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SUSTAINABILITY REPORTprocesses and takes them into account as it outlines its developmentstrategy. This Report covers three considerations that the Companybelieves to be important for long-term development:strategies for oil production and exploration;diversification of the Company's business: development of the gascomponent of the industry;legislative regulation of the industry.Oil production and explorationOil reserve replacement is an absolute necessity in the oil businessfor sustainable and long-term corporate development. Significantinvestments in that area have brought the Company to the lead positionin exploratory drilling and effectiveness of geological surveys inRussia.However, depletion of resources at some enterprises of the Companyranges from 1% (OAO Arkhangelskgeoldobycha) to 87% (OOOLUKOIL-Nizhnevolzhskneft). Reserves in deposits with depletion under20% comprise over half of total reserves, and reserves in depositswith depletion over 80% are around 4%. Hard-to-recover oil amountsto over half of total reserves, and almost one fifth of total reserves ofthe Company are in the form of oil with over 80% water cut.The Company believes that it is possible to sustain the current volumeof production by two different means. The first one is the explorationand acquisition of locations where new resources may be discovered.From its founding the Company has consistently increased its exploration.Replacement operations at some points amounted to 195% ofproduction. As a result, the Company was able, in a rather shortamount of time, to accumulate a reserve base in very promising newareas (the Caspian, the Timano-Pechora oil and gas province, and theBolshekhetsk depression) that represent alternatives to old, depletedones. From 2002 on, geological surveys have been undertaken usingonly the Company's own assets. In addition, newly discovered smallerdeposits in previously worked areas usually go into production immediatelyand become profitable. Thus, small deposits in Perm,24