2009

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Mark One) [x]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended            December 31, 2009                                               

OR

[  ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                         

Commission file number: 001-32395

ConocoPhillips

Delaware (State or other jurisdiction of incorporation or organization)		01-0562944 (I.R.S. Employer Identification No.)

600 North Dairy Ashford
Houston, TX 77079

Registrant’s telephone number, including area code: 281-293-1000

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange
Title of each class		on which registered
Common Stock, $.01 Par Value		New York Stock Exchange
Preferred Share Purchase Rights Expiring June 30, 2012		New York Stock Exchange
6.65% Debentures due July 15, 2018		New York Stock Exchange
7% Debentures due 2029		New York Stock Exchange
9.375% Notes due 2011		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.		[x] Yes [  ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.		[  ] Yes [x] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.		[x] Yes [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).		[x] Yes [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]		Accelerated filer [  ]		Non-accelerated filer [  ]		Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).		[  ] Yes [x] No

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $42.06, was $62.3 billion. The registrant, solely for the purpose of this required presentation, had deemed its Board of Directors and grantor trusts to be affiliates, and deducted their stockholdings of 811,943 and 39,808,419 shares, respectively, in determining the aggregate market value.

The registrant had 1,486,838,088 shares of common stock outstanding at January 31, 2010.

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2010 (Part III)

 

 

PART IV

Explanatory Note

This Amendment No. 1 to the Annual Report on Form 10-K of ConocoPhillips for the year ended December 31, 2009, is being filed for the purpose of providing separate audited financial statements of OAO LUKOIL in accordance with Rule 3-09 of Regulation S-X. These audited financial statements, which were not available prior to the due date for filing our 2009 Form 10-K, are included in Item 15, “Exhibits, Financial Statement Schedules.” Otherwise, this amendment does not update or modify in any way the financial position, results of operations, cash flows or the disclosures in ConocoPhillips’ Annual Report on Form 10-K for the year ended December 31, 2009, and does not reflect events occurring after the original filing date of February 25, 2010.

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements and Supplementary Data
		The financial statements and supplementary information, as listed in the Index to Financial Statements on page 70 of the original 2009 Form 10-K, were filed as part of the original 2009 Form 10-K filed on February 25, 2010.

	2.		Financial Statement Schedules
			Schedule II—Valuation and Qualifying Accounts was filed on page 173 of the original 2009 Form 10-K filed on February 25, 2010. All other schedules are omitted because they are not required, not significant, not applicable or the information is shown in another schedule, the financial statements or the notes to consolidated financial statements.
			The following information is included herein in this amended Form 10-K pursuant to Rule 3-09 of Regulation S-X:
			OAO LUKOIL

	•		Independent Auditors’ Report.
	•		Consolidated Balance Sheets as of December 31, 2009 and 2008.
	•		Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007.
	•		Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007.
	•		Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.
	•		Notes to Consolidated Financial Statements.
	•		Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited).

	3.		Exhibits
			The exhibits listed in the Index to Exhibits, which appears on pages 55 through 59 are filed as part of this annual report.

(c)

The financial statements of OAO LUKOIL, which appear below, are filed in accordance with Rule 3-09 of Regulation S-X.

Independent Auditors’ Report

The Board of Directors of OAO LUKOIL:

We have audited the accompanying consolidated balance sheets of OAO LUKOIL and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the management of OAO LUKOIL. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OAO LUKOIL and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ ZAO KPMG

ZAO KPMG
Moscow, Russian Federation
March 19, 2010

OAO LUKOIL Consolidated Balance Sheets As of December 31, 2009 and 2008 (Millions of US dollars, unless otherwise noted)

		Note		2009				2008
Assets
Current assets
Cash and cash equivalents		3			2,274				2,239
Short-term investments					75				505
Accounts and notes receivable, net		5			5,935				5,069
Inventories		6			5,432				3,735
Prepaid taxes and other expenses					3,549				3,566
Other current assets					574				519
Total current assets					17,839				15,633
Investments		7			5,944				3,269
Property, plant and equipment		8			52,228				50,088
Deferred income tax assets		12			549				521
Goodwill and other intangible assets		9			1,653				1,159
Other non-current assets					806				791
Total assets					79,019				71,461
Liabilities and Stockholders’ equity
Current liabilities
Accounts payable					4,906				5,029
Short-term borrowings and current portion of long-term debt		10			2,058				3,232
Taxes payable					1,828				1,564
Other current liabilities					902				750
Total current liabilities					9,694				10,575
Long-term debt		11, 15			9,265				6,577
Deferred income tax liabilities		12			2,080				2,116
Asset retirement obligations		8			1,189				718
Other long-term liabilities					412				465
Total liabilities					22,640				20,451
Equity		14
OAO LUKOIL stockholders’ equity
Common stock					15				15
Treasury stock, at cost					(282	)			(282	)
Additional paid-in capital					4,699				4,694
Retained earnings					51,634				45,983
Accumulated other comprehensive loss					(75	)			(70	)
Total OAO LUKOIL stockholders’ equity					55,991				50,340
Non-controlling interests					388				670
Total equity					56,379				51,010
Total liabilities and equity					79,019				71,461

/s/ Alekperov V.Y.				/s/ Kozvrev I.A.
President of OAO LUKOIL				Chief accountant of OAO LUKOIL
Alekperov V.Y.				Kozyrev I.A.

