OPPORTUNITIES IN RUSSIA AND CIS

1. V.M.Sokolsky LUKOIL-Neftekhim Chem Systems Seminars Annual European Conference 2003 Positioning for Improvement: Exploiting Uncertainty 12-13 February 2003, London, U.K. OPPORTUNITIES IN RUSSIA AND CIS Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

2. Current size of the Russian chemical industry Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Personnel – 842,000 people Sales– about 380 billion rubles (2002) Using official exchange rate, it is $12 billion worth of chemicals, or 0.6 per cent of the global chemical output (country rank 20) Making allowance for purchasing power of currencies and using a step-up factor, it is about $32 billion, or 1.8 per cent of the global output (country rank 16)

3. Index of chemical production in Russia,1990-2002 Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

4. Production of organic chemicals in Russia, 1990-2002 Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

5. Production of inorganic chemicals in Russia, 1990-2002 Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

6. Sectoral breakdown of chemicals in Russia Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Over 2/3 of the output is represented by basic chemicals, fertilisers and commodity polymers. Russia’s chemical industry structurally supplements that of West Europe, carrying a huge synergy potential

7. Russia’s foreign trade in chemicals Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Main export items: methanol, ammonia, mineral fertilisers, caprolactam, PVC, polyethylene, synthetic rubber • Main import items: engineering plastics, fibers, dyestuffs, paints, pharmaceuticals, perfumery and cosmetics • Export share in production: large-tonnage polymers – 30-37, methanol – 45, fertilisers – 81. • Import share in consumption: all plastics – 19, paints – 20, dyestuffs – 50, fibers – 56, drugs, perfumery and cosmetics – up to 60-70 • Russia’s positive balance of trade in chemicals stands at $2 billion a year. With all products internationally classified as chemicals, the balance is negative – from $1 billion to $3 billion (by various sources) • Russia’s main foreign trade partners are West European countries

8. Russia’s chemical exports, 1994-2002 (1) Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

9. Russia’s chemical exports, 1994-2002 (2) Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

10. Russia’s chemical imports, 1994-2002 Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

11. Regional distribution of the Russian chemical industry Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” The European Russia can be split into 4 regions of chemical industry, I.e. Volga-Urals super-region (56% of the national output) plus Central (21%), Northern (6%) and Southern regions (2%) The Asian Russia has 2 main chemical regions, i.e. Western (10%) and Eastern Siberia (5%). Note, the Russian Far East is almost void of chemicals. Each of the above regions has a number of chemical clusters within its borders.

12. Major players in the industry Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Petrochemical subsidiaries of oil & gas companies – SIBUR (Gazprom) and LUKOIL-Neftekhim (LUKOIL) • Individual petrochemical plants within oil & gas companies - YuKOS, Surgut, TNK, Tatneft, Itera, etc. • Agrochemical cartels and associations – Agrokhimholding, Fosagro, Evrokhim, etc. • Individual producers of petchems, fertilisers and other basic chemicals – Plastkard, TOAZ, etc. • Individual producers of fine chemicals – incl subsidiaries of foreign companies

13. The role of state in the industry Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Non-privatized enterprises account for only 1 per cent in the total number of plants and less than 5 per cent in their output. However, the role of the state in chemicals is much higher since: • Dozens of chemical plants are controlled by the state as their main shareholder (Dzerzhinsk Korund, Berezniki Soda, Sterlitamak Kaustik, Volgograd Khimprom, Cherepovets Azot, etc.) • Over 100 chemical plants are controlled by the state-owned holdings – SIBUR, Mezhregiongas, etc. (Tomsk, Tobolsk and other plants) • Almost all petrochemical plants in Tatarstan and Bashkiria are controlled by the governments of these republics The share of the state controlled enterprises in the Russian chemicals is probably 35-40 per cent

14. Investment activity of Russian and foreign companies, 1990-2002 Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Since 1990, the Russian companies have built about 20 new petchem plants with a combined capacity of over 2 million tpa (incl benzene, methanol, MTBE, LABS, VCM and PP units) Foreign companies preferred purchasing existing facilities in market-oriented sectors with a quick payback - such as detergents, pharmaceuticals, perfumery and cosmetics, tyres, etc. As a result, the Russian detergent industry is now dominated by Procter & Gamble, Henkel and Unilever with plants in Tula (30% of the national output), Saratov, St Petersburg and Perm regions Pharma, cosmetic and perfumery industries also abound in foreign firms - Searle, ICN, Gedeon Richter, Unilever and others with plants in Moscow, St Petersburg, Chelyabinsk, Kursk and other regions

15. Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Some new petrochemical projects Projects to be completed until 2005 - EB (230), styrene (200), PS (150), PTA (230), PET (80), polyester fibers (162) Projects to be completed after 2005 include methanol (1,400), MTBE (132), styrene (160), ethylene and PE (each up to over 1,000) and PP (around 1,000) To make the list of projects longer and more realistic, the country badly needs foreign direct investments, particularly from the West Funds in the West are known to be more readily available and cheaper than in Russia. Also, these often bring in advanced technology and high managerial skills.

