LukOil(OAO) LKOB 3rd Quarter Results

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

RNS Number : 0801S
LukOil (OAO)
27 November 2012




                                  OAO LUKOIL

                                      

                  INTERIM CONSOLIDATED FINANCIAL STATEMENTS

                                      

                    (prepared in accordance with US GAAP)

                                      

   As of and for the three and nine month periods ended September 30, 2012

                                      

                                 (unaudited)



These interim consolidated financial statements were prepared by OAO LUKOIL in
accordance with US GAAP and have not been audited by our independent  auditor. 
If these  financial statements  are audited  in the  future, the  audit  could 
reveal differences in our consolidated financial results and we can not assure
that any such differences would not be material.





                       Independent Accountants' Report



The Board of Directors

OAO LUKOIL:



We have reviewed  the accompanying  consolidated balance sheet  of OAO  LUKOIL 
andsubsidiaries as of September 30, 2012, the related consolidated statements
of comprehensive  income  for the  three-month  and nine-month  periods  ended 
September 30,  2012  and 2011,  and  the related  consolidated  statements  of 
stockholders' equity and cash flows for the nine-month periods ended September
30, 2012 and 2011. Thisinterimfinancial information is the responsibility of
the Company's management.

We conducted  our reviews  in  accordance with  standards established  by  the 
American Institute  of  Certified  Public Accountants.  A  review  of  interim 
financial information consists principally  of applying analytical  procedures 
and making  inquiries  of persons  responsible  for financial  and  accounting 
matters. It  is  substantially  less  in scope  than  an  audit  conducted  in 
accordance with auditing standards generally accepted in the UnitedStates  of 
America, the objective of which is the expression of an opinion regarding  the 
financial information taken as a whole. Accordingly, we do not express such an
opinion.

Based on our  reviews, we  are not aware  of any  material modifications  that 
should be made to the accompanying  interim financial information for them  to 
be in conformity with accounting  principles generally accepted in the  United 
States of America.



ZAO KPMG

Moscow, Russian Federation

November 21, 2012



ZAO KPMG, a company incorporated under  the Laws of the Russian Federation,  a 
subsidiary of  KPMG Europe  LLP, and  a member  firm of  the KPMG  network  of 
independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity.



OAO LUKOIL

Consolidated Balance Sheets

(Millions of US dollars, unless otherwise noted)



                                                As of September              

                                                       30, 2012 As of December

                                          Note      (unaudited)       31, 2011
Assets
Current assets
Cash and cash equivalents                  4              2,435          2,753
Short-term investments                                      258            157
Accounts receivable, net                   5              9,451          8,921
Inventories                                               8,715          7,533
Prepaid taxes and other expenses                          3,188          3,219
Other current assets                                        913            946
Total current assets                                     24,960         23,529
Investments                                6              4,013          5,952
Property, plant and equipment             7, 8           63,912         56,803
Deferred income tax assets                                  614            591
Goodwill and other intangible assets       9              1,962          1,344
Other non-current assets                                  1,287          2,973
Total assets                                             96,748         91,192
Liabilities and Equity
Current liabilities
Accounts payable                                          6,839          5,995
Short-term borrowings and current
portion of long-term debt                  10               821          1,792
Taxes payable                                             2,930          2,271
Other current liabilities                                 1,227          1,050
Total current liabilities                                11,817         11,108
Long-term debt                           11, 14           5,668          7,300
Deferred income tax liabilities                           3,716          2,790
Asset retirement obligations               7              2,190          2,120
Other long-term liabilities                                 481            408
Total liabilities                                        23,872         23,726
Equity                                     13
OAO LUKOIL stockholders' equity
Common stock                                                 15             15
Treasury stock, at cost                                 (5,189)        (4,081)
Equity-linked notes                                     (2,500)          (980)
Additional paid-in capital                                5,030          4,798
Retained earnings                                        74,532         67,940
Accumulated other comprehensive loss                       (44)           (54)
Total OAO LUKOIL stockholders' equity                    71,844         67,638
Noncontrolling interests                                  1,032          (172)
Total equity                                             72,876         67,466
Total liabilities and equity                             96,748         91,192



President of OAO LUKOIL  Vice-president - Chief accountant of OAO LUKOIL
Alekperov V.Y.           Khoba L.N.



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





OAO LUKOIL

Consolidated Statements of Comprehensive Income

(Millions of US dollars, unless otherwise noted)



                                             For the For the nine For the nine
                          For the three three months
                           months ended        ended months ended months ended
                          September 30,    September    September    September
                                   2012     30, 2011     30, 2012     30, 2011

                     Note   (unaudited)  (unaudited)  (unaudited)  (unaudited)
Revenues
Sales (including
excise and export
tariffs)              20         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 expenses               (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  6              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               3           (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
Earnings per share
of common stock
attributable to OAO
LUKOIL (US dollars):  13
Basic                              4.65         2.88        10.91        11.55
Diluted                            4.55         2.83        10.68        11.31
Other comprehensive
income, net of tax:
Defined benefit
pension plan:
Prior service cost
arising during the
period                                3            4           10           11
Unrealized gains on
securities:
Unrecognized gain on
available-for-sale
securities                            -          (2)            -          (1)
Other comprehensive
income                                3            2           10           10
Comprehensive income              3,473        2,392        8,242        9,044
Comprehensive loss
(income)
attributable to
noncontrolling
interests                            39        (146)           84         (22)
Comprehensive income
attributable to OAO
LUKOIL                            3,512        2,246        8,326        9,022





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





OAO LUKOIL

Consolidated Statements of Stockholders' Equity (unaudited)

(Millions of US dollars, unless otherwise noted)



                                                                Accumulated

                                          Additional                  other                Noncontrol-
                                                                                 Total OAO
                  Common Treasury Equity-    paid-in Retained comprehensive        LUKOIL        ling   Total
                                   linked                                   stockholders'
                   stock    stock   notes    capital earnings income (loss)        equity  interests  equity
Ninemonthsended

September 30,
2012
Balance as of
December 31, 2011     15  (4,081)   (980)      4,798   67,940          (54)         67,638       (172)  67,466
Net income (loss)      -        -       -          -    8,316             -          8,316        (84)   8,232
Other
comprehensive
income                 -        -       -          -        -            10             10           -      10
Comprehensive
income (loss)                                           8,316            10          8,326        (84)   8,242
Dividends on
common stock           -        -       -          -  (1,724)             -        (1,724)           - (1,724)
Effect of stock
compensation plan      -        -       -         74        -             -             74           -      74
Stock purchased        -    (128) (2,500)          -        -             -        (2,628)           - (2,628)
Equity-linked
notes conversion       -    (980)     980          -        -             -              -           -       -
Changes in
noncontrolling
interests              -        -       -        158        -             -            158       1,288   1,446
Balance as of

September 30,
2012                  15  (5,189) (2,500)      5,030   74,532          (44)         71,844       1,032  72,876
Nine months ended

September 30,
2011
Balance as of
December 31, 2010     15  (3,683)   (980)      4,700   59,212          (67)         59,197         411  59,608
Net income             -        -       -          -    9,012             -          9,012          22   9,034
Other
comprehensive
income                 -        -       -          -        -            10             10           -      10
Comprehensive
income                                                  9,012            10          9,022          22   9,044
Dividends on
common stock           -        -       -          -  (1,629)             -        (1,629)           - (1,629)
Effect of stock
compensation plan      -        -       -         74        -             -             74           -      74
Stock purchased        -    (346)       -          -        -             -          (346)           -   (346)
Changes in
noncontrolling
interests              -        -       -          -        -             -              -        (49)    (49)
Balance as of