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

OAO LUKOIL Consolidated Statements of Income For the years ended December 31, 2009, 2008 and 2007 (Millions of US dollars, unless otherwise noted)

		Note		2009				2008				2007
Revenues
Sales (including excise and export tariffs)		22			81,083				107,680				81,891
Costs and other deductions
Operating expenses					(7,124	)			(8,126	)			(6,172	)
Cost of purchased crude oil, gas and products					(31,977	)			(37,851	)			(27,982	)
Transportation expenses					(4,830	)			(5,460	)			(4,457	)
Selling, general and administrative expenses					(3,306	)			(3,860	)			(3,207	)
Depreciation, depletion and amortization					(3,937	)			(2,958	)			(2,172	)
Taxes other than income taxes		12			(6,474	)			(13,464	)			(9,367	)
Excise and export tariffs					(13,058	)			(21,340	)			(15,033	)
Exploration expenses					(218	)			(487	)			(307	)
Loss on disposals and impairments of assets					(381	)			(425	)			(123	)
Income from operating activities					9,778				13,709				13,071
Interest expense					(667	)			(391	)			(333	)
Interest and dividend income					134				163				135
Equity share in income of affiliates		7			351				375				347
Currency translation (loss) gain					(520	)			(918	)			35
Other non-operating expense					(13	)			(244	)			(240	)
Income before income tax					9,063				12,694				13,015
Current income taxes					(1,922	)			(4,167	)			(3,410	)
Deferred income taxes					(72	)			700				(39	)
Total income tax expense		12			(1,994	)			(3,467	)			(3,449	)
Net income					7,069				9,227				9,566
Less: net income attributable to non-controlling interests					(58	)			(83	)			(55	)
Net income attributable to OAO LUKOIL					7,011				9,144				9,511
Basic and diluted earnings per share of common stock (US dollars) attributable to OAO LUKOIL:		14			8.28				10.88				11.48

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

OAO LUKOIL Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the years ended December 31, 2009, 2008 and 2007 (Millions of US dollars, unless otherwise noted)

		2009								2008								2007
		Stockholders’				Comprehen-				Stockholders’				Comprehen-				Stockholders’				Comprehen-
		equity				sive income				equity				sive income				equity				sive income
Common stock
Balance as of January 1			15								15								15
Balance as of December 31			15								15								15
Treasury stock
Balance as of January 1			(282	)							(1,591	)							(1,098	)
Stock purchased			—								(219	)							(712	)
Stock disposed			—								1,528								219
Balance as of December 31			(282	)							(282	)							(1,591	)
Additional paid-in capital
Balance as of January 1			4,694								4,499								3,943
Premium on non-outstanding shares issued			—								20								—
Effect of stock compensation plan			20								103								103
Changes in non-controlling interests			(15	)							—								—
Proceeds from sale of treasury stock in excess of carrying amount			—								72								453
Balance as of December 31			4,699								4,694								4,499
Retained earnings
Balance as of January 1			45,983								38,349								30,061
Net income			7,011				7,011				9,144				9,144				9,511				9,511
Dividends on common stock			(1,360	)							(1,510	)							(1,223	)
Balance as of December 31			51,634								45,983								38,349
Accumulated other comprehensive loss, net of tax
Balance as of January 1			(70	)							(59	)							(21	)
Pension benefits:
Prior service cost			(4	)			(4	)			(5	)			(5	)			(16	)			(16	)
Actuarial gain (loss)			1				1				(6	)			(6	)			(22	)			(22	)
Unrecognized loss on available-for-sale securities			(2	)			(2	)			—				—				—				—
Balance as of December 31			(75	)							(70	)							(59	)
Total comprehensive income for the year							7,006								9,133								9,473
Total OAO LUKOIL stockholders’ equity as of December 31			55,991								50,340								41,213
Non-controlling interests
Balance as of January 1			670								577								523
Net income attributable to non-controlling interests			58								83								55
Changes in non-controlling interests			(340	)							10								(1	)
Balance as of December 31			388								670								577
Total equity as of December 31			56,379								51,010								41,790

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

OAO LUKOIL Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the years ended December 31, 2009, 2008 and 2007 (Millions of US dollars, unless otherwise noted)

		Share Activity
		2009				2008				2007
		(thousands of shares)				(thousands of shares)				(thousands of shares)
Common stock, issued
Balance as of January 1			850,563				850,563				850,563
Balance as of December 31			850,563				850,563				850,563
Treasury stock
Balance as of January 1			(3,836	)			(23,321	)			(23,632	)
Purchase of treasury stock			—				(2,899	)			(8,756	)
Disposal of treasury stock			—				22,384				9,067
Balance as of December 31			(3,836	)			(3,836	)			(23,321	)

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

OAO LUKOIL Consolidated Statements of Cash Flows For the years ended December 31, 2009, 2008 and 2007 (Millions of US dollars)

