total income tax expense

Profit for the year

Profit for the year attributable to:

PJSC LUKOIL shareholders

Non-controlling interests

773,442

2,071

15,175

1,458

Other comprehensive income, net of income taxes

Items that may be reclassified to profit or loss:

Foreign currency translation differences for foreign operations

Items that will never be reclassified to profit or loss:

(20,263)

268,707

Change in fair value of equity instruments at fair value through other comprehensive

income

2,572

1,403

(767)

(1,423)

Remeasurements of defined benefit liability / asset of pension plan

Other comprehensive (loss) income

22, 28

(16,288)

759,225

266,517

283,150

Total comprehensive income for the year

attributable to:

PJSC LUKOIL shareholders

Non-controlling interests

757,152

2,073

281,675

1,475

Earnings per share

Profit for the year attributable to PJSC LUKOIL shareholders per share of common

stock (in Russian rubles):

23

Basic

1,185.60

1,129.17

23.31

22.46

Diluted

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

10

PJSC LUKOIL

Consolidated Statement of Changes in Equity

(Millions of Russian rubles)

Total equity

Additional

paid-in

attributable to

Retained PJSC LUKOIL controlling

Non-

Share

capital

Treasury

shares

Other

reserves

Total

equity

capital

earnings

shareholders

4,123,014

773,442

interests

31 December 2020

Profit for the year

Other comprehensive

(loss) income

938

-

(71,920)

-

39,298

-

296,641 3,858,057

7,752

4,130,766

775,513

-

(16,290)

773,442

2,071

-

2

(16,290)

757,152

(16,288)

759,225

Total comprehensive

(loss) income

773,442

2,073

Dividends on common

stock

-

(360,316)

-

(360,316)

(13,959)

(360,316)

(13,959)

Stock purchased

(13,959)

Equity-settled share-

based compensation plan

-

9,043

-

9,043

Changes in non-

controlling interests

-

100

-

(1,675)

100

(1,575)

31 December 2021

938

(85,879)

39,398

280,351 4,280,226

4,515,034

8,150 4,523,184

31 December 2019

Profit for the year

Other comprehensive

income

968

-

(308,160)

-

39,277

-

30,141 4,203,138

8,085

1,458

3,965,364

15,175

3,973,449

16,633

-

266,500

15,175

-

17

266,500

281,675

266,517

283,150

Total comprehensive

income

15,175

1,475

Dividends on common

stock

-

(258,389)

-

(258,389)

(2,026)

(258,389)

(2,026)

Stock purchased

(2,026)

Equity-settled share-

based compensation plan

-

15,381

-

15,381

Obligation to repurchase

common shares

-

120,988

117,278

-

120,988

-

120,988

-

Share capital reduction

(30)

(117,248)

Changes in non-

controlling interests

-

21

-

(1,808)

21

(1,787)

31 December 2020

938

(71,920)

39,298

296,641 3,858,057

4,123,014

7,752 4,130,766

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

11

PJSC LUKOIL

Consolidated Statement of Cash Flows

(Millions of Russian rubles)

Note

2021

2020

Cash flows from operating activities

Profit for the year attributable to PJSC LUKOIL shareholders

Adjustments for non-cash items:

773,442

15,175

Depreciation, depletion and amortisation

Equity share in income of associates and joint ventures

Dry hole write-offs

425,466

(29,980)

5,488

405,440

(11,474)

4,425

Loss on disposals and impairments of assets

Income tax expense

19,055

191,451

(2,595)

(16,519)

37,568

9,091

125,535

82,154

26,037

(13,051)

44,122

5,811

Non-cash foreign exchange (gain) loss

Finance income

Finance costs

Allowance for expected credit losses

Equity-settled share-based compensation plan

All other items, net

31,366

(9,563)

31,366

5,538

Changes in operating assets and liabilities:

Trade accounts receivable

(363,337)

(44,657)

185,047

83,061

128,139

37,868

Inventories

Accounts payable

(69,305)

10,200

Other taxes

Other current assets and liabilities

Income tax paid

(44,010)

(161,698)

25,168

(15,154)

(57,250)

9,448

Dividends received

Interests received

12,770

11,550

Net cash provided by operating activities

Cash flows from investing activities

Acquisition of licences

1,126,614

776,574

(337)

(433,042)

4,417

(2,630)

5,073

(235)

(495,443)

657

(8,232)

12,323

17

Capital expenditures

Proceeds from sale of property, plant and equipment

Purchases of financial assets

Proceeds from sale of financial assets

Sale of subsidiaries, net of cash disposed

Sale of associates

193

83

312

Acquisitions of interests in the projects and subsidiaries, net of cash acquired

Acquisitions of associates

(10,911)

(901)

(1,040)

(1,128)

(492,769)

Net cash used in investing activities

Cash flows from financing activities

Proceeds from issuance of short-term borrowings

Principal repayments of short-term borrowings

Proceeds from issuance of long-term debt

Principal repayments of long-term debt

Interest paid

(438,055)

1,019

(11,112)

187,361

(125,382)

(30,823)

(357,672)

(3,930)

134

1,971

(815)

108,796

(171,980)

(39,100)

(407,309)

(3,589)

47

Dividends paid on Company common shares

Dividends paid to non-controlling interest shareholders

Financing received from non-controlling interest shareholders

Purchase of Company’s stock

(13,958)

(14)

(2,026)

-

Purchases of non-controlling interest

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

(354,377)

(532)

(514,005)

58,000

(172,200)

516,032

343,832

333,650

343,832

677,482

6

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

12

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 1. Organisation and environment

The primary activities of PJSC LUKOIL (the “Company”) and its subsidiaries (together, the “Group”) are oil

exploration, production, refining, marketing and distribution. The Company is the ultimate parent entity of this

vertically integrated group of companies.

The Group was established in accordance with Presidential Decree No. 1403, issued on 17 November 1992.

Under this decree, on 5 April 1993, the Government of the Russian Federation transferred to the Company 51%

of the voting shares of fifteen enterprises. Under Government Resolution No. 861 issued on

1 September 1995, a further nine enterprises were transferred to the Group during 1995. Since 1995, the Group

has carried out a share exchange programme to increase its shareholding in each of the twenty-four founding

subsidiaries to 100%.

From formation, the Group has expanded substantially through consolidation of its interests, acquisition of new

companies and establishment of new businesses.

Business and economic environment

In July – September 2014, the United States (“US”), the European Union (“EU”) and several other countries

imposed a set of sanctions on Russia, including sectoral sanctions which affect several Russian oil and gas

companies. The US Department of the Treasury has placed the Company onto the Sectoral Sanctions

Identifications List subject to Directive 4 of the Office of foreign assets control (OFAC). Directive 4 prohibits

US companies and individuals from providing, exporting, or re-exporting directly or indirectly, goods, services

(except for financial services), or technology in support of exploration or production for deepwater, Arctic

offshore or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area

spreading from the Russian territory and claimed by the Russian Federation.

From January 2018 (based on acts adopted in August – October 2017), the US expanded abovementioned

sanctions to include certain categories of international oil projects initiated on or after 29 January 2018 in any

part of the world, in which companies placed on the Sectoral Sanctions Identifications List subject to Directive 4

(including the Company) have an ownership interest of 33% or more, or ownership of a majority of the voting

interests. Management believes these sanctions do not have a material adverse effect on the current or planned

Group’s oil projects.

In recent days, due to the events in Ukraine, the US has imposed additional sanctions on the Russian government,

as well as Russian entities and individuals. This includes full blocking sanctions on certain Russian state-owned

financial institutions. There have been restrictions put in place on the opening and maintenance of, or transacting

with, certain correspondent and payable-through accounts at foreign financial institutions. Additionally, there

have been new debt and equity restrictions imposed on major state-owned and private entities and Russian

sovereign debt. Similarly, the UK and EU have announced additional sanctions in recent days. The UK has

imposed blocking and asset freezing sanctions on certain Russian banks, entities, and individuals operating in

financial and defense sectors. The EU has designated certain Russian government officials, entities (including

Russian banks), and other individuals, and imposed restrictions on capital markets, loans, and credit that target

Russian sovereign debt. Moreover, there is a risk that further sanctions may be introduced. This may have

significant adverse impact on Russia’s economy. These events have led to depreciation of the Russian ruble and

increased volatility and uncertainty in the Russian economy.

At the same time, it is a stated goal to minimise the impact of these sanctions on energy companies and

consumers. The US has specifically authorised certain transactions related to the energy sector, highlighting the

need for continued, legitimate energy-related trade.

The consolidated financial statements reflect management’s assessment of the impact of the business

environment on the operations and the financial position of the Group. The future business environment may

differ from management’s assessment. Management will continue monitoring the situation closely to ensure

prompt reaction to the rapidly changing environment.

13

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 2. Basis of preparation

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting

Standards (“IFRS”).

These consolidated financial statements have been prepared on a historical cost basis, except certain assets and

liabilities measured at fair value.

The consolidated financial statements were authorised by the President of the Company on 2 March 2022.

Functional and presentation currency

The functional currency of each of the Group’s consolidated companies is the currency of the primary economic

environment in which the company operates. The management has analysed factors that influence the choice of

functional currency and has determined the functional currency for each Group company. For the majority of

them the functional currency is the local currency. The functional currency of the Company is the Russian ruble

(“RUB”).

The presentation currency of the Group is the RUB. All financial information presented in the RUB has been

rounded to the nearest million, except when otherwise indicated.

The results and financial position of Group companies whose functional currency is different from the

presentation currency of the Group are translated into presentation currency using the following procedures.

Assets and liabilities are translated at period-end exchange rates, income and expenses are translated at rates

which approximate actual rates at the date of the transaction. Resulting exchange differences are recognised in

other comprehensive income.

Note 3. Summary of significant accounting policies

Principles of consolidation

These consolidated financial statements include the financial position and results of operations of the Company

and controlled subsidiaries. A company controls an investee when it is exposed, or has rights, to variable returns

from its involvement with the investee and has the ability to affect those returns through its power over the

investee.

Investments in companies that the Group does not control, but where it has the ability to exercise significant

influence (Group’s interests are between 20% and 50%) over operating and financial policies, are accounted for

using the equity method. These investments include the Group’s interests in associates, joint ventures and

investments where the Company owns the majority of the voting interest but has no control. Associates are those

entities in which the Group has significant influence, but not control or joint control, over the financial and

operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group

has rights to the net assets of the arrangement.

Interests in associates and joint ventures are accounted for using the equity method and are recognised initially

at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the

Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after

adjustments to align the accounting policies with those of the Group, from the date that significant influence or

joint control commences until the date that significant influence or joint control ceases. When the Group’s share

of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest including any

long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the

extent that the Group has an obligation or has made payments on behalf of the investee.

14

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

Group’s share in jointly controlled operations is recognised in the consolidated financial statements based on its

share in assets, liabilities, income and expenses. Jointly controlled operations are arrangements in which parties

that have joint control over operating or financial policies have respective rights to use assets and responsibility

for liabilities in the arrangements.

Certain of Group’s unincorporated joint exploration and production activities are conducted through

arrangements that are not jointly controlled, either because unanimous consent is not required among all parties

involved, or no single group of parties has joint control over the activity. Such activities where control can be

achieved through agreement between more than one combination of involved parties are considered to be outside

the scope of IFRS 11 Joint Arrangements. In relation to its interests in these arrangements, the Group recognises

its share of any assets, liabilities, income and expenses.

Business combinations

For each business combination the Group measures goodwill at the acquisition date as:



the fair value of the consideration transferred; plus

the recognised amount of any non-controlling interests in the acquiree; plus

if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the

acquire; less



the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities

assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The

consideration transferred does not include amounts related to the settlement of previous transactions. Such

amounts are generally recognised in profit or loss.

Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent

consideration is classified as equity, it is not remeasured and settlement is accounted for within equity.

Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

Non-controlling interests

Non-controlling interests are measured at their proportionate share of the fair value of acquiree’s identifiable net

assets at the acquisition date.

Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity

transactions.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group

transactions, are eliminated during the process of consolidation. Unrealised gains arising from transactions with

equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the

investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there

is no evidence of impairment.

15

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

Foreign currency

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at

exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies

are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on

monetary items is the difference between amortised cost in the functional currency at the beginning of the period,

adjusted for effective interest and payments during the period, and the amortised cost in foreign currency

translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities

denominated in foreign currencies that are measured at fair value are translated to the functional currency at the

exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are

measured based on historical cost are translated using the exchange rate at the date of the transaction. Foreign

currency differences arising in translation are recognised in profit or loss, except for differences arising on the

translation of financial assets measured at fair value through other comprehensive income which are recognised

in other comprehensive income.

Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on

acquisition, are translated to the presentation currency at the exchange rates at the reporting date. The income

and expenses of foreign operations are translated to the presentation currency at exchange rates at the dates of

the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in

the foreign currency translation reserve in equity. However, if the foreign operation is a non-wholly owned

subsidiary, then the relevant proportionate share of the translation difference is allocated to non-controlling

interests. When a foreign operation is disposed of in a way that control, significant influence or joint control is

lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or

loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary

that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is

reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate

or joint venture that includes a foreign operation while retaining significant influence or joint control, the

relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary

item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable

future, foreign exchange gains and losses arising from such item form part of a net investment in a foreign

operation and are recognised in other comprehensive income, and presented in the translation reserve in equity.

Revenues

Revenues are recognised when a customer obtains control of the goods or services which usually occurs when

the title is passed, provided that risks and rewards of ownership are assumed by the customer and the customer

obtains obligation to pay for the goods or services.

Revenues include excise on petroleum products’ sales and duties on export sales of crude oil and petroleum

products.

Revenue from the production of oil and natural gas in which the Group has an interest with other producers is

recognised based on the Group’s working interest and the terms of the relevant production sharing contracts.

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

If the fair value of the non-cash consideration cannot be reasonably estimated, the consideration shall be

measured indirectly by reference to the stand-alone selling price of the goods or services promised to the

customer in exchange for the consideration.

16

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

Cash and cash equivalents

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

less.

Financial assets

The Group classifies non-derivative financial assets into the following categories, as appropriate: measured at

amortised cost, fair value through other comprehensive income and fair value through profit or loss.

A financial asset is measured at amortised cost if both of the following conditions are met:



the financial asset is held within a business model whose objective is to hold financial assets in order to

collect contractual cash flows;

the contractual terms of the financial asset give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding.

A financial asset is measured at fair value through other comprehensive income if both of the following

conditions are met:



the financial asset is held within a business model whose objective is achieved by both collecting

contractual cash flows and selling financial assets;

the contractual terms of the financial asset give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding.

A financial asset is measured at fair value through profit or loss unless it is measured at amortised cost or at fair

value through other comprehensive income. However, the Company may make an irrevocable election at initial

recognition for particular instruments in equity instruments that would otherwise be measured at fair value

through profit or loss to present subsequent changes in fair value in other comprehensive income.

The Group initially recognises as financial assets loans and receivables on the date when they are originated and

debt securities on the date when they are acquired. All other financial assets are recognised initially on the trade

date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or

it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which

substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in

transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Non-derivative financial liabilities

The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such

financial liabilities are recognised initially at fair value less any directly attributable transaction costs.

Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective

interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other

payables.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or

expire.

17

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

Derivative instruments

The Group uses various derivative financial instruments to hedge its commodity price risks. Such derivative

financial instruments are initially recognised at fair value on the date on which a derivative contract is entered

into and subsequently re-measured at fair value. Resulting realised and unrealised gains or losses are presented

in profit or loss on a net basis. The Group does not use hedge accounting.

Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories includes

expenditure incurred in acquiring the inventories, production or conversion costs and other delivery costs. In the

case of manufactured inventories, cost includes an appropriate share of production overheads based on normal

operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the

estimated costs of completion and selling expenses.

The disposal of finished goods is accounted for using the first-in first-out principle, the disposal of other

inventories by using the “average cost” method.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated

impairment losses. The cost of property, plant and equipment of major subsidiaries at 1 January 2014, the

Group’s date of transition to IFRSs, was determined by reference to its fair value at that date.

The Group recognises exploration and evaluation costs using the successful efforts method. Under this method,

all costs related to exploration and evaluation are capitalised and accounted for as construction in progress in

the amount incurred less impairment (if any) until the discovery (or absence) of economically feasible oil and

gas reserves has been established. When the technical feasibility and commercial viability of reserves extraction

is confirmed, exploration and evaluation assets should be reclassified into property, plant and equipment. Prior

to reclassification these assets should be reviewed for impairment and impairment loss (if any) expensed to the

financial results. If the exploration and evaluation activity is evaluated as unsuccessful, the costs incurred should

be expensed.

Depreciation, depletion and amortisation of capitalised costs of oil and gas properties is calculated using the

unit-of-production method based upon proved reserves for the cost of property acquisitions and proved

developed reserves for exploration and development costs.

Depreciation, depletion and amortisation of the capitalised costs of oil and gas properties related to risk service

contract is calculated using a depletion factor calculated as the ratio of value of the applicable crude oil

production for the period to the total capitalised costs to be recovered.

Depreciation of assets not directly associated with production is calculated on a straight-line basis over the

economic lives of such assets, estimated to be in the following ranges:

Buildings and constructions 5 – 40 years

Machinery and equipment

3 – 20 years

Depreciation methods and useful lives are reviewed at each reporting date and adjusted if appropriate.

Production and related overhead costs are expensed as incurred.

In addition to production assets, certain Group companies also maintain and construct social assets for the use

of local communities. Such assets are capitalised only to the extent that they are expected to result in future

economic benefits to the Group. If capitalised, they are depreciated over their estimated economic lives.

18

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

Impairment of non-current non-financial assets

The carrying amounts of the Group’s non-current non-financial assets, other than inventories and deferred tax

assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any

such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that

have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year at the

same time. For the purpose of impairment testing, assets that cannot be tested individually are grouped together

into the smallest group of assets that generates cash inflows from continuing use that are largely independent of

the cash inflows of other assets or related cash-generating unit (“CGU”).

Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which

goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects

the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business

combination is allocated to group of CGUs that are expected to benefit from the synergies of the combination.

The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU.

Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part

of the testing of the CGU to which the corporate asset is allocated. The recoverable amount of an asset or CGU

is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future

cash flows are discounted to their present value using a pre-tax discount rate that reflects current market

assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognised if the carrying amount of an asset or its related CGU exceeds its estimated

recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect

of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of

CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata

basis.

Significant unproved properties are assessed for impairment individually on a regular basis and any estimated

impairment is charged to expense.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses

recognised in prior periods are assessed at each reporting date. An impairment loss is reversed if there has been

a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the

extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,

net of depreciation or amortisation, if no impairment loss had been recognised.

Asset retirement obligations

The Group records the present value of the estimated future costs to settle its legal obligations to abandon,

dismantle or otherwise retire tangible non-current non-financial assets in the period in which the liability is

incurred. A corresponding increase in the carrying amount of the related non-current non-financial assets is also

recorded. Subsequently, the liability is accreted for the passage of time and the related asset is depreciated using

the same method as asset to be abandoned, dismantled or otherwise retired. Changes in the estimates of asset

retirement obligations (“ARO”) occur as a result of changes in cost and timing of liquidation or change of

discount rates and are accounted as part of cost of property, plant and equipment in the current period.

Lease

A single, on-balance sheet lease accounting model is used by lessees. A contract is, or contains, a lease if it

conveys a right to control the use of an identified asset for a period of time in exchange for consideration. A

lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability

representing its obligation to make lease payments. The Group has elected not to apply provided exemptions for

short-term leases and leases for which the underlying asset is of low value. Lessors classify leases as finance or

operating leases.

19

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

The Group recognises a depreciation charge for right-of-use assets and interest expense on lease liabilities.

Assets classified as held for sale

Assets classified as held for sale are separately presented in the consolidated statement of financial position and

reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The

assets and liabilities classified as held for sale are presented in current assets and liabilities of the consolidated

statement of financial position.

Income taxes

Deferred income tax assets and liabilities are recognised in respect of the future tax consequences attributable

to temporary differences between the carrying amounts of existing assets and liabilities for the purposes of the

consolidated statement of financial position and their respective tax bases. But as opposed to deferred tax

liabilities, deferred tax assets are recognised only to the extent that it is probable that taxable profit will be

available against which the deductible temporary difference can be utilised. Similarly a deferred tax asset shall

be recognised for the carryforward of unused tax losses to the extent that it is probable that future taxable profit

will be available. At the end of each reporting period realisability of deferred tax assets (both recognised and

unrecornised) should be reassessed. In case of existence of previously unrecognised deferred tax assets, they can

be recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset

to be recovered.

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable

income in the years in which those temporary differences are expected to reverse and the assets be recovered

and liabilities settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognised

in profit or loss in the reporting period which includes the enactment date.

Employee benefits

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s

net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the

amount of future benefit that employees have earned in return for their service in the current and prior periods.

That benefit is discounted to determine its present value and the fair value of any plan assets are deducted. The

discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the

terms of the Group’s obligations and that are denominated in the same currency in which the benefits are

expected to be paid.

