LukOil(OAO) LKOB 3rd Quarter Results (MDA)

  LukOil(OAO) (LKOB) - 3rd Quarter Results (MDA)

RNS Number : 0805S
LukOil (OAO)
27 November 2012




  Management's discussion and analysis of financial condition and results of
                                  operations

The following  report contains  a  discussion and  analysis of  the  financial 
condition of  OAOLUKOIL as  of September  30, 2012  and the  results of  it's 
operations for the three and nine month periods ended
September 30,  2012 and  2011, and  significant factors  that may  affect  its 
future performance. It should be read in conjunction with our interim US  GAAP 
consolidated financial statements and notes thereto.

References  to  "LUKOIL,"  "the  Company,"  "the  Group,"  "we"  or  "us"  are 
references to  OAO LUKOIL  and  its subsidiaries  and equity  affiliates.  All 
dollar amounts  are in  millions of  US dollars,  unless otherwise  indicated. 
Tonnes of  crude oil  and natural  gas liquids  produced are  translated  into 
barrels using conversion rates  characterizing the density  of crude oil  from 
each of  our oilfields  and actual  density  of liquids  produced at  our  gas 
processing plants. Tonnes of crude oil purchased as well as 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  35.31cubic  feet  per  cubic  meter. 
Translations of barrels of  crude oil into barrels  of oil equivalent  ("BOE") 
were made at the rate of 1barrel 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.





Key financial and operational results

                         3^rd quarter of Change, %       9 months of Change, %
                            2012    2011               2012     2011
Sales (millions of US
dollars)                  35,494  34,563       2.7  103,152   99,101       4.1
Net income attributable
to OAOLUKOIL (millions
of US dollars)             3,509   2,244      56.4    8,316    9,012     (7.7)
EBITDA (millions of US
dollars)                   5,441   4,628      17.6   14,249   15,316     (7.0)
Taxes other than income
taxes, excise and export
tariffs (millions of US
dollars)                 (8,900) (9,570)     (7.0) (27,506) (26,330)       4.5
Earning per share of
common stock
attributable to OAO
LUKOIL (US dollars):
Basic                       4.65    2.88      61.4    10.91    11.55     (5.6)
Diluted                     4.55    2.83      60.6    10.68    11.31     (5.6)
Hydrocarbon production
by the Group including 
our share in equity
affiliates

(thousands of BOE)       198,889 196,247       1.3  593,941  592,042       0.3
Daily hydrocarbon
production by the Group
including  our share in
equity affiliates
(thousands of BOE per
day)                       2,162   2,133       1.4    2,168    2,169       0.0
Crude oil and natural
gas liquids produced by
the Group including our
share in equity
affiliates (thousands of
barrels)                 170,566 171,086     (0.3)  507,016  513,675     (1.3)
Gas available for sale
produced by the Group
including  our share in
equity affiliates 
(millions of cubic
meters)                    4,813   4,276      12.6   14,771   13,317      10.9
Refined products
produced by the Group
including  our share in
equity affiliates
(thousands of tonnes)     16,204  16,115       0.6   46,899   46,960     (0.1)



During the nine months  of 2012, our net  income was $8,316million, which  is 
$696 million, or 7.7%, less than in the same period of 2011. At the same time,
our net income for the third quarter of 2012 amounted to $3,509million, which
is $1,265million, or 56.4%, more than in  the third quarter of 2011. Our  net 
income was  influenced mainly  by export  tariffs and  mineral extraction  tax 
rates and by hydrocarbon prices.

  Business overview

The primary activities of OAO LUKOIL and its subsidiaries are oil exploration,
production, refining, marketing and distribution. The Company is the  ultimate 
parent entity of a vertically integrated group of companies.

OAO LUKOIL was established in accordance with Presidential Decree 1403, issued
on November 17, 1992. Under this decree,  on April 5, 1993, the Government  of 
the Russian Federation transferred to the Company 51% of the voting shares  of 
fifteen enterprises. Under  Government Resolution 861  issued on September  1, 
1995, a further nine  enterprises were transferred to  the Group during  1995. 
Since 1995, the Group has carried out a share exchange program to increase its
shareholding in each of 24 founding subsidiaries to 100%. From formation,  the 
Group  has  expanded   substantially  through   consolidation  of   interests, 
acquisition of new companies and  establishment of new businesses. Now  LUKOIL 
is a global energy company operating through its subsidiaries in 38  countries 
on four continents.

LUKOIL is one of the world's largest energy companies in terms of  hydrocarbon 
reserves that amounted to 17.3 billion BOE as of January 1, 2012 and comprised
of 13.4 billion barrels of crude oil and
23.2 trillion cubic feet of gas.

Our operations are divided into four main business segments:

§ Exploration and Production - which includes our exploration, development and
production operations  relating to  crude oil  and gas.  These activities  are 
primarily located  within Russia,  with additional  activities in  Azerbaijan, 
Kazakhstan, Uzbekistan, the Middle East,  South America, Northern and  Western 
Africa and South-East Asia.

§ Refining, Marketing and Distribution - which includes refining and transport
operations, marketing  and  trading of  crude  oil, natural  gas  and  refined 
products.

§ Chemicals - which includes processing and trading of petrochemical products.

§ Power generation -  which includes generation,  transportation and sales  of 
electricity, heat and related services.

Each of our four main  segments is dependent on the  other, with a portion  of 
the revenues  of one  segment being  a  part of  the costs  of the  other.  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 page 7,  benchmarking 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. Accordingly,  an 
analysis of  either of  these segments  on a  stand-alone basis  could give  a 
misleading impression  of those  segments' underlying  financial position  and 
results of operations. For this reason, we  do not analyze either of our  main 
segments separately in the  discussion that follows.  However, we present  the 
financial data  for  each in  Note  20"Segment information"  to  the  interim 
consolidated financial statements.

  Changes in the Group structure

In January 2012, the  Group was offered  to acquire a 20%  stake in the  joint 
venture operating  the ISAB  refining complex  ("ISAB"). The  transaction  was 
approved by European  regulatory authorities  and was  completed in  September 
2012 in  amount of  €485  million (approximately  $609 million).  The  Group's 
ownership in ISAB  increased from 60%  to 80% and  the Group obtained  control 
over this joint venture. This transaction was a partial exercise of ERG S.p.A.
option to sell in full its stake in the joint venture established in 2008.  In 
April 2011, within this option, the Group  acquired an 11% stake in the  joint 
venture for €241 million (approximately $342 million).

In  August  2012,  the  Group  acquired  ConocoPhillips'  investment  in   OOO 
"Narianmarneftegas" ("NMNG")  and certain  related  assets for  $604  million. 
ConocoPhillips group owned 30% interest in NMNG. The acquisition increased the
Group's total ownership interest in NMNG to 100%.



