2010

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

(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, 2010
		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		01-0562944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 North Dairy Ashford
Houston, TX 77079

(Address of principal executive offices) (Zip Code)

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. [x]

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, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $49.09, was $72.8 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 827,349 and 37,798,903 shares, respectively, in determining the aggregate market value.

The registrant had 1,429,647,979 shares of common stock outstanding at January 31, 2011.

Documents incorporated by reference:

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2011 (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, 2010, is being filed for the purpose of providing separate financial statements of OAO LUKOIL in accordance with Rule 3-09 of Regulation S-X. These financial statements 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, 2010, and does not reflect events occurring after the original filing date of February 23, 2011.

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 69 of the original 2010 Form 10-K, were filed as part of the original 2010 Form 10-K filed on February 23, 2011.
	2.		Financial Statement Schedules
			Schedule II—Valuation and Qualifying Accounts was filed on page 174 of the original 2010 Form 10-K filed on February 23, 2011. 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
			For the six-month period ending June 30, 2010 (unaudited):

	•	Consolidated Balance Sheets as of June 30, 2010, and December 31, 2009.
	•	Consolidated Statements of Income for the three- and six-month periods ended June 30, 2010 and 2009.
	•	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the six-month periods ended June 30, 2010 and 2009.
	•	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009.
	•	Notes to Interim Consolidated Financial Statements.

For the three annual periods ending December 31, 2009:

	•	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 86 through 90 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.

OAO LUKOIL

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(prepared in accordance with US GAAP)

As of and for the three and six month periods ended June 30, 2010

(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.

OAO LUKOIL
Consolidated Balance Sheets
(Millions of US dollars, unless otherwise noted)

				As of June
				30, 2010			As of December
		Note		(unaudited)			31, 2009
Assets
Current assets
Cash and cash equivalents		4			3,748			2,274
Short-term investments					158			75
Accounts and notes receivable, net		5			6,721			5,935
Inventories					6,194			5,432
Prepaid taxes and other expenses					2,331			3,549
Other current assets					596			574
Total current assets					19,748			17,839
Investments		6			5,895			5,944
Property, plant and equipment		7			53,334			52,228
Deferred income tax assets					601			549
Goodwill and other intangible assets		8			1,614			1,653
Other non-current assets					1,198			806
Total assets					82,390			79,019
Liabilities and Equity
Current liabilities
Accounts payable					5,671			4,906
Short-term borrowings and current portion of long-term debt		9			1,731			2,058
Taxes payable					1,810			1,828
Other current liabilities					2,248			902
Total current liabilities					11,460			9,694
Long-term debt		10, 13			8,032			9,265
Deferred income tax liabilities					2,035			2,080
Asset retirement obligations		7			1,373			1,189
Other long-term liabilities					383			412
Total liabilities					23,283			22,640
Equity		12
OAO LUKOIL stockholders’ equity
Common stock					15			15
Treasury stock, at cost					(208	)		(282	)
Additional paid-in capital					4,683			4,699
Retained earnings					54,208			51,634
Accumulated other comprehensive loss					(68	)		(75	)
Total OAO LUKOIL stockholders’ equity					58,630			55,991
Noncontrolling interests					477			388
Total equity					59,107			56,379
Total liabilities and equity					82,390			79,019

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

OAO LUKOIL
Consolidated Statements of Income
(Millions of US dollars, unless otherwise noted)

