Always moving forward

Investments in Iraq: Decision Point

Gati Al-Jebouri

LUKOIL Vice President

1

LUKOIL AT A GLANCE

Azerbaijan

Belarus

Belgium

Bulgaria

Egypt

Finland

Ghana

Georgia

Italy

Iraq

Kazakhstan

Luxemburg

Macedonia

Mexico

Moldova

Montenegro

Netherlands

Norway

Nigeria

Croatia

Romania

Russia

Cameroon

Serbia

Spain

Turkey

Ukraine

USA

Uzbekistan

Exploration Production Oil refining Gas processing Petrochemicals Power generation Petrol stations Shipment

LUKOIL operates in more then 30 countries of the world

Full Energy Cycle

Exploration

Production

Oil Refining

Petrochemicals

Transportation Sales

«Green» energy

Power generation

Gas processing

2.2 Mboepd

1.3 Mbpd

1.1 mln ton

5,000 stations

6 GW

16 bln BOE proved reserves

LUKOIL in IOCs’ ratings: № 6 in energy sector (Platt’s 250) № 10 among oil & gas companies (The Forbes 2000) № 11 among private oil companies (Fortune Global-500)

LUKOIL in Russia:

15% of oil production 15% of oil refining 12% of proven oil reserves

LUKOIL in the world:

2% of oil production 2% of oil refining 1% of proven oil reserves

LUKOIL in Iraq:

№ 1 in production added № 2 in investments № 2 in oil reserves (p+p)

2

LUKOIL PROJECTS IN IRAQ

West Qurna-2

DPSC

Effective date

Jan

2010

West Qurna-2

LUKOIL acquires Statoil’s interest in the project and

raises its stake to 75%

May

2012

March

2014

West Qurna-2

Start of production First Plateau –

120 kbopd

June

2015

West Qurna-2

Phase 1 Target Plateau –

400 kbopd

Block 10

EDPSC Effective date

Feb

2017

Block 10

Commercial discovery made after drilling the first exploratory well

Block 10

Start of 2D seismic survey works

Aug

2016

Block 10

Start of exploratory drilling

Dec

2012

Jan

2014

3

WEST QURNA-2: GENERAL INFORMATION*

Total CAPEX – 38 bln USD

Total costs up to date: USD 7.5 bln USD

Iraq’s revenue up to date: 10.4 bln USD

9% of Iraqi oil production and 22% of Iraqi oil export in 2016

Highest incremental production growth in Iraq (400 kbpd)

10,000 workers** of Iraqi origin in LUKOIL and contractor organizations

* As of 31.12.2016 ** At the peak of construction

4

ERIDU: GENERAL INFORMATION

Iraq’s biggest oil discovery over the last 20 years with daily flow rate of more than 1,000 cubic meters of sweet oil from Mishrif horizon

The first exploratory well drilled to the depth of 3,168 meters was a success

No previous exploration drilling on the Block 10 territory of 5,665 sq.km

2,022 km of 2D seismic acquisition over 2013-2015

200 jobs created for local workers during seismic acquisition and 60 more during exploratory drilling

5

OIL PRODUCTION IN SOUTHERN IRAQ BY FIELDS

Source: Wood Mackenzie, LUKOIL

Two thirds of Iraqi oil production in 2016 came from seven oilfields operated by IOCs 2016 Iraqi production: 4.6 Mbpd Big Seven production: 3.1 Mbpd

Oil production, Mbpd

Basra

Baghdad

Badra 0.07

Halfaya 0.2

Majnoon

0.2

Az Zubair

0.4

West Qurna-2 0.4

West Qurna-1 0.4

Rumaila South

Rumaila North 1.4

6

SOUTHERN IRAQ EXPORT CAPACITY

0

1

2

3

4

2010 2017

Production Export capacity

Realization of Iraq Crude Oil Export Expansion Project (ICOEEP) allowed to expand Southern Iraq’s export capacity from 1.75 Mbpd to 3.75 Mbpd by 2017