Operational highlights

  Hydrocarbon production

We undertake exploration for, and production of, crude oil and natural gas  in 
Russia and internationally. In Russia our major oil producing subsidiaries are
OOO LUKOIL-Western Siberia, OOO  LUKOIL-Komi and OOO LUKOIL-Perm.  Exploration 
and  production  outside  of  Russia  is  performed  by  our  100%  subsidiary 
LUKOIL-Overseas, that has stakes  in PSA's and  other projects in  Kazakhstan, 
Azerbaijan, Uzbekistan, Iraq,  Saudi Arabia, Egypt,  Ghana, Cote d'Ivoire  and 
Vietnam.

The table  below summarizes  the  results of  our exploration  and  production 
activities.

                                                   3^rd quarter of 9 months of
                                                      2012    2011  2012  2011
                                                     (thousand BOE per day)
Daily production of hydrocarbons, including the
Company's share in equity affiliates, including:     2,162   2,133 2,168 2,169
- crude oil and natural gas liquids^(1)              1,854   1,860 1,851 1,882
- natural gas^(2)                                      308     273   317   287
                                                       (US dollar per BOE)
Hydrocarbon extraction expenses                       5.05    5.05  4.92  4.99
- in Russia                                           5.05    5.04  4.94  5.01
- outside Russia                                      5.09    5.24  4.74  4.67
                                                    (millions of US dollars)
Hydrocarbon extraction expenses                        971     955 2,821 2,842
- in Russia                                            900     894 2,611 2,671
- outside Russia                                        71      61   210   171
Exploration expenses                                    52     196   199   309
- in Russia                                             17      18   109    73
- outside Russia                                        35     178    90   236
Mineral extraction tax                               2,992   3,122 9,264 8,779
- in Russia                                          2,967   3,094 9,193 8,706
- outside Russia                                        25      28    71    73

^(1)Natural gas liquids produced at the Group gas processing plants.

^(2)^Gas available for sale (excluding  gas produced for our own  consumption 
and including petroleum gas sold to third parties).

Crude oil production.In  the nine  months of2012, we  produced 67.2  million 
tonnes  (496.6million  barrels)  of  crude   oil  compared  to  68.3   million 
tonnes(504.2 million  barrels)  in the  same  period of  2011  (including  the 
Company's share in equity affiliates).

The following table represents our crude oil production in the nine months  of 
2012 and 2011 by major regions.

                                                 Change to 2011
                                  9 months          Change in Organic 9 months
(thousands of tonnes)              of 2012 Total, % structure  change  of 2011
Western Siberia                     36,893      0.4         -     137   36,756
Timan-Pechora                       11,745   (12.8)         - (1,722)   13,467
Ural region                         10,036      5.4         -     516    9,520
Volga region                         2,640     11.8         -     278    2,362
Other in Russia                      1,418    (3.3)         -    (49)    1,467
Crude oil produced in Russia        62,732    (1.3)         -   (840)   63,572
Crude oil produced
internationally                      2,517    (1.4)      (37)       -    2,554
Total crude oil produced by
consolidated subsidiaries           65,249    (1.3)      (37)   (840)   66,126
Our share in crude oil produced
by equity affiliates:
in Russia                              288      8.7         -      23      265
outside Russia                       1,710   (10.0)         -   (189)    1,899
Total crude oil produced            67,247    (1.5)      (37) (1,006)   68,290

The main oil  producing region  for the Company  is Western  Siberia where  we 
produced 56.5% of our crude oil in the nine months of 2012 (55.6% in the  nine 
months of  2011).  Since the  second  half of  2011,  the Company  managed  to 
stabilize crude  oil production  in the  region that  had been  declining  for 
several preceding years.

The continuing  trend  of  increasing  water cut  at  our  Yuzhnoye  Khylchuyu 
oilfield was the main reason for the production decrease in Russia.

The structural decrease of our international  production was a result of  sale 
of 10% of our share in Karachaganak Petroleum Operating consortium ("KPO"), an
upstream project in Kazakhstan, to a state-owned KazMunayGaz in the end of the
second quarter of 2012.

In addition  to  our  production, we  purchase  crude  oil in  Russia  and  on 
international  markets.  In  Russia  we  primarily  purchase  crude  oil  from 
affiliated producing companies and other  producers. Then we either refine  or 
export purchased crude oil.  Crude oil purchased  on international markets  is 
normally  used  for  trading  activities,  for  supplying  our   international 
refineries or for processing at third party refineries.

                                                3^rd quarter of
                                          2012                   2011
                                   (thousand              (thousand
                                              (thousand              (thousand
                                 of barrels) of tonnes) of barrels) of tonnes)
Crude oil purchases in Russia            462         63       1,122        153
Crude oil purchases                   31,409      4,285      47,095      6,425
internationally
Total crude oil purchased             31,871      4,348      48,217      6,578



                                                  9 months of
                                          2012                   2011
                                   (thousand              (thousand
                                              (thousand              (thousand
                                 of barrels) of tonnes) of barrels) of tonnes)
Crude oil purchases in Russia          1,767        241       2,016        275
Crude oil purchases
internationally                       87,997     12,005     110,668     15,098
Total crude oil purchased             89,764     12,246     112,684     15,373

Significant part of  our crude oil  purchases is for  processing. In the  nine 
months of 2012, we purchased
8,995 thousand  tonnes of  crude oil  to process  at our  and at  third  party 
refineries, compared to
9,823 thousand tonnes  in the nine  months of  2011. The decrease  was due  to 
higher volumes  of  own  supply.  Our purchases  for  trading  also  decreased 
compared to the nine months of 2011.

Production of gas  and natural gas  liquids. In  the nine months  of 2012,  we 
produced 14,771 million cubic meters (86.9  million BOE) of gas available  for 
sale (including our share  in equity affiliates), that  is 10.9% more than  in 
the nine months of 2011.

Our major gas production field is  the Nakhodkinskoe field, where we  produced 
5,942 million cubic meters of  natural gas in the  nine months of 2012  (6,192 
million cubic  meters in  the  nine months  of  2011). Our  international  gas 
production increased  by 36.1%,  mostly due  to growth  of our  production  in 
Uzbekistan. We produced 754 million cubic meters of gas from the Gissar  field 
(commercial production commenced in  December 2011), and increased  production 
from the Khauzak field by 570 million cubic meters, or
by 30.2%.

In the nine months of 2012, the output of natural gas liquids at the Group gas
processing plants in Western Siberia, Ural and Volgograd regions of Russia was
10.4 million BOE, compared to 9.5 million BOE in the nine months of 2011.

  Refining, marketing and trading

Refining. We own and  operate four refineries located  in European Russia  and 
three refineries located outside of Russia - in Bulgaria, Ukraine and Romania.
Moreover, we have a 45% interest in the Zeeland Refinery in the Netherlands.