		Note				2009				2008				2007
Cash flows from operating activities
Net income							7,011				9,144				9,511
Adjustments for non-cash items:
Depreciation, depletion and amortization							3,937				2,958				2,172
Equity share in income of affiliates, net of dividends received							(213	)			(238	)			209
Dry hole write-offs							117				317				143
Loss on disposals and impairments of assets							381				425				123
Deferred income taxes							72				(700	)			39
Non-cash currency translation (gain) loss							(57	)			(668	)			251
Non-cash investing activities							(20	)			(29	)			(36	)
All other items — net							138				404				297
Changes in operating assets and liabilities:
Accounts and notes receivable							(1,171	)			2,647				(2,297	)
Inventories							(1,719	)			963				(1,148	)
Accounts payable							96				(989	)			1,599
Taxes payable							292				(521	)			386
Other current assets and liabilities							19				599				(368	)
Net cash provided by operating activities							8,883				14,312				10,881
Cash flows from investing activities
Acquisition of licenses							(40	)			(12	)			(255	)
Capital expenditures							(6,483	)			(10,525	)			(9,071	)
Proceeds from sale of property, plant and equipment							91				166				72
Purchases of investments							(216	)			(398	)			(206	)
Proceeds from sale of investments							478				636				175
Sale of interests in subsidiaries and affiliated companies							92				3				1,136
Acquisitions of subsidiaries and non-controlling interests (including advances related to acquisitions), net of cash acquired							(2,845	)			(3,429	)			(1,566	)
Net cash used in investing activities							(8,923	)			(13,559	)			(9,715	)
Cash flows from financing activities
Net movements of short-term borrowings							(1,281	)			974				(59	)
Cash received under sales-leaseback transaction							—				235				—
Proceeds from issuance of long-term debt							5,467				2,884				2,307
Principal repayments of long-term debt							(2,697	)			(1,547	)			(1,632	)
Dividends paid on company common stock							(1,337	)			(1,437	)			(1,230	)
Dividends paid to non-controlling interest stockholders							(85	)			(168	)			(78	)
Financing received from related and third party non-controlling interest stockholders							20				39				177
Purchase of Company’s stock							—				(219	)			(712	)
Proceeds from sale of Company’s stock							—				—				129
Other — net							—				2				—
Net cash provided by (used in) financing activities							87				763				(1,098	)
Effect of exchange rate changes on cash and cash equivalents							(12	)			(118	)			21
Net increase in cash and cash equivalents							35				1,398				89
Cash and cash equivalents at beginning of year							2,239				841				752
Cash and cash equivalents at end of year			3				2,274				2,239				841
Supplemental disclosures of cash flow information
Interest paid							520				440				338
Income taxes paid							1,575				4,902				2,872

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

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

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 Russian Federation has been experiencing political and economic change, that has affected and will continue to affect the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks, which do not typically exist in other markets. In addition, the recent contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment.

The accompanying 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

These consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Note 2. Summary of significant accounting policies

Principles of consolidation

These 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.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

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.

Revenue

Revenues from the production and sale of crude oil and petroleum products 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 operations in the Russian Federation and for the majority of operations 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 the consolidated statement of income.

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

In all cases, foreign currency transaction gains and losses are included in the consolidated statement of income.

As of December 31, 2009, 2008 and 2007, exchange rates of 30.24, 29.38 and 24.55 Russian rubles to the US dollar, respectively, have been used for translation purposes.

The Russian ruble and other currencies of republics of the former Soviet Union are not readily convertible outside of their countries. Accordingly, the translation of amounts recorded in these currencies into US dollars should not be construed as a representation that such currency amounts have been, could be or will in the future be converted into US dollars at the exchange rate shown or at any other exchange rate.

Cash and cash equivalents

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

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Cash with restrictions on immediate use

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

Accounts and notes receivable

Accounts and notes 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

Starting from January 1, 2009, the Group elected to change the inventory accounting method for finished goods and purchased products from the weighted average to the FIFO cost method. Management believes the FIFO cost method for these inventory categories is preferable because it reflects the results of the most recent business activity and allows a more rapid reflection of results of operations, and represents a better matching of cost of sales with related sales. The Group determined that it is impracticable to calculate the cumulative effect of applying this change retrospectively because of the lack of information available.

The cost of all other inventory categories is determined using an “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 the consolidated statement of income. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of 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 the consolidated statement of income 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 the consolidated statement of income 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 rate method and such amortization and accretion is recorded in the consolidated statement of income.

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, 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.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 2. Summary of significant accounting policies (continued)

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 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 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 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.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

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 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 the consolidated statement of income in the reporting period which includes the enactment date.

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 the consolidated statements of income.

Interest-bearing borrowings

Interest-bearing borrowings 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 the consolidated statement of income each year and the carrying amounts are adjusted as amortization accumulates.

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

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Pension benefits

The expected costs in respect of pension obligations of Group companies are determined by an independent actuary. Obligations in respect of each employee are accrued over the reporting periods during which the employee renders service in the Group.

The Group recognizes the funded status of postretirement defined benefit plan in the balance sheet with corresponding adjustments to accumulated other comprehensive income. The adjustment to accumulated other comprehensive income represents the net unrecognized actuarial gains and unrecognized prior service costs. These amounts are subsequently recognized as net periodic benefit cost. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods are recognized as a component of other comprehensive income. These amounts are subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income.

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 the consolidated statement of income. If the assessment indicates that a potentially material loss is not probable, but is reasonably possible, or is probable, but cannot be 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.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

The Group’s derivative activity is limited to certain petroleum products marketing and trading outside of its physical crude oil and petroleum products businesses 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 the consolidated statement of income on a net basis. Unrealized gains and losses are carried as assets or liabilities on the consolidated balance sheet.

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.

Recent accounting pronouncements

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, “Subsequent events” which amends Accounting Standards Codification (ASC) No. 855 (former SFAS No. 165, “Subsequent events”), issued in May 2009. The Group adopted ASC No. 855 starting from the second quarter of 2009. These standards address accounting and disclosure requirements related to subsequent events and require management of an entity which is an SEC filer or is a conduit bond obligator for conduit securities that are traded in a public market to evaluate subsequent event through the date that the financial statements are issued. Entities that do not meet these criteria should evaluate subsequent events through the date the financial statements are available to be issued and are required to disclose the date through which subsequent events have been evaluated. The Group determined that it should evaluate subsequent events through the date the financial statements are available to be issued and applied the requirements of ASU No. 2010-09 starting from the financial statements for 2009.