The calculation is performed annually by a qualified actuary. When the calculation results in a potential asset

for the Group, the recognised asset is limited to the present value of economic benefits available in the form of

any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present

value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan

in the Group. An economic benefit is available to the Group if it is realisable during the life of the plan, or on

settlement of the plan liabilities.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on

plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised

immediately in other comprehensive income. The Group determines the net interest expense (income) on the net

defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit

obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into

account any changes in the net defined benefit liability (asset) during the period as a result of contributions and

benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in

profit or loss.

20

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 3. Summary of significant accounting policies (continued)

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates

to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises

gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Treasury shares

Purchases by Group companies of the Company’s outstanding shares are recorded at cost and classified as

treasury shares within equity. Shares shown as Authorised and Issued include treasury shares. Shares shown as

Outstanding do not include treasury shares.

Earnings per share

Basic earnings per share is computed by dividing profit available for distribution to common shareholders of the

Company by the weighted-average number of common shares outstanding during the reporting period. Diluted

earnings per share is determined by adjusting profit available for distribution to common shareholders of the

Company and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential

ordinary shares, which comprise convertible notes and share options granted to employees.

Provisions and contingencies

Certain conditions may exist as of the consolidated financial statements date, which may result in losses to the

Group but the impact of which will only be resolved when one or more future events occur or fail to occur.

Liabilities of the Group with high level of probability of loss are recognised in the consolidated financial

statements as provisions. Liabilities of the Group with the level of probability that do not meet the conditions in

order to be recognised as provisions are considered to be contingent liabilities. Contingent liabilities are not

recognised in the consolidated financial statements but are disclosed in the notes to the consolidated financial

statements if probability of disposal of certain resources aimed to settle this liability is not remote. If probability

of disposal of certain resources is remote the information about such contingencies is not disclosed.

Environmental expenditures

Estimated losses from environmental remediation obligations are generally recognised no later than completion

of remedial feasibility studies. Group companies accrue for losses associated with environmental remediation

obligations when such losses are probable and reasonably estimable. Such accruals are adjusted as further

information becomes available or circumstances change.

Share-based payments

The Group accounts for cash-settled share-based payment awards to employees at fair value on the grant date

and as of each reporting date. Expenses are recognised over the vesting period. Equity-settled share-based

payment awards to employees are valued at fair value on the grant date and expensed over the vesting period.

Changes in accounting policies and disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the adoption

of the amendments to the existing standards effective as of 1 January 2021. These amendments related to interest

rate benchmark reform and did not have a significant impact on the consolidated financial statements:



amendments to IFRS 9 Financial Instruments;

amendments to IFRS 39 Financial Instruments: Recognition and Measurement;

amendments to IFRS 16 Leases;

amendments to IFRS 4 Insurance Contracts.

21

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 4. Use of estimates and judgments

Preparation of the consolidated financial statements in accordance with IFRS requires management to make

judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts

of assets, liabilities, income and expenses. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are

recognised in the period in which the estimates are revised and in any future periods affected.

Critical judgments in applying accounting policies that have the most significant effect on the amounts

recognised in the condensed interim consolidated financial statements are the following:



estimation of oil and gas reserves;

estimation of useful lives of property, plant and equipment;

impairment of non-current assets;

assessment and recognition of provisions and contingent liabilities;

definition of leases.

Oil and gas reserves estimates that are used for the reporting purposes are made in accordance with the

requirements adopted by U.S. Securities and Exchange Commission. Estimates are reassessed on an annual

basis.

Note 5. New standards and interpretations not yet adopted

The following amendments to the standards are effective for annual periods beginning 1 January 2022 and after,

available for early adoption:



Onerous contracts – Cost of Fulfilling a Contract (Amendments to IAS 37 Provisions, Contingent

Liabilities and Contingent Assets);

Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16 Property, Plant

and Equipment);



Reference to Conceptual Framework (Amendments to IFRS 3 Business Combinations);

Classification of Liabilities as Current or Non-current (Amendments to IAS 1 Presentation of Financial

Statements);



Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and

IFRS Practice Statement 2 Making Materiality Judgements);

Definition of Accounting Estimate (Amendments to IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors);

Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to

IAS 12 Income Taxes).

However, the Group did not make an early adoption of the amended standards in the preparation of these

consolidated financial statements, which are not expected to have a significant impact on the Group's

consolidated financial statements.

Note 6. Cash and cash equivalents

31 December 2021

70,508

31 December 2020

16,537

Cash held in RUB

Cash held in US dollars

Cash held in EUR

526,807

256,841

66,268

59,009

Cash held in other currencies

Total cash and cash equivalents

13,899

11,445

677,482

343,832

22

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 7. Accounts receivable, net

31 December 2021

31 December 2020

Trade accounts receivable (net of allowances of 36,028 million RUB and 32,762 million RUB

at 31 December 2021 and 2020, respectively)

727,934

357,159

Other current accounts receivable (net of allowances of 4,485 million RUB and

4,930 million RUB at 31 December 2021 and 2020, respectively)

13,938

13,112

Total accounts receivable, net

741,872

370,271

Note 8. Inventories

31 December 2021

415,612

31 December 2020

373,290

Crude oil and petroleum products

Materials for extraction and drilling

Materials and supplies for refining

Other goods, materials and supplies

Total inventories

25,260

25,582

4,008

4,681

23,080

22,983

467,960

426,536

Note 9. Prepaid taxes

31 December 2021

16,810

31 December 2020

17,983

Income tax

VAT recoverable

Excise tax recoverable

Export duties

VAT

14,735

12,940

35,804

8,350

13,512

8,009

46,240

26,407

Other taxes

6,225

5,133

Total prepaid taxes

133,326

78,822

Note 10. Other current assets

31 December 2021

57,124

31 December 2020

15,904

Advance payments

Prepaid expenses

Other assets

24,162

21,622

34,942

11,123

Total other current assets

116,228

48,649

Note 11. Investments in associates and joint ventures

Carrying value of investments in associates and joint ventures:

Ownership

Name of the company

Joint ventures:

Country 31 December 2021 31 December 2020 31 December 2021 31 December 2020

Tengizchevroil (TCO)

Kazakhstan

Azerbaijan

5.0%

12.5%

10.0%

5.0%

12.5%

10.0%

153,918

53,183

33,697

146,611

56,027

34,663

Caspian Pipeline Consortium

(CPC)

South Caucasus Pipeline

Company (SCPC)

Associates:

Associates

Total

40,734

44,336

281,532

281,637

TCO is engaged in development of hydrocarbon resources in Kazakhstan. The Group has classified its interest

in TCO as a joint venture as it has rights to the net assets of the arrangement.

23

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

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

31 December 2021

Current assets

TCO

253,674

CPC

53,194

417,325

41,799

3,256

SCPC

34,317

351,172

29,454

19,061

336,974

33,697

Others

Associates

46,285

Total

387,470

-

Non-current assets

Current liabilities

Non-current liabilities

Net assets (100%)

Share in net assets

3,634,400

263,141

214,144

30,815

4,617,041

365,209

1,228,935

2,395,998

153,918

129,247

100,367

40,734

1,380,499

3,258,803

281,532

425,464

53,183

31 December 2020

Current assets

TCO

185,179

CPC

49,950

449,020

39,529

11,224

448,217

56,027

SCPC

17,923

363,283

17,584

16,995

346,627

34,663

Others

Associates

37,049

Total

290,101

-

Non-current assets

Current liabilities

Non-current liabilities

Net assets (100%)

Share in net assets

3,398,159

153,329

222,001

22,011

4,432,463

232,453

1,228,347

2,201,662

146,611

127,928

109,111

44,336

1,384,494

3,105,617

281,637

2021

TCO

1,171,624

356,088

15,216

CPC

159,904

64,411

8,051

SCPC

80,204

44,835

4,484

Others

Associates

144,753

6,982

Total

1,556,485

472,316

29,980

Revenues

-

Net income, 100%

Share in net income

2,229

2020

TCO

657,608

113,342

3,407

CPC

151,648

57,684

7,210

SCPC

50,221

24,251

2,425

Others

4,627

1,402

701

Associates

74,160

Total

938,264

190,485

11,474

Revenues

Net income (loss), 100%

Share in net income (loss)

(6,194)

(2,269)

Note 12. Property, plant and equipment

Exploration

Refining, marketing

and production assets and distribution assets

Other assets

Total

Cost

31 December 2020

Additions

5,433,264

328,139

1,909

1,756,650

130,202

-

77,006

3,059

-

7,266,920

461,400

1,909

Acquisitions

Disposals

(39,402)

10,568

(35,387)

(42,898)

2,078

(1,669)

(68)

(76,458)

(32,398)

(31,733)

7,589,640

Foreign currency translation differences

Other

(31,720)

5,702,758

(2,091)

76,237

1,810,645

31 December 2021

Depreciation and impairment

31 December 2020

Depreciation for the period

Impairment loss

(2,193,734)

(304,135)

(1,002)

(802,877)

(115,827)

(24,491)

15,361

(22,368)

(3,512)

(1,571)

19

(3,018,979)

(423,474)

(27,064)

26,653

Impairment reversal

Disposals

11,273

19,819

32,433

1,111

88

53,363

Foreign currency translation differences

Other

(6,524)

22,939

16,503

21,655

1,266

628

23,549

31 December 2021

(2,452,648)

(871,196)

(25,605)

(3,349,449)

Advance payments for property, plant

and equipment

31 December 2020

31 December 2021

Carrying amounts

31 December 2020

31 December 2021

10,218

5,757

558

16,533

22,939

17,812

4,854

273

3,249,748

959,530

55,196

4,264,474

4,263,130

3,267,922

944,303

50,905

24

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 12. Property, plant and equipment (continued)

Exploration

Refining, marketing

and production assets and distribution assets

Other assets

Total

Cost

31 December 2019

Additions

4,795,674

424,751

1,209

1,510,515

144,941

-

76,246

4,864

-

6,382,435

574,556

1,209

Acquisitions

Disposals

(37,156)

272,259

(23,473)

5,433,264

(42,014)

143,409

(201)

(6,592)

2,704

(216)

77,006

(85,762)

418,372

(23,890)

7,266,920

Foreign currency translation differences

Other

31 December 2020

Depreciation and impairment

31 December 2019

Depreciation for the period

Impairment loss

1,756,650

(1,766,575)

(278,237)

(48,740)

18,358

(589,636)

(135,596)

(58,129)

38,776

(21,153)

(3,705)

-

(2,377,364)

(417,538)

(106,869)

60,611

Disposals

3,477

(1,032)

45

Foreign currency translation differences

Other

(144,090)

25,550

(60,206)

1,914

(205,328)

27,509

31 December 2020

(2,193,734)

(802,877)

(22,368)

(3,018,979)

Advance payments for property, plant

and equipment

31 December 2019

31 December 2020

Carrying amounts

31 December 2019

31 December 2020

6,791

13,314

831

20,936

16,533

10,218

5,757

558

3,035,890

934,193

55,924

4,026,007

4,264,474

3,249,748

959,530

55,196

The cost of assets under construction included in property, plant and equipment was 362,623 million RUB and

458,265 million RUB at 31 December 2021 and 2020, respectively.

Exploration and evaluation assets

2021

163,251

32,597

283

2020

129,951

36,881

362

1 January

Capitalised expenditures

Acquisitions through business combinations

Reclassified to development assets

Charged to expenses

(13,388)

(5,176)

380

(5,238)

(3,542)

6,244

Foreign currency translation differences

Other movements

61

(1,407)

163,251

31 December

178,008

The Company performs a regular annual impairment test of its assets. The test is based on geological models

and development programmes, which are revised on a regular basis, at least annually.

In the fourth quarter of 2021, the Group recognised an impairment loss in relation to property, plant and

equipment in the total amount of 27.1 billion RUB, of which 18.5 billion RUR related to international refineries

and resulted from a decline in the forecasted refining margins that followed the tightening of the EU

decarbonisation policy. A loss of 6.0 billion RUB related to refining, marketing and distribution assets in Russia,

a loss of 1.0 billion RUB related to exploration and production assets in Russia and a loss of 1.6 billion related

to other assets in Russia. Also, as a result of improvement of economic parameters, the Group recognised an

impairment reversal for its exploration and production assets in Russia in the amount of 10.0 billion RUB, for

its international exploration and production assets in the amount of 1.3 billion RUB and for its refining,

marketing and distribution assets in Russia in the amount of 15.4 billion RUB.

25

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 12. Property, plant and equipment (continued)

The recoverable amounts of CGUs subject to impairment and impairment reversal in the fourth quarter of 2021

in the amount of 41 billion RUB and 216 billion RUB, respectively, were determined as value in use equal to

the present value of the expected cash flows. Value in use was estimated using the following discount rates: for

exploration and production assets and other assets in Russia – 9.0%, for international exploration and production

assets – 10.0%, for refining, marketing and distribution assets in Russia – from 12.0% to 13.6%, for international

refining, marketing and distribution assets – from 6.6% to 10.3%.

For impairment test purposes at 31 December 2021 the following Brent Blend price assumptions have been

used: $75 per barrel in 2022, $70 per barrel in 2023 and $66 per barrel from 2024.

Due to a significant deterioration in the macroeconomic environment in the first quarter of 2020, the Company

revised the scenario conditions used in the impairment test at the end of 2019 and performed an impairment test

for assets at 31 March 2020.

As a result, in the first quarter of 2020, the Group recognised an impairment loss for its exploration and

production assets in Russia in the amount of 5.2 billion RUB, for its international exploration and production

assets in the amount of 2.2 billion RUB and for its international refining, marketing and distribution assets in

the amount of 28.8 billion RUB.

The recoverable amounts of CGUs in the amount of 139 billion RUB, which relate to assets impaired in the first

quarter of 2020, were determined as value in use equal to the present value of the expected cash flows. Value in

use was estimated using 9.0% discount rate for exploration and production assets in Russia, 8.2% discount rate

for international exploration and production assets and 7.5% discount rate for international refining, marketing

and distribution assets.

For impairment test purposes at 31 March 2020 the following Brent Blend price assumptions have been used:

$40 per barrel in 2020–2021, $45 per barrel in 2022, $50 per barrel in 2023, $55 per barrel in 2024 and $60 per

barrel from 2025.

Also, in the second quarter of 2020, the Group recognised an impairment loss for its international exploration

and production assets in the amount of 38.2 billion RUB. Of this amount, 35.9 billion RUB relates to gas projects

in the Republic of Uzbekistan and are determined based on the revised business model, which takes into account

conservative approaches to assessing the structure of gas supplies and pricing.

The recoverable amounts of CGUs in the amount of 106 billion RUB, which relate to assets impaired in the

second quarter of 2020, were determined as value in use equal to the present value of the expected cash flows.

Value in use was estimated using 11.2% discount rate.

In the fourth quarter of 2020, the Group recognised an impairment loss for its exploration and production assets

in Russia in the amount of 3.0 billion RUB, for its international exploration and production assets in the amount

of 0.1 billion RUB, for its refining, marketing and distribution assets in Russia in the amount of 7.7 billion RUB

and for its international refining, marketing and distribution assets in the amount of 21.6 billion RUB.

The recoverable amounts of CGUs in the amount of 52 billion RUB, which relate to assets impairment in the

fourth quarter of 2020, were determined as value in use equal to the present value of the expected cash flows.

Value in use was estimated using the following discount rates: for exploration and production assets in Russia

– 8.0%, for refining, marketing and distribution assets in Russia – from 9.7% to 12.8% and for international

refining, marketing and distribution assets – 6.4%.

For impairment test purposes at 31 December 2020 the following Brent Blend price assumptions have been

used: $50 per barrel in 2021, $54 per barrel in 2022, $57 per barrel in 2023, $58 per barrel in 2024 and $60 per

barrel from 2025.

26

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 12. Property, plant and equipment (continued)

Impairment reversal and impairment loss are included in “Other income (expenses)” in the consolidated

statement of profit or loss and other comprehensive income.

The measurement of recoverable amounts of property, plant and equipment is most sensitive to the volatility of

oil and gas prices. However, price reductions would also result in changes in other factors used when estimating

recoverable amounts. Quantitative assessment of suchlike impacts is very complicated, as it demands detailed

technical, geological and economical evaluations based on hypothetical scenarios rather than existing business

or development plans.

Note 13. Other non-current financial assets

31 December 2021

31 December 2020

Financial assets measured at fair value through other comprehensive income

Equity instruments

5,929

2,491

Financial assets measured at amortised cost

Long-term loans

20,223

1,624

230

31,075

1,916

15

Non-current accounts and notes receivable

Other financial assets

Financial assets measured at fair value through profit or loss

Long-term loans

33,732

33,195

Total other non-current financial assets

61,738

68,692

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

In December 2021, a Group company concluded a sale and purchase agreement with PJSC Gazprom Neft for

50% equity share of Meretoyakhaneftegaz LLC, a Gazprom Neft wholly owned subsidiary, for 52 billion RUB,

including cession of claim of Gazprom Neft’s loans worth 35 billion RUB. The contract was signed as part of

creating a joint venture to develop oil and gas cluster in the Nadym-Pur-Tazovsky area of the Yamal-Nenets

Autonomous District. The companies also agreed upon the programme of additional exploration of the blocks

of Meretoyakhaneftegaz LLC where 8.9 billion RUB of expenditures will be financed by LUKOIL. The

transaction is planned to be completed in 2022 after fulfilment of a number of conditions precedent, including

all necessary corporate approvals, as well as the consent of the Federal Antimonopoly Service. After acquisition,

this investment is going to be accounted by the Group using the equity method.

In October 2021, a Group company signed an agreement to purchase a 15.5% interest in the Shah Deniz natural

gas project in Azerbaijan sector of the Caspian sea from PETRONAS for $2.25 billion. In December 2021, the

terms of the agreement were amended as a result of negotiations with the Shah Deniz project partners on

implementation of pre-emptive rights. In accordance with the new arrangement, the share acquired by the Group

was reduced to 9.99% with proportional decrease in consideration to $1.45 billion. In the fourth quarter of 2021,

the Group company made an advance payment under this agreement in the amount of $92.5 million (6.7 billion

RUB). The transaction was closed on 17 February 2022 after all customary conditions, including approval by

SOCAR, the State Oil Company of the Azerbaijan Republic, were fulfilled. Following the completion of the

deal, the Group increased its share in the project from 10% to 19.99%.

In July 2021, a Group company entered into a contract to purchase the 50% operator interest in the Area 4 project

in Mexico by acquiring the operator’s holding company for approximately $435 million plus expenditures

incurred in 2021 and 2022 as of the transaction completion date. In the second half of 2021, the Group company

made an advance payment under this contract in the amount of $43.5 million (3.2 billion RUB). The transaction

was closed on 24 February 2022 after all customary conditions, including approval by the Mexican authorities,

were fulfilled.

27

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 15. Goodwill and other intangible assets

Other internally

generated

Internally

Acquired

generated software

intangible assets intangible assets

Goodwill

Total

Cost

31 December 2020

21,821

6,573

50,995

38,576

117,965

Additions as result of internal

developments

3,948

924

-

116

-

4,872

116

Acquisitions

-

Additions - separately acquired

Disposals

5,946

(1,900)

5,946

(2,074)

(137)

(37)

Foreign currency translation

differences

(83)

655

-

(456)

7,004

(2,298)

68

(1,876)

-

(4,257)

267

Other

31 December 2021

Amortisation and impairment

31 December 2020

Amortisation for the period

Impairment loss

26,204

52,927

36,700

122,835

(15,755)

(1,612)

(37,490)

(4,451)

(186)

33

(12,949)

(67,806)

(5,743)

(9,583)

34

(982)

(310)

-

1

(9,397)

Impairment reversal

Disposals

-

134

34

1,889

2,057

Foreign currency translation

differences

78

(222)

-

25

1,873

(112)

906

-

2,857

(309)

Other

31 December 2021

Carrying amounts

31 December 2020

31 December 2021

Cost

(16,747)

(1,862)

(38,444)

(21,440)

(78,493)

6,066

4,961

13,505

25,627

50,159

44,342

9,457

5,142

14,483

15,260

31 December 2019

19,532

4,975

52,782

32,337

109,626

Additions as result of internal

developments

1,914

-

1,859

-

5,597

-

3,773

5,597

Additions - separately acquired

Disposals

(190)

(23)

(11,088)

(11,301)

Foreign currency translation

differences

281

284

4

(242)

6,573

3,617

87

6,239

-

10,141

129

Other

31 December 2020

Amortisation and impairment

31 December 2019

Amortisation for the period

Impairment loss

21,821

50,995

38,576

117,965

(14,797)

(917)

-

(1,306)

(299)

(1)

(40,491)

(4,881)

(18)

(9,924)

(66,518)

(6,097)

(19)

-

Disposals

164

-

10,950

11,114

Foreign currency translation

differences

(260)

55

(4)

(2)

(2,851)

(199)

(3,025)

-

(6,140)

(146)

Other

31 December 2020

Carrying amounts

31 December 2019

31 December 2020

(15,755)

(1,612)

(37,490)

(12,949)

(67,806)

4,735

3,669

12,291

22,413

43,108

50,159

6,066

4,961

13,505

25,627

In the fourth quarter of 2021, the Group recognised an impairment loss in the amount of 9.4 billion RUB for

goodwill incurred on acquisition of one of international refineries due to a decline in the forecasted refining

margins that followed the tightening of the EU decarbonisation policy.