In September 2012, we  increased our interest up  to 80% and obtained  control 
over ISAB, in which we previously held 60% (49% before April 2011). Therefore,
starting from September 2012, ISAB  became our consolidated subsidiary  rather 
than an equity affiliate.

Compared to the  nine months  of 2011, the  total volume  of refined  products 
produced by the Group  (including our share  in equity affiliates  production) 
remained on roughly  the same  level. Due to  scheduled overhauls,  production 
volumes of  our  Russian  refineries  decreased by  3.2%.  Production  of  our 
international refineries increased by 16.3% as a result of the increase of our
share in ISAB.

We invested, and continue to  invest, significant resources in our  refineries 
aiming at taking the leading position  in Russia in producing ecological  fuel 
of high quality standards.  Starting from July 1,  2012, all the gasoline  and 
most of  diesel  fuel produced  by  the Group  in  Russia comply  with  Euro-5 
standards.

Along with our own production of refined  products we can refine crude oil  at 
third party refineries depending  on market conditions  and other factors.  In 
2011, we  began  processing  our  crude  oil at  a  third  party  refinery  in 
Kazakhstan. In 2012, we restarted processing operations in Belarus.

The following table summarizes key figures for our refining activities.



                                                 3^rd quarter of 9 months of
                                                    2012    2011   2012   2011
                                                   (millions of US dollars)
Refining expenses at the Group refineries            430     375  1,108  1,048
- in Russia                                          310     307    838    821
- outside Russia ^(^1)                               120      68    270    227
Refining expenses at ISAB and Zeeland Refinery
^(2)                                                 166     226    645    648
Refining expenses at third party refineries           28       2     75      7
Capital expenditures                                 345     225    905    524
- in Russia                                          279     193    581    407
- outside Russia                                      66      32    324    117
                                                (thousands of barrels per day)
Refinery throughput at the Group refineries        1,153   1,084  1,069  1,078
- in Russia                                          889     912    879    912
- outside Russia ^(^1)                               264     172    190    166
Refinery throughput at ISAB and Zeeland
Refinery ^(2) ^(3)                                   192     247    233    230
Refinery throughput at third party refineries         55       6     55      7
Total refinery throughput                          1,404   1,337  1,357  1,315
                                                    (thousands of tonnes)
Refined products produced at the Group
refineries                                        13,808  12,962 38,169 38,247
- in Russia                                       10,674  10,934 31,370 32,401
- outside Russia ^(^1)                             3,134   2,028  6,799  5,846
Production of ISAB and Zeeland Refinery ^(2)       2,396   3,153  8,730  8,713
Refined products produced at third party
refineries                                           684      72  1,919    241
Total refined products produced                   16,888  16,187 48,818 47,201

^(1) Including 80% share of ISAB for September 2012.

^(2) Including 60% share of ISAB from April 2011 to August 2012 (49% share  of 
ISAB before April 2011) and 49% share of Zeeland Refinery.

^(3) Including refined product processed.



Marketing and  trading.Our marketing  and trading  activities mainly  include 
wholesale and bunkering operations in Western Europe, South-East Asia, Central
America and retail  operations in  the USA,  Central and  Eastern Europe,  the 
Baltic States and  other regions. In  Russia we purchase  refined products  on 
occasion, primarily to manage supply chain bottlenecks.

The Group retails  its refined  products in  26 countries  through nearly  5.6 
thousand petrol stations. Most of the stations operate under the LUKOIL brand.

The table below summarizes figures for our trading activities.

                                           3^rd quarter of  9 months of
                                              2012    2011   2012   2011
                                               (thousands of tonnes)
Retail sales                                 4,103   4,204 11,371 11,152
Wholesale sales                             24,874  21,932 71,809 65,257
Total refined products sales                28,977  26,136 83,180 76,409
Refined products purchased in Russia           385     643  1,136  1,539
Refined products purchased internationally  13,530  10,295 38,956 32,755
Total refined products purchased            13,915  10,938 40,092 34,294



Exports of crude oil  and refined products from  Russia. The volumes of  crude 
oil exported from Russia by our subsidiaries are summarized as follows:

                                           3^rd quarter of
                                  2012                        2011
                       (thousands of (thousands of (thousands of (thousands of
                            barrels)       tonnes)      barrels)       tonnes)
Exports of crude oil
using Transneft export
routes                        57,196         7,803        54,059         7,375
Exports of crude oil
bypassing Transneft            8,569         1,169         9,917         1,353
Total crude oil
exports                       65,765         8,972        63,976         8,728



                                             9 months of
                                  2012                        2011
                       (thousands of (thousands of (thousands of (thousands of
                            barrels)       tonnes)      barrels)       tonnes)
Exports of crude oil
using Transneft export
routes                       178,501        24,352       158,556        21,631
Exports of crude oil
bypassing Transneft           19,945         2,721        31,145         4,249
Total crude oil
exports                      198,446        27,073       189,701        25,880

In the nine months of 2012, our  export of crude oil from Russia increased  by 
4.6%, compared to the same period of 2011, and we exported 43.2% of our  total 
domestic crude oil production (40.7% in the nine months of 2011).

Almost all the  volume of crude  oil exported bypassing  Transneft was  routed 
through our own export infrastructure. The reduction of export through our own
export infrastructure  was mainly  caused  by a  decrease in  production  from 
Yuzhnoye Khylchuyu oilfield (1,010 thousand tonnes in the nine months of  2012 
compared to 2,794 thousand tonnes in the nine months of 2011).

In the nine months  of 2012, we  exported from Russia  16.9 million tonnes  of 
refined products, a  decrease of 9.4%,  compared to the  respective period  of 
2011. Primarily, we export from Russia diesel fuel, fuel oil and gasoil. These
products account for approximately 88% of our refined products export volumes.

The decrease in refined  products export and increase  in the export of  crude 
oil were both a result of a decrease in throughput at our refineries in Nizhny
Novgorod and Ukhta due to scheduled overhauls in the second and third quarters
of 2012, respectively.

In the nine months of 2012, our  revenue from export of crude oil and  refined 
products from Russia  both to Group  companies and third  parties amounted  to 
$19,696 million and $12,695 million, respectively
($18,607 million for crude oil and $13,887 million for refined products in the
nine months of 2011).



Main macroeconomic factors affecting our results of operations

  Changes in the price of crude oil and refined products

The price at  which we  sell crude  oil and  refined products  is the  primary 
driver of the  Group's revenues.  During the nine  months of  2012, the  Brent 
crude oil price  fluctuated between $88  and $128 per  barrel and reached  its 
peak of $128.18 in the beginning of  March. During the third quarter of  2012, 
average crude oil prices increased by  1.1% compared to the second quarter  of 
2012, quarter-end Brent price amounted to $111.00per barrel.