In January 2010, the FASB issued ASU No. 2010-01, “Accounting for Distributions to Shareholders with Components of Stock and Cash” which addresses how an entity should account for the stock portion of a dividend in certain arrangements when a shareholder makes an election to receive cash or stock, subject to limitations on the amount of the dividend to be issued in cash. The stock portion of the dividend should be accounted for as a stock issuance upon distribution, resulting in basic earnings per share being adjusted prospectively. Prior to distribution, the entity’s obligation to issue shares would be reflected in diluted earnings-per-share based on the guidance in ASC No. 260, which addresses contracts that may be settled in shares. This ASU is effective for interim and annual periods ending after December 15, 2009. The Group adopted ASU No. 2010-01 for the 2009 annual financial statements. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

In January 2010, the FASB issued ASU No. 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification” to clarify the scope of ASC Subtopic No. 810-10, “Consolidation — Overall.” This ASU specifies that the guidance in ASC Subtopic No. 810-10 on accounting for decreases in ownership of a subsidiary applies to: (1) a subsidiary or group of assets that constitutes a business or nonprofit activity; (2) a subsidiary that is a business or a nonprofit activity that is transferred to an equity method investee or a joint venture; and (3) an exchange of a group of assets that constitute a business or nonprofit activity for a noncontrolling interest in an entity. If a company’s ownership interest in a subsidiary that is not a business or nonprofit activity decreases, then other accounting guidance generally would be applied based on the nature of the transaction. The new pronouncement also clarifies that the recent guidance on accounting for decreases in ownership of a subsidiary does not apply if the transaction is a sale of in-substance real estate or a conveyance of oil and gas properties. This ASU is effective for interim and annual periods ending after December 15, 2009 and the guidance should be applied on a retrospective basis to the first period in which the company adopted ASC No. 810. The Group adopted ASU No. 2010-02 for the 2009 annual financial statements. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

In January 2010, the FASB issued ASU No. 2010-03, “Extractive activities — Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures”. The main provisions of ASU No. 2010-03 are the following: (1) expanding the definition of oil- and gas-producing activities to include the extraction of saleable hydrocarbons, in solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable resources that are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction; (2) entities should use first-day-of-the-month price during the 12-month period (the 12-months average price) in calculating proved oil and gas reserves and estimating related standardized measure of discounted net cash flows; (3) requiring entities to disclose separately information about reserves quantities and financial statement amounts for geographic areas that represent 15 percent or more of proved reserves; (4) separate disclosure for consolidated entities and equity method investments. ASU No. 2010-03 is effective for annual reporting periods ending on or after December 31, 2009. The Group adopted ASU No. 2010-03 for the 2009 annual financial statements. This adoption did not have a material impact on the Group’s reported reserves evaluation, results of operations, financial position or cash flows.

In June 2009, the FASB issued amendments to ASC No. 810 (former FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”) to address the effects of the elimination of the qualifying special purpose entity concept. More specifically, it requires a qualitative rather than a quantitative approach to determine the primary beneficiary of a variable interest entity, it amends certain guidance pertaining to the determination of the primary beneficiary when related parties are involved, and it amends certain guidance for determining whether an entity is a variable interest entity. Additionally, these amendments require continuous assessment of whether an enterprise is the primary beneficiary of a variable interest entity. Amendments are effective on January 1, 2010, and the Group does not expect any material impact on its results of operations, financial position or cash flows upon adoption.

In June 2009, the FASB issued ASC No. 105 (former SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”). The FASB Accounting Standards Codification (“Codification”) is the exclusive authoritative reference for US GAAP recognized by the FASB and applied by nongovernmental entities, except for SEC rules and interpretive releases, which are also authoritative US GAAP for SEC registrants. The change established by ASC No. 105 divides nongovernmental US GAAP into authoritative Codification and guidance that is not authoritative. The contents of the Codification carry the same level of authority, eliminating the four-level US GAAP hierarchy previously set forth in SFAS No. 162. The Codification supersedes all non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Group adopted ASC No. 105 starting from the third quarter of 2009. This adoption did not have any impact on the Group’s results of operations, financial position or cash flows.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

In December 2008, the FASB amended ASC Nos. 310, 320, 323, 405, 460, 470, 712, 715, 810, 815, 860, 954 and 958 (former FSP FAS 140-4 and FIN 46(R)-8, “Disclosures about Transfers of Financial Assets and Interest in Variable Interest Entities”). It requires additional disclosures about transfers of financial assets and requires public entities, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. The Group adopted new provisions starting from the fourth quarter of 2008. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

In March 2008, the FASB issued ASC No. 815 (former SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”). This ASC improves financial reporting about derivative instruments and hedging activities by enhanced disclosures of their effects on an entity’s financial position, financial performance and cash flows. The Group adopted the provisions of ASC No. 815 starting from the first quarter of 2009. This adoption did not have any impact on the Group’s results of operations, financial position or cash flows.

In December 2007, the FASB issued ASC No. 805 (former SFAS No. 141 (Revised), “Business combinations”). This ASC applies to all transactions in which an entity obtains control of one or more businesses. In April 2009, this ASC was amended and requires an entity to recognize the total fair value of assets acquired and liabilities assumed in a business combination; to recognize and measure the goodwill acquired in the business combination or gain from a bargain purchase and modifies the disclosure requirements. The Group adopted the provisions of ASC No. 805 for business combinations for which the acquisition date is after December 31, 2008. This adoption did not have any impact on the Group’s results of operations, financial position or cash flows.

In December 2007, the FASB issued ASC No. 810 (former SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”). This ASC applies to all entities that prepare consolidated financial statements (except not-for-profit organizations) and affects those which have an outstanding noncontrolling interest (or minority interest) in their subsidiaries or which have to deconsolidate a subsidiary. This ASC changes the classification of a non-controlling interest; establishing a single method of accounting for changes in the parent company’s ownership interest that does not result in deconsolidation and requires a parent company to recognize a gain or loss when a subsidiary is deconsolidated. The Group prospectively adopted the provisions of ASC No. 810 in the first quarter of 2009, except for the presentation and disclosure requirements which were applied retrospectively. This adoption did not have any impact on the Group’s results of operations, financial position or cash flows.