September 30,
2011                  15  (4,029)   (980)      4,774   66,595          (57)         66,318         384  66,702
                                                                          Share activity (thousands of shares)
                                                                              Common stock      Treasury stock
Nine months ended September 30, 2012
Balance as of December 31, 2011                                                    850,563            (76,101)
Stock purchased                                                                          -             (2,096)
Equity-linked notes conversion                                                           -            (17,500)
Balance as of September 30, 2012                                                   850,563            (95,697)
Nine months ended September 30, 2011
Balance as of December 31, 2010                                                    850,563            (69,208)
Purchase of treasury stock                                                               -             (5,919)
Balance as of September 30, 2011                                                   850,563            (75,127)





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





OAO LUKOIL

Consolidated Statements of Cash Flows

(Millions of US dollars)



                                               For the nine
                                                                  For the nine
                                               months ended
                                                                 months ended
                                        September 30, 2012 September 30, 2011

                                   Note         (unaudited)        (unaudited)
Cash flows from operating
activities
Net income attributable to OAO
LUKOIL                                                8,316              9,012
Adjustments for non-cash items:
Depreciation, depletion and
amortization                                          3,581              3,345
Equity share in income of
affiliates, net of dividends
received                                                113                160
Dry hole write-offs                                      90                215
(Gain) loss on disposals and
impairments of assets                                 (137)                171
Deferred income taxes                                  (89)                500
Non-cash currency translation loss
(gain)                                                  188               (83)
Non-cash investing activities                           (5)                (8)
All other items - net                                    88                294
Changes in operating assets and
liabilities:
Trade accounts receivable                             (140)              (925)
Inventories                                           (712)              (907)
Accounts payable                                        574                716
Taxes payable                                           590                393
Other current assets and
liabilities                                             373                416
Net cash provided by operating
activities                                           12,830             13,299
Cash flows from investing
activities
Acquisition of licenses                                 (8)                (6)
Capital expenditures                                (8,061)            (5,581)
Proceeds from sale of property,
plant and equipment                                     392                 47
Purchases of investments                              (156)               (63)
Proceeds from sale of investments                        74                 65
Sale of subsidiaries, net of cash
disposed                                                  9                 48
Acquisitions of subsidiaries and
equity method affiliates
(including advances related to
acquisitions), net of cash
acquired                                              (722)            (2,130)
Net cash used in investing
activities                                          (8,472)            (7,620)
Cash flows from financing
activities
Net movements of short-term
borrowings                                              (7)              (600)
Proceeds from issuance of
long-term debt                                            -                  1
Principal repayments of long-term
debt                                                (1,368)              (794)
Dividends paid on Company common
stock                                               (1,795)            (1,585)
Dividends paid to noncontrolling
interest stockholders                                  (82)               (76)
Financing received from
noncontrolling interest
stockholders                                              2                  3
Purchase of Company's stock                           (128)              (346)
Purchase of equity-linked notes                       (740)                  -
Purchase of noncontrolling
interest                                              (606)                (1)
Net cash used in financing
activities                                          (4,724)            (3,398)
Effect of exchange rate changes on
cash and cash equivalents                                48              (208)
Net (decrease) increase in cash
and cash equivalents                                  (318)              2,073
Cash and cash equivalents at
beginning of period                                   2,753              2,368
Cash and cash equivalents at end
of period                           4                 2,435              4,441



Supplemental disclosures of cash flow information

Interest paid       308   437
Income taxes paid 1,339 1,707







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





OAO LUKOIL

Notes to Interim Consolidated Financial Statements (unaudited)

(Millions of US dollars, unless otherwise noted)



Note 1. Organization and environment



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



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



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



Business and economic environment



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



Basis of preparation



The accompanying interim consolidated  financial statements and notes  thereto 
have not been audited by independent accountants, except for the balance sheet
as of  December 31,2011.  In the  opinion of  the Company's  management,  the 
interim  consolidated  financial  statements   include  all  adjustments   and 
disclosures necessary  to  present  fairly  the  Group's  financial  position, 
results of operations and cash flows for the interim periods reported  herein. 
These adjustments were of a normal recurring nature.



These interim  consolidated financial  statements have  been prepared  by  the 
Company in accordance  with accounting  principles generally  accepted in  the 
United States of  America ("US  GAAP") as applicable  to interim  consolidated 
financial statements. These interim  consolidated financial statements  should 
be read in conjunction with the Group's December 31, 2011 annual  consolidated 
financial statements.



The results  for  the nine-month  period  ended  September 30,  2012  are  not 
necessarily indicative of the results expected for the full year.



Note 2. Summary of significant accounting policies



Principles of consolidation



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



Use of estimates



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



Revenues



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



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



Foreign currency translation



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



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



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



In all cases, foreign  currency transaction gains and  losses are included  in 
profit or loss.



As of September 30, 2012  and December 31, 2011,  exchange rates of 30.92  and 
32.20 Russian  rubles to  the  US dollar,  respectively,  have been  used  for 
translation purposes.



Cash and cash equivalents



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



Cash with restrictions on immediate use



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



Accounts receivable



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



Inventories



The cost of  finished goods  and purchased  products is  determined using  the 
first-in, first-out  cost  method (FIFO).  The  cost of  all  other  inventory 
categories is determined using the "average cost" method.



Investments



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



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



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



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



Property, plant and equipment



Oil and gas properties are accounted  for using the successful efforts  method 
of accounting whereby property acquisitions, successful exploratory wells, all
development costs (including development  dry holes and  the Group's share  of 
operators' expenses during  the development  stage of  production sharing  and 
risk service contracts), and support equipment and facilities are capitalized.
Unsuccessful exploratory wells are  expensed when a well  is determined to  be 
non-productive.  Other  exploratory  expenditures,  including  geological  and 
geophysical costs are expensed as incurred.



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



Depreciation, depletion and amortization of  capitalized costs of oil and  gas 
properties is calculated using the unit-of-production method based upon proved
reserves for the cost of  property acquisitions and proved developed  reserves 
for exploration and development costs.



Production and related overhead costs are expensed as incurred.



Depreciation  of  assets  not  directly  associated  with  oil  production  is 
calculated on a straight-line  basis over the economic  lives of such  assets, 
estimated to be in the following ranges:



Buildings and constructions 5 - 40 years
Machinery and equipment     5 - 20 years



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



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



Asset retirement obligations



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



Goodwill and other intangible assets



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



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



Impairment of long-lived assets



Long‑lived assets,  such  as  oil  and gas  properties  (other  than  unproved 
properties), other property, plant,  and equipment, and purchased  intangibles 
subject to  amortization,  are  assessed for  impairment  whenever  events  or 
changes in circumstances indicate that the  carrying amount of an asset  group 
may not  be recoverable.  Recoverability of  assets  to be  held and  used  is 
measured by a  comparison of  the carrying  amount of  an asset  group to  the 
estimated undiscounted  future cash  flows expected  to be  generated by  that 
group. If  the  carrying  amount  of an  asset  group  exceeds  its  estimated 
undiscounted future cash flows, an impairment charge is recognized by  writing 
down the  carrying amount  to the  estimated fair  value of  the asset  group, 
generally determined  as  discounted  future  net cash  flows.  Assets  to  be 
disposed of are separately presented in the balance sheet and reported at  the 
lower of the  carrying amount or  fair value less  costs to sell,  and are  no 
longer depreciated. The assets and liabilities of a disposed group  classified 
as held  for  sale are  presented  separately  in the  appropriate  asset  and 
liability sections of the balance sheet.