28

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 16. Accounts payable

31 December 2021

701,864

31 December 2020

533,598

Trade accounts payable

Other accounts payable

Total accounts payable

84,599

64,334

786,463

597,932

Note 17. Short-term borrowings and current portion of long-term debt

31 December 2021

31 December 2020

18,736

Short-term borrowings from third parties

7,993

899

Short-term borrowings from related parties

2,522

Current portion of long-term debt

71,359

80,251

61,378

Total short-term borrowings and current portion of long-term debt

82,636

Short-term borrowings from third parties include amounts repayable in US dollars of 6,914 million RUB and

17,510 million RUB and amounts repayable in other currencies of 1,079 million RUB and 1,226 million RUB

at 31 December 2021 and 2020, respectively. The weighted-average interest rate on short-term borrowings from

third parties was 3.20% and 2.63% per annum at 31 December 2021 and 2020, respectively. Short-term

borrowings from third parties are unsecured at 31 December 2021.

Note 18. Long-term debt

31 December 2021

58,728

31 December 2020

112,660

36,901

Long term loans and borrowings from third parties

6.656% non-convertible US dollar bonds, maturing 2022

4.563% non-convertible US dollar bonds, maturing 2023

4.750% non-convertible US dollar bonds, maturing 2026

2.80% non-convertible US dollar bonds, maturing 2027

3.875% non-convertible US dollar bonds, maturing 2030

3.60% non-convertible US dollar bonds, maturing 2031

Lease obligations

37,131

111,393

74,186

110,737

73,751

85,299

-

111,181

85,297

110,532

-

185,843

749,058

(71,359)

677,699

193,872

638,453

(61,378)

577,075

Total long-term debt

Current portion of long-term debt

Total non-current portion of long-term debt

Long-term loans and borrowings

Long-term loans and borrowings from third parties include amounts repayable in US dollars of

56,678 million RUB and 101,376 million RUB, amounts repayable in euros of 122 million RUB and

11,284 million RUB at 31 December 2021 and 2020, respectively, and amounts repayable in Russian rubles and

other currencies of 1,928 million RUB at 31 December 2021. This debt has maturity dates from 2022 through

2028. The weighted-average interest rate on long-term loans and borrowings from third parties was 2.03% and

2.54% per annum at 31 December 2021 and 2020, respectively. A number of long-term loan agreements contain

certain financial covenants which are being met by the Group. Long-term loans and borrowings from third

parties are unsecured at 31 December 2021.

29

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 18. Long-term debt (continued)

Non-convertible bonds

On 26 October 2021, a Group company issued two tranches of non-convertible bonds totaling $2.3 billion

(170.9 billion RUB). The first tranche of $1.15 billion (85.45 billion RUB) was placed with a maturity of

5.5 years and a coupon yield of 2.80% per annum, the second tranche of $1.15 billion (85.45 billion RUB) was

placed with a maturity of 10 years and a coupon yield of 3.60% per annum. All bonds were placed at face value

and have a half year coupon period.

On 6 May 2020, a Group company issued non-convertible bonds totaling $1.5 billion (111.45 billion RUB). The

bonds were placed with a maturity of 10 years and a coupon yield of 3.875% per annum. All bonds were placed

at face value and have a half year coupon period.

In November 2016, a Group company issued non-convertible bonds totaling $1 billion (74.3 billion RUB).

The bonds were placed with a maturity of 10 years and a coupon yield of 4.750% per annum. All bonds were

placed at face value and have a half year coupon period.

In April 2013, a Group company issued two tranches of non-convertible bonds totaling $3 billion

(222.9 billion RUB). The first tranche totaling $1.5 billion (111.45 billion RUB) was placed with a maturity of

5 years and a coupon yield of 3.416% per annum. The second tranche totaling $1.5 billion (111.45 billion RUB)

was placed with a maturity of 10 years and a coupon yield of 4.563% per annum. All bonds were placed at face

value and have a half year coupon period. In April 2018, a Group company redeemed all issued bonds of the

first tranche in accordance with the conditions of the bond issue.

In November 2010, a Group company issued two tranches of non-convertible bonds totaling $1 billion

(74.3 billion RUB) with a maturity of 10 years and a coupon yield of 6.125%. The first tranche totaling

$800 million (59.4 billion RUB) was placed at a price of 99.081% of the bond’s face value with a resulting yield

to maturity of 6.250%. The second tranche totaling $200 million (14.9 billion RUB) was placed at a price of

102.44% of the bond’s face value with a resulting yield to maturity of 5.80%. All bonds have a half year coupon

period. In November 2020, a Group company redeemed all issued bonds in accordance with the conditions of

the bond issue.

In June 2007, a Group company issued two tranches of non-convertible bonds totaling $1 billion (74.3 billion

RUB). $500 million (37.15 billion RUB) were placed with a maturity of 10 years and a coupon yield of 6.356%

per annum. Another $500 million (37.15 billion RUB) were placed with a maturity of 15 years and a coupon

yield of 6.656% per annum. All bonds were placed at face value and have a half year coupon period. In June

2017, a Group company redeemed all issued bonds of the first tranche in accordance with the conditions of the

bond issue.

30

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 18. Long-term debt (continued)

Reconciliation of liabilities arising from financing activities

Loans and

borrowings

Lease

obligations

Other

liabilities

Bonds

Total

31 December 2020

133,918

331,921

193,872

3,265

662,976

Changes from financing cash flows:

Proceeds from issuance of short-term

borrowings

1,019

(11,112)

26,319

(80,158)

-

1,019

(11,112)

187,361

Principal repayments of short-term borrowings

Proceeds from issuance of long-term debt

Principal repayments of long-term debt

Interest paid

-

161,042

-

(45,224)

(9,892)

-

(125,382)

(30,823)

(357,672)

(336,609)

-

(20,931)

(357,672)

(378,603)

Dividends paid on Company common stock

Total changes from financing cash flows

Other changes:

-

(63,932)

161,042

(55,116)

Interest accrued

741

-

102

-

9,893

-

22,361

33,097

Dividends declared on Company common stock

360,316

Changes arising from obtaining or losing control

over subsidiaries

(1,449)

(1,659)

-

11,422

-

(3,245)

36,739

3,700

(5)

(16)

(1,454)

6,502

The effect of changes in foreign exchange rates

Non-cash additions to lease obligations

Other changes

-

36,739

25,666

460,866

787,233

689,152

1

-

21,965

404,621

29,283

135,920

Total other changes

(2,366)

67,620

134,026

11,524

504,487

247,326

47,087

185,843

171,880

31 December 2021

31 December 2019

Changes from financing cash flows:

Proceeds from issuance of short-term

borrowings

1,971

-

1,971

(815)

Principal repayments of short-term borrowings

Proceeds from issuance of long-term debt

Principal repayments of long-term debt

Interest paid

(815)

-

108,796

(78,456)

-

108,796

(171,980)

(39,100)

(407,309)

(508,437)

(30,686)

(62,838)

(10,501)

-

(28,599)

(407,309)

(435,908)

Dividends paid on Company common stock

Total changes from financing cash flows

Other changes:

-

(29,530)

30,340

(73,339)

Interest accrued

1,853

-

128

10,501

-

26,810

258,389

1,082

-

39,292

258,389

111,905

50,009

Dividends declared on Company common stock

The effect of changes in foreign exchange rates

Non-cash additions to lease obligations

Other changes

-

54,125

-

27,010

-

29,688

50,009

5,133

95,331

193,872

559

2

16,972

303,253

3,265

22,666

Total other changes

29,422

133,918

54,255

331,921

482,261

662,976

31 December 2020

31

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 19. Taxes payable

31 December 2021

16,920

31 December 2020

16,614

Income tax

Mineral extraction tax

101,767

43,165

49,332

Tax on additional income from hydrocarbon production

2,881

VAT

77,109

35,650

Excise tax

25,284

22,733

Property tax

Other taxes

Total taxes payable

5,409

5,675

12,537

9,573

282,191

142,458

Note 20. Other current liabilities

31 December 2021

41,643

31 December 2020

31,142

Advances received

Dividends payable

Other

25,701

1,610

4,064

2,745

Total other current liabilities

71,408

35,497

Note 21. Provisions

Asset

retirement

Provision for

unused

employee environmental

Pension

Other

obligations compensations

liabilities

4,185

liabilities

vacations

provisions

Total

137,787

113,420

24,367

31 December 2021

Incl.: Non-current

Current

100,926

100,590

336

2,272

121

12,105

9,878

6,850

252

11,449

1,438

10,011

6,924

2,245

4,679

1,141

2,151

10,939

175

3,044

2,227

6,598

6,326

322

31 December 2020

Incl.: Non-current

Current

111,614

110,916

698

4,204

13,794

11,678

2,116

153,801

126,665

27,136

1,329

10,764

2,875

6,004

Asset retirement obligations changed as follows:

2021

111,614

3,600

(812)

2020

63,387

39,826

(154)

1 January

Provisions made during the period

Reversal of provisions

Provisions used during the period

Accretion expense

(204)

(325)

3,651

(19,188)

1,477

94

3,882

8,921

(9,395)

5,450

22

Change in discount rate

Changes in estimates

Foreign currency translation differences

Other

694

31 December

100,926

111,614

Note 22. Pension liabilities

The Group sponsors a postretirement defined benefit pension plan that covers the majority of the Group’s

employees. One type of pension plan is based on years of service, final remuneration levels as of the end of 2003

and employee gratitude, received during the period of work. The other type of pension plan is based on salary.

These plans are solely financed by Group companies. Simultaneously employees have the right to receive

pension benefits with a partial payment by the Group (up to 4% of the annual salary of the employee).

32

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 22. Pension liabilities (continued)

Plan assets and pensions payments are managed by a non-state pension fund, JSC “NPF Otkritie” (former “NPF

LUKOIL-GARANT”). The Group also provides several long-term social benefits, including lump-sum death-

in-service benefit, in case of disability and upon retirement payments. Also certain payments are received by

retired employees upon reaching a certain old age or invalidity.

The Company uses 31 December as the measurement date for its pension obligation. An independent actuary

has assessed the benefit obligations at 31 December 2021 and 2020.

The following table sets out movement in the pension liabilities before taxation during 2021 and 2020.

2021

13,794

2,312

(1,601)

(1,621)

(700)

(80)

2020

12,544

1,771

1,680

(1,566)

(693)

49

1 January

Components of defined benefit costs recorded in profit or loss

Components of defined benefit costs recorded in other comprehensive (loss) income

Contributions from employer

Benefits paid

Opening balance adjustment

Liability assumed in business combination

31 December

1

9

12,105

13,794

Note 23. Equity

Common shares

31 December 2021

31 December 2020

(thousands of

shares)

(thousands of

shares)

Issued common shares, par value of 0.025 RUB each

Treasury shares

692,866

(42,522)

650,344

692,866

(40,367)

652,499

Outstanding common shares

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

On 3 December 2019, at the extraordinary general shareholders’ meeting a decision was made to reduce the

share capital of the Company by purchase of a portion of issued shares in order to reduce the total number

thereof. Share capital reduction to 693 million common shares by purchase and cancellation of 22 million

common shares was executed on 10 February 2020. Most of the common shares were purchased from a Group

company.

Dividends

At the extraordinary general shareholders’ meeting on 2 December 2021, interim dividends for 2021 were

approved in the amount of 340 RUB per common share.

At the annual general shareholders’ meeting on 24 June 2021, dividends for 2020 were approved in the amount

of 213 RUB per common share. At the extraordinary shareholders’ meeting on 3 December 2020, interim

dividends for 2020 were approved in the amount of 46 RUB per common share. Total dividends for 2020 were

approved in the amount of 259 RUB per common share.

Dividends on the Company’s shares payable of 25,644 million RUB and 699 million RUB are included in “Other

current liabilities” in the consolidated statement of financial position at 31 December 2021 and 2020,

respectively.

33

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 23. Equity (continued)

Earnings per share

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

2021

773,442

652,365

32,603

2020

15,175

Profit for the year attributable to PJSC LUKOIL shareholders

Weighted average number of common shares (thousands of shares)

650,965

24,827

Dilutive effect of equity-settled share-based compensation plan (thousands of shares)

Weighted average number of common shares, assuming dilution (thousands of shares)

684,968

675,792

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

rubles):

Basic

1,185.60

1,129.17

23.31

22.46

Diluted

Note 24. Personnel expenses

Personnel expenses were as follows:

2021

166,844

37,309

2020

156,597

35,063

Payroll costs

Statutory insurance contributions and social taxes

Share-based compensation

Total personnel expenses

31,366

235,519

223,026

Note 25. Finance income and costs

Finance income was as follows:

2021

9,874

4,383

2,262

16,519

2020

6,244

4,245

2,562

13,051

Interest income from deposits

Interest income from loans

Other finance income

Total finance income

Finance costs were as follows:

2021

31,609

4,197

2020

37,333

4,505

Interest expenses

Accretion expenses

Other finance costs

Total finance costs

1,762

2,284

37,568

44,122

Note 26. Other income and expenses

Other income was as follows:

2021

5,260

2020

2,618

7,267

8,085

17,970

Gain on disposal of assets

Reversal of impairment of assets

Other income

26,687

12,219

44,166

Total other income

34

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 26. Other income and expenses (continued)

Other expenses were as follows:

2021

14,355

36,647

6,651

2020

20,755

114,665

8,423

Loss on disposal of assets

Impairment loss

Charity expenses

Other expenses

10,156

67,809

11,287

155,130

Total other expenses

Note 27. Lease

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

other equipment. The lease typically runs for a period of 3–5 years. Some leases include an option to renew the

lease for additional period after the end of the non-cancellable period. The Group has applied judgement to

determine the lease term for some lease contracts in which it is a lessee that includes renewal option. Moreover,

in determining the lease term the Group also took into account economic factors, which influence asset usage

duration in its activity.

Exploration

Refining, marketing

and production assets and distribution assets

Other assets

Total

Carrying amounts

Property, plant and equipment owned

Right-of-use assets

3,233,821

34,101

812,161

132,142

944,303

820,657

138,873

959,530

45,976

4,929

4,091,958

171,172

31 December 2021

3,267,922

3,214,181

35,567

50,905

49,574

5,622

4,263,130

4,084,412

180,062

Property, plant and equipment owned

Right-of-use assets

31 December 2020

3,249,748

55,196

4,264,474

Right-of-use assets:

Exploration

Refining, marketing

and production assets and distribution assets

Other assets

5,622

14

Total

180,062

36,738

1 January 2021

35,567

5,449

138,873

31,275

Additions

Depreciation for the period

Other movements

31 December 2021

1 January 2020

(9,245)

2,330

(37,587)

(419)

(853)

146

(47,685)

2,057

34,101

39,946

2,589

132,142

131,829

45,573

4,929

4,406

1,868

(754)

102

171,172

176,181

50,030

Additions

Depreciation for the period

Other movements

31 December 2020

(10,322)

3,354

(54,497)

15,968

(65,573)

19,424

35,567

138,873

5,622

180,062

Lease liabilities:

31 December 2021

Incl.: Non-current

Current

185,843

156,502

29,341

31 December 2020

Incl.: Non-current

Current

193,872

159,340

34,532

35

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 27. Lease (continued)

Within the consolidated statement of profit or loss and other comprehensive income the following expenses were

recognised: interest on lease liabilities in the amount of 9,140 million RUB and 9,435 million RUB and variable

lease payments not included in the measurement of lease liabilities in the amount of 9,336 million RUB and

10,853 million RUB during 2021 and 2020, respectively. Income from sub-leasing right-of-use assets was not

material.

Within the consolidated statement of cash flows the total cash outflow under leases, including variable lease

payments attributable to capital expenditure, amounted to 123,355 million RUB and 170,990 million RUB

during 2021 and 2020, respectively.

Note 28. Income tax

Operations in the Russian Federation are subject to a 20% income tax rate. For the period from 2017 till 2024

(inclusive) the Federal income tax rate is set as 3.0% and the regional income tax rate is set as 17.0%. Regional

income tax rate may be reduced for certain categories of taxpayers by the laws of constituent entities of the

Russian Federation, however certain restrictions apply on the application of the reduced regional rates.

The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they

operate.

A number of Group companies in Russia are paying income tax as a consolidated taxpayers’ group (“CTG”).

This allows taxpayers to offset taxable losses generated by certain participants of a CTG against taxable profits

of other participants of the CTG.

Income tax was as follows:

2021

162,872

935

2020

63,458

(2,096)

61,362

20,792

82,154

Current income tax expense for the year

Adjustment for prior periods

Current income taxes

163,807

27,644

191,451

Deferred income tax

Total income tax expense

The following table is a reconciliation of the amount of income tax expense that would result from applying the

Russian combined statutory income tax rate of 20% applicable to the Company to profit before income taxes to

total income taxes.

2021

966,964

193,393

2020

98,787

19,757

Profit before income taxes

Notional income tax at the Russian statutory rate

Increase (reduction) in income tax due to:

Non-deductible items, net

17,438

(12,315)

935

9,483

7,907

Domestic and foreign rate differences

Adjustment for prior periods

(2,096)

47,103

82,154

Change in recognised deductible temporary differences

Total income tax expense

(8,000)

191,451

The following table sets out the tax effects of each type of temporary differences which give rise to deferred

income tax assets and liabilities.

36

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 28. Income tax (continued)

31 December 2021 31 December 2020

Property, plant and equipment

Investments

11,154

13

9,221

53

Inventories

10,948

2,497

6,658

Accounts receivable

Accounts payable and provisions

Tax loss carry forward

Other

1,586

9,089

9,691

24,948

639

22,614

522

Total deferred income tax assets

Set off of tax

59,288

(36,446)

22,842

(320,308)

(1,316)

(5,902)

(10,166)

(1,078)

(1,111)

(339,881)

36,446

(303,435)

(280,593)

50,345

(34,047)

16,298

(290,641)

(1,863)

(3,149)

(4,662)

(652)

Deferred income tax assets

Property, plant and equipment

Investments

Inventories

Accounts receivable

Accounts payable and provisions

Other

(2,036)

(303,003)

34,047

(268,956)

(252,658)

Total deferred income tax liabilities

Set off of tax

Deferred income tax liabilities

Net deferred income tax liabilities

Foreign currency

translation

Recognition in Acquisitions

31 December 2020 profit or loss and disposal

differences and

other 31 December 2021

Property, plant and equipment

Investments

(281,420)

(1,810)

3,509

(27,800)

498

(14)

80

9

(309,154)

(1,303)

5,046

-

Inventories

1,581

(18)

(26)

(6)

Accounts and notes receivable

Accounts payable and provisions

Tax loss carry forward

Other

(3,076)

9,039

(4,587)

(722)

-

(7,669)

8,011

-

(306)

(23)

13

22,614

(1,514)

(252,658)

2,357

-

24,948

(472)

1,029

Net deferred income tax liabilities

(27,644)

(32)

(259)

(280,593)

Foreign currency

translation

Recognition in Acquisitions

31 December 2019 profit or loss and disposal

differences and

other 31 December 2020

Property, plant and equipment

Investments

(270,843)

(1,457)

211

(9,859)

(306)

244

-

(962)

(47)

(281,420)

(1,810)

3,509

Inventories

3,110

(9)

(13)

(17)

(75)

-

197

Accounts and notes receivable

Accounts payable and provisions

Tax loss carry forward

Other

(6,968)

9,534

4,385

(480)

928

(3,076)

9,039

(1,406)

(16,687)

(29)

35,344

(1,307)

(235,486)

4,032

(178)

3,490

22,614

(1,514)

(252,658)

Net deferred income tax liabilities

(20,792)

130

37

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 28. Income tax (continued)

Deferred tax assets have not been recognised in respect of the temporary differences related to the following

items:

31 December 2021 31 December 2020

Property, plant and equipment

Tax loss carry forward

Other

15,980

35,297

655

15,136

39,126

5,670

Total unrecognised deferred tax assets

51,932

59,932

Management believes that it is not probable that taxable profit will be available against which these deductible

temporary differences can be utilised.

Amounts recognised in other comprehensive income during 2021:

Before tax

Tax

Net of tax

Foreign currency translation differences for foreign operations

(20,263)

-

(20,263)

Change in fair value of financial assets at fair value through other

comprehensive income

2,572

1,601

-

(198)

2,572

1,403

Remeasurements of defined benefit liability / asset of pension plan

Total

(16,090)

(16,288)

Amounts recognised in other comprehensive income during 2020:

Before tax

Tax

Net of tax

Foreign currency translation differences for foreign operations

268,707

-

268,707

Change in fair value of financial assets at fair value through other

comprehensive income

(767)

(1,680)

-

257

(767)

(1,423)

Remeasurements of defined benefit liability / asset of pension plan

Total

266,260

266,517

Retained earnings of foreign subsidiaries for which deferred taxation has not been provided included

1,013,402 million RUB and 1,361,368 million RUB at 31 December 2021 and 2020, respectively. This liability

was not recognised because the Group considers such amounts to be indefinitely invested, i.e. management

believes that they will not be returned in the foreseeable future. Moreover the Group controls the dividend policy

of its subsidiaries and is able to veto the payment of dividends.