				For the three				For the three				For the six				For the six
				months ended				months ended				months ended				months ended
				June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
		Note		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues
Sales (including excise and export tariffs)		19			25,853				20,116				49,755				34,861
Costs and other deductions
Operating expenses					(2,032	)			(1,876	)			(3,802	)			(3,108	)
Cost of purchased crude oil, gas and products					(10,755	)			(7,910	)			(20,275	)			(13,272	)
Transportation expenses					(1,429	)			(1,187	)			(2,780	)			(2,356	)
Selling, general and administrative expenses					(853	)			(791	)			(1,655	)			(1,520	)
Depreciation, depletion and amortization					(1,030	)			(1,009	)			(2,060	)			(2,003	)
Taxes other than income taxes					(2,269	)			(1,395	)			(4,349	)			(2,593	)
Excise and export tariffs					(4,762	)			(2,888	)			(9,340	)			(5,407	)
Exploration expenses					(29	)			(32	)			(146	)			(69	)
Gain (loss) on disposals and impairments of assets					13				(15	)			10				12
Income from operating activities					2,707				3,013				5,358				4,545
Interest expense					(196	)			(171	)			(373	)			(334	)
Interest and dividend income					45				27				98				65
Equity share in income of affiliates		6			129				71				236				182
Currency translation loss					(2	)			(109	)			(42	)			(124	)
Other non-operating (expense) income					(46	)			62				(75	)			61
Income before income taxes					2,637				2,893				5,202				4,395
Current income taxes					(584	)			(537	)			(1,140	)			(837	)
Deferred income taxes					10				(106	)			44				(196	)
Total income tax expense		3			(574	)			(643	)			(1,096	)			(1,033	)
Net income					2,063				2,250				4,106				3,362
Less: (net income) net loss attributable to noncontrolling interests					(114	)			74				(104	)			(133	)
Net income attributable to OAO LUKOIL					1,949				2,324				4,002				3,229
Basic and diluted earnings per share of common stock (US dollars) attributable to OAO LUKOIL:		12			2.30				2.74				4.72				3.81

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

OAO LUKOIL
Consolidated Statements of Stockholders’Equity and Comprehensive Income (unaudited)
(Millions of US dollars, unless otherwise noted)

																		Accumulated				Total OAO
										Additional								other				LUKOIL				Noncontrol-
		Common				Treasury				paid-in				Retained				comprehensive				stockholders’				ling				Total
		stock				stock				capital				earnings				loss				equity				interests				equity
Six months ended June 30, 2010
Balance as of December 31, 2009			15				(282	)			4,699				51,634				(75	)			55,991				388				56,379
Net income			-				-				-				4,002				-				4,002				104				4,106
Prior service cost			-				-				-				-				6				6				-				6
Unrecognized gain on available for sale securities			-				-				-				-				1				1				-				1
Comprehensive income																							4,009				104				4,113
Dividends on common stock			-				-				-				(1,428	)			-				(1,428	)			-				(1,428	)
Effect of stock compensation plan			-				-				49				-				-				49				-				49
New shares issued			-				-				1				-				-				1				-				1
Stock purchased			-				(188	)			-				-				-				(188	)			-				(188	)
Stock disposed			-				262				(69	)			-				-				193				-				193
Changes in the non-controlling interests			-				-				3				-				-				3				(15	)			(12	)
Balance as of June 30, 2010			15				(208	)			4,683				54,208				(68	)			58,630				477				59,107
Six months ended June 30, 2009
Balance as of December 31, 2008			15				(282	)			4,694				45,983				(70	)			50,340				670				51,010
Net income			-				-				-				3,229				-				3,229				133				3,362
Prior service cost			-				-				-				-				6				6				-				6
Unrecognized loss on available for sale securities			-				-				-				-				(2	)			(2	)			-				(2	)
Comprehensive income																							3,233				133				3,366
Dividends on common stock			-				-				-				(1,360	)			-				(1,360	)			-				(1,360	)
Effect of stock compensation plan			-				-				52				-				-				52				-				52
Changes in the non-controlling interests			-				-				-				-				-				-				(273	)			(273	)
Balance as of June 30, 2009			15				(282	)			4,746				47,852				(66	)			52,265				530				52,795

		Share activity (thousands of shares)
		Common stock				Treasury stock
Six months ended June 30, 2010
Balance as of December 31, 2009			850,563				(3,836	)
Purchase of treasury stock			-				(3,622	)
Disposal of treasury stock			-				3,540
Balance as of June 30, 2010			850,563				(3,918	)
Six months ended June 30, 2009
Balance as of December 31, 2008			850,563				(3,836	)
Balance as of June 30, 2009			850,563				(3,836	)