Income taxes



Deferred income tax assets  and liabilities are recognized  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 financial  statements  and  their respective  tax  bases  and  in 
respect of operating loss  and tax credit  carryforwards. Deferred income  tax 
assets and liabilities are measured using enacted tax rates expected to  apply 
to taxable  income in  the  years in  which  those temporary  differences  are 
expected to reverse and the assets  be recovered and liabilities settled.  The 
effect on deferred income tax assets and liabilities of a change in tax  rates 
is recognized in  profit or loss  in the reporting  period which includes  the 
enactment date.  The  estimated  effective  income tax  rate  expected  to  be 
applicable for the full fiscal year is used in providing for income taxes on a
current year-to-date basis.



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



An income tax position  is recognized only if  the uncertain position is  more 
likely than not of  being sustained upon examination,  based on its  technical 
merits. A recognized  income tax position  is measured at  the largest  amount 
that is greater than 50% likely  of being realized. Changes in recognition  or 
measurement are  reflected in  the  period in  which  the change  in  judgment 
occurs. The Company records interest and  penalties relating to income tax  in 
income tax expense in profit or loss.



Interest-bearing borrowings



Interest-bearing borrowings from third parties (except convertible notes)  are 
initially recorded  at the  value  of net  proceeds received.  Any  difference 
between the net proceeds and the  redemption value is amortized at a  constant 
rate over the  term of the  borrowing. Amortization is  included in profit  or 
loss and the carrying amounts are adjusted as amortization accumulates.



For borrowings from related parties (except convertible notes) issued with  an 
interest rate lower than the market  interest rate, the Group determines  book 
value using market  interest rate.  The resulting difference  is allocated  to 
additional paid-in capital and is amortized  at a constant rate over the  term 
of the borrowings. Amortization is included in profit or loss each period  and 
the carrying amounts are adjusted as amortization accumulates.



For convertible  notes  issued  with  a  cash  conversion  option,  the  Group 
allocates the  proceeds from  issuance between  a liability  component and  an 
equity component. The Group records the equity component at an amount equal to
the difference  between  the proceeds  received  and  the fair  value  of  the 
liability component, measured as  the fair value of  a similar liability  that 
does not  have  an  associated  equity component.  The  Group  recognizes  the 
interest cost in subsequent periods at its borrowing rate for  non-convertible 
debt.



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



Pension benefits



The expected costs in  respect of pension obligations  of Group companies  are 
determined by management based  on the amount of  pension obligations for  the 
previous financial year calculated by  an independent actuary. Obligations  in 
respect of  each  employee are  accrued  over  the periods  during  which  the 
employee renders service to the Group.



Treasury stock



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



Earnings per share



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



Contingencies



Certain conditions may exist as of the balance sheet date, which may result in
losses to the Group but the impact of which will only be resolved when one  or 
more future events occur or fail to occur.



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



Environmental expenditures



Estimated losses  from  environmental remediation  obligations  are  generally 
recognized no later  than completion  of remedial  feasibility studies.  Group 
companies  accrue  for  losses   associated  with  environmental   remediation 
obligations when  such  losses are  probable  and reasonably  estimable.  Such 
accruals  are   adjusted  as   further   information  becomes   available   or 
circumstances change. Costs of expected future expenditures for  environmental 
remediation obligations are not discounted to their present value.



Use of derivative instruments



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



Share-based payments



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



Comparative amounts



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



Changes in accounting policy



In September 2011,  the FASB  issued Accounting Standards  Update ("ASU")  No. 
2011-08, "Testing Goodwill for  Impairment," which allows an  entity to use  a 
qualitative approach  to test  goodwill for  impairment. This  ASU permits  an 
entity to first  assess qualitative factors  to determine whether  it is  more 
likely than not  that the  fair value  of a reporting  unit is  less than  its 
carrying amount and  hence whether  it is  necessary to  perform the  two-step 
goodwill impairment test  as required by  the provisions of  Topic 350 of  the 
Codification. ASU No.  2011-08 is  effective for annual  and interim  goodwill 
impairment tests performed for the  fiscal years beginning after December  15, 
2011. The Group adopted the requirements of ASU No.2011-08 starting from  the 
first quarter of 2012.  This adoption did  not have a  material impact on  the 
Group's results of operations,  financial position or cash  flows and did  not 
require additional disclosures.



In June 2011, the FASB issued ASU No. 2011-05, "Presentation of  comprehensive 
income," which amends Topic  220 of the Codification.  This ASU increases  the 
prominence of other comprehensive income  in financial statements. Under  this 
ASU, an entity  has the option  to present  the components of  net income  and 
comprehensive income in either one or  two statements. The ASU eliminates  the 
option in US GAAP  to present other comprehensive  income in the statement  of 
changes in equity. ASU No. 2011-05 is effective for public entities for fiscal
years, and interim periods  within those years,  beginning after December  15, 
2011 (except those reclassification adjustments  deferred by ASU No.  2011-12) 
and should be applied retrospectively.  The Group adopted the requirements  of 
ASU No.2011-05 starting from the first quarter of 2012. This adoption changed
the presentation of  net and comprehensive  incomes and stockholders'  equity, 
but did not have  any impact on the  Group's results of operations,  financial 
position or cash flows.



In May 2011, the  FASB issued ASU No.  2011-04, "Amendments to Achieve  Common 
Fair Value  Measurement and  Disclosure Requirements  in US  GAAP and  IFRSs," 
which amends Topic  820 of the  Codification. This ASU  provides guidance  for 
fair value measurements and disclosure requirements and clarifies the  Board's 
intent about the application of existing fair value measurement  requirements. 
The new standard does not extend the  use of fair value but, rather,  provides 
guidance about how fair value should  be applied where it already is  required 
or permitted under US GAAP. ASU  No. 2011-04 is effective for public  entities 
during interim and annual periods beginning after December 15, 2011 and should
be  applied  prospectively.  The  Group   adopted  the  requirements  of   ASU 
No.2011-04 starting from  the first quarter  of 2012. This  adoption did  not 
have a  material  impact  on  the Group's  results  of  operations,  financial 
position or cash flows.



In April 2011, the FASB issued ASU No. 2011-02, "A Creditor's Determination of
Whether a Restructuring Is a Troubled Debt Restructuring," which amends  Topic 
310 of the Codification. This ASU provides additional guidance in  considering 
whether a restructuring  constitutes a troubled  debt restructuring and  helps 
creditors in  determining whether  a  creditor has  granted a  concession  and 
whether a debtor is  experiencing financial difficulties.  ASU No. 2011-02  is 
effective starting from  the first interim  or annual period  beginning on  or 
after June 15,  2011. The Group  adopted the requirements  of ASU  No.2011-02 
starting from the third quarter of 2011. This adoption did not have a material
impact on the Group's results of operations, financial position or cash  flows 
and did not require additional disclosures.



Recent accounting pronouncements



In December  2011,  the  FASB  issued  ASU  No.  2011-11,  "Disclosures  about 
Offsetting Assets and  Liabilities." This  ASU requires  entities to  disclose 
information about offsetting and related  arrangements to enable users of  its 
financial statements to  understand the  effect of those  arrangements on  its 
financial position.  The  scope  includes  derivatives,  sale  and  repurchase 
agreements  and  reverse  sale  and  repurchase  agreements,  and   securities 
borrowing and securities  lending arrangements. ASU  No. 2011-11 is  effective 
for annual reporting periods on or after January 1, 2013, and interim  periods 
within those annual periods, and should be applied retrospectively. The  Group 
is evaluating  the effect  of the  adoption of  ASU No.2011-11  and does  not 
expect any material impact on its results of operations, financial position or
cash flows.



Note 3. Income taxes



Operations in the Russian Federation are subject to a Federal income tax  rate 
of 2.0% and a regional income tax rate that varies from 13.5% to 18.0% at  the 
discretion of  the individual  regional  administration. The  Group's  foreign 
operations  are  subject  to  taxes  at  the  tax  rates  applicable  to   the 
jurisdictions in which they operate.