The consequences of taxation in Russia of certain profits of controlled foreign corporations in accordance with

applicable tax legislation are accounted for within current and deferred tax liabilities.

Note 29. Commitments and contingencies

Capital commitments

Capital commitments of the Group relating to construction and acquisition of property, plant and equipment

amount to 552,506 million RUB and 501,550 million RUB at 31 December 2021 and 2020, respectively.

Insurance

To provide insurance protection, the Group uses the services of Russian and international insurance companies

with high ratings. The Group's most significant risks are reinsured at the first-class foreign markets. In respect

of liability to third parties for damages to property and the environment resulting from accidents related to the

Group's property or activities, the Group has insurance coverage that is generally higher than the limits set by

law. Management believes that the Group has sufficient insurance coverage of its core operating assets, as well

as risks, which could have a material effect on the Group’s operations and financial position.

38

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 29. Commitments and contingencies (continued)

Environmental liabilities

Group companies and their predecessor companies have operated in the Russian Federation and other countries

for many years, which resulted in certain environmental consequences. Environmental regulations are currently

in development stage in the Russian Federation and other countries where the Group has operations. Group

companies routinely assess and evaluate their environmental obligations in response to new and changing

legislation.

As liabilities in respect of the Group’s environmental obligations are able to be determined, they are recognised

in profit or loss. The likelihood and amount of liabilities relating to environmental obligations under proposed

or any future legislation cannot be reasonably estimated at present and could become material. Under existing

legislation, however, management believes that there are no significant unrecorded liabilities or contingencies,

which could have a material adverse effect on the operating results or financial position of the Group.

Social assets

Certain Group companies contribute to Government sponsored programmes, the maintenance of local

infrastructure and the welfare of their employees within the Russian Federation and elsewhere. Such

contributions include assistance with the construction, development and maintenance of housing, hospitals and

transport services, recreation and other social needs. The funding of such assistance is periodically determined

by management and is appropriately capitalised or expensed as incurred.

Taxation environment

The taxation systems in the Russian Federation and other emerging markets where Group companies operate

are relatively new and are characterised by numerous taxes and frequently changing legislation, which is often

unclear, contradictory, and subject to interpretation. Often, differing interpretations exist among different tax

authorities within the same jurisdictions and among taxing authorities in different jurisdictions. Taxes are subject

to review and investigation by a number of authorities, who are enabled by law to impose substantial fines,

penalties and interest charges. In the Russian Federation a tax year remains open for review by the tax authorities

during three subsequent calendar years. However, under certain circumstances a tax year may remain open

longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive

position in their interpretation and enforcement of tax legislation. Such factors significantly increase taxation

risks in the Russian Federation and other emerging markets where Group companies operate, comparing to other

countries where taxation regimes have been subject to development and clarification over longer periods.

The tax authorities in each region of the Russian Federation may have a different interpretation of similar

taxation issues which may result in taxation issues successfully defended by the Group in one region being

unsuccessfully defended by the Group in another region. There is some direction provided from the central

authority based in Moscow on particular taxation issues.

The Group has implemented tax planning and management strategies based on existing legislation. The Group

is subject to tax authority audits on an ongoing basis, which is a normal practice in the Russian Federation and

other republics of the former Soviet Union, and, at times, the authorities have attempted to impose additional

significant taxes on the Group. Management believes that it has adequately met the requirements and provided

for tax liabilities based on its interpretation of existing tax legislation. However, the relevant tax authorities may

have differing interpretations and the effects on the consolidated financial statements, if the authorities were

successful in enforcing their interpretations, could be significant.

39

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 29. Commitments and contingencies (continued)

Litigation and claims

In July 2015, the prosecutors with the Ploesti Court of Appeals (hereinafter the “Prosecutor’s Office”) charged

the general director and several officers of PETROTEL-LUKOIL S.A., a Group company, with bad faith use of

the company’s credit and money laundering. Similar charges were brought against LUKOIL Europe Holdings

B.V., a former Group company, for 2010–2014. On 10 May 2016, the Prahova Tribunal lifted all preventive

measures that were in effect against the accused individuals. Upon preliminary hearings the Prosecutor’s Office

revised the amount of damage claimed from $2.2 billion (163.4 billion RUB) to $1.5 billion (111.4 billion RUB).

An expertise of all relevant issues of the criminal case was carried out during 2017, the results of which were

accepted by the Tribunal on 12 February 2018. At the final hearing on the case which was held on

23 October 2018 the court issued a not guilty decision to all the accused, including general director of

PETROTEL-LUKOIL S.A., his deputies and PETROTEL-LUKOIL S.A. and LUKOIL Europe Holdings B.V.

themselves. As a result freezing injunction in the amount of approximately $1.5 billion (111.4 billion RUB) was

removed from all assets of the refinery, shares and accounts of PETROTEL-LUKOIL S.A. and LUKOIL Europe

Holdings B.V. On 1 November 2018, this decision was appealed by the Prosecutor’s Office to the Ploesti Court

of Appeals. On 27 November 2019, the Ploesti Court of Appeals issued a decision to return the case for a new

examination in the court of the first instance. On 24 December 2019, the defendants appealed the decision in an

order of extraordinary appeal to the Ploesti Court of Appeals. On 17 June 2020, the Ploesti Court of Appeals

rejected the appeal of PETROTEL-LUKOIL S.A. and transferred the case to the Prahova Tribunal. On

9 December 2020, the Prahova Tribunal issued a repeated acquittal due to the absence of an event of a crime.

On 16 December 2020, the Prosecutor’s Office filed a protest against the court's verdict. The hearings took place

on 23 September and 21 October 2021. On 25 November 2021 the Ploesti Court of Appeals issued a decision to

return the case for a new examination in the court of the first instance. The hearing on the main court case was

originally scheduled to 23 February 2022 but was postponed to 12 April 2022. Management does not believe

that the outcome of this matter will have a material adverse effect on the Group’s financial position.

LUKOIL Overseas Karachaganak B.V., a Group company, among other contractors, is involved in the dispute

with the Republic of Kazakhstan arising from the Final Production Sharing Agreement relating to the Contract

area of the Karachaganak Oil and Gas Condensate Field with respect to cost recovery in 2010-2017. Currently,

within the framework of the dispute the parties are making efforts to resolve the existing controversies by way

of negotiations and management believes that the amounts of claim, as well as calculations of potential losses

arising from the dispute to be preliminary and should not be disclosed in order to avoid any adverse impact on

the process. Management also believes that the ultimate outcome of this dispute will not have a material adverse

effect on the financial position of the Group.

On 21 May 2020, the Federal Antimonopoly Service of Russia (hereinafter – FAS of Russia) filed a claim to the

Arbitration court of the Arkhangelsk region for invalidating the transaction of PJSC LUKOIL for the sale of

100% of shares of JSC Arkhangelskgeoldobycha to LLC Otkritie Promyshlennye Investitsii in May 2017 and

applying the consequences of its invalidity. On 31 July 2020, the Arbitration court of Arkhangelsk region passed

the case to Arbitration court of Moscow. The hearing date was postponed to 15 April 2022. The transaction to

sell shares of JSC Arkhangelskgeoldobycha was concluded after a five-month due diligence and verification of

information provided by the seller and the buyer, without any objections from regulatory authorities, in strict

compliance with the Russian legislation, after an approval was obtained from the Governmental Commission

for Control over Foreign Investments in the Russian Federation. In addition, a written approval was obtained

from FAS of Russia to conduct this transaction. The price of the asset was agreed by the parties of the transaction

as a result of the lengthy negotiations where largest investment banks were involved as advisers, which confirms

the market nature of the deal. In this regard, the Company does not agree with the arguments set out in the claim

of FAS of Russia and regards itself as a bona fide seller in this transaction, and will take all necessary measures

to protect its rights and legitimate interests. Management does not believe that the outcome of this matter will

have a material adverse effect on the Group’s financial position.

The Group is involved in various other claims and legal proceedings arising in the normal course of business.

While these claims may seek substantial damages against the Group and are subject to uncertainty inherent in

any litigation, management does not believe that the ultimate resolution of such matters will have a material

adverse impact on the Group’s operating results or financial position.

40

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 30. Related party transactions

The senior management of the Company believes that the Group has appropriate procedures in place to identify

and properly disclose transactions with related parties and has disclosed all of the relationships identified which

it deemed to be significant. Related party sales and purchases of oil and oil products were primarily to and from

associates and joint ventures. Other financial assets mostly represent loans given to associates and joint ventures.

Loans and borrowings mostly represent lease obligations.

Outstanding balances with related parties were as follows:

31 December 2021

5,295

31 December 2020

2,474

Accounts receivable and other current assets

Other financial assets

32,903

32,403

Total assets

38,198

34,877

Accounts payable

9,364

6,902

Short term borrowings and long-term debt

Total liabilities

17,623

17,649

26,987

24,551

Related party transactions were as follows:

2021

2020

15,351

2,707

Sales of oil and oil products

Other sales

33,191

3,303

Purchases of oil and oil products

Other purchases

75,342

21,374

2,321

57,915

18,342

5,075

Proceeds from sale of other financial assets, net

(Principal repayments) proceeds from issuance of short term borrowings and long-term

debt, net

(1,490)

2,080

Key management remuneration

Key management personnel includes members of the Board of Directors and members of the Management

Board. Remuneration of key management personnel, including basic salary, bonuses and other payments,

amounted to 1,768 million RUB and 1,728 million RUB during 2021 and 2020, respectively.

Also, a provision under the compensation plan (disclosed in Note 31 “Compensation plan”) was accrued in

relation to the Company’s key management personnel in the amount of 3,137 million RUB during 2021 and

2020.

Note 31. Compensation plan

In late December 2017, the Company announced a compensation plan based on approximately 40 million shares

available to certain members of management and key employees for the period from 2018 to 2022, which was

implemented in July 2018 and recognised as equity-settled share-based compensation plan.

The fair value of the plan was estimated at the grant date at 156.8 billion RUB based on forecasting principles

of Monte-Carlo model and is not going to be recalculated in the future. The fair value was estimated assuming

a spot-price of the Company’s share in the amount of 4,355 RUB at the grant date, discount for illiquidity in the

amount of 9.95% per annum, a risk-free interest rate of 7.50% per annum, an expected dividend yield of 4.99%

per annum, an expected time to maturity of five years and a volatility factor of 25.68%. The expected volatility

factor was estimated based on the historical volatility of the Company’s shares for the previous five years. The

vesting of shares is contingent on meeting the requisite service period, certain KPIs and share price appreciation.

The Group is planning to recognise expenses related to the plan evenly during the vesting period.

Related to this share plan the Group recognised compensation expenses of 31,366 million RUB during 2021 and

2020.

41

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 32. Segment information

The Group has the following operating segments – exploration and production; refining, marketing and

distribution; corporate and other. These segments have been determined based on the nature of their operations.

Management on a regular basis assesses the performance of these operating segments.

The exploration and production segment explores for, develops and produces crude oil and gas. The refining,

marketing and distribution segment includes refining, petrochemical and transport operations, marketing and

trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and

related services. The corporate and other business operating segment includes activities of the Company and

businesses beyond the Group’s traditional operations.

Geographical segments are based on the area of operations and include two segments: Russia and International.

Operating segments

Refining,

Exploration and

production

marketing and Corporate and

2021

distribution

other

Elimination

Consolidated

Sales and other operating revenues

Third parties

261,725

2,594,151

9,158,150

77,382

15,268

36,387

-

9,435,143

-

Inter-segment

(2,707,920)

Total revenues

2,855,876

279,074

9,235,532

276,170

51,655

11,879

(2,707,920)

(57,931)

9,435,143

509,192

Operating expenses

Selling, general and administrative

expenses

Profit (loss) for the year attributable to

PJSC LUKOIL shareholders

41,611

135,140

67,841

(29,402)

215,190

773,442

572,284

986,255

284,333

487,294

(61,037)

(50,208)

(22,138)

(18,930)

EBITDA

1,404,411

(191,451)

16,519

(37,568)

2,731

Income tax expense

Finance income

Finance costs

Foreign exchange gain

Equity share in income of associates

and joint ventures

29,980

Other expenses

(23,643)

Depreciation, depletion and

amortisation

Profit for the year attributable to

non-controlling interests

(425,466)

(2,071)

Profit for the year attributable to PJSC

LUKOIL shareholders

773,442

42

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 32. Segment information (continued)

Refining,

Exploration and

marketing and Corporate and

2020

production

distribution

other

Elimination

Consolidated

Sales and other operating revenues

Third parties

164,993

1,377,246

5,455,680

70,300

18,728

40,892

-

5,639,401

-

Inter-segment

(1,488,438)

Total revenues

1,542,239

262,343

5,525,980

195,558

59,620

14,875

(1,488,438)

(32,803)

5,639,401

439,973

Operating expenses

Selling, general and administrative

expenses

48,670

120,607

62,838

(33,088)

199,027

Profit (loss) for the year attributable to

PJSC LUKOIL shareholders

125,192

500,081

(4,882)

(102,523)

(39,378)

(2,612)

15,175

EBITDA

243,322

(16,931)

687,094

(82,154)

13,051

(44,122)

(26,110)

Income tax expense

Finance income

Finance costs

Foreign exchange loss

Equity share in income of associates

and joint ventures

11,474

Other expenses

(137,160)

Depreciation, depletion and

amortisation

Profit for the year attributable to

non-controlling interests

(405,440)

(1,458)

15,175

Profit for the year attributable to PJSC

LUKOIL shareholders

Geographical segments

2021

86,338

2020

23,522

Sales of crude oil within Russia

Export of crude oil and sales of crude oil by foreign subsidiaries

Sales of petroleum products within Russia

3,529,957

1,043,067

4,261,684

58,685

1,918,944

785,663

2,548,961

36,386

Export of petroleum products and sales of petroleum products by foreign subsidiaries

Sales of chemicals within Russia

Export of chemicals and sales of chemicals by foreign subsidiaries

Sales of gas within Russia

101,491

29,714

57,036

32,649

Sales of gas by foreign subsidiaries

142,692

57,227

68,200

Sales of energy and related services within Russia

Sales of energy and related services by foreign subsidiaries

Other sales within Russia

53,607

14,316

10,451

48,597

40,169

Other export sales and other sales of foreign subsidiaries

Total sales

61,375

63,813

9,435,143

5,639,401

2021

Russia International Elimination Consolidated

Sales and other operating revenues

Third parties

1,429,116

1,779,341

3,208,457

352,409

8,006,027

4,288

-

(1,783,629)

12,284

9,435,143

-

Inter-segment

Total revenues

8,010,315

144,499

119,625

57,366

9,435,143

509,192

215,190

773,442

1,404,411

Operating expenses

Selling, general and administrative expenses

Profit for the year attributable to PJSC LUKOIL shareholders

EBITDA

99,605

(4,040)

738,170

(22,094)

(23,186)

1,180,553

247,044

43

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 32. Segment information (continued)

2020

Russia International Elimination Consolidated

Sales and other operating revenues

Third parties

1,041,967

994,845

2,036,812

314,341

91,727

4,597,434

1,670

-

(996,515)

34,133

5,639,401

-

Inter-segment

Total revenues

4,599,104

91,499

5,639,401

439,973

199,027

Operating expenses

Selling, general and administrative expenses

110,938

(3,638)

Profit (loss) for the year attributable to PJSC LUKOIL

shareholders

202,309

590,553

(184,450)

105,065

(2,684)

(8,524)

15,175

EBITDA

687,094

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

Singapore.

2021

2020

Sales revenues

in Switzerland

in the USA

4,606,978

1,197,085

621,637

2,449,415

680,033

357,647

in Singapore

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

Note 33. Subsidiaries

The most significant subsidiaries of the Group are presented below:

31 December 2021

31 December 2020

Total

shares

Voting

shares

Total

shares

Voting

shares

Country of

incorporation

Subsidiary

LUKOIL-West Siberia LLC

LUKOIL-PERM LLC

Russia

100.00% 100.00% 100.00% 100.00%

Russia

LUKOIL-Komi LLC

Russia

RITEK LLC

Russia

LUKOIL-Permnefteorgsintez LLC

LUKOIL-Nizhegorodnefteorgsintez LLC

LUKOIL-Nizhnevolzhskneft LLC

LUKOIL-Volgogradneftepererabotka LLC

LITASCO SA

Russia

Switzerland

Cyprus

SOYUZNEFTEGAZ VOSTOK LIMITED

LUKOIL INTERNATIONAL GmbH

LUKOIL International Upstream Holding B.V.

LUKOIL Neftohim Burgas AD

LUKOIL Overseas Karachaganak B.V.

LUKOIL Overseas Shah Deniz Ltd.

LUKOIL Overseas Uzbekistan Ltd.

LUKOIL Securities B.V.

Austria

Netherlands

Bulgaria

Netherlands

Cyprus

99.85%

100.00% 100.00% 100.00% 100.00%

Cyprus

Netherlands

USA

LUKOIL Pan Americas LLC

44

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 34. Fair value

There are the following methods of fair value measurement based on the valuation method:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability,

either directly or indirectly;

Level 3 – unobservable inputs.

The following tables show the carrying amounts and fair values of financial assets and financial liabilities

included in the consolidated statement of financial position at 31 December 2021 and 2020.

Fair value

31 December 2021

Carrying amount

Level 1

Level 2

Level 3

Total

Financial assets:

Commodity derivative contracts

1,553

33,732

5,929

-

1,553

-

33,732

-

1,553

33,732

5,929

Financial assets at fair value through

profit or loss

Financial assets at fair value through

other comprehensive income

-

5,929

Financial liabilities:

Commodity derivative contracts

Loans and borrowings

1,377

-

1,377

-

1,377

749,058

514,279

243,070

757,349

Fair value

31 December 2020

Carrying amount

Level 1

Level 2

Level 3

Total

Financial assets:

Commodity derivative contracts

316

33,195

2,491

-

316

-

33,195

-

316

33,195

2,491

Financial assets at fair value through

profit or loss

Financial assets at fair value through

other comprehensive income

-

2,491

Financial liabilities:

Commodity derivative contracts

Loans and borrowings

418

-

418

-

418

638,453

362,818

307,832

670,650

The fair values of cash and cash equivalents (Level 1), accounts receivable and long-term accounts receivable

(Level 3), short-term borrowings (Level 3) are approximately equal to their value as disclosed in the consolidated

statement of financial position. The fair value of long-term receivables was determined by discounting with

estimated market interest rates for similar financing arrangements. The fair value of long-term loans (Level 3)

was determined as a result of discounting using estimated market interest rates for similar financing instruments.

These amounts include all future cash outflows associated with the long-term debt repayments, including the

current portion and interest. Market interest rates mean the rates of raising long-term debt by companies with a

similar credit rating for similar tenors, repayment schedules and other similar main terms. The fair value of

bonds (Level 1) was determined based on market quotations at 31 December 2021 and 2020.

Note 35. Capital and risk management

The Group’s governing bodies pay great attention to risk management issues to provide a reasonable guarantee

for the achievement of the set objectives under the conditions characterised by uncertainties and negative impact

factors. The Group is constantly identifying, describing, estimating and monitoring the possible events that may

affect its activities, and is elaborating measures to prevent them or mitigate their negative impact to the greatest

extent possible if such events do take place.

45

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 35. Capital and risk management (continued)

The Group seeks to actively promote risk management and is presently focusing its efforts on the improvement

of a general enterprise risk management system (ERM) based on the best international practices. The Group is

constantly improving the applicable regulatory methodological risk management base that establishes

requirements aimed at organizing the risk management process at all stages, and defines management standards

for certain risk types of utmost importance, which are uniform for all of Group organisations. The Risk

Committee, a dedicated body under the President of the Company, was set up and began its work in 2011.

The information with regard to key financial risks of the Group is presented below.

Credit risk

The Group’s most significant credit risks include first of all the risk of failure by its counterparties to perform

their obligations in terms of payment for the products supplied by the Group. In order to mitigate these risks, the

Group focuses on partnerships with counterparties that have high credit ratings, accepts letters of credit and

guarantees issued by reputable banks and sometimes demands prepayment for the products supplied. In addition,

it utilises tools to limit the credit risks of a given counterparty.

Another group of credit risks includes risks associated with contractor banks’ activities and potential impairment

of their financial stability. In order to mitigate these risks, the Group is involved in centralised treasury

operations, part of which are aimed at fund raising, investment and operations involving currency exchange and

financial derivatives. The credit ratings of contractor banks are monitored on a regular basis.

The carrying amount of financial assets represents the maximum exposure to credit risk.