In February 2007, the FASB issued ASC Nos. 470, 825 and 954 (former SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”). These ASC expands the possibility of using fair value measurements and permits enterprises to choose to measure certain financial assets and financial liabilities at fair value. Enterprises shall report unrealized gains and losses on items for which the fair value option has been elected in earnings in each subsequent period. The Group adopted the provisions of ASC Nos. 470, 825 and 954 in the first quarter of 2008 and elected not to use the fair value option for its financial assets and financial liabilities not already carried at fair value in accordance with other standards. This adoption did not have any impact on the Group’s results of operations, financial position or cash flows.

In September 2006, the FASB issued ASC No. 820 (former SFAS No. 157, “Fair Value Measurements”), which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. Effective January 1, 2009, the Group fully adopted ASC No. 820. Because there usually is a lack of quoted market prices for long-lived assets, the Group determines fair value using the present value of estimated future net cash flows from using these assets or by using historical data of market transactions with similar assets where possible. Fair value used in the initial recognition of asset retirement obligations is determined using the present value of expected future dismantlement costs, which are estimated based on the costs for dismantlement services for similar assets providing by third parties. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 3. Cash and cash equivalents

		As of December				As of December
		31,2009				31,2008
Cash held in Russian rubles			557				444
Cash held in other currencies			1,384				1,425
Cash of a banking subsidiary in other currencies			131				132
Cash held in related party banks in Russian rubles			174				182
Cash held in related party banks in other currencies			28				56
Total cash and cash equivalents			2,274				2,239

Note 4. Non-cash transactions

The consolidated statement of cash flows excludes the effect of non-cash transactions, which are described in the following table:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Non-cash investing activity			20				29				36
Non-cash acquisitions			100				1,969				—
Settlement of stock-based compensation plan liability			—				—				537
Total non-cash transactions			120				1,998				573

The following table shows the effect of non-cash transactions on investing activity:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Net cash used in investing activity			8,923				13,559				9,715
Non-cash acquisitions			100				1,969				—
Non-cash investing activity			20				29				36
Total investing activity			9,043				15,557				9,751

Note 5. Accounts and notes receivable, net

		As of December				As of December
		31,2009				31,2008
Trade accounts and notes receivable (net of provisions of $191 million and $133 million as of December 31, 2009 and 2008, respectively)			4,389				3,466
Current VAT and excise recoverable			1,205				855
Other current accounts receivable (net of provisions of $41 million and $38 million as of December 31, 2009 and 2008, respectively)			341				748
Total accounts and notes receivable			5,935				5,069

Note 6. Inventories

		As of December				As of December
		31,2009				31,2008
Crude oil and petroleum products			4,391				2,693
Materials for extraction and drilling			387				439
Materials and supplies for refining			37				35
Other goods, materials and supplies			617				568
Total inventories			5,432				3,735

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 7. Investments

		As of December				As of December
		31,2009				31,2008
Investments in equity method affiliates and joint ventures			4,754				2,988
Long-term loans given by non-banking subsidiaries			1,176				251
Other long-term investments			14				30
Total long-term investments			5,944				3,269

Investments in “equity method” affiliates and corporate 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.

		Year ended								Year ended								Year ended
		December 31, 2009								December 31, 2008								December 31, 2007
						Group’s								Group’s								Group’s
		Total				share				Total				share				Total				share
Revenues			5,139				2,275				4,590				2,144				2,930				1,382
Income before income taxes			1,305				478				1,602				807				1,398				650
Less income taxes			(407	)			(127	)			(869	)			(432	)			(605	)			(303	)
Net income			898				351				733				375				793				347

		As of December 31, 2009								As of December 31, 2008
						Group’s								Group’s
		Total				Share				Total				share
Current assets			6,796				1,524				2,023				982
Property, plant and equipment			18,877				5,284				5,872				2,841
Other non-current assets			607				240				544				269
Total assets			26,280				7,048				8,439				4,092
Short-term debt			442				274				158				47
Other current liabilities			3,982				817				1,188				557
Long-term debt			7,769				732				890				392
Other non-current liabilities			1,633				471				220				108
Net assets			12,454				4,754				5,983				2,988

In December 2009, the Group acquired the remaining a 46.0% interest in its equity affiliate LUKARCO B.V. for $1.6 billion, thereby increasing the ownership stake to 100%. LUKARCO B.V. is a holding company, which owns a 5% share in Tengizchevroil, a joint venture which develops the Tengiz and Korolevskoe fields in Kazakhstan, and a 12.5% share in the Caspian Pipeline Consortium (CPC), which carries Kazakhstani and Russian oil to Novorossiysk marine terminal. Therefore the Group increased the ownership in Tengizchevroil from 2.7% to 5% and the ownership in CPC from 6.75% to 12.5%. The first installment in the amount of $300 million was paid in December 2009; the remaining amount should be paid no later than two years after the acquisition. The Group is using the equity method of accounting for investments in Tengizchevroil and CPC.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 7. Investments (continued)

In June 2009, a Group company entered into an agreement with Total to acquire a 45% interest in the TRN refinery in the Netherlands. The transaction was finalized in September 2009 in the amount of approximately $700 million. The Group supplies crude oil and market refined products in line with its equity stake in the refinery. The refinery has the flexibility to process Urals blend crude oil as well as significant volumes of straight-run fuel oil and vacuum gasoil, which will allow the Group to integrate the plant into its crude oil supply and refined products marketing operations. This plant with a Nelson complexity index of 9.8 has an annual topping capacity of 7.9 million tonnes and an annual capacity of a hydro-cracking unit of approximately 3.4 million tonnes. This acquisition was made in accordance with the Group’s plans to develop its refining capacity in Europe.