16. Russia’s strengths and opportunities –feedstocks, energy and labour (2002) Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Crude oil reserves – from 7 to 14 billion tons, production – 379 million tons, prices - $100-120 per ton Refined products capacity – 282 million tpa, production 178 million ton, naphtha price - $160-190 per ton Natural gas reserves – 60 trillion m3 (1/3 of the world total), production – 588 billion m3, prices – $23.5 per 1,000 m3 Electricity: capacity – 215,000 MWt, production – 890 billion kwt-h, price - 2 US cents per kwt-h Labour: monthly salary in chemicals of about $100 (vs $250 in fuel industry)

17. Russia’s strengths and opportunities – market size and potential Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Population of about 150 million people, with GDP amounting to $400-450 billion • Economic growth in 1999-2002 - above global average (in 2002 – 4.2%) with good outlook for further growth • Chemical consumption of up to $35-40 billion with high growth potential - due to low per capita consumption • Good links with other FSU countries (with population of 150 million people and GDP of $300 billion) • Old-established links with CEE countries (with population of 130 million people and GDP of $750 billion)

18. Russia’s strengths and opportunities – political and economic factors Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Increased political stability • Market character of the national economy • Prevalence of private sector and high level of competiton in chemicals and other industries • Continued commitment to the policy of reforms (tax, banking, etc.)

19. Russia’s strengths and opportunities – taxes and customs Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Russia’s taxes are among world’s lowest: • Corporate income tax – 24% (reduced from 35%) • Personal income tax – 13% (cut from 12-35%) • Social security tax - 16-36% (cut from 38%) • Transport tax - insignificance (cut from 1%) • Sales tax of 5% - to be axed soon • Property tax – 2% (unchanged) • VAT – 20% (unchanged) Russia’s admission to WTO will remove custom barriers

20. Russia’s weaknesses & threats Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Low technical level of the existing plants - old processes, small and highly worn units, overmanning • Capital mobilization problems - expensive loans, import duties on equipment, etc. • Institutional problems – state monopolies, regulated prices, customs and duties, etc. • Limited size of the domestic market at present • Long distances separating key producing areas from the main feedstock sources and markets • Poor infrastructure for delivery of feedstocks & products • The lack of information about the plants and markets

21. What to develop? Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Aromatic chain. Exportable surplus of 250-300 ktpa. High domestic demand and growing import of derivatives incl PET, PS, etc. • Olefin chain. Cheap feedstocks (NGL and naphtha). High demand and growing import of derivatives incl PE, PP and PS. • Methanol chain.High demand for derivatives (MTBE potential stands at 3 million tpa). New promising outlets incl MTO.

22. Where to develop? Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Non-freezing seaports - particularly oil and gas terminals (St Petersburg, Kaliningrad, Novorossiysk, Odessa) Major petro- and gas-chemical centres in Russia (Budyonnovsk, Saratov, Volgograd, Perm, Nizhnekamsk), Ukraine (Kalush, Gorlovka) and Belarus (Novopolotsk) Existing and potential gas processing centres in the European Russia (Astrakhan, Budyonnovsk, Cherepovets, Murmansk) and in Western Siberia (Surgut, Tobolsk, etc.)

23. With whom to develop? Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” In petrochemicals, LUKOIL-Neftekhim is a partner of the first choice

24. LUKOIL-Neftekhim status and structure Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” LUKOIL-Neftekhim is LUKOIL’s petrochemical subsidiary which currently operates the following companies: • Stavrolen (Budyonnovsk) – a producer of olefins, benzene, VAM and HDPE • Saratovorgsintez (Saratov) – a producer of ACN, PAN fibres, phenol, acetone and MMA • LUKOR (Kalush) – a producer of chlorine, caustic soda, olefins, aromatics, VCM and HDPE • VARS (Ventspils) – ACN terminal • Stavrochem (Budapest) and LUKOIL Chemical (Antwerp) - trading companies Petrochemical part of Neftokhim (Burgas) is also expected to be operated by LUKOIL-Neftekhim