The Group's effective income tax rate  for the periods presented differs  from 
the statutory  income tax  rate primarily  due to  domestic and  foreign  rate 
differences, the incurrence  of costs that  are either not  tax deductible  or 
only deductible to a certain limit and taxable or deductible income or loss on
foreign currency translation differences of Russian Group companies.



The Company and its  Russian subsidiaries file income  tax returns in  Russia. 
Until January 1, 2012, there were no provisions in the tax 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 may 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.





Note 4. Cash and cash equivalents



                                                As of September As of December
                                                       30, 2012       31, 2011
Cash held in Russian rubles                                 490            926
Cash held in US dollars                                   1,279          1,224
Cash held in other currencies                               319            271
Cash held in related party banks in Russian
rubles                                                      308            309
Cash held in related party banks in other
currencies                                                   39             23
Total cash and cash equivalents                           2,435          2,753





Note 5. Accounts receivable, net



                                                As of September As of December
                                                       30, 2012       31, 2011
Trade accounts receivable (net of provisions of
$222 million and $179 million as of September
30, 2012 and December 31, 2011, respectively)             7,365          7,209
Current VAT and excise recoverable                        1,705          1,333
Other current accounts receivable (net of
provisions of $60 million and $54 million as of
September 30, 2012 and December31, 2011,
respectively)                                               381            379
Total accounts receivable, net                            9,451          8,921





Note 6. Investments



                                                As of September As of December
                                                       30, 2012       31, 2011
Investments in equity method affiliates and
joint ventures                                            2,781          4,887
Long-term loans to equity method affiliates and
joint ventures                                            1,188          1,001
Other long-term investments                                  44             64
Total long-term investments                               4,013          5,952





Investments in "equity method" affiliates and joint ventures



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



                                                          For the three months
                          For the three months ended                     ended
                                  September 30, 2012        September 30, 2011
                             Total     Group's share      Total  Group's share
Revenues                     6,563             1,001      8,088          1,253
Income before
income taxes                 3,605               267      3,406            248
Less income taxes          (1,961)             (203)    (1,053)           (80)
Net income                   1,644                64      2,353            168



                                                           For the nine months
                            For the nine months ended                    ended
                                   September 30, 2012       September 30, 2011
                              Total     Group's share     Total  Group's share
Revenues                     22,339             3,380    24,508          3,624
Income before
income taxes                 10,145               743    10,312            757
Less income taxes           (3,968)             (335)   (3,159)          (247)
Net income                    6,177               408     7,153            510



                              As of September 30, 2012 As of December 31, 2011
                                 Total   Group's share    Total  Group's share
Current assets                   6,003             913    7,379          1,406
Property, plant and equipment   18,331           3,992   19,064          5,587
Other non-current assets           400             139    1,454            462
Total assets                    24,734           5,044   27,897          7,455
Short-term debt                  1,334             295    1,100            223
Other current liabilities        3,081             466    3,703            668
Long-term debt                   7,690           1,214    7,461          1,069
Other non-current liabilities    1,147             288    1,581            608
Net assets                      11,482           2,781   14,052          4,887



In April  2011,  the Company  and  OAO ANK  Bashneft  signed an  agreement  to 
establish a joint venture  and to develop two  oil fields named after  R.Trebs 
and A.Titov, located in the Nenets Autonomous District of Russia. According to
the agreement,  the mineral  rights for  the development  of the  fields  were 
re-issued  by  OAO  ANK  Bashneft  in   favor  of  its  100%  subsidiary   OOO 
Bashneft-Polus.  In  December  2011,  the   Company  acquired  25.1%  of   OOO 
Bashneft-Polus  for  $153   million,  and  OOO   Bashneft-Polus  acquired   29 
exploration wells  located  on these  fields  from  a Group  company  for  $60 
million. The parties agreed to transport oil extracted from the fields via the
Group's transportation  infrastructure and  to  consider the  exploitation  of 
certain other nearby  infrastructure owned by  the Group. In  May 2012,  state 
authorities cancelled  the  order  to  transfer the  mineral  rights  for  the 
development of the fields named after R.Trebs and A.Titov to the joint venture
and the license was returned to OAO ANK Bashneft. Management does not  believe 
that this matter will have a material adverse effect on the Group's  financial 
condition. The Company and OAO  ANK Bashneft are continuing their  cooperation 
within the project and  carry out reasonable  actions for re-issuance  mineral 
rights by state authorities in favor of OOO Bashneft-Polus.



Note 7. Property, plant and equipment and asset retirement obligations



                                           At cost                Net
                                          As of     As of      As of     As of
                                      September  December  September  December
                                       30, 2012  31, 2011   30, 2012  31, 2011
Exploration and Production:
Russia                                   58,576    54,269     36,992    34,415
International                             9,138     8,138      7,099     6,376
Total                                    67,714    62,407     44,091    40,791
Refining, Marketing, Distribution
and Chemicals:
Russia                                   13,102    12,133      7,799     7,395
International                            10,298     6,903      7,446     4,282
Total                                    23,400    19,036     15,245    11,677
Power generation and other:
Russia                                    5,348     4,890      4,288     4,026
International                               422       406        288       309
Total                                     5,770     5,296      4,576     4,335
Total property, plant and equipment      96,884    86,739     63,912    56,803



As of  September  30,  2012  and  December  31,  2011,  the  asset  retirement 
obligation amounted to  $2,195 million  and $2,126  million, respectively,  of 
which $5 million and $6 million was included in "Other current liabilities" in
the consolidated balance  sheets as  of September  30, 2012  and December  31, 
2011, respectively. During the nine-month periods ended September 30, 2012 and
2011, asset retirement obligations changed as follows:



                                                           For the nine months
                                       For the nine months ended September 30,
                                  ended September 30, 2012                2011
Asset retirement obligations as
of January 1                                         2,126               1,798
Accretion expense                                      129                 116
New obligations                                         81                  38
Changes in estimates of existing
obligations                                          (136)                (66)
Spending on existing obligations                       (2)                 (4)
Property dispositions                                  (8)                (10)
Foreign currency translation and
other adjustments                                        5               (102)
Asset retirement obligations as
of September 30                                      2,195               1,770



The asset retirement obligations incurred during the nine-month periods  ended 
September 30, 2012  and 2011  were Level  3 (unobservable  inputs) fair  value 
measurements. The Group uses a present  value technique to evaluate its  asset 
retirement obligations  based on  estimated future  liquidation costs  derived 
from prior transactions or third-party  pricing information, and using  market 
discount rates adjusted for risks.



Note 8. Suspended wells



During the  nine-month  period  ended  September  30,  2012,  total  suspended 
exploratory well costs capitalized  changed insignificantly ($511 million  and 
$542 million as of  September 30, 2012 and  December 31, 2011,  respectively). 
Suspended exploratory well  costs capitalized  for a period  greater than  one 
year amounted to $440 million  and $464 million as  of September 30, 2012  and 
December 31, 2011, respectively. No wells were charged to expenses during  the 
nine-month period ended September 30, 2012.



Note 9. Goodwill and other intangible assets



The carrying value of goodwill and other intangible assets as of September 30,
2012 and December 31, 2011 was as follows:



                                       As of September

                                              30, 2012 As of December 31, 2011
Amortized intangible assets
Software                                           422                     389
Licenses and other assets                          270                     343
Goodwill                                         1,270                     612
Total goodwill and other intangible
assets                                           1,962                   1,344



All goodwill  amounts  relate  to the  refining,  marketing  and  distribution 
segment. In the  third quarter of  2012, the Group  obtained control over  the 
joint venture which operates the ISAB refinery (Priolo, Italy) and  recognized 
goodwill  in  the  amount  of  $658  million  (refer  to  Note  15.   Business 
combinations). During the  nine-month period ended  September 30, 2012,  there 
were no other changes in goodwill.