In June 2008, a Group company signed an agreement with ERG S.p.A. to establish a joint venture to operate the ISAB refinery complex in Priolo, Italy. In December 2008, the Group completed the acquisition of a 49% stake in the joint venture for €1.45 billion (approximately $1.83 billion) and paid €600 million (approximately $762 million) as a first installment. The remaining amount was paid in February 2009. The seller has a put option, the effect of which would be to increase the Group’s stake in the company operating the ISAB refinery complex up to 100%. As of December 31, 2009, the fair value of this option for the Group is zero. The agreement states that each partner is responsible for procuring crude oil and marketing refined products in line with its equity stake in the joint venture. The ISAB refinery complex has the flexibility to process Urals blend crude oil, and the Group integrated its share of the ISAB refinery complex capacity into its crude oil supply and refined products marketing operations. The ISAB refinery complex includes three jetties and storage tanks totaling 3,700 thousand cubic meters and has an annual refining capacity of 16 million tonnes.

Note 8. Property, plant and equipment and asset retirement obligations

		At cost								Net
		As of December				As of December				As of December				As of December
		31, 2009				31, 2008				31, 2009				31, 2008
Exploration and Production:
Western Siberia			23,465				21,663				13,878				12,784
European Russia			24,908				23,111				17,761				17,103
International			6,371				5,910				5,170				5,009
Total			54,744				50,684				36,809				34,896
Refining, Marketing, Distribution and Chemicals:
Western Siberia			6				122				5				107
European Russia			10,228				9,752				6,923				6,829
International			6,849				6,462				4,783				4,633
Total			17,083				16,336				11,711				11,569
Other:
Western Siberia			186				178				94				89
European Russia			3,951				3,618				3,491				3,385
International			189				200				123				149
Total			4,326				3,996				3,708				3,623
Total property, plant and equipment			76,153				71,016				52,228				50,088

In December 2009, the Company performed a regular annual impairment test of its exploration and production assets. The test was based on geological models and development programs, which are revised on a regular basis. As a result of the test, the Company recognized an impairment loss of $238 million for certain properties in the Timan-Pechora and Central European regions of Russia. The fair value of these assets was determined using the present value of the expected cash flows. The Group also recognized an impairment loss of $63 million related to the project in Iran due to incapability of undertaking further works because of the threat of economic sanctions of the US Government.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 8. Property, plant and equipment and asset retirement obligations (continued)

In June 2008, the Company performed an impairment test of certain exploration and production assets located in oil fields in the Timan-Pechora region of Russia, due to a revision of geological models. The revision resulted in a reduction of planned development activities on these oil fields. The fair value of these assets was determined using the present value of the expected cash flows. As a result, the Company recognized an impairment loss of $156 million. In December 2008, the Group recognized an impairment loss of $58 million relating to retail petrol stations in the USA.

As of December 31, 2009 and 2008, the asset retirement obligations amounted to $1,199 million and $728 million, respectively, of which $10 million was included in “Other current liabilities” in the consolidated balance sheets as of each balance sheet date. During 2009 and 2008, asset retirement obligations changed as follows:

		2009				2008
Asset retirement obligations as of January 1			728				821
Accretion expense			63				78
New obligations			146				54
Changes in estimates of existing obligations			311				(88	)
Spending on existing obligations			(7	)			(8	)
Property dispositions			(13	)			(3	)
Foreign currency translation and other adjustments			(29	)			(126	)
Asset retirement obligations as of December 31			1,199				728

The asset retirement obligations incurred during 2009 and 2008 were Level 3 (unobservable inputs) fair value measurements.

Note 9. Goodwill and other intangible assets

The carrying value of goodwill and other intangible assets as of December 31, 2009 and 2008 was as follows:

		As of December				As of December
		31, 2009				31, 2008
Amortized intangible assets
Software			419				500
Licenses and other assets			465				335
Goodwill			769				324
Total goodwill and other intangible assets			1,653				1,159

All goodwill amounts relate to the refining, marketing and distribution segment.

In the fourth quarter of 2009, the Group recognized goodwill related to acquisitions of a 100% interest in the Akpet group, 100% interests in OOO Smolenskneftesnab, OOO IRT Investment, OOO PM Invest and OOO Retaier House and 100% interests in ZAO Association Grand and OOO Mega Oil M in the amount of $114 million, $165 million and $196 million, respectively (refer to Note 16. Business combinations).

In December 2008, the Group recognized an impairment loss of $100 million relating to goodwill on the acquisition of Beopetrol due to the change in the economic environment. Beopetrol is a marketing and distribution company operating a chain of retail petrol stations in Serbia. The fair value of Beopetrol was determined using the present value of the expected cash flows.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

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

		As of December				As of December
		31, 2009				31, 2008
Short-term borrowings from third parties			442				2,301
Short-term borrowings from related parties			77				—
13,50% Russian ruble bonds			496				—
Current portion of long-term debt			1,043				931
Total short-term borrowings and current portion of long-term debt			2,058				3,232

Short-term borrowings from third parties are unsecured and include amounts repayable in US dollars of $282 million and $1,529 million, amounts repayable in Euro of $76 million and $676 million and amounts repayable in Russian rubles of $18 million and $70 million as of December 31, 2009 and 2008, respectively. The weighted-average interest rate on short-term borrowings from third parties was 2.02% and 5.15% per annum as of December 31, 2009 and 2008, respectively.

Russian ruble bonds

In June 2009, the Company issued 15 million short-term stock exchange bonds with a face value of 1,000 Russian rubles each. Bonds were placed at the face value with a maturity of 364 days. The coupon yield is 13.5% per annum and is paid at the maturity date.