25. Some LUKOIL-Neftekhim locations Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим”

26. LUKOIL-Neftekhim’s range of products Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Olefins, aromatics and other basic petrochemicals - ethylene, propylene, C4 stream, benzene, phenol, acetone • Monomers - VCM, acrylonitrile, MMA, VAM • Polymers - HDPE, PAN fibers

27. LUKOIL-Neftekhim capacities forsome products, 000 tpa Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Ethylene 1,050 Propylene 450 Benzene 215 Polyethylene 500 VCM 370 ACN 180 PAN fibers 37 MMA 28

28. LUKOIL-Neftekhim size of operations Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Total annual sales: over $500 million (excluding chemical sales of Neftokhim) • Annual total chemical production capacity: around • 3 million tons • Annual total sales of chemicals: 2 million tons • Monthly shipments of chemicals: over 100,000 metric tons to more than 50 countries

29. LUKOIL-Neftekhim sales policy Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Domestic market is of primary importance due to: 1) better access, 2) higher prices, 3) faster growth LUKOIL-Neftekhim share in the domestic market: HDPE - 40%, ACN - 95%, PAN fibres - 30%, phenol - 20% Yet, because of limitations of the domestic market, about 50 per cent of the output is exported In future, LUKOIL-Neftekhim will retain its primary orientation to the domestic market coupled with high export sales and exposure to global factors

30. LUKOIL-Neftekhim strategy Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Its core is an evolutionary development with a focus on: • Close linkage with LUKOIL • Modernisation and debottlenecking • Improving feedstock supply and marketing systems • Expansion in existing and new product segments

31. Linkage with LUKOIL Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” • Material flows. LUKOIL-Neftekhim draws most of its feedstocks from LUKOIL and ships some chemicals to the latter. With good feedstock supply, LUKOIL-Neftekhim has a strong competitive advantage over other companies. It also eases LUKOIL’s dependence on fuel markets. • Financial flows. For development projects, LUKOIL-Neftekhim can use both its own resources and financial assistance from LUKOIL. Being a profitable company, it has been continuously contributing to LUKOIL’s total profits. • Corporate culture. LUKOIL-Neftekhim is a part of LUKOIL Group of companies developing a corporate culture similar to that of the largest vertically integrated Western companies.

32. Improvements in feedstock supply system Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Introducing lighter feedstocks at Budyonnovsk and Kalush Using new sources of crude oil and refined products : • CPC oil pipeline running from the Northern Caspian - with a possibility of building a new refinery in the south of Russia. • LUKOIL’s sources of supply in the Black Sea & Mediterranean area incl Romania, Iraq, Egypt, etc. Using own sources of natural gas making allowance for: • Availability of ethane-rich gas reserves in the Northern Caspian, in proximity to Budyonnovsk site and export markets • Expected gas production of up to 10 billion m3 a year

33. Improvements in the marketing system Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Better market research Broader trading practice • developing a system incorporating existing and planned storage and distribution centres in Europe • trading through dealers and own trading companies • getting direct access to customers Improvements in quality and transportation of products • improving range of products and grades • certifying products and quality control systems by international standards • elaborating new efficient delivery schemes

34. Expansion in existing and new segments Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” Expansion in existing product segments - by building/acquiring new assets. Projects under study include new crackers and polyolefin plants at Budyonnovsk, Kalush and Saratov. The aim is to consolidate LUKOIL-Neftekhim’s market share and exploit its competitive advantages in feedstocks. Expansion in new product segments, aimed at increasing vertical integration with a focus on the following projects: At Budyonnovsk – polypropylene (100 ktpa) and HDPE gas pipes At Saratov – sodium cyanide (20 ktpa) and PMMA (25 ktpa) At Kalush – PVC (150 ktpa) and polypropylene (100 ktpa) The aim is to add value to chemicals produced and increase flexibility under the changing market conditions

35. Summary Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” LUKOIL-Neftekhim accounts for 3% of LUKOIL total sales with petchems share in sales of world oil majors varying from 10% to 25%. Hence, the company has a high growth potential. LUKOIL-Neftekhim is a company intending to operate on a global scale abiding by international standards of corporate management. LUKOIL-Neftekhim intends to cooperate with other companies, particularly with leaders in technology and other areas Possible areas of cooperation are joint production of chemicals, feedstock supply and marketing arrangements.

36. Закрытое акционерное общество “ЛУКОЙЛ-Нефтехим” THANK YOU FOR YOUR ATTENTION!