Oil Production vs Export Capacity, Mbpd

SPM 1,2,3 ABOT KAAOT

Export Capacity, Mbpd

3.75

Source: Wood Mackenzie, LUKOIL

7

2017 BUDGETS VS PRODUCTION BY FIELDS

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

OPEX, bln

USD

CAPEX, bln USD

Companies will invest in maintaining current level of production in 2017

Source: Wood Mackenzie, LUKOIL

Rumaila $2.9 bln

1.4 Mbpd

5.8 $/bbl

Total costs bln USD

Oil Production Mbpd

Oil Field

Total costs, $/bbl

Zubair $1.7 bln

0.4 Mbpd

12.4 $/bbl

WQ-1 $1.3 bln 0.4 Mbpd

8.3 $/bbl

WQ-2 $0.8 bln

0.4 Mbpd

5.5 $/bbl

Majnoon $1.0 bln

0.2 Mbpd

11.8

Halfaya $0.9 bln

0.2 Mbpd

12.3 $/bbl

Badra $0.4 bln

0.07 Mbpd

16.9 $/bbl

8

FUTURE INVESTMENT REQUIREMENTS

$124 bln

Rumaila

$26.4 bln

WQ-1

$18.8 bln

Zubair

$20.0 bln

WQ-2

$32.8 bln

Majnoon

$14.3 bln

Halfaya

$10.1 bln

Badra

$1.5 bln

Investment Plans for South Iraqi Oil Fields from 2017 onwards

The key bottleneck for the Iraqi oil industry is a shortage of water resources for injection.

In 2010-2013, the Common Seawater Supply Project (CSSP) with the cost of over $10 bln was designed to solve the issue. But the problem is still in place.

At the moment, most of the companies have reached zero or positive cumulative cash flows and are in a position to decide on future investments.

Future investments are highly dependent on revised schedules, timely cost recovery, IRR levels and TSC conditions.

Source: Wood Mackenzie, LUKOIL

9

REMUNERATION* OF IOC IN 2017-2034

0

0.1

0.2

0.3

6 8 10 12 14 16 18 20

Rem

unera

tion o

f IO

C /

Ira

qi Revenue,

2017-2

034, %

Remuneration of IOC / CAPEX, 2017-2034, %

Source: Wood Mackenzie, LUKOIL

* Share of IOC after deduction of taxes, P-factor and non-refundable costs are not applied

Remuneration CAPEX Oil Field

Remuneration, $ bln

Remuneration Iraqi Revenue

X 100%

X 100%

Zubair 16%

0.1%

$3.2 bln

WQ-1 13%

0.1%

WQ-2 10%

0.1%

$3.3 bln

Majnoon 8%

0.04%

$1.2

bln Halfaya 13%

0.04%

$1.1 bln

$2.5 bln

Rumaila 34%

0.3%

$9.0 bln

Badra 75%

0.04% $1.1 bln

34 76

10

HOW TO BOOST IRAQ’S INVESTMENT POTENTIAL

As per the TSC conditions, IOCs’ remuneration (after deduction of taxes, excluding P-factor and non-refundable costs) amounts to less than 1% of the total Iraqi oil revenues, which is equivalent to 21.4 bln USD (3.3 bln USD for WQ-2) over 2017-2034.

Due to unfavorable macroeconomic conditions 2014-2016, the majority of investment projects in Iraq demonstrates now Internal Rate of Return (IRR) of only 3-5%

Low IRR negatively affects Iraqi competitiveness among oil producing countries looking to attract foreign investments

To attract more investments and achieve higher oil production growth, it’s essential to: adhere to TSC in terms of costs reimbursement working together with IOC in order to increase projects’ IRR taking into account

interests of both parties

Other important requirements are: strict adherence to the approved work schedule, cost effective production, mutually beneficial employment policy, cooperation with local contractors and population

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2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

High Investment Scenario Fast growth - Iraq Ministry of Oil

FORECAST OF IRAQ’S OIL PRODUCTION

Medium Investment Scenario Limited Growth - Wood Mackenzie

Low Investment Scenario Maintaining current production level

Oil

Pro

duct

ion,

Mbpd

Always moving forward