Note 10. Short-term borrowings and current portion of long-term debt



                                       As of September

                                              30, 2012 As of December 31, 2011
Short-term borrowings from third
parties                                            137                     118
Short-term borrowings from related
parties                                             13                      30
Current portion of long-term debt                  671                   1,644
Total short-term borrowings and
current portion of long-term debt                  821                   1,792



Short-term borrowings from  third parties  are unsecured  and include  amounts 
repayable in US dollars of $55million  and $56 million, amounts repayable  in 
Euro of $36 million and $17 million and amounts repayable in other  currencies 
of $46 million and $45 million as of September 30, 2012 and December 31, 2011,
respectively. The weighted-average interest rate on short-term borrowings from
third parties was  4.43% and  4.93% per  annum as  of September  30, 2012  and 
December 31, 2011, respectively.



Note 11. Long-term debt



                                            As of September
                                                            As of December 31,
                                                   30, 2012               2011
Long-term loans and borrowings from third
parties                                                 805              2,652
6.375% non-convertible US dollar bonds,
maturing 2014                                           898                897
2.625% convertible US dollar bonds,
maturing 2015                                         1,430              1,412
6.356% non-convertible US dollar bonds,
maturing 2017                                           500                500
7.250% non-convertible US dollar bonds,
maturing 2019                                           596                596
6.125% non-convertible US dollar bonds,
maturing 2020                                           998                998
6.656% non-convertible US dollar bonds,
maturing 2022                                           500                500
13.35% Russian ruble bonds, maturing 2012                 -                776
9.20% Russian ruble bonds, maturing 2012                323                311
7.40% Russian ruble bonds, maturing 2013                194                186
Capital lease obligations                                95                116
Total long-term debt                                  6,339              8,944
Current portion of long-term debt                     (671)            (1,644)
Total non-current portion of long-term debt           5,668              7,300





Long-term loans and borrowings



Long-term loans and borrowings from third parties include amounts repayable in
US dollars of $541 million and $834 million, amounts repayable in Euro of $244
million and $284 million,  amounts repayable in Russian  rubles of $1  million 
and $1,514 million, and amounts  repayable in other currencies of  $19million 
and $20million as of September 30, 2012 and December 31, 2011,  respectively. 
This debt  has maturity  dates from  2012 through  2023. The  weighted-average 
interest rate on long-term loans and  borrowings from third parties was  1.83% 
and 5.39%  per  annum  as  of  September  30,  2012  and  December  31,  2011, 
respectively. A number of long-term loan agreements contain certain  financial 
covenants which  are  being met  by  the  Group. Approximately  31%  of  total 
long-term loans and borrowings from third  parties is secured by export  sales 
and property, plant and equipment.



US dollar convertible bonds



In December 2010, a Group company issued unsecured convertible bonds  totaling 
$1.5 billion with  a coupon yield  of 2.625%  and maturity in  June 2015.  The 
bonds were placed at  face value. The bonds  are convertible into LUKOIL  ADRs 
(each representing one  ordinary share of  the Company) and  currently have  a 
conversion price of $72.6489  per ADR. Bondholders have  the right to  convert 
the bonds into LUKOIL ADRs during the  period starting from 40 days after  the 
issue date and ending 6 dealing days before the maturity date. The issuer  has 
the right to redeem the bonds after December 31, 2013.



US dollar non-convertible bonds



In November 2010, a Group company issued two tranches of non-convertible bonds
totaling $1.0 billion with a coupon yield of 6.125% and maturity in 2020.  The 
first tranche totaling $800 million  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 was placed at  a price of 102.44% of the  bond's 
face value with a resulting yield to maturity of 5.80%. These tranches have  a 
half year coupon period.



In November 2009, a Group company issued two tranches of non-convertible bonds
totaling $1.5 billion. The first tranche  totaling $900 million with a  coupon 
yield of 6.375% per annum was placed with a maturity of 5years at a price  of 
99.474% of the bond's face value with a resulting yield to maturity of 6.500%.
The second tranche  totaling $600 million  with a coupon  yield of 7.250%  per 
annum was placed  with a maturity  of 10 years  at a price  of 99.127% of  the 
bond's face value with a resulting yield to maturity of 7.375%. These tranches
have a half year coupon period.



In June  2007, a  Group  company issued  non-convertible bonds  totaling  $1.0 
billion. $500 million were  placed with a  maturity of 10  years and a  coupon 
yield of 6.356% per annum. Another $500 million were placed with a maturity of
15 years and a coupon yield of 6.656% per annum. All bonds were placed at face
value and have a half year coupon period.



Russian ruble bonds



In December 2009, the  Company issued 10 million  stock exchange bonds with  a 
face value of 1,000 Russian rubles each.  The bonds were placed at face  value 
with a maturity of 1,092  days. The bonds have a  182 days' coupon period  and 
bear interest at 9.20% per annum.



In August 2009, the Company issued 25 million stock exchange bonds with a face
value of 1,000 Russian rubles each. The bonds were placed at face value with a
maturity of 1,092  days. The  bonds had  a 182  days' coupon  period and  bore 
interest at 13.35% per annum. In August 2012, the Company redeemed all  issued 
bonds in accordance with the conditions of the bond issue.



In December 2006, the Company issued  14 million non-convertible bonds with  a 
face value of 1,000 Russian rubles each. Eight million bonds were placed  with 
a maturity of 5 years  and a coupon yield of  7.10% per annum and six  million 
bonds were placed with a maturity of 7  years and a coupon yield of 7.40%  per 
annum. All bonds were placed at face value and have a half year coupon period.
In December 2011,  the Company redeemed  all issued bonds  with a maturity  of 
five years in accordance with the conditions of the bond issue.



Note 12. Pension benefits



The Group  sponsors  a postretirement  defined  benefit pension  program  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 the salary. These plans are solely financed by  Group 
companies. Simultaneously employees have the right to receive pension benefits
with a share-based payment by the Group (up to 4% of the annual salary of  the 
employee). Plan assets and pensions payoffs are managed by a non-state pension
fund, 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 and invalidity.



Components of net periodic benefit cost were as follows:



                                     For the three  For the nine  For the nine
                       For the three  months ended  months ended  months ended
                        months ended September 30, September 30, September 30,
                  September 30, 2012          2011          2012          2011
Service cost                       4             3            11            11
Interest cost                      4             6            14            18
Less    expected 
return  on  plan 
assets                           (2)           (2)           (7)           (8)
Amortization  of 
prior    service 
cost                               3             4            10            11
Total net
periodic benefit
cost                               9            11            28            32



Note 13. Stockholders' equity



Common stock



                                           As of September      As of December

                                       30, 2012 (thousands 31, 2011 (thousands
                                                        of                  of

                                                   shares)             shares)
Authorized and issued common stock,
par value of 0.025 Russian rubles each             850,563             850,563
Treasury stock                                    (95,697)            (76,101)
Outstanding common stock                           754,866             774,462





Earnings per share



The calculation of  basic and  diluted earnings  per share  for the  reporting 
periods was as follows:



                                                                  For the nine
                        For the three For the three  For the nine months ended
                         months ended  months ended  months ended
                        September 30, September 30, September 30,   September
                                 2012          2011          2012     30, 2011
Net income                      3,509         2,244         8,316        9,012
Add back interest and
accretion on 2.625%
convertible US dollar
bonds, maturing 2015
(net of tax at
effective rate)                    16            16            47           47
Total diluted net
income                          3,525         2,260         8,363        9,059
Weighted average number
of outstanding common
shares (thousands of
shares)                       754,866       778,256       762,510      780,268
Add back treasury
shares held in respect
of convertible debt
(thousands of shares)          20,513        20,393        20,463       20,365
Weighted average number
of outstanding common
shares, assuming
dilution (thousands of
shares)                       775,379       798,649       782,973      800,633


Earnings per share of
common stock
attributable to

OAO LUKOIL (US
dollars):
Basic                            4.65          2.88         10.91        11.55
Diluted                          4.55          2.83         10.68        11.31



Equity-linked notes



In June  2012,  a  Group  company entered  into  a  prepaid  forward  purchase 
agreement for OAO LUKOIL shares for $2.5 billion. The Group's right to receive
the shares is evidenced  by equity-linked notes  of $2.5billion. These  notes 
are redeemable  for  LUKOIL ADRs  (each  representing one  ordinary  share  of 
OAOLUKOIL) on or before September  15, 2015 at the option  of the Group at  a 
prevailing market price. These equity-linked notes have been classified within
OAO LUKOIL stockholders' equity.



In April 2012, a Group company  converted equity-linked notes of $980  million 
into 17.5 million LUKOIL  ADR's (each representing one  ordinary share of  OAO 
LUKOIL).



Dividends



At the annual stockholders' meeting on June 27, 2012, dividends were  declared 
for 2011 in the amount of 75.00 Russian rubles per common share, which at  the 
date of the meeting was equivalent to $2.26. Dividends payable of $10  million 
are included in "Other current liabilities" in the consolidated balance sheets
as of September 30, 2012 and December 31, 2011.



At the annual stockholders' meeting on June 23, 2011, dividends were  declared 
for 2010 in the amount of 59.00 Russian rubles per common share, which at  the 
date of the meeting was equivalent to $2.11.



Note 14. Financial and derivative instruments



Fair value



The fair values of cash and cash equivalents (Level 1), current and  long-term 
accounts receivable  (Level  3) are  approximately  equal to  their  value  as 
disclosed  in  the  consolidated  financial  statements.  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 debt  (Level 3) differs from the amount  disclosed 
in  the  consolidated  financial  statements.  The  estimated  fair  value  of 
long-term debt  as of  September 30,  2012 and  December 31,  2011 was  $6,924 
million and $8,666  million, respectively,  as a result  of discounting  using 
estimated market  interest rates  for  similar financing  arrangements.  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 similar other main  terms. 
During the  nine months  ended September  30,  2012, the  Group did  not  have 
significant transactions or  events that would  result in nonfinancial  assets 
and liabilities measured at fair value on a nonrecurring basis.



Derivative instruments



The Group uses  financial and commodity-based  derivative contracts to  manage 
exposures to  fluctuations  in  foreign  currency  exchange  rates,  commodity 
prices, or to exploit market opportunities.  Since the Group is not  currently 
using hedge accounting, defined by Topic 815, "Derivative and hedging," of the
Codification, all gains  and losses, realized  or unrealized, from  derivative 
contracts have been recognized in profit or loss.



Topic 815  of  the Codification  requires  purchase and  sales  contracts  for 
commodities that are readily convertible to cash (e.g., crude oil, natural gas
and gasoline) to be  recorded on the balance  sheet as derivatives unless  the 
contracts are  for  quantities  the  Group  expects to  use  or  sell  over  a 
reasonable period in the normal  course of business (i.e., contracts  eligible 
for the normal purchases and normal sales exception). The Group does apply the
normal purchases and normal sales exception to certain long-term contracts  to 
sell oil products. This normal purchases and normal sales exception is applied
to eligible  crude  oil  and  refined product  commodity  purchase  and  sales 
contracts. However, the  Group may elect  not to apply  this exception  (e.g., 
when another derivative  instrument will  be used to  mitigate the  risk of  a 
purchase or sale contract but hedge  accounting will not be applied; in  which 
case  both  the  purchase  or  sales  contract  and  the  derivative  contract 
mitigating the resulting risk  will be recorded on  the balance sheet at  fair 
value).



The fair value  hierarchy for  the Group's derivative  assets and  liabilities 
accounted for at fair value on a recurring basis was:



                    As of September 30, 2012        As of December 31, 2011
                 Level 1 Level 2 Level 3   Total Level 1 Level 2 Level 3 Total
Assets
Commodity
derivatives            -   1,040       -   1,040       -     575       -   575
Total assets           -   1,040       -   1,040       -     575       -   575
Liabilities
Commodity
derivatives            - (1,193)       - (1,193)       -   (599)       - (599)
Total
liabilities            - (1,193)       - (1,193)       -   (599)       - (599)
Net liabilities        -   (153)       -   (153)       -    (24)       -  (24)



The derivative values above are based on  an analysis of each contract as  the 
fundamental unit of account as required by Topic 820, "Fair Value Measurements
and Disclosures,"  of  the  Codification.  Therefore,  derivative  assets  and 
liabilities with the same counterparty are  not reflected net where the  legal 
right of offset exists.  Gains or losses  from contracts in  one level may  be 
offset by gains  or losses  on contracts  in another  level or  by changes  in 
values of physical contracts or positions that are not reflected in the  table 
above.



Commodity derivatives  are valued  using quotations  provided by  brokers  and 
price index developers. These quotes are corroborated with market data and are
classified   as   Level   2.   Commodity   derivatives   are   valued    using 
industry-standard models that consider  various assumptions, including  quoted 
forward  prices  for   commodities,  time  value,   volatility  factors,   and 
contractual prices for the underlying  instruments, as well as other  relevant 
economic measures.



Commodity derivative contracts



The Group operates in  the worldwide crude oil,  refined product, natural  gas 
and natural gas liquids markets and  is exposed to fluctuations in the  prices 
for these commodities. These fluctuations  can affect the Group's revenues  as 
well as the cost of operating, investing and financing activities.  Generally, 
the Group's policy is to remain  exposed to the market prices of  commodities. 
However, the  Group  uses futures,  forwards,  swaps and  options  in  various 
markets to  balance  physical  systems,  meet  customer  needs,  manage  price 
exposures on specific transactions, and do an immaterial amount of trading not
directly related to the Group's  physical business. These activities may  move 
the Group's profile away from market average prices.



The fair value of commodity derivative assets and liabilities as of  September 
30, 2012 was:



                     As of September 30, 2012
Assets
Accounts receivable                     1,040
Liabilities
Accounts payable                      (1,193)

Hedge accounting has not been used for items in the table.



As required  under Topic  815 of  the Codification  the amounts  shown in  the 
preceding  table  are  presented  gross  (i.e.,  without  netting  assets  and 
liabilities with the same counterparty where the right of offset and intent to
net  exist).  Derivative  assets  and  liabilities  resulting  from   eligible 
commodity contracts have been netted in the consolidated balance sheet and are
recorded as  accounts receivable  in the  amount of  $38million and  accounts 
payable in the amount of $191 million.



Financial results from commodity derivatives were included in the consolidated
statements of comprehensive income  in "Cost of purchased  crude oil, gas  and 
products" and for the three and nine  months ended September 30, 2012 were  in 
the total amount of net loss of $534 million (of which realized losswas  $224 
million and unrealized loss was $310 million) and net loss of $452 million (of
which realized losswas $323  million and unrealized  loss was $129  million), 
respectively.



As of September 30, 2012, the net position of outstanding commodity derivative
contracts, primarily to  manage price exposure  on underlying operations,  was 
not significant.