Trade and other receivables

Analysis of the aging of receivables:

31 December 2021

679,265

24,879

31 December 2020

342,930

10,895

Not past due

Past due less than 45 days

Past due from 46 to 180 days

Past due from 181 to 270 days

Past due from 271 to 365 days

Past due more than 365 days

Total trade and other receivables

7,204

4,315

5,463

635

8,790

11,053

16,271

443

741,872

370,271

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

Allowance for expected credit losses changed as follows during 2021:

31 December 2020

37,692

9,085

Increase in allowance charged to profit or loss

Write-off

(5,172)

(600)

Foreign currency translation differences

Other

(492)

31 December 2021

40,513

46

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 35. Capital and risk management (continued)

Allowance for expected credit losses changed as follows during 2020:

31 December 2019

31,287

5,771

Increase in allowance charged to profit or loss

Write-off

(2,379)

3,679

Foreign currency translation differences

Other

(666)

31 December 2020

37,692

Financial instruments used by the Group and potentially exposed to concentrations of credit risk consist

primarily of cash equivalents, over-the-counter production contracts and trade receivables. The cash and cash

equivalents are held with banks, which are generally highly rated.

The credit risk from the Group’s over-the-counter derivative contracts, such as forwards and swaps, derives from

the counterparty to the transaction, typically a major bank or financial institution. Individual counterparty

exposure is managed within predetermined credit limits and includes the use of cash-call margins when

appropriate, thereby reducing the risk of significant non-performance. The Group also uses futures contracts,

but futures have a negligible credit risk because they are traded on the New York Mercantile Exchange or the

Intercontinental Exchange (ICE Futures).

Liquidity risk

The Group’s liquidity is managed on a centralised basis. There is an efficient global system in place to manage

the Group’s liquidity, which includes an automated system of concentrating and re-distributing the funds,

corporate dealing and also rolling cash-flow forecasts. The liquidity indicators are monitored on a continuous

basis.

Contractual maturities of the Group’s financial liabilities (the Group itself determines the grouping of the

maturity based on contractual maturities and, where relevant, on judgment):

Contractual

Carrying

cash flows Less than 12

amount (undiscounted)

months

1-2 years

2-5 years Over 5 years

Loans and borrowings,

including interest expense

67,925

98,303

14,972

5,897

41,626

35,808

Bonds, including interest

expense

507,821

185,843

783,778

1,377

609,355

239,418

783,778

1,377

56,535

38,635

781,949

1,377

126,378

30,103

710

113,472

71,025

800

312,970

99,655

319

Lease obligations

Trade and other payables

Derivative financial liabilities

31 December 2021

-

1,546,744

1,732,231

893,468

163,088

226,923

448,752

Contractual

Carrying

cash flows Less than 12

amount (undiscounted)

months

1-2 years

2-5 years Over 5 years

Loans and borrowings,

including interest expense

134,092

173,227

50,966

23,218

47,289

51,754

Bonds, including interest

expense

334,313

193,872

597,406

418

407,958

257,533

597,406

418

15,295

44,232

595,465

418

50,764

27,429

1,437

-

135,780

67,514

141

206,119

118,358

363

Lease obligations

Trade and other payables

Derivative financial liabilities

31 December 2020

-

1,260,101

1,436,542

706,376

102,848

250,724

376,594

47

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 35. Capital and risk management (continued)

Currency risk

The Group is subject to foreign exchange risks since it operates in a number of countries. The exchange rate of

the Russian ruble to the US dollar produces the greatest impact on transaction results, since the Group’s export

proceeds are denominated in dollars, while the major costs are incurred in Russia and are denominated in Russian

rubles.

As part of the centralised approach to management of the treasury operations and liquidity of the Group, the

risks associated with unfavorable changes in the exchange rates are generally consolidated at the corporate level.

The Company uses an integrated approach to manage its currency risks, including the application of natural

hedging mechanisms, which encompass management of the currency structure of its monetary assets and

liabilities.

The carrying amounts of the Group’s assets and liabilities which form currency risk at 31 December 2021 and

2020 are presented in the tables below and contain balances between Group companies whose functional

currency is different from the currency of the contract.

31 December 2021

Financial assets:

USD

EUR

Other currencies

Cash and cash equivalents

Trade and other receivables

Loans

16,921

179,599

326,739

2,574

63,201

17,061

3,135

4

3,185

27,161

-

Other financial assets

Financial liabilities:

Loans and borrowings

Trade and other payables

Net exposure

88

(350,565)

(6,782)

(53,893)

(28,667)

841

(12,229)

(41,124)

(22,919)

168,486

31 December 2020

Financial assets:

USD

EUR

Other currencies

Cash and cash equivalents

Trade and other receivables

Loans

2,014

79,401

260,894

1,698

56,041

181

778

4,516

-

3,452

2

Other financial assets

Financial liabilities:

Loans and borrowings

Trade and other payables

Net exposure

90

(354,100)

(29,350)

(39,443)

(41,051)

(8,622)

10,003

(8,470)

(19,875)

(22,961)

The following exchange rates applied:

31 December 2021

74.29

31 December 2020

73.88

USD

EUR

84.07

90.68

Sensitivity analysis

Analysis of the currency position shows that the Group mainly uses RUR, US dollar and EUR in its operating

activity. Thus sensitivity analysis shows how strengthening (weakening) of these currencies at 31 December

2021 and 2020 would have affected the measurement of financial assets and liabilities denominated in foreign

currencies and affected profit (loss) before taxes. The analysis assumes that all other variables remain constant.

48

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 35. Capital and risk management (continued)

Profit (loss)

2021

16,473

(60)

2020

(5,262)

1,121

US Dollar (increase by 10%)

Euro (increase by 10%)

Russian ruble (increase by 10%)

(14,873)

3,873

The weakening of these currencies by 10% will have equal effect on profit (loss) but with opposite sign.

Interest rate risk

The Group is exposed to a significant interest rate risk both in the short- and long-term. A change in interest

rates may affect the cost of funds borrowed by the Group as well as the size of cash flows.

To mitigate this risk, the Group is constantly monitoring market conditions, taking measures to improve the debt

structure by reaching an optimum balance between fixed and variable interest rates, controlling the need for

additional financing and outstanding debt refinancing, extending the term of debt obligations.

The interest rate profiles of the Group are presented below:

31 December 2021

31 December 2020

Fixed rate instruments:

Financial assets

36,099

(691,309)

(655,210)

35,603

(527,063)

(491,460)

Financial liabilities

Net exposure

Variable rate instruments:

Financial assets

36,304

(66,641)

(30,337)

39,523

(132,648)

(93,125)

Financial liabilities

Net exposure

Sensitivity analysis for variable rate instruments

A reasonably possible change of 100 basis points in interest rates at 31 December 2021 and 2020 would have

increased (decreased) profit (loss) before taxes by the amounts shown below. This analysis assumes that all other

variables remain constant.

Profit (loss) before taxes

100 bp increase

100 bp decrease

2021

Net financial liabilities

2020

(303)

303

931

Net financial liabilities

(931)

Capital management

The Group’s capital management objectives are to secure the ability to continue as a going concern and to

optimise the cost of capital in order to enhance value to shareholders. The Company’s management performs

regular assessment of the net debt to equity ratio to ensure it meets the Company’s current rating requirements.

Equity includes share capital, reserves and retained earnings, as well as non-controlling interests. Net debt is a

non-IFRS measure and is calculated as a sum of loans and borrowings, as presented in the consolidated statement

of financial position, less cash and cash equivalents. Net debt to equity ratio enables the users to see how

significant net debt is.

49

PJSC LUKOIL

Notes to Consolidated Financial Statements

(Millions of Russian rubles, unless otherwise noted)

Note 35. Capital and risk management (continued)

The Group’s net debt to equity ratio was as follows:

31 December 2021

757,950

31 December 2020

659,711

Total debt

Less cash and cash equivalents

Net debt

(677,482)

80,468

(343,832)

315,879

Equity

4,523,184

1.78%

4,130,766

7.65%

Net debt to equity ratio

50

PJSC LUKOIL

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

(Millions of Russian rubles, unless otherwise noted)

Supplementary Information on Oil and Gas Exploration and Production Activities

IFRS do not require the information on oil and gas reserves to be disclosed in consolidated financial statements.

However, management believes that this supplementary information will benefit the users of consolidated

financial statements of the Group.

The information on oil and gas exploration and production activities is presented in six separate tables:

I. Capitalised costs relating to oil and gas producing activities.

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

III. Results of operations for oil and gas producing activities.

IV. Reserve quantity information.

V. Standardised measure of discounted future net cash flows.

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

Amounts shown for equity method companies represent the Group’s share in its exploration and production

associates and joint ventures, which are accounted for using the equity method of accounting.

I. Capitalised costs relating to oil and gas producing activities

Total Group's share in

consolidated

companies

equity method

companies

31 December 2021

International

123,833

Russia

128,120

Unproved oil and gas properties

Proved oil and gas properties

Accumulated DD&A

251,953

5,450,805

(2,452,648)

3,250,110

35,405

389,168

(130,590)

293,983

1,689,995

(1,085,251)

728,577

3,760,810

(1,367,397)

2,521,533

Net capitalised costs

Total Group's share in

consolidated

companies

equity method

companies

31 December 2020

International

105,907

Russia

123,493

Unproved oil and gas properties

Proved oil and gas properties

Accumulated DD&A

229,400

37,901

370,006

(120,843)

287,064

1,645,275

(980,878)

770,304

3,558,589

(1,212,856)

2,469,226

5,203,864

(2,193,734)

3,239,530

Net capitalised costs

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

Total Group's share in

consolidated

companies

equity method

companies

2021

International

Russia

1,097

Acquisition of properties - Proved

Acquisition of properties - Unproved

Exploration costs

-

1,097

-

629

-

12,899

51,634

64,533

1,333

18,100

253,987

274,517

30,999

1,926

17,266

19,821

Development costs

305,621

339,050

Total costs incurred

Total Group's share in

consolidated

companies

equity method

companies

2020

International

-

Russia

1,443

Acquisition of properties - Unproved

Exploration costs

1,443

-

237

8,151

30,862

311,355

343,660

39,013

Development costs

Total costs incurred

43,959

52,110

355,314

395,770

10,824

11,061

51

PJSC LUKOIL

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

(Millions of Russian rubles, unless otherwise noted)

III. Results of operations for oil and gas producing activities

The Group’s results of operations for oil and gas producing activities are presented below. Sales and transfers

to Group companies are based on market prices, income taxes are based on statutory rates. The results of

operations exclude corporate overhead and interest costs.

Total Group's share in

consolidated

companies

equity method

companies

2021

International

Russia

Revenue

Sales

211,112

-

1,128,834

1,290,175

2,419,009

(162,453)

(2,983)

1,339,946

1,290,175

2,630,121

(204,557)

(7,076)

62,488

2,051

Transfers

Total revenues

211,112

(42,104)

(4,093)

(104,077)

(1,069)

(12,822)

46,947

64,539

(5,910)

(28)

Production costs (excluding production taxes)

Exploration expenses

Depreciation, depletion and amortisation

Taxes other than income taxes

Related income taxes

(193,111)

(1,352,412)

(134,102)

573,948

(297,188)

(1,353,481)

(146,924)

620,895

(8,241)

(20,159)

(10,794)

19,407

Total results of operations for producing activities

Total Group's share in

consolidated

companies

equity method

companies

2020

International

Russia

Revenue

Sales

123,966

-

645,991

572,660

769,957

572,660

33,879

1,039

34,918

(7,395)

-

Transfers

Total revenues

123,966

(40,583)

(3,163)

(77,736)

(755)

1,218,651

(158,328)

(2,951)

1,342,617

(198,911)

(6,114)

Production costs (excluding production taxes)

Exploration expenses

Depreciation, depletion and amortisation

Taxes other than income taxes

Related income taxes

(191,707)

(611,640)

(56,455)

197,570

(269,443)

(612,395)

(57,618)

198,136

(8,632)

(8,864)

(4,161)

5,866

(1,163)

566

Total results of operations for producing activities

IV. Reserve quantity information

Proved reserves are the estimated quantities of oil and gas reserves which according to geological and

engineering data are going to be recoverable with reasonable certainty in future years from known reservoirs

under existing economic and operating conditions. Existing economic and operating conditions are based on the

12-months average price and the year-end costs. Proved reserves do not include additional quantities of oil and

gas reserves that may result from applying secondary or tertiary recovery techniques not yet tested and

determined to be economic.

Proved developed reserves are the quantities of proved reserves expected to be recovered through existing wells

with existing equipment and operating methods.

Due to the inherent uncertainties and the necessarily limited nature of reservoir data, estimates of reserves are

inherently imprecise, require the application of judgment and are subject to change as additional information

becomes available.

52

PJSC LUKOIL

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

(Millions of Russian rubles, unless otherwise noted)

Management has included within proved reserves significant quantities which the Group expects to produce

after the expiry dates of certain of its current production licences in the Russian Federation. The Subsoil Law of

the Russian Federation states that, upon expiration, a licence is subject to renewal at the initiative of the licence

holder provided that further exploration, appraisal, production or remediation activities are necessary and

provided that the licence holder has not violated the terms of the licence. Since the law applies to both newly

issued and old licences and the Group has currently renewed 66% of its licences, management believes that

licences will be renewed upon their expiration for the remainder of the economic life of each respective field.

Estimated net proved oil and gas reserves and changes thereto for 2021 and 2020 are shown in the tables set out

below.

Group's share in

equity method

companies

Millions of barrels

Consolidated subsidiaries

Crude oil

International

Russia

11,358

(268)

373

Total

11,742

(128)

401

31 December 2019

384

140

28

273

6

Revisions of previous estimates

Extensions and discoveries

Production

2

(39)

513

(139)

-

(549)

10,914

175

(588)

11,427

36

(16)

265

(5)

(4)

5

31 December 2020

Revisions of previous estimates

Purchase/sale of hydrocarbons in place*

Extensions and discoveries

Production

16

11

433

444

(30)

355

(568)

10,970

(598)

11,325

(14)

247

31 December 2021

Proved developed reserves

31 December 2020

283

7,210

7,493

104

31 December 2021

229

7,429

7,658

120

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

becoming subject to consolidation.

The non-controlling interest share included in the above total proved reserves was 60 million barrels and

61 million barrels at 31 December 2021 and 2020, respectively. The non-controlling interest share included in

the above proved developed reserves was 37 million barrels and 38 million barrels at 31 December 2021 and

2020, respectively. All non-controlling interests relate to reserves in the Russian Federation.

Group's share in

equity method

companies

Billions of cubic feet

Natural gas

Consolidated subsidiaries

International

Russia

16,426

73

Total

22,294

277

31 December 2019

5,868

204

233

11

Revisions of previous estimates

Extensions and discoveries

Production

15

350

365

-

(381)

5,706

521

(617)

16,232

305

(998)

21,938

826

(26)

218

10

31 December 2020

Revisions of previous estimates

Purchase/sale of hydrocarbons in place*

Extensions and discoveries

Production

2

13

15

(5)

4

10

297

307

(546)

5,693

(565)

16,282

(1,111)

21,975

(25)

202

31 December 2021

Proved developed reserves

31 December 2020

4,118

5,746

9,864

113

31 December 2021

3,847

5,603

9,450

120

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

becoming subject to consolidation.

53

PJSC LUKOIL

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

(Millions of Russian rubles, unless otherwise noted)

The non-controlling interest share included in the above total proved reserves was 23 billion cubic feet at

31 December 2021 and 2020. The non-controlling interest share included in the above proved developed

reserves was 14 billion cubic feet and 15 billion cubic feet at 31 December 2021 and 2020, respectively. All

non-controlling interests relate to reserves in the Russian Federation.

V. Standardised measure of discounted future net cash flows

Estimated future cash inflows from hydrocarbons production are computed by applying the 12-months average

price for oil and gas and the year-end exchange rates to year-end quantities of estimated net proved reserves.

Adjustments in this calculation for future price changes are limited to those required by contractual arrangements

in existence at the end of each reporting year. Future development and production costs are those estimated

future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end

cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are

calculated by applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and tax

credits and are applied to estimated future pre-tax net cash flows, less the tax bases of related assets. Discounted

future net cash flows have been calculated using a ten percent discount factor. Discounting requires a year-by-

year estimate of when future expenditures will be incurred and when reserves will be produced.

The information provided in the tables set out below does not represent management’s estimate of the Group’s

expected future cash flows or of the value of the Group’s proved oil and gas reserves. Estimates of proved

reserve quantities are imprecise and change over time as new information becomes available. Moreover,

probable and possible reserves, which may become proved in the future, are excluded from the calculations. The

arbitrary valuation requires assumptions as to the timing and amount of future development and production

costs. The calculations should not be relied upon as an indication of the Group’s future cash flows or of the value

of its oil and gas reserves.

Total Group's share in

consolidated

companies

equity method

companies

31 December 2021

International

2,796,202

(1,468,599)

(164,013)

1,163,590

(499,839)

663,751

Russia

51,116,716

(40,375,139)

(1,815,645)

8,925,932

Future cash inflows

53,912,918

(41,843,738)

(1,979,658)

10,089,522

(5,090,156)

4,999,366

1,095,313

(584,612)

(116,430)

394,271

Future production and development costs

Future income tax expenses

Future net cash flows

Discount for estimated timing of cash flows (10% p.a.)

Discounted future net cash flows

(4,590,317)

4,335,615

(149,683)

244,588

Non-controlling share in discounted future net cash

flows

-

27,545

-

Total Group's share in

consolidated

equity method

companies

31 December 2020

International

2,361,227

(1,462,485)

(108,293)

790,449

Russia

28,537,502

(23,445,365)

(679,792)

companies

30,898,729

(24,907,850)

(788,085)

Future cash inflows

639,463

(392,022)

(76,904)

170,537

(84,307)

86,230

Future production and development costs

Future income tax expenses

Future net cash flows

4,412,345

5,202,794

Discount for estimated timing of cash flows (10% p.a.)

Discounted future net cash flows

(306,616)

483,833

(2,345,485)

2,066,860

(2,652,101)

2,550,693

Non-controlling share in discounted future net cash

flows

-

12,861

-

54

PJSC LUKOIL

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

(Millions of Russian rubles, unless otherwise noted)

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

Consolidated companies

2021

2,550,693

5,385

2020

4,227,145

23

Discounted present value at 1 January

Net changes due to purchases and sales of minerals in place

Sales and transfers of oil and gas produced, net of production costs

Net changes in prices and production costs estimates

Net changes in mineral extraction taxes

Extensions and discoveries, less related costs

Previously estimated development cost incurred during the year

Revisions of previous quantity estimates

Net change in income taxes

(1,065,007)

10,666,754

(7,609,605)

198,810

(525,197)

(4,640,038)

2,622,343

86,574

291,048

360,474

20,422

105,832

(583,505)

267,681

381,202

461,076

(443,331)

2,550,693

Accretion of discount

Other changes

171,280

Discounted present value at 31 December

4,999,366

Group's share in equity method companies

Discounted present value at 1 January

2021

86,230

-

2020

125,573

(60)

Net changes due to purchases and sales of minerals in place

Sales and transfers of oil and gas produced, net of production costs

Net changes in prices and production costs estimates

Net changes in mineral extraction taxes

Extensions and discoveries, less related costs

Previously estimated development cost incurred during the year

Revisions of previous quantity estimates

Net change in income taxes

(38,442)

339,838

(146,612)

4,227

(18,659)

(116,411)

74,626

1,047

24,887

(10,861)

(24,492)

13,491

(3,678)

244,588

26,199

2,013

14,268

17,621

(39,987)

86,230

Accretion of discount

Other changes

Discounted present value at 31 December

55

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following report contains a discussion and analysis of the financial position of PJSC LUKOIL at

31 December 2021 and the results of its operations for the three-month periods ended 31 December and

30 September 2021 and for the years 2021 and 2020, as well as significant factors that may affect its future

performance. It should be read in conjunction with our International Financial Reporting Standards (“IFRS”)

consolidated financial statements, including notes and supplementary information on oil and gas exploration

and production activities.

References to “LUKOIL,” “the Company,” “the Group,” “we” or “us” are references to PJSC LUKOIL and

its subsidiaries and equity affiliates. All ruble amounts are in millions of Russian rubles (“RUB”), unless

otherwise indicated. Income and expenses of our foreign subsidiaries were translated to rubles at rates, which

approximate actual rates at the date of the transaction. Tonnes of crude oil and natural gas liquids produced

were translated into barrels using conversion rates characterising the density of crude oil from each of our

oilfields and the actual density of liquids produced at our gas processing plants. Hydrocarbon extraction

expenses per barrel were calculated using these actual production volumes. Other operational indicators

expressed in barrels were translated into barrels using an average conversion rate of 7.33 barrels per tonne.

Translations of cubic meters to cubic feet were made at the rate of 35.31 cubic feet per cubic meter.

Translations of barrels of crude oil into barrels of oil equivalent (“BOE”) were made at the rate of 1 barrel per

BOE and of cubic feet – at the rate of 6 thousand cubic feet per BOE.

This report includes forward-looking statements – words such as “believes,” “anticipates,” “expects,”

“estimates,” “intends,” “plans,” etc. – that reflect management’s current estimates and beliefs, but are not

guarantees of future results. Please see “Forward-looking statements” on page 102 for a discussion of some

factors that could cause actual results to differ materially.