Note 11. Long-term debt

		As of December				As of December
		31, 2009				31, 2008
Long-term loans and borrowings from third parties (including loans from banks in the amount of $3,967 million and $3,333 million as of December 31, 2009 and 2008, respectively)			4,043				3,384
Long-term loans and borrowings from related parties			1,939				2,165
6.375% US dollar bonds, maturing 2014			895				—
6.356% US dollar bonds, maturing 2017			500				500
7.250% US dollar bonds, maturing 2019			595				—
6.656% US dollar bonds, maturing 2022			500				500
7.25% Russian ruble bonds, maturing 2009			—				204
7.10% Russian ruble bonds, maturing 2011			265				272
8.00% Russian ruble bonds, maturing 2012			—				8
13.35% Russian ruble bonds, maturing 2012			827				—
9.20% Russian ruble bonds, maturing 2012			331				—
7.40% Russian ruble bonds, maturing 2013			198				204
Capital lease obligations			215				271
Total long-term debt			10,308				7,508
Current portion of long-term debt			(1,043	)			(931	)
Total non-current portion of long-term debt			9,265				6,577

Long-term loans and borrowings

Long-term loans and borrowings from third parties include amounts repayable in US dollars of $3,493 million and $2,844 million, amounts repayable in Euro of $487 million and $375 million and amounts repayable in Russian rubles of $42 million and $112 million as of December 31, 2009 and 2008, respectively. This debt has maturity dates from 2010 through 2021. The weighted-average interest rate on long-term loans and borrowings from third parties was 2.77% and 4.09% per annum as of December 31, 2009 and 2008, respectively. A number of long-term loan agreements contain certain financial covenants due levels of which are being met by the Group. Approximately 15% of total long-term debt is secured by export sales and property, plant and equipment.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

The Company has a secured loan agreement with Deutche Bank AG with an outstanding amount of $1,200 million as of December 31, 2009, maturing up to 2012. Borrowings under this agreement bear interest at three month LIBOR plus 4.0% per annum.

A Group company has an unsecured syndicated loan agreement with an outstanding amount of $860 million as of December 31, 2009, with maturity dates up to 2013. The loan was arranged by ABN AMRO Bank, Banco Bilbao Vizcaya Argentaria, BNP Paribas, The Bank of Tokyo-Mitsubishi UFJ, ING Bank, Mizuho Corporate Bank and WestLB. Borrowings under this agreement bear interest from three month LIBOR plus 0.85% to three month LIBOR plus 0.95% per annum.

Two Group companies have unsecured loan agreements with an outstanding amount of $424 million as of December 31, 2009, maturing up to 2011. The loans were arranged by ABN AMRO Bank, The Bank of Tokyo-Mitsubishi UFJ, Barclays Capital, BNP Paribas, Citibank, Dresdner Kleinwort, ING Bank and WestLB. Borrowings under these agreements bear interest at three month LIBOR plus 3.25% per annum.

The Company has an unsecured syndicated loan agreement with the European Bank for Reconstruction and Development with an outstanding amount of $258 million as of December 31, 2009, maturing up to 2017. Borrowings under this agreement bear interest from six month LIBOR plus 0.45% to six month LIBOR plus 0.65% per annum.

A Group company has a secured loan agreement, arranged by Credit Suisse, supported by an Overseas Private Investment Corporation guarantee, with an outstanding amount of $175 million as of December 31, 2009. Borrowings under this agreement bear interest at six month LIBOR plus 4.8% per annum and have maturity dates up to 2015.

A Group company has an unsecured loan agreement with Citibank with an outstanding amount of $129 million as of December 31, 2009, maturing up to 2019. Borrowings under this agreement bear interest at euribor plus 0.125% per annum.

The Company has an unsecured syndicated loan agreement, arranged by ABN AMRO Bank and CALYON with an outstanding amount of $125 million as of December 31, 2009, maturing up to 2012. Borrowings under this agreement bear interest at three month LIBOR plus 0.40% per annum.

A Group company has an unsecured loan agreement with BNP Paribas with an outstanding amount of $119 million as of December 31, 2009, maturing up to 2018. Borrowings under this agreement bear interest at six month euribor plus 0.15% per annum.

A Group company has an unsecured loan agreement with Citibank with an outstanding amount of $100 million as of December 31, 2009, maturing in 2011. Borrowings under this agreement bear interest at one month LIBOR plus 0.90% per annum.

As of December 31, 2009, the Group has a number of other loan agreements with fixed rates with a number of banks and other organizations totaling $239 million, maturing from 2010 to 2021. The weighted average interest rate under these loans was 4.12% per annum.

As of December 31, 2009, the Group has a number of other floating rate loan agreements with a number of banks and other organizations totaling $414 million, maturing from 2010 to 2017. The weighted average interest rate under these loans was 2.16% per annum.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

A Group company has a number of loan agreements nominated in Russian rubles with ConocoPhillips, the Group’s related party, with an outstanding amount of $1,939 million as of December 31, 2009. This amount includes $1,660 million loaned by ConocoPhillips to a joint venture OOO Narianmarneftegaz (“NMNG”) (refer to Note 17. Consolidation of Variable Interest Entity). Borrowings under these agreements bear interest at fixed rates ranging from 6.8% to 8.2% per annum and have maturity dates up to 2038. These agreements are a part of the Company’s broad-based strategic alliance with ConocoPhillips and this financing is used to develop oil production and the distribution infrastructure in the Timan-Pechora region of the Russian Federation.

US dollar bonds

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 5 years at a price of 99.474% of the bond’s face value. The resulting yield to maturity for the first tranche is 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. The resulting yield to maturity for the second tranche is 7.375%. These tranches have a half year coupon period.