Substantially all  the  crude  oil  the Group  exports  is  Urals  blend.  The 
following table shows the average crude oil and refined product prices in  the 
respective periods of 2012 and 2011.

                         3^rd quarter of  Change,         9 months of  Change,
                          2012      2011        %      2012      2011        %
                     (in US dollars per barrel, except for figures in percent)
Brent crude             109.50    113.41    (3.4)    112.21  111.89        0.3
Urals crude (CIF
Mediterranean) ^ (1)    109.13    111.43    (2.1)    111.09  109.24        1.7
Urals crude (CIF
Rotterdam) ^ (1)        108.69    111.52    (2.5)    110.71  109.22        1.4
                      (in US dollars per metric tonne, except for figures in
                                             percent)
Fuel oil 3.5% (FOB
Rotterdam)              621.25    630.62    (1.5)    644.98  604.56        6.7
Diesel fuel 10 ppm
(FOB Rotterdam)         977.17    967.33      1.0    977.74  953.94        2.5
High-octane gasoline
(FOB Rotterdam)       1,062.57  1,026.87      3.5  1,051.97 1,001.82       5.0

Source: Platts.

^(1)The Company sells crude oil on foreign markets on various delivery  terms. 
Thus, our average realized sale price of oil on international markets  differs 
from the average prices  of Urals blend on  Mediterranean and Northern  Europe 
markets.

  Domestic crude oil and refined products prices

Substantially all  crude oil  produced  in Russia  is produced  by  vertically 
integrated oil companies  such as  ours. As  a result,  most transactions  are 
between affiliated entities within  vertically integrated groups. Thus,  there 
is no concept of a benchmark domestic market price for crude oil. The price of
crude oil  that  is  produced but  not  refined  or exported  by  one  of  the 
vertically  integrated   oil   companies   is  generally   determined   on   a 
transaction-by-transaction basis against a background of world market  prices, 
but with  no direct  reference or  correlation. At  any time  there may  exist 
significant price differences between regions for similar quality crude oil as
a result of the competition and economic conditions in those regions.

Domestic prices for refined  products are determined to  some extent by  world 
market prices,  but  they are  also  directly  affected by  local  demand  and 
competition.

The table  below  represents  average domestic  wholesale  prices  of  refined 
products in the respective periods of 2012 and 2011.

                         3^rd quarter of   Change, %   9 months of   Change, %
                            2012     2011               2012    2011
                        (in US dollars per metric tonne, except for figures in
                                               percent)
Fuel oil                  295.22   333.73     (11.5)  293.89  321.90     (8.7)
Diesel fuel               753.05   700.23        7.5  777.91  740.35       5.1
High-octane gasoline
(Regular)                 807.77   929.99     (13.1)  801.01  870.58     (8.0)
High-octane gasoline
(Premium)                 879.26   977.89     (10.1)  858.84  911.30     (5.8)

Source: InfoTEK (excluding VAT).



  Changes in the US dollar-ruble exchange rate and inflation

A substantial part of our  revenue is either denominated  in US dollars or  is 
correlated to some extent with US dollar  crude oil prices, while most of  our 
costs in  the Russian  Federation are  settled in  Russian rubles.  Therefore, 
ruble inflation and movements of  exchange rates can significantly affect  the 
results of  our  operations. In  particular,  the appreciation  of  the  ruble 
against the US  dollar generally  causes our costs  to increase  in US  dollar 
terms, and vice  versa. The  appreciation of the  purchasing power  of the  US 
dollar in the Russian Federation calculated  on the basis of the  ruble-dollar 
exchange rates and  the level  of inflation  in Russia  was 3.3%  in the  nine 
months of 2012, compared to the nine months of 2011.

The following table gives data  on inflation in Russia  and the change in  the 
ruble-dollar exchange rate.

                                            3^rd quarter of 9 months of
                                               2012    2011  2012  2011
Ruble inflation (CPI), %                        1.9   (0.3)   5.2   4.7
Change of the ruble-dollar exchange rate, %     5.8  (13.5)   4.0 (4.6)
Average exchange rate for the period

(ruble to US dollar)                          32.01   29.05 31.10 28.77
Exchange rate at the end of the period

(ruble to US dollar)                          30.92   31.88 30.92 31.88

  Tax burden

The following table represents average enacted rates for taxes specific to the
oil industry in Russia for the respective periods.

                                                       3^rd quarter of Change,
                                                     2012^(1) 2011^(1)       %
Export tariffs on crude oil               $/tonne      366.27   442.45  (17.2)
Export tariffs on refined products
Middle distillates (jet fuel), diesel
fuel and gasoils                          $/tonne      241.70   296.42  (18.5)
Light distillates
gasoline                                  $/tonne      329.63   398.18  (17.2)
straight-run gasoline                     $/tonne      329.63   398.18  (17.2)
Liquid fuels (fuel oil)                   $/tonne      241.70   206.59    17.0
Mineral extraction tax
Crude oil                                RUR/tonne   5,146.30 4,544.85    13.2
Natural gas                            RUR/1,000 m^3   251.00   237.00     5.9

^(1) Average values.

                                                           9 months of Change,
                                                     2012^(1) 2011^(1)       %
Export tariffs on crude oil              $/tonne       403.30   411.01   (1.9)
Export tariffs on refined products
Middle distillates (jet fuel), diesel
fuel and gasoils                         $/tonne       266.14   276.91   (3.9)
Light distillates
gasoline                                 $/tonne       362.95   334.72     8.4
straight-run gasoline                    $/tonne       362.95   322.87    12.4
Liquid fuels (fuel oil)                  $/tonne       266.14   188.92    40.9
Mineral extraction tax
Crude oil                               RUR/tonne   5,085.65 4,368.40    16.4
Natural gas                           RUR/1,000 m^3   251.00   237.00     5.9

^^(1)Average values.

Tax rates set in rubles and translated at the average exchange rates are as
follows:

                                                     Change,
                                     3^rd quarter of
                                   2012^(1) 2011^(1)       %
Mineral extraction tax
Crude oil                $/tonne     160.79   156.47     2.8
Natural gas            $/1,000 m^3     7.84     8.16   (3.9)

^(1) Average values.

                                                     Change,
                                         9 months of
                                   2012^(1) 2011^(1)       %
Mineral extraction tax
Crude oil                $/tonne     163.53   151.86     7.7
Natural gas            $/1,000 m^3     8.07     8.24   (2.1)

^^(1)Average values.

The rates  of taxes  specific to  the oil  industry in  Russia are  linked  to 
international crude oil prices and are changed in line with them. The  methods 
to determine the rates for such taxes are presented below.