Currency exchange rate derivative contracts



The  Group  has  foreign  currency  exchange  rate  risk  resulting  from  its 
international  operations.  The  Group  does  not  comprehensively  hedge  the 
exposure to  currency  rate changes,  although  the Group  selectively  hedges 
certain foreign currency exchange rate exposures, such as firm commitments for
capital projects or local currency tax payments and dividends.



The fair value of foreign currency derivatives assets and liabilities open  as 
of September 30, 2012 was not significant.



The impact from foreign currency derivatives during the three and nine  months 
ended September 30, 2012 on the consolidated statement of comprehensive income
was not significant.  The net  position of outstanding  foreign currency  swap 
contracts as of September 30, 2012 also was not significant.



Credit risk



The  Group's   financial  instruments   that   are  potentially   exposed   to 
concentrations  of  credit  risk   consist  primarily  of  cash   equivalents, 
over-the-counter derivative contracts and trade receivables. Cash  equivalents 
are placed  in high-quality  commercial  paper, money  market funds  and  time 
deposits with major international banks and financial institutions.



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 ICE Futures.



Certain of the Group's derivative instruments contain provisions that  require 
the Group to post  collateral if the derivative  exposure exceeds a  threshold 
amount. The  Group  has  contracts  with fixed  threshold  amounts  and  other 
contracts with variable threshold amounts  that are contingent on the  Group's 
credit rating.  The variable  threshold amounts  typically decline  for  lower 
credit ratings, while both the variable and fixed threshold amounts  typically 
revert to zero if the Group's credit rating falls below investment grade. Cash
is the  primary collateral  in  all contracts;  however, many  contracts  also 
permit the Group to post letters of credit as collateral.



There were noderivative instruments with such credit-risk-related  contingent 
features that were in a liability position as of September 30, 2012. The Group
posted $29 million  in collateral  in the normal  course of  business for  the 
over-the-counter derivatives. If  the Group's credit  rating were lowered  one 
level from its  "BBB-" rating  (per Standard and  Poors) as  of September  30, 
2012, and it would be below investment  grade, the Group would be required  to 
post additional collateral of $5 million to the Group's counterparties for the
over-the-counter derivatives,  either  with cash  or  letters of  credit.  The 
maximum additional  collateral based  on  the lowest  downgrade would  be  $14 
million in total.



Note 15. Business combinations



In January 2012, the Group  received a notice that  the Board of Directors  of 
ERG S.p.A. ("ERG")  decided to  exercise its  option to  sell to  the Group  a 
further 20% interest  in the joint  venture which operates  the ISAB  refining 
complex (Priolo,  Italy).  The notice  was  received in  accordance  with  the 
initial agreement on the  establishment of the joint  venture signed in  2008. 
This agreement gave  the second investor  - ERG a  step-by-step put option  to 
sell its  share in  the joint  venture to  the Group.  Approval of  regulatory 
authorities has been received. The transaction was finalized in September 2012
in the amount of €485  million (approximately $609 million). Accordingly,  the 
Group's stake in the joint venture increased from 60% to 80% and in accordance
with the initial agreement on the establishment of the joint venture the Group
obtained control and consolidated this joint venture. The Group  preliminarily 
allocated $658million  to goodwill,  $3,023 million  to property,  plant  and 
equipment, $800 million to deferred  tax liability, $1,024 million to  current 
assets and $444 million to current liabilities.



Note 16. Consolidation of Variable Interest Entity



The Group  and  ConocoPhillips  had a  joint  venture,  OOO  Narianmarneftegaz 
("NMNG"), which  develops oil  reserves  in the  Timan-Pechora region  of  the 
Russian Federation. The Group and ConocoPhillips had equal voting rights  over 
the joint venture's activity and effective ownership interests of 70% and 30%,
respectively. In August 2012, the Group acquired ConocoPhillips' investment in
NMNG and certain  assets related  to NMNG  for $604  million. The  acquisition 
brings the Group's total ownership interest in NMNG to 100%.



Up until the date of acquisition  of the 30% interest, the Group  consolidated 
NMNG due to the fact  that NMNG was a variable  interest entity and the  Group 
was considered to be the primary beneficiary.





Note 17. Commitments and contingencies



Capital expenditure, exploration and investment programs



The Group owns and operates a number of assets under which it has  commitments 
for  capital  expenditure  in  relation  to  its  exploration  and  investment 
programs. They mainly  relate to  existing license agreements  in the  Russian 
Federation, production sharing agreements and long-term service contracts.The
Group also has  a commitment to  execute the investment  program in its  power 
generation companies.



During the  three-month  period  ended  September  30,  2012,  there  were  no 
significant changes in  the commitments  from those disclosed  in the  Group's 
consolidated financial statements for the period ended June30, 2012.



Operating lease obligations



Group companies have commitments  of $463 million primarily  for the lease  of 
vessels and petroleum distribution outlets. Operating lease expenses were  $57 
million, $44 million, $158 million and $126 million for the three months ended
September 30, 2012 and 2011 and for  the nine months ended September 30,  2012 
and 2011, respectively. Commitments for minimum rentals under these leases  as 
of September 30, 2012 are as follows:



                                              As of September 30, 2012
For the three-months ending December 31, 2012                       40
2013 fiscal year                                                   113
2014 fiscal year                                                    92
2015 fiscal year                                                    66
2016 fiscal year                                                    48
beyond                                                             104



Insurance



The insurance industry in the Russian Federation and certain other areas where
the Group has operations is in the course of development. Management  believes 
that the Group has adequate property  damage coverage for its main  production 
assets. In respect  of third  party liability for  property and  environmental 
damage  arising  from  accidents  on  Group  property  or  relating  to  Group 
operations, the Group  has insurance  coverage that is  generally higher  than 
insurance limits set by the local legal requirements. Management believes that
the Group has  adequate insurance coverage  of the risks,  which could have  a 
material effect on the Group's operations and financial position.



Environmental liabilities



Group companies and their  predecessor entities have  operated in the  Russian 
Federation and other countries for many years and, within certain parts of the
operations,  environmental  related  problems  have  developed.  Environmental 
regulations are currently  under consideration in  the Russian Federation  and 
other areas where the Group  has operations. Group companies routinely  assess 
and evaluate their 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 charged against  income. 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
materially adverse effect on  the operating results  or financial position  of 
the Group.





Social assets



Certain Group  companies  contribute  to Government  sponsored  programs,  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 
capitalized (only to  the extent that  they are expected  to result in  future 
economic benefits to the Group) 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 characterized  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 
severe fines, penalties and interest charges. In the Russian Federation a  tax 
year remains  open  for  review  by  the  tax  authorities  during  the  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 may  create 
substantially more significant  taxation risks in  the Russian Federation  and 
other emerging  markets where  Group companies  operate, than  those in  other 
countries  where  taxation  regimes  have  been  subject  to  development  and 
clarification over long periods.



The tax authorities  in each  region may  have a  different interpretation  of 
similar taxation  issues  which may  result  in taxation  issues  successfully 
defended by the  Group in  one region  being unsuccessful  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   at  the  time   of 
implementation. The Group  is subject to  tax authority audits  on an  ongoing 
basis, as is  normal in  the Russian environment  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 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 financial statements, if  the 
authorities were  successful  in  enforcing their  interpretations,  could  be 
significant.