Table of Contents

Business overview................................................................................................................................... 58

Impact of COVID-19 on the Group’s operation s .................................................................................... 58

Key financial and operational results ...................................................................................................... 60

Changes in the Group structur e ............................................................................................................... 61

Main macroeconomic factors affecting our results of operations ........................................................... 62

International crude oil and refined products prices ............................................................................. 62

Domestic crude oil and refined products prices .................................................................................. 62

Changes in ruble exchange rate and inflation ..................................................................................... 63

Taxation .............................................................................................................................................. 63

Transportation tariffs on crude oil, natural gas and refined products in Russia .................................. 69

Reserves base .......................................................................................................................................... 71

Segments highlights ................................................................................................................................ 73

Exploration and production................................................................................................................. 73

West Qurna-2 projec t .......................................................................................................................... 76

Refining, marketing and distribution .................................................................................................. 78

Financial results ...................................................................................................................................... 83

Sales revenue s ..................................................................................................................................... 84

Operating expenses ............................................................................................................................. 88

Cost of purchased crude oil, gas and products .................................................................................... 90

Transportation expenses...................................................................................................................... 91

Selling, general and administrative expenses...................................................................................... 92

Depreciation, depletion and amortisation............................................................................................ 92

Equity share in income of associates and joint ventures ..................................................................... 92

Taxes other than income taxes ............................................................................................................ 93

Excise and export tariffs...................................................................................................................... 94

Foreign exchange gain (loss) .............................................................................................................. 95

Other expenses .................................................................................................................................... 95

Income taxes ....................................................................................................................................... 96

Non-GAAP items reconciliation ............................................................................................................. 97

EBITDA reconciliatio n ....................................................................................................................... 97

Free cash flow reconciliation .............................................................................................................. 97

Liquidity and capital resources ............................................................................................................... 98

Operating activities ............................................................................................................................. 98

Investing activities .............................................................................................................................. 98

Financing activities ............................................................................................................................. 99

Debt maturity .................................................................................................................................... 100

Litigation and claims............................................................................................................................. 100

Critical accounting policie s ................................................................................................................... 100

Other information.................................................................................................................................. 100

Forward-looking statement s .................................................................................................................. 102

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Business overview

The primary activities of LUKOIL and its subsidiaries are hydrocarbon exploration, production, refining,

marketing and distribution.

LUKOIL is one of the world’s largest publicly traded vertically integrated energy companies. Our proved

reserves under SEC standards amounted to 15.3 billion BOE at 1 January 2022 and comprised of 11.6 billion

barrels of crude oil and 22.2 trillion cubic feet of gas. Most of our reserves are conventional. We undertake

exploration for, and production of, crude oil and gas in Russia and internationally. In Russia, our major oil

producing regions are West Siberia, Timan-Pechora, Ural and Volga region. Our international upstream

segment includes stakes in PSAs and other projects in Kazakhstan, Azerbaijan, Uzbekistan, Romania, Iraq,

Egypt, Ghana, Norway, Cameroon, Nigeria, Mexico, the Republic of Congo and the UAE. Our daily

hydrocarbon production in 2021 amounted to 2.2 million BOE, with liquid hydrocarbons representing

approximately 76% of our overall production volumes.

LUKOIL has geographically diversified downstream assets portfolio primarily in Russia and Europe. Our

downstream operations include crude oil refining, petrochemical and transport operations, marketing and

trading of crude oil, natural gas and refined products, retail sales of refined products, power generation,

transportation and sales of electricity, heat and related services.

We own and operate four refineries located in European Russia and three refineries located outside Russia –

in Bulgaria, Romania, and Italy. Moreover, we have a 45% interest in the Zeeland refinery in the Netherlands.

We also own two petrochemical plants in Russia and have petrochemical facilities at our refineries in Bulgaria

and Italy. Along with our own production of refined products, we refine crude oil at third party refineries

depending on market conditions and other factors. Throughput at our refineries in the full year 2021 amounted

to 1.3 million barrels per day, and we produced 1.1 million tonnes of petrochemicals, including olefins,

polyolefins and products of organic synthesis.

We market our own and purchased crude oil and refined products through our sales channels in Russia, Europe,

South-East Asia, Central and North America and other regions. We own petrol stations in 19 countries. Most

of our retail networks are located close to our refineries. Our retail sales in the full year 2021 amounted to

13.9 million tonnes of refined products. We also supply jet fuel to airports and bunker fuel to sea and river

ports in and outside Russia.

We are involved in production, distribution and marketing of electrical energy and heat both in Russia and

internationally. In the full year 2021, our total output of commercial electrical energy was 15.8 billion kWh.

Our operations and finance activities are coordinated from headquarters in Moscow. We divide our operations

into three main business segments: “Exploration and production,” “Refining, marketing and distribution,” and

“Corporate and other”.

Impact of COVID-19 on the Group’s operations

In December 2019, the emergence of a new strain of coronavirus (COVID-2019) was reported in China and

has subsequently spread globally. On 11 March 2020, the World Health Organization declared the COVID-19

outbreak a pandemic. Mobility restrictions, quarantines and similar lockdown measures implemented in

different countries to cope with the pandemic had a significant negative impact on the global economy.

Deceleration of economic activity resulted in a substantial decrease in demand for hydrocarbons leading to

oversupply on the international oil market and a sharp decline in oil prices. Failure of OPEC+ countries to

reach a new agreement on crude oil production quotas in the beginning of March 2020 put an incremental

pressure on oil prices. As a result, the price for Brent collapsed to a 20-years minimum of $13 per barrel in

April 2020.

On 12 April 2020, OPEC+ countries entered into a new agreement to reduce their collective output by

9.7 million barrels per day starting from 1 May 2020. This coordinated production cut together with the

negative impact of low oil prices on crude oil production in different countries resulted in lower supply of

crude oil and reduction of surplus on the crude oil market and led to a gradual recovery of oil prices. This

upward oil price trend was further supported by the gradual lifting of lockdowns in different countries, recovery

in economic activity and respective growth in demand for hydrocarbons resulted in crude oil price growth,

with the price of Brent reaching its peak of $86 per barrel at the end of October 2021.

58

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

From the beginning of COVID-19 pandemic the Group has taken necessary measures to avoid direct impact

of the pandemic on its operations with a special focus on protection of the health of employees and clients and

uninterrupted production processes.

The major impact of COVID-19 on the macroeconomic environment in the oil and gas industry resulted in a

number of consequences on operational and financial performance of the Group.

From February through August 2020, we reduced production of gas at our projects in Uzbekistan to

approximately 20% of the projects capacity due to lower demand for Uzbek gas from China. At the same time,

since September 2020, we have recovered our gas production in Uzbekistan on the back of growing demand

for gas from China. As of December 2020, production was back to the project levels.

Due to the new OPEC+ agreement, we cut our crude oil production in Russia in May 2020 by approximately

310 thousand barrels per day, or by 19%, as compared to our daily crude oil production in Russia in the first

quarter of 2020. To minimise the negative impact of this production cut on our financial performance the cut

was implemented at the least profitable fields. Since May 2020, our crude oil production in Russia stepped up

sequentially and in the fourth quarter of 2021 was approximately 270 thousand barrels per day higher as

compared to the May 2020 level. As a result, our domestic average daily crude oil production in 2021 exceeded

the level of 2020. Due to the OPEC+ agreement, crude oil production was also cut at some of our international

projects. For example, average daily production at the West Qurna-2 project in Iraq was approximately 20

thousand barrels per day below its capacity in the fourth quarter of 2021.

Our refining and marketing segment was also affected as demand for jet fuel and motor fuels declined

substantially, which had a negative impact on the benchmark refining margins and sales volumes. We adjusted

the product slate and optimised utilisation rates at our refineries starting from the second quarter of 2020 in

order to efficiently react to the adverse macro changes. As a result, in the second quarter of 2020, our average

daily refinery throughput volumes were 21% lower than in 2019. Gradual improvement of macro conditions

resulted in the recovery of utilisation rates at our refineries with the average daily refinery throughput volumes

in 2021 being 16% higher as compared to the second quarter of 2020.

We also faced a steep decline in the retail sales volumes of motor fuels at our filling stations in Russia and

other countries in April 2020, when volumes were 40% lower compared to April 2019 level. However, from

May 2020, retail sales volumes started recovering and in the fourth quarter of 2021 were approximately 12%

higher compared to the fourth quarter of 2020.

The impact of the pandemic on the Group’s financial performance in 2021 is discussed in detail in the below

discussion and analysis.

Management believes that the Group is in a solid financial condition and has adequate liquidity with the net

financial debt position (excluding lease obligations) of minus 105 billion RUB at the end of 2021. This

represents an incremental support for continuous operations and meeting all of the Group’s obligations, as well

as adequate financing of the investment programme.

59

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Key financial and operational results

Q4

2021

Q3 Change,

12 months of

2021 2020

(millions of rubles)

6.9 9,435,143 5,639,401

Change,

%

2021

%

Sales revenue................................................................... 2,768,031 2,588,745

67.3

>100

97.2

>100

EBITDA¹, including ........................................................

Exploration and production segment...........................

Refining, marketing and distribution segment ............

EBITDA¹ net of West Qurna-2 project............................

395,013

296,522

114,380

377,440

355,176

245,036

125,757

347,438

11.2 1,404,411

21.0

(9.0)

8.6 1,361,080

687,094

500,081

243,322

655,098

986,255

487,294

Profit for the period attributable to LUKOIL

shareholders.....................................................................

Capital expenditures ........................................................

Free cash flow² ................................................................

Free cash flow before changes in working capital ...........

233,790

127,281

190,074

244,236

192,475

94,328

227,670

233,522

21.5

773,442

433,042

693,572

877,468

15,175

495,443

281,131

189,383

>100

(12.6)

>100

34.9

(16.5)

4.6

(thousand BOE per day)

Production of hydrocarbons, including our share in

associates and joint ventures............................................

crude oil and natural gas liquids..................................

gas...............................................................................

Refinery throughput at the Group refineries ....................

2,335

1,782

553

2,152

1,662

490

8.5

7.2

12.9

(10.5)

2,197

1,678

519

2,117

1,651

466

3.8

1.6

11.4

7.7

1,233

1,378

1,264

1,174

¹ Profit from operating activities before depreciation, depletion and amortisation.

² Cash flow from operating activities less capital expenditures.

In the fourth quarter of 2021, compared to the previous quarter, our financial results were positively impacted

by an increase in international hydrocarbon prices, higher domestic crude oil and international gas production

volumes, as well as higher positive export duty lag effect and the accounting specifics of our international

trading operations. At the same time, these positive factors were partially offset by weaker results of our

international refining, retail and trading businesses.

Compared to the full year 2020, our financial results were driven up by higher hydrocarbon prices, an increase

in hydrocarbon production volumes, positive inventory effect at our refineries, higher refining margins in

Russia, positive export duty lag effect, as well as the ruble depreciation. Elimination of tax incentives for high-

viscous crude oil and weaker results of retail business in Russia were the main restraining factors.

As a result, our EBITDA increased by 11.2% and by 104.4% compared to the third quarter of 2021 and the

full year 2020, respectively.

In the fourth quarter of 2021, a foreign exchange gain amounted to 5.8 billion RUB, as compared to a

0.7 billion RUB loss in the previous quarter. In the full year 2021, a foreign exchange gain amounted to

2.7 billion RUB, while in the full year 2020 sharp ruble depreciation resulted in a foreign exchange loss of

26.1 billion RUB.

Compared to the third quarter of 2021, our depreciation, depletion and amortisation expenses decreased by

8.9% mainly due to a positive effect of an increase in proved developed hydrocarbon reserves at Group’s

certain fields at the end of 2021 and consequent recalculation of depletion of respective fixed assets for the

full year, despite an increase in crude oil production in Russia and an increase in cost compensation related to

the West Qurna-2 project. Compared to the full year 2020, our depreciation, depletion and amortisation

expenses increased by 4.9% mainly as a result of higher cost compensation related to the West Qurna-2 project,

as well as an increase in gas production in Uzbekistan.

Due to a significant deterioration in the macroeconomic environment in 2020, the Group recognised an

impairment loss of property, plant and equipment and other non-current assets in the total amount of

107 billion RUB in 2020 (net of impairment reversals). In 2021, a net impairment loss in relation to property,

plant and equipment, goodwill and other non-current assets amounted to 10 billion RUB.

In the fourth quarter and the full year 2021, profit attributable to LUKOIL shareholders amounted to 234 billion

RUB and 773 billion RUB, respectively, compared to profit in the amount of 192 billion RUB in the third

quarter of 2021 and profit in the amount of 15 billion RUB in the full year 2020.

Our capital expenditures increased by 33 billion RUB, or by 34.9%, compared to the third quarter of 2021, and

decreased by 62 billion RUB, or by 12.6%, compared to the full year 2020.

60

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

In the fourth quarter of 2021, our free cash flow amounted to 190 billion RUB, a decrease of 16.5% compared

to the third quarter of 2021, and in the full year 2021, it amounted to 694 billion RUB, an increase of 146.7%

compared to the full year 2020. A quarter-on-quarter decrease in our free cash flow was mainly due to

dynamics of working capital and an increase in capital expenditures, while a year-on-year increase was mainly

a result of improved profitability of our core operations and lower capital expenditures that was partially offset

by working capital dynamics.

Compared to the third quarter of 2021 and the full year 2020, the Group’s average daily hydrocarbon

production increased by 8.5% and by 3.8%, respectively, mainly due to the dynamics of the external limitations

on crude oil production due to the OPEC+ agreement, as well as higher international gas production volumes.

Compared to the previous quarter, average daily throughput volumes at our refineries decreased by 10.5%

mainly due to scheduled maintenance works at the refineries outside Russia, as well as seasonal throughput

optimisation in Russia. Compared to the full year 2020, average daily throughput volumes at our refineries

increased by 7.7% mainly due to higher refineries utilisation rates due to better market environment in 2021,

as well as scheduled maintenance works in 2020.

Changes in the Group structure

In December 2021, a Group company concluded a sale and purchase agreement with PJSC Gazprom Neft for

50% equity share of Meretoyakhaneftegaz LLC, a Gazprom Neft wholly owned subsidiary, for 52 billion RUB,

including cession of claim of Gazprom Neft’s loans worth 35 billion RUB. The contract was signed as part of

creating a joint venture to develop oil and gas cluster in the Nadym-Pur-Tazovsky area of the Yamal-Nenets

Autonomous District. The companies also agreed upon the programme of additional exploration of the blocks

of Meretoyakhaneftegaz LLC where 8.9 billion RUB of expenditures will be financed by LUKOIL. The

transaction is planned to be completed in 2022 after fulfilment of a number of conditions precedent, including

all necessary corporate approvals, as well as the consent of the Federal Antimonopoly Service.

In October 2021, a Group company signed an agreement to purchase a 15.5% interest in the Shah Deniz natural

gas project in Azerbaijan sector of the Caspian Sea from PETRONAS for $2.25 billion. In December 2021,

the terms of the agreement were amended as a result of negotiations with the Shah Deniz project partners on

implementation of pre-emptive rights. In accordance with the new arrangement, the share acquired by the

Group was reduced to 9.99% with proportional decrease in consideration to $1.45 billion. The transaction was

closed on 17 February 2022 after all customary conditions, including approval by SOCAR, the State Oil

Company of the Azerbaijan Republic, were fulfilled.

In July 2021, a Group company entered into a contract to purchase the 50% operator interest in the Area 4

project in Mexico by acquiring the operator’s holding company for approximately $435 million plus

expenditures incurred in 2021 and 2022 as of the transaction completion date. The transaction was closed on

24 February 2022 after all customary conditions, including approval by the Mexican authorities, were fulfilled.

61

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Main macroeconomic factors affecting our results of operations

International crude oil and refined products prices

The price at which we sell crude oil and refined products is the primary driver of the Group’s revenues.

The dynamics of our realised prices on international markets generally matches the dynamics of commonly

used spot benchmarks such as Brent crude oil price, however our average prices are usually different from

such benchmarks due to different delivery terms, quality mix, as well as specifics of regional markets in case

of petroleum product sales.

During 2021, the price for Brent crude oil increased from $50.0 per barrel in January to $86.1 per barrel in the

end of October owing to gradual recovery of global demand for crude oil and the effect of the OPEC+

agreement. As a result, average price increased by 8.1% compared to the third quarter of 2021, and by 69.1%

compared to the full year 2020.

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(US dollars per barrel)

Brent FOB dated........................................................

Urals (average MED and Rotterdam)........................

79.48

78.17

73.55

71.19

8.1

9.8

70.69

69.10

41.79

41.39

69.1

66.9

(US dollars per tonne)

Diesel fuel 10 ppm (FOB Rotterdam) .......................

Premium gasoline (FOB Rotterdam).........................

Naphtha (FOB Rotterdam) ........................................

Jet fuel (FOB Rotterdam)..........................................

Vacuum gas oil (FOB Rotterdam).............................

Marine fuel 0.5% (FOB Rotterdam)..........................

Fuel oil 3.5% (FOB Rotterdam) ................................

Source: Platts, Argus.

682.09

768.70

725.23

712.27

540.00

548.19

424.54

601.70

718.74

663.12

625.80

505.39

506.03

396.64

13.4

7.0

9.4

13.8

6.8

8.3

582.33

676.22

629.76

605.91

485.95

493.70

383.38

367.07

382.61

351.35

361.50

297.95

311.50

221.37

58.6

76.7

79.2

67.6

63.1

58.5

73.2

7.0

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(rubles per barrel)

Brent FOB dated........................................................

Urals (average MED and Rotterdam)........................

5,770

5,676

5,404

5,231

6.8

8.5

5,207

5,089

3,015

2,986

72.7

70.4

(rubles per tonne)

Diesel fuel 10 ppm (FOB Rotterdam) .......................

Premium gasoline (FOB Rotterdam).........................

Naphtha (FOB Rotterdam) ........................................

Jet fuel (FOB Rotterdam)..........................................

Vacuum gas oil (FOB Rotterdam).............................

Marine fuel 0.5% (FOB Rotterdam)..........................

Fuel oil 3.5% (FOB Rotterdam) ................................

49,524

55,812

52,656

51,715

39,207

39,802

30,824

44,210

52,809

48,723

45,981

37,133

37,181

29,143

12.0

5.7

8.1

12.5

5.6

7.0

42,891

26,483

27,604

25,349

26,081

21,496

22,473

15,971

62.0

80.4

83.0

71.1

66.5

61.8

76.8

49,807

46,384

44,627

35,792

36,363

28,237

5.8

Translated to rubles using average exchange rate for the period.

Domestic crude oil and refined products prices

Most of the crude oil in Russia is produced and then refined or exported by vertically integrated oil companies.

As a result, there is no liquid spot market for crude oil in Russia and no publicly available spot price benchmark.

Domestic prices may deviate significantly from export netbacks and they also vary between different regions

of Russia driven by supply-demand balance on regional markets.

Domestic prices for refined products correlate to some extent with export netbacks, but are also materially

affected by supply-demand balance on regional markets.

62

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

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

Q4

2021

Q3

2021

Change,

%

12 months of

2021 2020

Change,

%

(rubles per tonne)

Diesel fuel .................................................................

Regular gasoline........................................................

Premium gasoline......................................................

Fuel oil ......................................................................

Source: InfoTEK (excluding VAT).

49,000

44,694

45,653

26,014

45,007

48,681

50,556

23,139

8.9

(8.2)

(9.7)

12.4

43,625

37,292

39,727

41,866

10,990

17.0

16.0

14.3

>100

46,083

47,858

22,611

Changes in ruble exchange rate and inflation

A substantial part of our revenue is either denominated in US dollars and euro or correlated to some extent

with US dollar crude oil prices, while most of our costs are settled in Russian rubles. Therefore, a depreciation

of the ruble against the US dollar and euro generally causes our revenues to increase in ruble terms, and vice

versa. Ruble inflation also affects the results of our operations.

The following table provides data on inflation in Russia and change in the ruble-dollar and the ruble-euro

exchange rates.

Q4

2021

2.9

Q3

2021

1.1

12 months of

2021 2020

8.4

4.9

Ruble inflation (CPI), %..............................................................................

Ruble to US dollar exchange rate

72.61

72.76

74.29

73.47

72.37

72.76

73.65

73.88

74.29

72.15

61.91

73.88

Average for the period............................................................................

At the beginning of the period ................................................................

At the end of the period ..........................................................................

Ruble to euro exchange rate

83.07

84.88

84.07

86.66

86.20

84.88

87.19

90.68

84.07

82.45

69.34

90.68

Average for the period............................................................................

At the beginning of the period ................................................................

At the end of the period ..........................................................................

Source: Bank of Russia, Federal State Statistics Service.

Taxation

Key upstream tax rates. The following tables represent average statutory enacted rates applicable to our

upstream operations in Russia with no taxation incentives:

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(US dollars per tonne)

Mineral extraction tax¹ ..............................................

Export duty on crude oil............................................

308.02

70.49

276.00

64.63

11.6

9.1

261.66

59.15

120.87

45.87

>100

29.0

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(rubles per tonne)

Mineral extraction tax ...............................................

Export duty on crude oil¹...........................................