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

OAO LUKOIL
Consolidated Statements of Cash Flows (unaudited)
(Millions of US dollars, unless otherwise noted)

				For the six				For the six
				months ended				months ended
				June 30, 2010				June 30, 2009
		Note		(unaudited)				(unaudited)
Cash flows from operating activities
Net income attributable to OAO LUKOIL					4,002				3,229
Adjustments for non-cash items:
Depreciation, depletion and amortization					2,060				2,003
Equity share in income of affiliates, net of dividends received					(30	)			(123	)
Dry hole write-offs					94				23
Gain on disposals and impairments of assets					(10	)			(12	)
Deferred income taxes					(44	)			196
Non-cash currency translation gain					(188	)			(207	)
Non-cash investing activities					(6	)			(13	)
All other items – net					280				161
Changes in operating assets and liabilities:
Accounts and notes receivable					(800	)			(2,009	)
Inventories					(764	)			(924	)
Accounts payable					779				245
Taxes payable					(16	)			337
Other current assets and liabilities					902				234
Net cash provided by operating activities					6,259				3,140
Cash flows from investing activities
Acquisition of licenses					(12	)			-
Capital expenditures					(3,120	)			(2,995	)
Proceeds from sale of property, plant and equipment					31				64
Purchases of investments					(170	)			(111	)
Proceeds from sale of investments					66				224
Sale of subsidiaries, net of cash disposed					111				5
Acquisitions of subsidiaries and non-controlling interests (including advances related to acquisitions), net of cash acquired					(239	)			(2,096	)
Net cash used in investing activities					(3,333	)			(4,909	)
Cash flows from financing activities
Net movements of short-term borrowings					(771	)			(70	)
Proceeds from issuance of long-term debt					13				1,482
Principal repayments of long-term debt					(604	)			(274	)
Dividends paid on Company common stock					(1	)			(1	)
Dividends paid to non-controlling interest stockholders					(34	)			(34	)
Financing received from related and third party non-controlling interest stockholders					13				11
Purchase of Company’s stock					(188	)			-
Sale of Company’s stock					193				-
Net cash (used in) provided by financing activities					(1,379	)			1,114
Effect of exchange rate changes on cash and cash equivalents					(73	)			(34	)
Net increase (decrease) in cash and cash equivalents					1,474				(689	)
Cash and cash equivalents at beginning of year					2,274				2,239
Cash and cash equivalents at end of period		4			3,748				1,550
Supplemental disclosures of cash flow information
Interest paid					378				305
Income taxes paid					955				473

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 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 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, 2009. 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, 2009 annual consolidated financial statements.

The results for the six-month period ended June 30, 2010 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.

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

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 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 the consolidated statement of income.

For certain other operations, 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 June 30, 2010 and December 31, 2009, exchange rates of 31.20 and 30.24 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 Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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 obtained. 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 FIFO cost method. 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 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 Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

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 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 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 Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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 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 the consolidated statement 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 period 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 Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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.

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.

Use of derivative instruments

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.

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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.

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 events 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. 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. This ASU also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the detailed Level 3 roll forward disclosures (which are effective for the annual reporting periods starting after December 15, 2010 and for interim periods within those annual reporting periods). The Group adopted the requirements of ASU No. 2010-06 (except for the detailed Level 3 roll forward disclosures) starting from the first quarter of 2010. 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 starting from the financial statements for 2009. This adoption did not have a material impact on the Group’s reported reserves evaluation, results of operations, financial position or cash flows.