Crude oil extraction tax rate.  The base rate is  446 rubles per metric  tonne 
extracted  (419  rubles  in  2011)  and  it  is  adjusted  depending  on   the 
international market price of Urals blend and the ruble exchange rate. The tax
rate is zero when the average Urals blend international market price for a tax
period is less  than or  equal to  $15.00 per  barrel. Each  $1.00 per  barrel 
increase in the international Urals blend price over the threshold ($15.00 per
barrel) results in an increase  of the tax rate  by $1.61 per tonne  extracted 
(or $0.22 per barrel extracted using a conversion factor of 7.33).

The base  rate for  2013  is currently  set at  470  rubles per  metric  tonne 
extracted. However, the rate may be amended by the authorities later on.

The crude oil  extraction tax  rate varies  depending on  the development  and 
depletion of a particular oilfield. The tax rate is zero for extra-heavy crude
oil and for  crude oil  produced in certain  regions of  Eastern Siberia,  the 
Caspian Sea and the Nenetsky Autonomous District, depending on the period  and 
volume of production.

The Group produces crude oil in the  Caspian Sea. In the nine months of  2012, 
the amount of  incentive was  relatively insignificant,  but we  expect it  to 
increase as the production volumes grow.

Natural gas extraction  tax rate.The  mineral extraction tax  on natural  gas 
production is calculated using a flat rate.  In 2011, the rate was 237  rubles 
per thousand cubic  meters. On January  1, 2012,  the rate was  raised to  251 
rubles per thousand cubic meters.

Crude oil export duty rateis calculated  on a progressive scale. The rate  is 
zero when the average Urals blend  international market price is less than  or 
equal to approximately $15.00  per barrel ($109.50 per  metric tonne). If  the 
Urals blend price is between $15.00 and $20.00 per barrel ($146.00 per  metric 
tonne), each $1.00 per  barrel increase in the  Urals blend price over  $15.00 
results in an increase of the crude  oil export duty rate by $0.35 per  barrel 
exported. If the  Urals blend price  is between $20.00  and $25.00 per  barrel 
($182.50 per metric tonne), each $1.00 per barrel increase in the Urals  blend 
price over $20.00 results in an increase of the crude oil export duty rate  by 
$0.45 per barrel exported. Each $1.00  per barrel increase in the Urals  blend 
price over $25.00 per barrel  results in an increase  of the crude oil  export 
duty rate no more than by $0.65 per barrel exported. Starting from October  1, 
2011, the maximum increase of  export duty rate is  $0.60 per barrel for  each 
$1.00 per barrel increase in the Urals blend price.

The crude  oil  export duty  rate  is revised  monthly  on the  basis  of  the 
immediately preceding one-month period of crude oil price monitoring.

A special export duty  regime is in place  for certain greenfields.  Effective 
from December 2010, the list of  the oilfields where the reduced rate  applies 
also includes our  Yu. Korchagin and  V. Filanovsky oilfields  located in  the 
Caspian Sea.

Export duty rates on refined  products prior to 2011  were set by the  Russian 
government. The rate of  export duty depended on  internal demand for  refined 
products and international  crude oil market  conditions. Starting from  2011, 
export duty  rates  on refined  products  are calculated  by  multiplying  the 
current crude oil  export duty rate  by a coefficient  according to the  table 
below.

                                            Before October 1, After October 1,
                                                         2011             2011
Multiplier for:
Light distillates (except for gasolines),
middle distillates (jet fuel), diesel fuel
and gasoils                                             0.670            0.660
Gasolines^(1)                                           0.467            0.900
Liquid fuels (fuel oil)                                 0.467            0.660
Motor and other oils                                    0.467            0.660
Other products                                          0.467            0.660

^(1) Starting from May  2011, a coefficient for  gasoline export duty rate  is 
set at 0.9.

Crude oil and refined products exported to the member countries of the  Custom 
Union - Belarus and Kazakhstan, are not subject to export duties.

Excise 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.

In other  countries where  the  Group operates,  excises  are paid  either  by 
producers or retailers depending on the local legislation.

Starting from 2011, excise rates on refined products in Russia were  increased 
and tied to the ecological class of fuel. Excise tax rates for the  respective 
periods of 2012 and 2011 are listed below:

                                  3^rd quarter of Change, %
                                    2012     2011
Gasoline
Below Euro-3          RUR/tonne 8,225.00 5,995.00      37.2
Euro-3                RUR/tonne 7,882.00 5,672.00      39.0
Euro-4                RUR/tonne 6,822.00 5,143.00      32.6
Euro-5                RUR/tonne 5,143.00 5,143.00         -
Diesel fuel
Below Euro-3          RUR/tonne 4,300.00 2,753.00      56.2
Euro-3                RUR/tonne 4,300.00 2,485.00      73.0
Euro-4                RUR/tonne 3,562.00 2,247.00      58.5
Euro-5                RUR/tonne 2,962.00 2,247.00      31.8
Motor oils            RUR/tonne 6,072.00 4,681.00      29.7
Straight-run gasoline RUR/tonne 7,824.00 6,089.00      28.5



                              3^rd quarter of Change, %
                                 2012    2011
Gasoline
Below Euro-3          $/tonne  256.97  206.40      24.5
Euro-3                $/tonne  246.26  195.28      26.1
Euro-4                $/tonne  213.14  177.06      20.4
Euro-5                $/tonne  160.68  177.06     (9.3)
Diesel fuel
Below Euro-3          $/tonne  134.34   94.78      41.7
Euro-3                $/tonne  134.34   85.55      57.0
Euro-4                $/tonne  111.29   77.36      43.9
Euro-5                $/tonne   92.54   77.36      19.6
Motor oils            $/tonne  189.71  161.16      17.7
Straight-run gasoline $/tonne  244.45  209.63      16.6



                                      9 months of Change, %
                                    2012     2011
Gasoline
Below Euro-3          RUR/tonne 7,892.88 5,995.00      31.7
Euro-3                RUR/tonne 7,549.88 5,672.00      33.1
Euro-4                RUR/tonne 6,822.00 5,143.00      32.6
Euro-5                RUR/tonne 6,258.25 5,143.00      21.7
Diesel fuel
Below Euro-3          RUR/tonne 4,165.82 2,753.00      51.3
Euro-3                RUR/tonne 3,977.18 2,485.00      60.0
Euro-4                RUR/tonne 3,562.00 2,247.00      58.5
Euro-5                RUR/tonne 3,360.54 2,247.00      49.6
Motor oils            RUR/tonne 6,072.00 4,681.00      29.7
Straight-run gasoline RUR/tonne 7,824.00 6,089.00      28.5



                                9 months of Change, %
                                2012   2011
Gasoline
Below Euro-3          $/tonne 253.80 208.40      21.8
Euro-3                $/tonne 242.77 197.17      23.1
Euro-4                $/tonne 219.37 178.79      22.7
Euro-5                $/tonne 201.24 178.79      12.6
Diesel fuel
Below Euro-3          $/tonne 133.96  95.70      40.0
Euro-3                $/tonne 127.89  86.39      48.0
Euro-4                $/tonne 114.54  78.11      46.6
Euro-5                $/tonne 108.06  78.11      38.3
Motor oils            $/tonne 195.25 162.72      20.0
Straight-run gasoline $/tonne 251.59 211.67      18.9



Income tax. Starting from January 1, 2009, the Federal income tax rate is 2.0%
and the regional income tax rate  varies between 13.5% and 18.0%. The  Group's 
foreign operations are  subject to taxes  at the tax  rates applicable to  the 
jurisdictions in which they operate.