22,364

5,118

20,279

4,749

10.3

7.8

19,273

4,357

8,720

3,309

>100

31.6

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

These rates are linked to international crude oil prices and change in line with them.

Tax manoeuvre. The Russian Government has been implementing the so-called tax manoeuvre in the oil

industry, which involves reduction of export duty rate and increase in the crude oil extraction tax and excise

tax rates, as well as an introduction of a negative excise tax on refinery feedstock. From 2019, crude oil export

duty rate is being gradually reduced and will be nulled in 2024. Simultaneously, the mineral extraction tax rate

for crude oil is being equivalently increased. To eliminate the negative effect of export duty reduction on

refining margins, a negative excise on refinery feedstock was introduced. To reduce the sensitivity of domestic

63

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

prices for motor fuel to changes in international prices, a so-called damper coefficient was included into the

negative excise formula, which also led to an increase in mineral extraction tax rate.

Crude oil extraction tax rate is calculated on a monthly basis. Crude oil extraction tax is payable in rubles

per metric tonne extracted. The tax rate is calculated according to the formula below:

Exchange Rate

(

)

Rate = 919 × Price − 15 ×

– Incentive + 428 + Tax manoeuvre Factor

261

+ Damper Factors

where Price is a Urals blend price in US dollars per barrel and Exchange Rate is an average ruble exchange

rate to US dollar during the period. The Incentive Factor represents incentives discussed further in this section.

The Tax manoeuvre Factor is derived as Export duty reduction factor multiplied by the base export duty rate.

The two fixed Damper Factors are applicable when the corresponding components of a negative excise

formula are positive. From 2020, in addition to the fixed factors a new variable Damper Factor, which is linked

to the export netbacks for gasoline and diesel fuel, was added to the formula. In 2021, the formula was amended

by increasing the variable Damper Factor, which was synchronised with an increase in the damper coefficient

in the formula of negative excise tax on refinery feedstock.

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

2024 and

2020

2021

2022

2023

further

Export duty reduction factor..................................................

0.333

0.500

0.667

0.833

1

(rubles)

Damper Factor for gasoline...................................................

Damper Factor for diesel fuel................................................

105

92

105

92

105

92

105

92

105

92

Mineral extraction tax on crude oil has the following types of tax incentives applied to our fields and deposits:

.

A special reducing coefficient is applied to the standard tax rate depending on location, size and

complexity of a particular field. This type of incentive with different coefficients was applied to our

Yu. Korchagin field located in the Caspian offshore until the end of 2021, and is applied to our new

small-sized fields (recoverable reserves less than 5 million tonnes) and fields and deposits with low

permeability like V. Vinogradov, Sredne-Nazymskoye and Imilorskoye fields and Tyumen deposits.

Before the end of 2020, the incentive was applied to our highly depleted fields (more than 80%

depletion), the Permian layers of our Usinskoye field in Timano-Pechora producing high-viscous

crude oil, as well as our Yaregskoye field producing extra-viscous crude oil. After the adoption of

amendments to the Russian Tax Code in October 2020 these tax incentives have been cancelled as of

1 January 2021. The cancellation of mineral extraction tax incentives for our highly depleted fields

was followed by allowance of inclusion of the respective licence areas into Group 3 of tax on additional

income regime (see below) as of beginning of 2021;

.

A fixed tax rate of 15% of the Urals price is applied to our V. Filanovsky offshore field and other

greenfields, located in the Caspian Sea;

A fixed tax rate of 30% of the Urals price is applied to our offshore greenfields, located in the Baltic

Sea;

A special tax rate is applied to crude oil produced at licence areas with TAI regime. For Groups 1 and

4 of TAI a discount to the special tax rate is applied depending on the duration of commercial

production at the particular licence area. For highly depleted licence areas in Group 3 of TAI a 20%

discount will be applied to the special tax rate starting from 1 January 2024.

Some of the mineral extraction tax incentives are limited in time or capped by cumulative oil production

volumes.

64

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Tax on additional income. Starting from 2019, a tax on additional income (hereinafter TAI) from the crude

oil and gas condensate production has been implemented for certain licence areas. The TAI rate is set at 50%

and is applied to the estimated sales revenue less actual and estimated costs, where actual costs include both

operating expenses and capital expenditures. Moreover, TAI tax base may be reduced by the historical

cumulative losses attributable to the licence area. For crude oil production subject to TAI, a special mineral

extraction tax rate (in US dollars per barrel) is applied which equals to 50% of the difference between Urals

oil price and $15 less the enacted export duty rate. From September 2021, Damper Factors are added to this

special mineral extraction tax rate.

TAI is implemented for five groups of licence areas. In Group 1, LUKOIL has nineteen licence areas with

greenfields in the Yamal-Nenets Autonomous District, including Pyakyakhinskoye field, and a number of

fields in Timan-Pechora. In Group 3, LUKOIL has eight licence areas with brownfields in West Siberia that

adopted TAI regime as of 1 January 2019, as well as 105 licence areas with depleted reserves in different

regions transferred to TAI regime in 2021. In Group 4, LUKOIL has two licence areas with greenfields in

West Siberia and five licence areas in Timan-Pechora added in 2021. LUKOIL has licence areas neither in

Group 2 nor in Group 5 of the TAI regime.

Crude oil export duty rate is denominated in US dollars per tonne of crude oil exported and is calculated by

multiplying the base export duty rate calculated on a monthly basis by the adjusting factor from tables below.

International Urals price

Base export duty rate

Less than, or equal to, $109.5 per tonne ($15 per barrel)

$0 per tonne

Above $109.5 but less than, or equal to, $146.0 per tonne

($20 per barrel)

35% of the difference between the actual price and

$109.5 per tonne (or $0.35 per barrel per each $1 increase in crude

oil price over $15 per barrel)

Above $146.0 but less than, or equal to, $182.5 per tonne

($25 per barrel)

$12.78 per tonne plus 45% of the difference between the actual price

and $146.0 per tonne (or $1.75 plus $0.45 per barrel per each $1

increase in crude oil price over $20 per barrel)

Above $182.5 per tonne ($25 per barrel)

$29.2 per tonne plus 30% of the difference between the actual price

and $182.5 per tonne (or $4 plus $0.3 per barrel per each $1 increase

in crude oil price over $25 per barrel)

2024 and

2020

2021

2022

2023

further

Adjusting factor .....................................................................................

0.667

0.500

0.333

0.167

0

The rate for a month is being based on average Urals price for the period from the 15th day of the previous

month to the 14th day of the current month. This calculation methodology results in the so-called “export duty

lag effect,” when export duty rate lags the oil price changes, which may lead to sizeable impact on our financial

results in the periods of high oil price volatility. As a result of the tax manoeuvre, the lag effect is migrating

from the export duty to the mineral extraction tax.

65

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(US dollars per barrel)

Urals price (Argus)....................................................

Export duty on crude oil .......................................

Mineral extraction tax on crude oil.......................

Net Urals price¹.....................................................

Export duty lag effect.......................................

Mineral extraction tax lag effect.......................

Net Urals price¹ assuming no lag .....................

78.17

9.66

42.19

26.32

0.31

71.19

8.85

37.81

24.53

0.07

9.8

9.2

11.6

7.3

>100

5.3

69.10

8.10

35.84

25.16

0.50

41.39

6.28

66.9

29.0

>100

35.6

-

16.56

18.55

(0.39)

(0.20)

19.14

0.31

25.70

0.07

24.39

0.50

24.16

-

26.2

(rubles per barrel)²

Urals price (Argus)....................................................

Export duty on crude oil .......................................

Mineral extraction tax on crude oil.......................

Net Urals price¹.....................................................

Export duty lag effect.......................................

Mineral extraction tax lag effect.......................

Net Urals price¹ assuming no lag .....................

5,676

701

3,064

1,911

23

5,231

651

2,778

1,802

5

8.5

7.7

10.3

6.0

>100

4.1

5,089

2,986

453

1,195

1,338

(28)

70.4

31.8

>100

38.4

-

597

2,640

1,852

37

1,778

23

1,865

5

(14)

1,380

-

1,792

28.8

¹ Urals price net of export duty and mineral extraction tax on crude oil.

² Translated to rubles for Urals and export duty on crude oil using average exchange rate for the period.

Crude oil produced at some of our fields and licence areas under special tax regimes is subject to zero export

duty. In particular, a zero rate applies to crude oil of our V. Filanovsky field and other greenfields located in

the Caspian Sea, the offshore greenfields in the Baltic Sea as well as licence areas included into the Group 1

of the TAI regime.

A reduced rate was applied to crude oil produced at our Yaregskoye field producing extra-viscous crude oil

and our Yu. Korchagin field in the Caspian offshore. In October 2020, amendments to the Russian customs

legislation were adopted, providing for the cancellation of reduced export duty rates applied to crude oil

produced at these fields starting from 1 January 2021.

Crude oil exported to member countries of the Customs Union in the Eurasian Economic Union of Russia,

Belarus, Kazakhstan, Armenia and the Kyrgyz Republic (Customs Union) is not subject to export duties.

Crude oil and refined products exported from Russia are subject to two steps of customs declaration and duty

payments: temporary and complete. A temporary declaration is submitted based on preliminary exports

volumes and the duty is paid in rubles translated from US dollars at the date of the temporary declaration. A

complete declaration is submitted after receiving the actual data on the exported volumes, but no later than six

months after the date of the temporary declaration. The final amount of the export duty is adjusted depending

on the actual volumes, the ruble-dollar exchange rate at the date of the complete declaration (except for pipeline

deliveries for which the exchange rate at the temporary declaration date is used) and the export duty rate. If

temporary and complete declarations are submitted in different reporting periods, the final amount of the export

duty is adjusted in the period of submission of the complete declaration. The high volatility of the ruble-dollar

exchange rates may lead to significant adjustments. For the purposes of the IFRS consolidated financial

statements, data from temporary declarations at the reporting period end is translated to rubles from US dollars

using the period-end exchange rate.

66

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Tax incentives

The table below illustrates the impact of tax incentives on taxation of crude oil production from different fields

and deposits in our portfolio calculated at $50 per barrel Urals price and zero damper factors.

Mineral

extraction

tax Export duty

(in US dollars per barrel)

As %

of oil price

Total

Under 2021 tax formulas

Standard ..........................................................................................

23.5

5.7

29.2

58.3

Yu. Korchagin field ..........................................................................

V. Filanovsky field ...........................................................................

D41 field...........................................................................................

V. Vinogradov and Imilorskoye fields..............................................

New fields with reserves below 5 million tonnes..............................

Tyumen deposits...............................................................................

13.2

7.5

15.0

5.7

0.0

5.7

18.9

7.5

15.0

37.8

15.0

30.0

15.2

20.9

41.9

17.0–23.5

21.4

22.7–29.2

27.1

45.5–58.3

54.5

Natural gas extraction tax rate is calculated using a special formula depending on average regulated

wholesale natural gas price in Russia, Urals price, the share of gas production in total hydrocarbon production

at particular licence area, regional location and complexity of particular gas field. Reinjected natural gas and

associated petroleum gas are subject to zero extraction tax rate.

Gas produced from our two major fields in Russia, Nakhodkinskoye and Pyakyakhinskoye, is taxed at the rates

subject to application of reducing coefficients due to the fields’ geographical location and the depth of

reservoir.

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(US dollars per thousand cubic meters)¹

Nakhodkinskoye field ...............................................

Pyakyakhinskoye field ..............................................

6.50

5.40

6.42

5.23

1.2

3.3

6.31

6.56

5.63

6.97

12.2

(5.9)

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(rubles per thousand cubic meters)

Nakhodkinskoye field ...............................................

Pyakyakhinskoye field ..............................................

472

392

472

384

-

2.1

465

483

406

503

14.5

(4.0)

Export duty rates on refined products are calculated by multiplying the enacted crude oil export duty rate

by a coefficient according to the table below.

2020 and further

Multiplier for:

Gasolines, diesel fuel and other light and middle distillates.........................................................................

Straight-run gasoline ....................................................................................................................................

Fuel oil .........................................................................................................................................................

0.30

0.55

1.00

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

Excise taxes on refined products. The responsibility to pay excises on refined products in Russia is imposed

on refined product producers (except for straight-run gasoline). Only domestic sales volumes are subject to

excises.

Excise tax expense on straight-run gasoline used as a petrochemical feedstock is reimbursed with a coefficient

of 1.7, and excise tax expense on middle distillates used as refinery feedstock, bunker fuel or fuel at power

plants is reimbursed in double amount. Since 1 April 2020, the fixed excise tax rate for middle distillates was

replaced with formula-based rate linked to the level of damper for diesel fuel.

67

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

In other countries where the Group operates, excise taxes are paid by either producers or retailers depending

on the local legislation.

Excise tax rates on motor fuels in Russia are tied to the ecological class of fuel. Average excise tax rates for

the periods considered are listed below.

Q4

2021

Q3

2021

Change,

%

12 months of

2021 2020

Change,

%

(rubles per tonne)

Gasoline (below Euro-5) ...........................................

Gasoline (Euro-5)......................................................

Diesel fuel .................................................................

Motor oils..................................................................

Middle distillates*.....................................................

13,624

13,262

9,188

5,841

9,938

13,624

13,262

9,188

5,841

9,938

-

13,624

13,262

9,188

5,841

10,595

13,100

12,752

8,835

5,616

14,524

4.0

(27.1)

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

Established excise tax rates are listed below.

2021

2022

2023

2024

(rubles per tonne)

14,169

13,793

14,736

14,345

9,938

15,325

14,919

10,336

6,571

Gasoline (below Euro-5) ...........................................

Gasoline (Euro-5)......................................................

Diesel fuel .................................................................

Motor oils..................................................................

13,624

13,262

9,188

9,556

6,075

6,318

5,841

Negative excise tax on refinery feedstock

The reduction of export duties on crude oil in the course of the tax manoeuvre in Russia leads to an increase

in feedstock costs for the domestic refineries. This negative effect is partially compensated by a decrease in

export duties on refined products, with the remaining part of the negative effect being fully offset by the

negative excise tax implemented from 1 January 2019. The negative excise tax is payable by the Government

to the refineries. The negative excise tax rate is calculated separately for each refinery based on the average

Urals crude oil price and refinery product slate during the month. Our Ukhta refinery benefits from a special

uplift regional coefficient of 1.3 applied to the negative excise tax.

The negative excise tax formula also includes the damper coefficient for gasoline and diesel fuel sold on the

domestic market and starting from 2021 it also includes an investment factor. The damper coefficient is

calculated by multiplying the respective Compensation Coefficients and a difference between gasoline and

diesel fuel export netbacks at North-Western Russia delivery basis and Fixed benchmarks. When the damper

coefficient is positive, it is payable by the Government to the refinery, and vice versa. In 2021, the damper

coefficient formula was amended which resulted in an increase in damper coefficient for gasoline from

1 May 2021 and for diesel fuel from 1 January 2022.

The investment factor is a multiplier to the negative excise tax excluding the damper, which is applicable when

a special agreement is signed with the Government providing for at least 60 billion RUB of investments into

development of а refinery. The multiplier depends on the refinery’s geography. In March 2021, the Company

signed an agreement with the Government according to which it is eligible for the investment factor in relation

to the project for construction of a delayed coker unit at Nizhny Novgorod refinery starting from 2021. In

August 2021, the Company signed similar agreement in relation to the project for construction of a catalytic

cracker unit at Perm refinery, the investment factor is applied starting from December 2021. For both projects

the investment factor will be applied until 1 January 2031.

68

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

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

January -

May -

April December

2020

2021

2022

2023

2024

(rubles per tonne)

Fixed benchmark for gasoline.......................................

Fixed benchmark for diesel fuel ...................................

53,600

48,300

56,300

50,700

52,300

50,700

55,200

52,250

56,900

53,850

58,650

55,500

2020 and further

Compensation coefficient for gasoline .........................................................................................................

Compensation coefficient for diesel fuel ......................................................................................................

0.68

0.65

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(US dollars per tonne)¹

Gasoline ....................................................................

Diesel fuel .................................................................

240.53

151.87

214.26

94.10

12.3

61.4

165.83

81.39

(89.65)

(78.06)

-

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(rubles per tonne)

Gasoline ....................................................................

Diesel fuel .................................................................

17,464

11,027

15,743

6,914

10.9

59.5

12,214

5,995

(6,468)

(5,632)

-

Income tax. Operations in the Russian Federation are subject to a 20% income tax rate. For the period from

2017 till 2024 (inclusive) a Federal income tax rate is set as 3.0% and a regional income tax rate is set as

17.0%. Regional income tax rate may be reduced for certain categories of taxpayers by the laws of constituent

entities of the Russian Federation, however certain restrictions apply on the application of the reduced regional

rates.

The Company and its Russian subsidiaries file income tax returns in Russia. A number of Group companies in

Russia are paying income tax as a consolidated taxpayers’ group (“CTG”). This allows taxpayers to offset

taxable losses generated by certain participants of a CTG against taxable profits of other participants of the

CTG.

The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they

operate.

Transportation tariffs on crude oil, natural gas and refined products in Russia

Many of our production assets are located relatively far from our customers. As a result, transportation tariffs

are an important factor affecting our profitability.

Сrude oil produced at our fields in Russia is transported to refineries and exported primarily through the trunk

oil pipeline system of the state-owned company, Transneft. In some cases, crude oil is also shipped via railway

infrastructure of the state-owned company, Russian Railways.

Refined products produced at our Russian refineries are transported primarily by railway (Russian Railways)

and the pipeline system of Transnefteproduct, a subsidiary of Transneft.

Gas that is not sold at the wellhead is transported through the Unified Gas Supply System owned and operated

by Gazprom.

Transneft, Russian Railways and Gazprom are state-controlled natural transportation infrastructure

monopolies and their tariffs are regulated by the Federal Antimonopoly Service of Russia and set in rubles.

69

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

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

service providers in Russia.

Q4 2021 to

Q3 2021

2021 to 2020

Transneft (crude oil)........................................................................................

Russian Railways (crude oil and refined products)..........................................

0.0%

3.6%

0.0%

3.7%

70

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Reserves base

The tables below summarise the net proved reserves of our consolidated subsidiaries and our share in net

proved reserves of our associates and joint ventures under the standards of the US Securities and Exchange

Commission (until the economic limit of commercial production is reached) that have been derived from our

reserve reports audited by Miller and Lents Ltd, our independent reservoir engineers, at 31 December 2021

and 2020.

Changes in 2021

Extensions,

discoveries and

Revision of

31 December

2021 Production⁽¹⁾

changes in

previous 31 December

(hydrocarbons, millions of BOE)

structure

223

99

estimates

2020

7,884

2,403

2,156

1,116

163

West Siberia .....................................................

Timan-Pechora .................................................

Ural region .......................................................

Volga region .....................................................

Other in Russia .................................................

Outside Russia ..................................................

Proved oil and gas reserves ............................

Probable oil and gas reserves ........................

Possible oil and gas reserves ..........................

¹ Gas production shown before own consumption.

7,796

2,461

2,187

1,132

208

1,484

15,268

6,057

2,851

(323)

(116)

(127)

(89)

(11)

(136)

(802)

12

75

61

77

4

97

28

52

15

(58)

171

1,663

15,385

5,581

2,802

514

Changes in 2021

Extensions,

discoveries and

Revision of

31 December

2021

changes in

previous 31 December

(crude oil, millions of barrels)

Production

(258)

(105)

(118)

(80)

structure

191

92

estimates

2020

5,789

2,278

2,030

756

West Siberia ....................................................

Timan-Pechora ................................................

Ural region .......................................................

Volga region ....................................................

Other in Russia ................................................

Outside Russia .................................................

Proved oil reserves .........................................

Probable oil reserves ....................................

Possible oil reserves .......................................

5,722

2,329

2,044

766

207

504

11,572

4,544

2,422

-

64

40

92

22

52

12

68

(10)

(41)

(612)

5

160

(146)

31

679

461

11,692

4,105

2,314

Changes in 2021

Extensions,

discoveries and

Revision of

31 December

changes in

structure

previous 31 December

2021 Production⁽¹⁾

estimates

2020

12,572

750

(gas, billions of cubic feet)

West Siberia ....................................................

Timan-Pechora ................................................

Ural region .......................................................

Volga region ....................................................

Other in Russia ................................................

Outside Russia .................................................

Proved gas reserves .......................................

Probable gas reserves ....................................

Possible gas reserves ......................................

¹ Gas production shown before own consumption.

12,444

(391)

(66)

(53)

(55)

(3)

194

41

34

39

-

69

67

792

858

2,198

6

123

55

(7)

754

2,159

16

5,879

22,177

9,080

2,575

(568)

(1,136)

13

321

529

836

5,905

22,156

8,861

2,927

The Company’s proved hydrocarbon reserves at 31 December 2021 amounted to 15.3 billion BOE and

comprised of 11.6 billion barrels of crude oil and 22.2 trillion cubic feet of gas.

The proved reserves replacement ratio at the Company's projects in Russia totaled 109% in 2021, including

109% for liquids and 108% for gas.