In June 2007, a Group company issued non-convertible bonds totaling $1 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 the 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. Bonds were placed at the 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. Bonds were placed at the face value with a maturity of 1,092 days. The bonds have a 182 days’ coupon period and bear interest at 13.35% per annum.

In January 2007, OAO UGK TGK-8 (“TGK-8”), a subsidiary acquired in 2008 (refer to Note 16. Business combinations) issued 3.5 million non-convertible bonds with a face value of 1,000 Russian rubles each. These bonds were placed at the face value with a maturity of 5 years, with a coupon yield of 8.0% per annum and a half year coupon period. By the end of May 2009, TGK-8 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 the face value and have a half year coupon period.

In November 2004, the Company issued 6 million non-convertible bonds with a face value of 1,000 Russian rubles each, maturing on November 23, 2009. The bonds had a half year coupon period and beard interest at 7.25% per annum. In November 2009, the Company redeemed all issued bonds in accordance with the conditions of the bond issue.

Maturities of long-term debt

Annual maturities of total long-term debt during the next five years, including the portion classified as current, are $1,043 million in 2010, $1,890 million in 2011, $2,105 million in 2012, $524 million in 2013, $1,094 million in 2014 and $3,652 million thereafter.

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 12. Taxes

The Group is taxable in a number of jurisdictions within and outside of the Russian Federation and, as a result, is subject to a variety of taxes as established under the statutory provisions of each jurisdiction.

The total cost of taxation to the Group is reported in the consolidated statement of income as “Total income tax expense” for income taxes, as “Excise and export tariffs” for excise taxes, export tariffs and petroleum products sales taxes and as “Taxes other than income taxes” for other types of taxation. In each category taxation is made up of taxes levied at various rates in different jurisdictions.

Until January 1, 2009, operations in the Russian Federation were subject to a Federal income tax rate of 6.5% and a regional income tax rate that varied from 13.5% to 17.5% at the discretion of the individual regional administration. Starting on January 1, 2009, the Federal income tax rate is 2.0% and regional income tax rate varies from 13.5% to 18.0%. The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which they operate.

As of January 1, 2009 and 2008, and during 2009, 2008 and 2007, the Group did not have any unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were accrued. The Group’s policy is to record interest and penalties related to unrecognized tax benefits as components of income tax expense. In addition, the Group does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

The Company and its Russian subsidiaries file standalone income tax returns in Russia. With a few exceptions, income tax returns in Russia are open to examination by the Russian tax authorities for the tax years beginning in 2007.

There are not currently, and have not been during the three years ended December 31, 2009, any provisions in the taxation legislation of the Russian Federation to permit the Group to reduce taxable profits in a Group company by offsetting tax losses in another Group company against such profits. Tax losses of a Group company in the Russian Federation may, however, be used fully or partially to offset taxable profits in the same company in any of the ten years following the year of loss.

Domestic and foreign components of income before income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Domestic			9,013				12,767				11,699
Foreign			50				(73	)			1,316
Income before income taxes			9,063				12,694				13,015

Domestic and foreign components of income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Current
Domestic			1,677				3,614				2,940
Foreign			245				553				470
Current income tax expense			1,922				4,167				3,410
Deferred
Domestic			98				(523	)			77
Foreign			(26	)			(177	)			(38	)
Deferred income tax expense (benefit)			72				(700	)			39
Total income tax expense			1,994				3,467				3,449

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 12. Taxes (continued)

The following table is a reconciliation of the amount of income tax expense that would result from applying the Russian combined statutory income tax rate to income before income taxes to total income taxes:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Income before income taxes			9,063				12,694				13,015
Notional income tax at Russian statutory rate			1,813				3,047				3,123
Increase (reduction) in income tax due to:
Non-deductible items, net			252				792				372
Foreign rate differences			68				159				84
Effect of enacted tax rate changes			—				(299	)			—
Domestic regional rate differences			(251	)			(261	)			(237	)
Change in valuation allowance			112				29				107
Total income tax expense			1,994				3,467				3,449

Taxes other than income taxes were:

		Year ended				Year ended				Year ended
		December 31, 2009				December 31, 2008				December 31, 2007
Mineral extraction tax			5,452				12,267				8,482
Social taxes and contributions			399				512				442
Property tax			470				405				313
Other taxes and contributions			153				280				130
Taxes other than income taxes			6,474				13,464				9,367

Deferred income taxes are included in the consolidated balance sheets as follows:

		As of December				As of December
		31,2009				31,2008
Other current assets			66				92
Deferred income tax assets — non-current			549				521
Other current liabilities			(50	)			(49	)
Deferred income tax liabilities — non-current			(2,080	)			(2,116	)
Net deferred income tax liability			(1,515	)			(1,552	)

The following tables set out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities:

		As of December				As of December
		31,2009				31,2008
Accounts receivable			42				50
Long-term liabilities			295				208
Inventories			5				17
Property, plant and equipment			209				226
Accounts payable			28				10
Operating loss carry forwards			555				578
Other			132				166
Total gross deferred income tax assets			1,266				1,255
Less valuation allowance			(397	)			(285	)
Deferred income tax assets			869				970

OAO LUKOIL Notes to Consolidated Financial Statements
(Millions of US dollars, except as indicated)

Note 12. Taxes (continued)

		As of December				As of December
		31,2009				31,2008
Property, plant and equipment			(2,189	)			(2,226	)
Accounts payable			(6	)			(4	)
Accounts receivable			(7	)			(21	)
Long-term liabilities			(58	)			(118	)
Inventories			(68	)			(57	)
Investments			(16	)			—
Other			(40	)			(96	)
Deferred income tax liabilities			(2,384	)			(2,522	)
Net deferred income tax liability			(1,515	)			(1,552	)