Litigation and claims



On November  27,  2001,  Archangel Diamond  Corporation  ("ADC"),  a  Canadian 
diamond development company,  filed a  lawsuit in the  Denver District  Court, 
Colorado against OAO Arkhangelskgeoldobycha ("AGD"), a Group company, and  the 
Company  (together  the  "Defendants").   ADC  alleged  that  the   Defendants 
interfered with  the transfer  of  a diamond  exploration license  to  Almazny 
Bereg, a joint venture between ADC  and AGD. ADC claimed compensatory  damages 
of $1.2 billion and punitive damages of $3.6billion. On October 15, 2002, the
District Court dismissed the lawsuit  for lack of personal jurisdiction.  This 
ruling was upheld  by the  Colorado Court  of Appeals  on March  25, 2004.  On 
November 21,  2005, the  Colorado  Supreme Court  affirmed the  lower  courts' 
ruling that no specific jurisdiction exists over the Defendants. By virtue  of 
this finding,  AGD  (the  holder  of  the  diamond  exploration  license)  was 
dismissed from the lawsuit.  The Colorado Supreme  Court found, however,  that 
the trial court  made a  procedural error by  failing to  hold an  evidentiary 
hearing before making its ruling concerning general jurisdiction regarding the
Company and remanded  the case to  the Colorado Court  of Appeals to  consider 
whether the lawsuit should have  been dismissed on alternative grounds  (i.e., 
forum non conveniens). The Colorado Court  of Appeals declined to dismiss  the 
case based on forum non conveniens and  the case was remanded to the  District 
Court. In June 2009,  three creditors of ADC  filed an Involuntary  Bankruptcy 
Petition putting ADC into bankruptcy. In November 2009, after adding a  claim, 
ADC removed the case from  the District Court to  the US Bankruptcy Court.  On 
October 28, 2010, the Bankruptcy Court granted the Company's Motion for Remand
and Abstention and remanded the case to the Denver District Court. On  October 
20, 2011, the Denver District Court  dismissed all claims against the  Company 
for lack of jurisdiction. ADC filed notice of appeal on April 17, 2012.



On August 23, 2012, the Court of Appeals affirmed the Denver District  Court's 
dismissal for lack of jurisdiction. ADC  filed a Petition for Rehearing  which 
was denied  on September  20, 2012.  ADC then  filed a  petition for  Writ  of 
Certiorari in the  Colorado Supreme  Court on  October 18,  2012. The  Company 
filed its Response to the Writ on November 1, 2012. The Colorado Supreme Court
has not  indicated yet  if it  will consider  this case.  Management does  not 
believe that  the ultimate  resolution of  this matter  will have  a  material 
adverse effect on the Group's financial condition.



On January 6,  2012, ADC  filed a  lawsuit in the  US District  Court for  the 
District of  Colorado  (federal  court) reasserting  almost  identical  claims 
asserted in the aforementioned  lawsuit and dismissed  by the Denver  District 
Court  (state  court)  notwithstanding  ADC's  appeal  of  the  state  court's 
decision. In Federal Court case, the Company has filed a Motion to Dismiss and
discovery has been stayed  pending further action. The  Company plans to  seek 
dismissal of the case  and vigorously defend the  matter. Management does  not 
believe that  the ultimate  resolution of  this matter  will have  a  material 
adverse effect on the Group's financial condition.



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 
condition.



Note 18. Related party transactions



In the  rapidly developing  business environment  in the  Russian  Federation, 
companies and individuals  have frequently  used nominees and  other forms  of 
intermediary companies in 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  in this environment  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 affiliated companies. Related party processing  services 
were provided by affiliated refineries.



Below are related party transactions not disclosed elsewhere in the  financial 
statements. Refer also to  Notes 4, 6,  10, 12 and  19 for other  transactions 
with related parties.



Sales of  oil and  oil products  to related  parties were  $304 million,  $328 
million, $914  million  and  $1,014million  during  the  three  months  ended 
September 30, 2012  and 2011 and  during the nine  months ended  September30, 
2012 and 2011, respectively.



Other sales to related parties were $11 million, $13 million, $38 million  and 
$40 million during  the three  months ended September  30, 2012  and 2011  and 
during the nine months ended September 30, 2012 and 2011, respectively.



Purchases of oil and oil products from related parties were $113 million,  $61 
million, $361 million and $266million during the three months ended September
30, 2012 and  2011 and  during the nine  months ended  September30, 2012  and 
2011, respectively.



Purchases of processing services from related parties were $161 million,  $214 
million, $639 million and $648 million during the three months ended September
30, 2012 and  2011 and  during the nine  months ended  September30, 2012  and 
2011, respectively.



Other purchases  from  related parties  were  $26 million,  $16  million,  $59 
million and $44 million during the  three months ended September 30, 2012  and 
2011  and  during  the  nine  months  ended  September  30,  2012  and   2011, 
respectively.



Amounts receivable  from  related  parties,  including  short-term  loans  and 
advances, were $313  million and  $339 million as  of September  30, 2012  and 
December 31,  2011,  respectively. Amounts  payable  to related  parties  were 
$67million and $115 million as of  September 30, 2012 and December 31,  2011, 
respectively.



Note 19. Compensation plan



Since December 2009, the Company has a compensation plan to certain members of
management for the period from 2010 to 2012, which is based on assigned shares
and provides compensation consisting of  two parts. The first part  represents 
annual bonuses that are based on the number of assigned shares and the  amount 
of dividend per share. The payment of these bonuses is contingent on the Group
meeting certain financial  KPIs in  each financial  year. The  second part  is 
based upon the  Company's common stock  appreciation from 2010  to 2012,  with 
rights vesting  after the  date of  the compensation  plan's termination.  The 
number of assigned shares is approximately 17.3 million shares.



For the first part of the share plan the Group recognizes a liability based on
expected dividends and the number of assigned shares.



The second part of the share plan  is classified as equity settled. The  grant 
date fair value of the plan was estimated at $295 million. The fair value  was 
estimated using  the  Black-Scholes-Merton option-pricing  model,  assuming  a 
risk-free interest rate of 8.0% per annum, an expected dividend yield of 3.09%
per annum, an expected term of three years and a volatility factor of  34.86%. 
The  expected  volatility  factor  was  estimated  based  on  the   historical 
volatility of the  Company's shares for  the previous five  year period up  to 
January 2010.



As of  September  30,  2012,  there was  $25  million  of  total  unrecognized 
compensation cost related to  unvested benefits. This cost  is expected to  be 
recognized in the three-month period ending December 31, 2012.



Related to  these  plans the  Group  recorded $35  million,  $34million,  $114 
million and  $105 million  of compensation  expenses during  the three  months 
ended September 30, 2012 and 2011  and during the nine months ended  September 
30, 2012 and 2011, respectively, of which $25 million during the three  months 
ended September30, 2012 and 2011 and $74 million during the nine months  ended 
September 30,  2012 and  2011  are recognized  as  an increase  in  additional 
paid-in capital, respectively. As of September 30, 2012 and December 31, 2011,
$32 million and  $28 million  related to these  plans are  included in  "Other 
current liabilities"  in the  consolidated balance  sheets, respectively.  The 
total recognized tax benefit related to these accruals during the three months
ended September 30, 2012 and 2011  and during the nine months ended  September 
30, 2012 and 2011,  is $7 million,  $7 million, $23  million and $21  million, 
respectively.



Note 20. Segment information



Presented below is  information about the  Group's operating and  geographical 
segments for the three and nine months  ended September 30, 2012 and 2011,  in 
accordance with Topic 280, "Segment reporting," of the Codification.



The Group has the following  operating segments - exploration and  production; 
refining, marketing and  distribution; chemicals; power  generation and  other 
business segments. 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  primarily  crude  oil.  The  refining,  marketing  and 
distribution segment processes crude oil into refined products and  purchases, 
sells and transports crude oil  and refined petroleum products. The  chemicals 
segment refines  and sells  chemical products.  The power  generation  segment 
produces  steam  and  electricity,  distributes  them  and  provides   related 
services. The  activities  of the  other  business operating  segment  include 
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



For the three months ended September 30, 2012

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