ANNUAL REPORT 2005 - Lukoil

NOTE 20. COMMITMENTS AND CONTINGENCIES
Capital expenditure, exploration and investment programs
The Group owns and operates refineries in Bulgaria (LUKOIL Neftochim Bourgas AD) and Romania (Petrotel-LUKOIL).
As a result of Bulgaria and Romania joining the European Union in 2007, LUKOIL Neftochim Bourgas AD and
Petrotel-LUKOIL are required to upgrade their refining plants to comply with the requirements of European Union legislation in
relation to the quality of produced petroleum products and environmental protection. These requirements are stricter than existing
Bulgarian and Romanian legislation. The Group estimates the amount of future capital commitment required to upgrade
LUKOIL Neftochim Bourgas AD and Petrotel-LUKOIL to be approximately $607 million and $60 million, respectively.
Group companies have commitments under the terms of existing license agreements in the Russian Federation of
$1,380 million over the next 5 years and of $115 million thereafter. Management believes that a significant portion of
these commitments will be fulfilled by the services to be performed by Eurasia Drilling Company and ZAO Globalstroy-
Engineering as discussed below.
In connection with the sale of LUKOIL-Burenie (refer to Note 10 "Dispositions of subsidiaries and assets") the Group
signed a five year contract for drilling services. Under the terms of the contract, drilling services of $378 million,
$571 million, $661 million, and $666 million will be provided by LUKOIL-Burenie (now Eurasia Drilling Company) during
2006, 2007, 2008, and 2009, respectively.
The Company has signed a four-year agreement for the provision of construction, engineering and technical services with
ZAO Globalstroy-Engineering. The volume of these services is based on the Group's capital construction program, which
is re-evaluated on an annual basis. The Group estimates the amount of capital commitment under this agreement for
2006 to be approximately $850 million.
Group companies have commitments for capital expenditure contributions in the amount of $479 million related to
various production sharing agreements over the next 32 years.
Group companies have investment commitments relating to oil deposits in Iraq of $495 million to be spent within 3 years
from when exploitation becomes possible. Due to significant changes in the political and economic situation in Iraq the
future of this contract is not clear, however, the Group is actively pursuing its legal right to this contract in Iraq in alliance
with ConocoPhillips.
CONSOLIDATED FINANCIAL STATEMENTS
Operating lease obligations
A Group company has commitments of $1,140 million primarily for the lease of vessels and petroleum distribution outlets
over the next 9 years. Commitments for minimum rentals under these leases as of December 31, 2005 are as follows:
As of
December 31, 2005
2006 316
2007 180
2008 108
2009 88
2010 88
beyond 360
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. The Group has limited
business interruption insurance coverage. Management does not believe that it is appropriate to have full insurance
coverage against business interruption given the Group's geographical diversity and the limited impact it considers
likely to occur from a single event.
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