Until January 1, 2012, there were no provisions in the taxation legislation of
the Russian Federation  to permit  the Group to  reduce taxable  profits of  a 
Group company by offsetting tax losses  of another Group company against  such 
profits. Tax losses could be fully or partially used to offset taxable profits
in the same company in any of the ten years following the year of loss.

Starting from January 1,  2012, if certain conditions  are met, taxpayers  are 
able to pay 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.  Certain  Group 
companies met  the  legislative requirements  and  pay  income tax  as  a  CTG 
starting from the first quarter of 2012.

Losses generated by  a taxpayer  before joining a  CTG are  not available  for 
offset against taxable profits of other participants of the CTG. However, if a
taxpayer leaves a CTG, such losses  again become available for offset  against 
future profits generated by  the same taxpayer. The  expiration period of  the 
losses is extended to  take account of  any time spent within  a CTG when  the 
losses were unavailable for use.

  Transportation of crude oil and refined products in Russia

The main Russian crude oil production  regions are remote from the main  crude 
oil and refined products  markets. Therefore, access  by crude oil  production 
companies to the markets is dependent on the extent of diversification of  the 
transport infrastructure and access to it. As a result, transportation cost is
an important macroeconomic factor affecting our net income.

Transportation of  crude  oil produced  in  Russia to  refineries  and  export 
destinations is performed primarily through  the trunk oil pipeline system  of 
state-owned OAO AK Transneft or by railway transport.

Transportation of refined products in Russia is performed by railway transport
and the  pipeline  system  of OAOAKTransnefteproduct.  The  Russian  railway 
infrastructure is  owned and  operated  by OAO  Russian Railways.  Both  these 
companies are state-owned. We transport the major part of our refined products
by railway transport.

In Russia, the gas is mostly sold at the wellhead and then transported through
the Unified Gas Supply System ("UGSS"). The UGSS is responsible for gathering,
transporting,  dispatching  and  delivering  substantially  all  natural   gas 
supplies in Russia and is owned  and operated by OAO Gazprom ("Gazprom").  The 
Federal Service for Tariffs  of the Russian  Federation regulates natural  gas 
transportation tariffs. We  are not able  to sell our  gas other than  through 
UGSS.



Three and nine  months ended  September30,2012, compared to  three and  nine 
months ended September30,2011

The table below presents our consolidated statements of income for the periods
indicated.

                                             3^rd quarter of       9 months of
                                               2012     2011     2012     2011
                                               (millions of US dollars)
 Revenues
 Sales (including excise and export
  tariffs)                                   35,494   34,563  103,152   99,101

 Costs and other deductions
 Operating expenses                        (2,349)  (2,280)  (6,891)  (6,858)
 Cost of purchased crude oil, gas and
  products                                 (16,343) (15,051) (47,127) (43,058)
 Transportation expenses                   (1,523)  (1,604)  (4,625)  (4,677)
 Selling, general and administrative
  expenses                                    (904)  (1,043)  (2,665)  (2,845)
 Depreciation, depletion and amortization  (1,309)  (1,137)  (3,581)  (3,345)
 Taxes other than income taxes             (3,309)  (3,442) (10,248)  (9,811)
 Excise and export tariffs                 (5,591)  (6,128) (17,258) (16,519)
 Exploration expense                          (52)    (196)    (199)    (309)
 (Loss) gain on disposals and impairments
  of assets                                    (29)     (11)      137    (171)
 Income from operating activities            4,085    3,671   10,695   11,508

 Interest expense                            (109)    (182)    (430)    (532)
 Interest and dividend income                   62       53      194      144
 Equity share in income of affiliates           64      168      408      510
 Currency translation loss                    (97)    (154)    (493)    (312)
 Other non-operating income (expense)           41     (48)     (26)      287
 Income before income taxes                  4,046    3,508   10,348   11,605

 Current income taxes                        (613)  (1,091)  (2,205)  (2,071)
 Deferred income taxes                          37     (27)       89    (500)
 Total income tax expense                    (576)  (1,118)  (2,116)  (2,571)

 Net income                                  3,470    2,390    8,232    9,034

 Net loss (income) attributable to
  noncontrolling interests                       39    (146)       84     (22)

 Net income attributable to OAO LUKOIL       3,509    2,244    8,316    9,012

  Earning per share of common stock
  attributable to
 OAO LUKOIL (in US dollars):

  
 Basic                                        4.65     2.88    10.91    11.55
 Diluted                                      4.55     2.83    10.68    11.31

The analysis of the main financial  indicators of the financial statements  is 
provided below.

  Sales revenues

Sales breakdown                                 3^rd quarter of    9 months of
                                                   2012    2011    2012   2011
                                                   (millions of US dollars)
Crude oil
Export and sales on international markets other
than CIS                                          6,265   8,056  18,948 21,827
Export and sales to CIS                             395     654   1,243  1,885
Domestic sales                                      446     366   1,093  1,209
                                                  7,106   9,076  21,284 24,921
Refined products
Export and sales on international markets
Wholesale                                        19,075  16,160  55,957 48,426
Retail                                            2,867   3,055   7,973  8,489
Domestic sales
Wholesale                                         2,303   2,033   5,854  5,530
Retail                                            2,249   2,324   6,276  5,694
                                                 26,494  23,572  76,060 68,139
Petrochemicals
Export and sales on international markets           232     277     776    849
Domestic sales                                       73     241     191    744
                                                    305     518     967  1,593
Gas and gas products
Export and sales on international markets           565     475   1,781  1,356
Domestic sales                                      276     261     789    732
                                                    841     736   2,570  2,088
Sales of energy and related services                296     229     983  1,137
Other
Sales on international markets                      238     243     659    666
Domestic sales                                      214     189     629    557
                                                    452     432   1,288  1,223
Total sales                                      35,494  34,563 103,152 99,101