71

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

As a result of geological exploration and production drilling conducted in 2021, LUKOIL added 501 million

BOE to proved reserves, which is 8% higher year-on-year. The largest contribution was made by the assets in

West Siberia, Ural region, Timan-Pechora, as well as in the Baltic and Caspian Seas. The conversion of

contingent resources to reserves added 40 million BOE to proved reserves. The reserves dynamics was

negatively affected by reserves revision for the international projects which are based on production sharing

agreements or service contracts due to an increase in annual average crude oil price.

72

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Segments highlights

Our operations are divided into three main business segments:

.

Exploration and Production – which includes our exploration, development and production

operations related to crude oil and gas. These activities are primarily located within Russia, with

additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western

Africa, Norway, Romania and Mexico.

.

Refining, Marketing and Distribution – which includes refining, petrochemical and transport

operations, marketing and trading of crude oil, natural gas and refined products, generation,

transportation and sales of electricity, heat and related services.

Corporate and other – which includes operations related to our headquarters (which coordinates

operations of the Group companies), finance activities, and certain other activities, that are not

primary to the Group.

Each of our segments is dependent on the others, with a portion of the revenues of one segment being a part

of the costs of the others. In particular, our Refining, Marketing and Distribution segment purchases crude oil

from our Exploration and Production segment. As a result of certain factors considered in the “Domestic crude

oil and refined products prices” section on p. 62, benchmark crude oil market prices in Russia cannot be

determined with certainty. Therefore, the prices set for inter-segment purchases of crude oil reflect a

combination of market factors, primarily international crude oil market prices, transportation costs, regional

market conditions, the cost of crude oil refining and other factors. We present the financial data for each

segment in Note 32 “Segment information” to our consolidated financial statements.

Exploration and production

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(millions of rubles)

EBITDA....................................................................

in Russia...........................................................

outside Russia and Iraq ....................................

in Iraq...............................................................

296,522

234,633

44,316

17,573

245,036

206,932

30,366

7,738

21.0

13.4

45.9

>100

986,255

500,081

421,573

46,512

31,996

97.2

95.0

>100

35.4

821,914

121,010

43,331

Hydrocarbon extraction expenses..............................

in Russia...........................................................

outside Russia and Iraq ....................................

in Iraq...............................................................

54,073

43,457

6,438

51,235

40,817

6,231

5.5

6.5

3.3

204,557

162,453

25,616

16,488

198,911

158,328

23,371

17,212

2.8

2.6

9.6

4,178

4,187

(0.2)

(4.2)

(rubles per BOE)

Hydrocarbon unit extraction expenses (excluding

Iraq)...........................................................................

in Russia...........................................................

outside Russia and Iraq ....................................

242

249

203

245

244

248

(1.2)

1.9

(18.1)

244

246

235

247

243

282

(1.2)

1.2

(16.8)

(US dollars per BOE)

Hydrocarbon unit extraction expenses (excluding

Iraq)...........................................................................

in Russia...........................................................

outside Russia and Iraq ....................................

3.33

3.43

2.79

3.33

3.32

3.37

-

3.1

(17.1)

3.31

3.33

3.19

3.42

3.36

3.91

(3.2)

(0.8)

(18.5)

Our upstream EBITDA increased by 21.0% compared to the third quarter of 2021. In Russia, EBITDA

increased by 13.4% quarter-on-quarter mainly as a result of higher crude oil prices and production volumes,

higher positive export duty lag effect, as well as prior periods’ extraction tax recalculation. Outside Russia and

Iraq, our EBITDA increased by 45.9% mainly as a result of an increase in hydrocarbon prices and higher gas

production volumes.

73

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Compared to the full year 2020, our upstream EBITDA increased almost two-fold. In Russia, the increase was

mainly a result of higher crude oil prices, positive export duty lag effect, higher crude oil production volumes,

and the ruble depreciation, although these factors were partially offset by elimination of tax incentives for

high-viscous crude oil. Outside Russia and Iraq, our upstream EBITDA increased mainly due to higher

hydrocarbon prices, higher natural gas production volumes and the ruble depreciation.

The dynamics of EBITDA of the West Qurna-2 project was mainly a result of changes in incurred costs and

their compensation.

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(thousand BOE per day)

Crude oil and natural gas liquids

Consolidated subsidiaries

West Siberia.....................................................

Timan-Pechora.................................................

Ural region .......................................................

Volga region.....................................................

Other in Russia.................................................

Total in Russia......................................................

Iraq¹..................................................................

Other outside Russia ........................................

Total outside Russia..............................................

Total consolidated subsidiaries..........................

Our share in associates and joint ventures

in Russia...........................................................

outside Russia ..................................................

761

300

344

214

27

1,646

36

57

93

1,739

710

284

325

223

28

1,570

20

40

60

1,630

7.2

5.6

5.8

(4.0)

(3.6)

4.8

80.0

42.5

55.0

6.7

704

281

323

219

28

1,555

34

50

84

1,639

669

274

313

217

29

1,502

53

106

1,608

5.2

2.6

3.2

0.9

(3.4)

3.5

(35.8)

(5.7)

(20.8)

1.9

10

33

9

23

11.1

43.5

10

29

11

32

(9.1)

(9.4)

Total share in production of associates and joint

ventures....................................................................

Total crude oil and natural gas liquids..................

43

1,782

32

1,662

34.4

7.2

39

1,678

43

1,651

(9.3)

1.6

Natural and petroleum gas²

Consolidated subsidiaries

West Siberia.................................................

Timan-Pechora ............................................

Ural region...................................................

Volga region................................................

Other in Russia ............................................

Total in Russia .................................................

Uzbekistan...................................................

Other outside Russia....................................

Total outside Russia .........................................

Total consolidated subsidiaries..........................

Share in associates and joint ventures

172

31

26

24

0

253

234

54

288

541

170

30

21

26

0

247

188

46

234

481

1.2

3.3

23.8

(7.7)

-

179

29

24

25

0

257

200

50

250

507

203

29

23

26

0

281

128

46

174

455

(11.8)

-

4.3

(3.8)

-

(8.5)

56.3

8.7

2.4

24.5

17.4

23.1

12.5

43.7

11.4

in Russia...........................................................

outside Russia ..................................................

1

11

1

8

(0.6)

44.5

2

10

1

10

18.2

(3.1)

Total share in production of associates and joint

ventures....................................................................

Total natural and petroleum gas............................

12

553

9

490

33.3

12.9

12

519

11

466

0.2

11.4

Total daily hydrocarbon production (excluding

the West Qurna-2 project)......................................

2,299

2,335

2,132

2,152

7.8

8.5

2,163

2,197

2,064

2,117

4.8

3.8

Total daily hydrocarbon production......................

Including natural gas liquids produced at the gas

processing plants .......................................................

43

37

16.1

35

39

(8.9)

¹ Compensation crude oil related to the Group.

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

74

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(thousands of tonnes)

West Siberia ..............................................................

Timan-Pechora..........................................................

Ural region ................................................................

Volga region..............................................................

Other in Russia..........................................................

Crude oil produced in Russia ....................................

9,300

3,732

4,038

2,578

351

8,658

3,673

3,825

2,686

358

7.4

1.6

5.6

(4.0)

(2.0)

4.2

34,157

14,287

15,094

10,467

1,424

32,448

14,102

14,565

10,339

1,486

5.3

1.3

3.6

1.2

(4.2)

3.4

19,999

19,200

75,429

72,940

Iraq¹...........................................................................

Other outside Russia..................................................

Crude oil produced outside Russia ............................

488

596

1,084

271

430

701

80.1

38.6

54.6

1,828

2,088

3,916

2,843

2,256

5,099

(35.7)

(7.4)

(23.2)

Total crude oil produced by consolidated

subsidiaries...............................................................

21,083

19,901

5.9

79,345

78,039

1.7

Our share in crude oil produced by associates

and joint ventures:

in Russia....................................................................

outside Russia............................................................

120

382

104

269

15.4

42.0

503

1,328

519

1,491

(3.1)

(10.9)

Total crude oil produced.........................................

21,585

20,274

6.5

81,176

80,049

1.4

¹ Compensation crude oil related to the Group.

Our main oil producing region is West Siberia where we produced 44.1% and 43.0% of our crude oil in the

fourth quarter and the full year 2021 (43.5% in the third quarter of 2021 and 41.6% in the full year 2020). Our

crude oil production increased by 6.5% compared to the third quarter of 2021 and by 1.4% compared to the

full year 2020.

The dynamics of our crude oil production volumes in Russia since the beginning of 2017 has been driven by

external limitations due to agreements of OPEC and some of the non-OPEC countries, including Russia, (the

OPEC+ countries) to cap production levels in order to stabilise the global crude oil market. Following these

agreements, the Group limited production in its traditional regions (West Siberia, Timan-Pechora, and Ural)

at the least-productive fields and fields with high water-cuts.

In April 2020, OPEC+ countries entered into a new agreement to reduce their collective output by 9.7 million

barrels per day starting from 1 May 2020 as a response to a dramatic contraction in demand for crude oil due

to the COVID-19 pandemic. The agreement expires at the end of 2022 and its parameters are adjusted

depending on the market situation. Due to the agreement, in May 2020, the Group reduced its crude oil

production in Russia by approximately 310 thousand barrels per day, or by 19%, as compared to the average

daily crude oil production level in the first quarter of 2020. Subsequently, our crude oil production in Russia

has been gradually recovering. As a result, in the fourth quarter of 2021, crude oil production by the Group in

Russia was approximately 270 thousand barrels per day higher than the May 2020 level and in 2021 it exceeded

the level of 2020.

The new OPEC+ agreement also led to limitations on oil production by the Group at certain international

projects.

Despite external limitations on production volumes, development of the priority projects continued. In

particular, in West Siberia total crude oil and gas condensate production at the V. Vinogradov, Imilorskoye,

Sredne-Nazymskoye and Pyakyakhinskoye fields increased in 2021 by 8.1% year-on-year, to 4.5 million

tonnes.

75

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Gas production (excluding flaring, reinjected gas and gas used in production of natural gas liquids) by major

regions is presented in the table below.

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(millions of cubic meters)

West Siberia, including: ............................................

Nakhodkinskoye field ......................................

Pyakyakhinskoye field .....................................

Other fields.......................................................

Timan-Pechora..........................................................

Ural region ................................................................

Volga region..............................................................

Other in Russia..........................................................

Gas produced in Russia.............................................

2,691

1,025

740

926

477

400

375

3

2,659

1,026

750

883

463

331

402

3

1.2

(0.1)

(1.3)

4.9

11,082

4,334

3,113

3,635

1,826

1,502

1,549

11

12,592

5,376

3,599

3,617

1,810

1,451

1,593

17

(12.0)

(19.4)

(13.5)

0.5

0.9

3.5

(2.8)

(35.3)

(8.5)

3.0

20.8

(6.7)

-

3,946

3,858

2.3

15,970

17,463

Uzbekistan.................................................................

Other outside Russia..................................................

Gas produced outside Russia.....................................

3,655

851

4,506

2,944

713

3,657

24.2

19.4

23.2

12,420

3,053

15,473

7,947

2,861

10,808

56.3

6.7

43.2

Total gas produced by consolidated subsidiaries..

8,452

7,515

12.5

31,443

28,271

11.2

Our share in gas produced by associates and

joint ventures:

in Russia....................................................................

outside Russia............................................................

30

177

28

123

7.1

43.9

135

598

115

619

17.4

(3.4)

Total gas produced..................................................

8,659

7,666

13.0

32,176

29,005

10.9

In the fourth quarter and the full year 2021, LUKOIL Group's gas production was 8.7 billion cubic meters and

32.2 billion cubic meters, which was 13.0% higher quarter-on-quarter, and 10.9% higher year-on-year.

In Russia, our major gas production region is Bolshekhetskaya depression in West Siberia, where gas is

produced mainly from the Nakhodkinskoye and Pyakyakhinskoye fields. Our gas production in Russia

increased by 2.3% compared to the third quarter of 2021, and decreased by 8.5% compared to the full year

2020 mainly as a result of natural production decline at our Nakhodkinskoye field. Outside Russia, the main

gas production region is Uzbekistan where we have shares in two PSAs. Quarter-on-quarter, our international

gas production (including our share in associates’ production) increased by 23.9% The increase was mainly

attributable to higher production volumes in Uzbekistan. Our international gas production increased by 40.6%

year-on-year mainly as a result of recovery of gas production in Uzbekistan after temporary decline in 2020

due to lower demand from China for gas produced in Uzbekistan amid the COVID-19 pandemic.

West Qurna-2 project

The West Qurna-2 field in Iraq is developed under the service contract, signed in January 2010. In May 2018,

a Group company and Iraqi party signed a new field development plan, according to which, crude oil

production is planned to increase to 800 thousand barrels per day. Starting from 1 May 2020, crude oil

production at the field is limited due to the OPEC+ agreement. In the fourth quarter of 2021, average daily

production at the field was approximately 20 thousand barrels per day below its capacity.

Accounting for the cost compensation within the West Qurna-2 project in our consolidated statement of

financial position and consolidated statement of profit or loss and other comprehensive income is as follows.

Capital expenditures are recognised in Property, plant and equipment. Extraction expenses are recognised in

Operating expenses in respect of all the volume of crude oil production at the field regardless of the volume

of compensation crude oil the Group is eligible for. As the compensation revenue is recognised, capitalised

costs are amortised.

76

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

There are two steps of revenue recognition:

.

The Iraqi party, on a quarterly basis, approves invoice for cost recovery and remuneration fee for

which the Group is eligible for in the reporting period. Amount of the invoice depends on crude oil

production volumes during the period and amount of costs claimed for reimbursement. Approved

invoice amount for the reporting quarter is recognised in crude oil sales revenue.

.

Based on the approved invoices, the Iraqi party arranges schedule of crude oil shipments against its

liability for cost compensation and remuneration. As this crude oil is actually shipped, its cost is

recognised at current market price in Cost of purchased crude oil, gas and products. Further, revenue

from sales of this crude oil, or products from its refining, is recognised in Sales. Unsold crude oil and

refined products are recognised in Inventories.

The following table summarises data on capital and operating costs incurred, compensation crude oil received,

costs yet unrecovered and remuneration fee.

Сosts

incurred¹

9,778

Remunera-

tion fee

675

Crude oil Crude oil to

(millions of US dollars)

received

be received

Cumulative at 31 December 2020 .....................................................

Change in 2021 .................................................................................

Cumulative at 31 December 2021...................................................

¹ Including prepayments.

9,868

585

656

10,434

240

915

938

(42)

10,806

543

The West Qurna-2 project summary is presented below:

Q4

2021

(thousand

barrels)

35,196

Q3

2021

Change, %

(thousand (thousand

(thousand

tonnes)

4,663

tonnes)

5,146

barrels)

31,899

Total production........................................................

10.4

Production related to cost compensation and

remuneration .............................................................

Shipment of compensation crude oil¹........................

3,343

1,988

488

291

1,853

3,709

271

542

80.1

(46.3)

80.1

(46.3)

(millions (millions of

of rubles) US dollars) of rubles) US dollars)

Cost compensation ....................................................

Remuneration fee ......................................................

20,136

2,219

277

30

9,561

2,002

130

27

>100

10.8

>100

11.1

22,355

307

11,563

157

>100

Cost of compensation crude oil, received as liability

settlement (included in Cost of purchased crude oil,

gas and products)¹ .....................................................

Extraction expenses...................................................

Depreciation, depletion and amortisation..................

EBITDA....................................................................

11,422

4,178

16,000

17,573

158

58

221

242

20,314

4,187

5,415

7,738

276

57

73

(43.8)

(0.2)

>100

(42.8)

1.8

>100

105

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

revenues are recognised.

77

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

12 months of

2021

(thousand

barrels)

2020

Change, %

(thousand (thousand

(thousand

tonnes)

18,172

tonnes)

18,566

barrels)

124,295

Total production........................................................

126,991

2.2

Production related to cost compensation and

remuneration .............................................................

Shipment of compensation crude oil¹........................

12,506

13,439

1,828

1,965

19,447

18,996

2,843

2,777

(35.7)

(29.2)

(35.7)

(29.2)

(millions (millions of

of rubles) US dollars) of rubles) US dollars)

Cost compensation ....................................................

Remuneration fee ......................................................

52,119

8,051

60,170

709

109

818

42,604

7,694

50,298

597

107

704

22.3

4.6

19.6

18.8

1.9

16.2

Cost of compensation crude oil, received as liability

settlement (included in Cost of purchased crude oil,

gas and products)¹ .....................................................

Extraction expenses...................................................

Depreciation, depletion and amortisation..................

EBITDA....................................................................

69,237

16,488

35,728

43,331

939

224

487

590

45,428

17,212

25,630

31,996

626

239

361

450

52.4

(4.2)

39.4

35.4

50.0

(6.3)

34.9

31.1

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

revenues are recognised.

Refining, marketing and distribution

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

Q4

2021

Q3

2021

Change,

%

12 months of

Change,

%

2021

2020

(millions of rubles)

EBITDA....................................................................

in Russia ...............................................................

outside Russia.......................................................

114,380

111,181

3,199

125,757

107,875

17,882

(9.0)

3.1

(82.1)

487,294

370,683

116,611

243,322

180,753

62,569

>100

86.4

Refining expenses at the Group refineries.................

in Russia ...............................................................

outside Russia.......................................................

39,825

14,836

24,989

32,171

13,383

18,788

23.8

10.9

33.0

129,093

52,751

76,342

92,613

42,614

49,999

39.4

23.8

52.7

(rubles per tonne)

Unit refining expenses at the Group refineries ..........

in Russia ...............................................................

outside Russia.......................................................

2,573

1,359

5,483

1,860

1,188

3,116

38.4

14.4

76.0

2,050

1,238

3,753

1,580

1,062

2,703

29.8

16.5

38.8

(US dollars per tonne)

Unit refining expenses at the Group refineries ..........

in Russia ...............................................................

outside Russia.......................................................

35.44

18.71

75.51

25.31

16.16

42.41

40.0

15.8

78.1

27.84

16.81

50.95

21.90

14.73

37.46

27.1

14.1

36.0

Our refining, marketing and distribution EBITDA was 9.0% lower compared to the third quarter of 2021. At

the same time, in Russia, refining, marketing and distribution EBITDA increased by 3.1% quarter-on-quarter

largely due to better results of refineries, as well as a seasonal increase in profitability of our power generating

business. Outside Russia, our refining, marketing and distribution EBITDA decreased by 82.1% mainly due

to maintenance works and higher energy costs at our refineries, lower profitability of our trading business, as

well as seasonally weaker results of our retail business. Negative impact of these factors was partially offset

the accounting specifics of our international trading operations and higher positive inventory effect at our

refineries.

Compared to the full year 2020, our refining, marketing and distribution EBITDA increased more than two-

fold. In Russia, our downstream EBITDA increased largely due to higher refining margins and throughput

volumes, bigger positive inventory effect at our refineries and stronger results of petrochemical business. This

was partially offset by weaker results of our retail business. Outside Russia, our downstream EBITDA

increased significantly owing to a change in inventory effect at our refineries, better results of our retail

business, higher refinery throughput volumes, as well as the accounting specifics of our international trading

operations.

78

PJSC LUKOIL

Management’s discussion and analysis of financial condition and results of operations for the three-month periods ended

31 December and 30 September 2021 and for the years 2021 and 2020

Refining and petrochemicals

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

Q4

Q3 Change,

12 months of

Change,

2021

%

2021

2020

%

(thousands of tonnes)

Refinery throughput at the Group refineries..............

in Russia ...............................................................

outside Russia, including......................................

crude oil ...........................................................

refined products................................................

Refinery throughput at third party refineries .............

Total refinery throughput.......................................

15,478

10,920

4,558

4,223

335

17,299

11,270

6,029

5,396

633

(10.5)

(3.1)

(24.4)

(21.7)

(47.1)

50.0

62,959

42,616

20,343

18,331

2,012

6

58,608

40,109

18,499

16,888

1,611

7.4

6.3

10.0

8.5

24.9

(95.9)

7.2

3

2

146

58,754

15,481

17,301

(10.5)

62,965

Production of the Group refineries in Russia¹ ......

diesel fuel..............................................................

motor gasoline ......................................................

fuel oil...................................................................

jet fuel...................................................................

lubricants and components....................................

straight-run gasoline .............................................

vacuum gas oil......................................................

bitumen.................................................................

coke ......................................................................

bunker fuel............................................................

gas products..........................................................

petrochemicals......................................................

other products .......................................................

10,345

4,386

2,209

956

706

211

600

-

10,718

4,379

2,265

1,213

822

216

561

-

(3.5)

0.2

40,423

16,615

8,147

4,173

2,747

856

2,419

633

923

1,100

1,460

321

372

657

38,090

16,084

7,076

3,142

2,182

923

2,458

589

904

1,108

2,022

307

298

997

6.1

3.3

(2.5)

(21.2)

(14.1)

(2.3)

7.0

15.1

32.8

25.9

(7.3)

(1.6)

7.5

-

271

295

379

74

106

152

271

264

370

88

99

170

2.1

11.7

2.4

(15.9)

7.1

(0.7)

(27.8)

4.6

24.8

(34.1)

(10.6)

Production of the Group refineries outside

Russia .......................................................................