Sales volumes                                  3^rd quarter of     9 months of
                                                  2012    2011    2012    2011
Crude oil                                          (thousands of barrels)
Export and sales on international markets
other than CIS                                   57,745 71,871 172,306 199,743
Export and sales to CIS                           7,103 12,608  23,903  35,507
Domestic sales                                    8,356  7,858  21,763  25,047
                                                73,204  92,337 217,972 260,297
Crude oil                                           (thousands of tonnes)
Export and sales on international markets
other than CIS                                   7,878   9,805  23,507  27,250
Export and sales to CIS                            969   1,720   3,261   4,844
Domestic sales                                   1,140   1,072   2,969   3,417
                                                 9,987  12,597  29,737  35,511
Refined products                                    (thousands of tonnes)
Export and sales on international markets
Wholesale                                       21,541  18,859  63,304  56,926
Retail                                           1,765   1,840   4,908   5,181
Domestic sales
Wholesale                                        3,333   3,073   8,505   8,331
Retail                                           2,338   2,364   6,463   5,971
                                                28,977  26,136  83,180  76,409
Total sales volume of crude oil and refined
products                                        38,964  38,733 112,917 111,920





Realized average sales prices                3^rd quarter of       9 months of
                                               2012     2011     2012     2011
Average realized price
international
Oil (excluding CIS)             ($/barrel)   108.52   112.09   109.97   109.28
Oil (CIS)                       ($/barrel)    55.49    51.96    51.99    53.10
Refined products
Wholesale                       ($/tonne)    885.54   856.90   883.94   850.69
Retail                          ($/tonne)  1,624.55 1,660.38 1,624.60 1,638.55
Average realized price within
Russia
Oil                             ($/barrel)    53.32    46.67    50.21    48.28
Refined products
Wholesale                       ($/tonne)    690.96   661.60   688.25   663.73
Retail                          ($/tonne)    962.37   982.81   971.17   953.57

During the third quarter of 2012,  our revenues increased by $931 million,  or 
by 2.7%, compared to  the same period  of 2011, crude  oil sales decreased  by 
$1,970  million,   or  by   21.7%,  refined   products  sales   increased   by 
$2,922million, or by 12.4%.

During the nine months of 2012,  our revenues increased by $4,051 million,  or 
by 4.1%, compared  to the same  period of  2011. Our revenues  from crude  oil 
sales decreased by  $3,637 million, or  by 14.6%. Our  revenues from sales  of 
refined products increased by $7,921million, or by 11.6%.

Sales of crude oil

Compared to the respective periods of 2011, our total crude oil sales revenues
decreased by
$1,970 million, or by 21.7%, in the third  quarter of 2012 as a result of  the 
decrease in sales volumes and  prices and by $3,637  million, or by 14.6%,  in 
the nine months of 2012 as a result of decreased sales volumes.

Our sales volumes  decreased by  20.7%, or by  2,610 thousand  tonnes, in  the 
third quarter of 2012 and by 16.3%,  or by 5,774 thousand tonnes, in the  nine 
months of 2012, because of lower  scale of trading operations and decrease  in 
production.

During the third quarter and the nine  months of 2012, our revenue from  crude 
oil export from Russia both to the Group companies and third parties  amounted 
to $6,504 million and $19,696 million, respectively.

    Sales of refined products

Compared to  the same  periods of  2011,  our revenue  from the  wholesale  of 
refined products outside of Russia increased  by $2,915 million, or by  18.0%, 
in the third quarter of  2012 as a result of  an increase in sales volumes  by 
14.2% and prices by 3.3%, and increased by $7,531 million, or by 15.6%, in the
nine months of 2012 due to an increase in sales volumes by 11.2% and prices by
3.9%.

Our revenue from international retail sales  decreased by $188 million, or  by 
6.2%, in the third  quarter of 2012 and  by $516 million, or  by 6.1%, in  the 
nine months of  2012 due to  a decrease in  average prices by  2.2% and  sales 
volumes by 4.1% in the third quarter of  2012, and due to a decrease in  sales 
volumes by 5.3% in the nine months of 2012. Retail sales volumes decreased  by 
75 thousand tonnes in the third quarter of 2012 and by 273 thousand tonnes  in 
the nine months of  2012, mainly as  a result of  restructuring of our  retail 
network in the USA.

Our revenue from  the wholesale  of refined  products on  the domestic  market 
increased by $270  million, or  by 13.3%,  in the  third quarter  of 2012  and 
increased by $324 million, or by 5.9%, in the nine months of 2012. Our average
realized price increased by 4.4% and by 3.7%, respectively. Our sales  volumes 
also increased by 8.5% in  the third quarter of 2012  and by 2.1% in the  nine 
months of 2012.

Our revenue from retail sales in Russia decreased by $75 million, or by  3.2%, 
in the third quarter of  2012 and increased by $582  million, or by 10.2%,  in 
the nine months of  2012. Domestic retail sales  volumes decreased by 1.1%  in 
the third quarter of  2012 and increased  by 8.2% in the  nine months of  2012 
resulting from the increase in domestic demand for motor fuels. Average retail
prices in Russia decreased by 2.1%, compared to the third quarter of 2011, and
increased by 1.8%, compared to the nine months of 2011.

In the third quarter and the nine  months of 2012, our revenue from export  of 
refined products  from  Russia  both  to Group  companies  and  third  parties 
amounted to $3,906 million and $12,695 million, respectively.

Sales of petrochemical products

In the third quarter of 2012, our revenue from sales of petrochemical products
decreased by $213million, or by  41.1%, and in the  nine months of 2012,  our 
revenue decreased by $626 million, or by  39.3%, mainly as a consequence of  a 
fire on  our  petrochemical  plant  in Stavropol,  Russia  in  December  2011. 
Domestic sales volumes dropped by  71.1% in the third  quarter of 2012 and  by 
73.9% in the  nine months of  2012. International sales  volumes decreased  by 
15.2% in the third quarter and by  3.1% the nine months of 2012. The  decrease 
of international sales was due to maintenance works at our petrochemical plant
Karpatnaftochim Ltd. in Ukraine.  Our international realized prices  decreased 
by 0.6% in the third quarter of 2012 and by 4.7% in the nine months of 2012.

    Sales of gas and gas products

Sales of gas and gas refined products increased by $105 million, or by  14.3%, 
in the third quarter  of 2012 and by  $482 million, or by  23.1%, in the  nine 
months of 2012.

Gas products wholesales revenue  decreased by $16 million,  or by 5.0% in  the 
third quarter of 2012 and increased by $101 million, or by 11.5%, in the  nine 
months of 2012. Average realized  wholesale prices for gas products  decreased 
by 15.6% in the third quarter of 2012 and by 5.4% in the nine months of  2012, 
while sales volumes increased by 12.5% and 17.8%, respectively.

Retail gas products  revenue remained flat  to the third  quarter of 2011  and 
decreased by $11  million, or by  2.4%, compared  to the nine  months of  2011 
because of price factor.

Natural gas sales revenue increased by $101 million, or by 51.7%, in the third
quarter of 2012 and by
$348 million, or by 57.6%, in the nine months of 2012. This revenue  increased 
both domestically and internationally. At the domestic market, this was mainly
a result of the increase of sales  price to Gazprom by 30.8%. The main  reason 
for the rise  of revenue  outside of  Russia was  the increase  of both  sales 
volumes and prices in Uzbekistan.

    Domestic sales of energy and related services

We sell  substantially  all  our energy  and  related  services  domestically. 
International sales are relatively insignificant.

Our revenue from sales of electricity, heat and related services increased  by 
$67 million, or by 29.3%, in the  third quarter of 2012 and decreased by  $154 
million, or by 13.5%,  in the nine  months of 2012.  These changes in  revenue 
were a  result of  changes  in volume  of resale  operations  as a  result  of 
alteration of scheme of electricity supplies to our subsidiaries.

    Sales of other products

Other  sales  include   non-petroleum  sales  through   our  retail   network, 
transportation services,  rental revenue,  crude oil  extraction and  refining 
services, and other  revenue of  our production and  marketing companies  from 
sales of goods and services not related to our primary activities.

In the third  quarter of 2012,  other sales  increased by $20  million, or  by 
4.6%, and in the nine months of 2012, other sales increased by $65 million, or
by 5.3%. Other sales include $22 million of ISAB refining services revenue for
September 2012.

  Operating expenses

Operating expenses include the following:

                                                   3^rd quarter of 9 months of
                                                      2012    2011  2012  2011
                                                    (millions of US dollars)
Hydrocarbon extraction expenses                        971     955 2,821 2,842
Own refining expenses                                  430     375 1,108 1,048
Refining expenses at third parties and affiliated
refineries                                             194     228   720   655
Cost of processing operations at ISAB                   16       -    16     -
Expenses for crude oil transportation to
refineries                                             325     267   914   807
Power generation and distribution expenses             146     108   463   477
Petrochemical expenses                                  72      89   230   250
Other operating expenses                               195     258   619   779
Total operating expenses                             2,349   2,280 6,891 6,858

The method of allocation of operating expenses above differs from the approach
used in preparing the  data for Note 20  "Segment information" to our  interim 
consolidated financial statements. Expenditures  in the segment reporting  are 
grouped depending  on  the segment  to  which a  particular  company  belongs. 
Operating expenses for the purposes of this analysis are grouped based on  the 
nature of the costs incurred.

Our operating expenses  increased by  $69 million, or  by 3.0%,  in the  third 
quarter of 2012 and by
$33 million, or by 0.5%, in the nine months of 2012.

    Hydrocarbon extraction expenses

Our extraction expenses include expenditures related to repairs of  extraction 
equipment, labor costs, expenses on artificial stimulation of reservoirs, fuel
and electricity costs,  cost of  extraction of natural  gas liquids,  property 
insurance of extraction equipment and other similar costs.

In the  third  quarter of  2012,  our  extraction expenses  increased  by  $16 
million, or by 1.7%, and in the  nine months of 2012, our extraction  expenses 
decreased by $21  million, or by  0.7%. Increase in  labor costs, repairs  and 
artificial stimulation of  reservoirs was  compensated for  by devaluation  of 
ruble against  the  US dollar.  Our  average hydrocarbon  extraction  expenses 
remained at the same level of $5.05 per  BOE as in the third quarter of  2011, 
but decreased from $4.99per BOE  in the nine months of  2011 to $4.92 per  BOE 
the nine months of 2012, or by 1.4%.

    Own refining expense

Our own refining expenses increased by $55 million, or by 14.7%, in the  third 
quarter of 2012, and by
$60 million, or by 5.7%, in the nine months of 2011.

Refining expenses at our domestic refineries remained nearly flat to the third
quarter of 2011, and in the nine  months of 2012 increased by $17 million,  or 
by 2.1%.  The increase  of expenses  due  to higher  consumption and  cost  of 
additives was compensated for by the ruble devaluation and lower energy cost.

Refining expenses at our  international refineries increased  by 76.5%, or  by 
$52 million, in the third quarter of 2012 and by 18.9%, or by $43 million,  in 
the nine months of 2012. The increase was mainly due to obtaining control over
ISAB in  September  2012 (see  Refining,  marketing and  trading  section  for 
details).

    Refining expenses at third party and affiliated refineries

Along with  our own  production of  refined products  we have  the ability  to 
refine crude oil at third party  and affiliated refineries both in Russia  and 
abroad.

In the third quarter and the nine  months of 2012, refining expenses at  third 
party and  affiliated refineries  decreased by  14.9% and  increased by  9.9%, 
respectively. The decrease to the third  quarter of 2011 was due to  obtaining 
control over  ISAB in  September  2012 (see  Refining, marketing  and  trading 
section for details). The increase compared to the nine months of 2011 was due
to crude oil  processing at  third party  refineries in  Belorussia since  the 
beginning of 2012.

    Expenses for crude oil transportation to refineries

Expenses for crude oil transportation to refineries include pipeline, railway,
freight and other costs related  to delivery of the  Group's own crude oil  to 
refineries for further processing.

In the  third  quarter of  2012,  expenses  for crude  oil  transportation  to 
refineries increased by $58 million, or by 21.7%, while in the nine months  of 
2012 they increased by $107 million, or by 13.3%. The increase was largely due
to supplies  of  our crude  oil  to the  refineries  in Belorussia,  where  we 
commenced crude oil processing in the first quarter of 2012.

    Petrochemical expenses

In the third quarter of 2012,  operating expenses of our petrochemical  plants 
decreased by $17 million, or by 19.1%, compared to the third quarter of  2011, 
and in the nine months of 2012, these expenses decreased by $20 million, or by
8.0%, compared  to the  nine months  of 2011.  Despite the  sharp decrease  in 
production as a result of the fire that destroyed the ethylene production unit
at our plant  in Stavropol,  Russia, operating  expenses of  the plant  didn't 
decrease significantly due to  overhauls at other plant  units. The effect  of 
the increased production at Group's  other petrochemical plants was  partially 
compensated by the devaluation of local currencies against the US dollar.

    Power generation and distribution expenses

Power generation  and distribution  expenses increased  by $38million,  or  by 
35.2%, in the third quarter of 2012 and decreased by $14 million, or by  2.9%, 
in the nine months of 2012. These changes in expenses were a result of changes
in volume  of  resale  operationsas  a  result  of  alteration  of  scheme  of 
electricity supplies to our subsidiaries.

    Other operating expenses

Other  operating  expenses  include  expenses  of  the  Group's  upstream  and 
downstream entities  that  do not  relate  to their  core  activities,  namely 
rendering of transportation and extraction  services, costs of other  services 
provided and goods  sold by  our production  and marketing  companies, and  of 
non-core businesses of the Group.

In the  third quarter  of  2012, other  operating  expenses decreased  by  $63 
million, or by 24.4%, and in the nine months of 2012, other operating expenses
decreased by $160 million, or by 20.5%.

  Cost of purchased crude oil, gas and products

Cost of purchased crude oil, gas and products includes cost of crude oil and

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