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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 starting from the financial statements for 2009. 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. 2010-01, “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 starting from the financial statements for 2009. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amends the guidance on variable interest entities (“VIE”) in ASC No. 810. This ASU changes the approach to determining VIE primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether an entity is the primary beneficiary of a VIE. ASU No. 2009-17 also clarifies, but does not significantly change, the characteristics that identify a VIE. ASU No. 2009-17 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009, and for subsequent interim and annual reporting periods. The Group adopted the requirements of ASU No. 2009-17 starting from the first quarter of 2010. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value,” which amends Subtopic No. 820-10, “Fair Value Measurements and Disclosures–Overall” for the fair value measurements of liabilities. ASU No. 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: valuation based on the quoted price of the identical liability when traded as an asset; valuation based on quoted prices for similar liabilities or similar liabilities when traded as an asset, or another valuation technique that is consistent with the principles of Topic 820 (such as present value technique or price for the identical liability). This ASU also clarifies that an entity is not required to include a separate input relating to the existence of a restriction that prevents the transfer of the liability. ASU No. 2009-05 is effective for the first interim or annual reporting periods after its publication. The Group adopted the requirements of ASU No. 2009-05 starting from the financial statements for 2009. This adoption did not have a material impact on the Group’s results of operations, financial position or cash flows.

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 2. Summary of significant accounting policies (continued)

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. 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.

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 and the incurrence of costs that are either not tax deductible or only deductible to a certain limit.

Note 4. Cash and cash equivalents

		As of June				As of December
		30, 2010				31, 2009
Cash held in Russian rubles			1,922				557
Cash held in other currencies			1,523				1,384
Cash of a banking subsidiary in other currencies			94				131
Cash held in related party banks in Russian rubles			135				174
Cash held in related party banks in other currencies			74				28
Total cash and cash equivalents			3,748				2,274

Note 5. Accounts and notes receivable, net

		As of June				As of December
		30, 2010				31, 2009
Trade accounts and notes receivable (net of provisions of $189 million and $191 million as of June 30, 2010 and December 31, 2009, respectively)			5,207				4,389
Current VAT and excise recoverable			1,097				1,205
Other current accounts receivable (net of provisions of $44 million and $41 million as of June 30, 2010 and December 31, 2009, respectively)			417				341
Total accounts and notes receivable, net			6,721				5,935

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

Note 6. Investments

		As of June				As of December
		30, 2010				31, 2009
Investments in equity method affiliates and joint ventures			4,698				4,754
Long-term loans given by non-banking subsidiaries			1,171				1,176
Other long-term investments			26				14
Total long-term investments			5,895				5,944

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 ended								For the three months ended
		June 30, 2010								June 30, 2009
		Total				Group’s share				Total				Group’s share
Revenues			8,050				1,008				1,094				529
Income before income taxes			2,125				170				232				118
Less income taxes			(453	)			(41	)			(92	)			(47	)
Net income			1,672				129				140				71
		For the six months ended								For the six months ended
		June 30, 2010								June 30, 2009
		Total				Group’s share				Total				Group’s share
Revenues			11,658				1,743				1,951				937
Income before income taxes			4,399				341				458				246
Less income taxes			(1,300	)			(105	)			(127	)			(64	)
Net income			3,099				236				331				182
		As of June 30, 2010								As of December 31, 2009
		Total				Group’s share				Total				Group’s share
Current assets			6,515				1,344				6,796				1,524
Property, plant and equipment			18,065				4,910				18,877				5,284
Other non-current assets			897				304				607				240
Total assets			25,477				6,558				26,280				7,048
Short-term debt			53				21				442				274
Other current liabilities			3,204				477				3,982				817
Long-term debt			7,865				894				7,769				732
Other non-current liabilities			1,693				468				1,633				471
Net assets			12,662				4,698				12,454				4,754

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.

OAO LUKOIL
Notes to Interim Consolidated Financial Statements (unaudited)
(Millions of US dollars, unless otherwise noted)

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

		At cost								Net
		As of June				As of December				As of June				As of December
		30, 2010				31, 2009				30, 2010				31, 2009
Exploration and Production:
Western Siberia			24,375				23,465				14,413				13,878
European Russia			25,519				24,908				17,771				17,761
International			6,826				6,371				5,464				5,170
Total			56,720				54,744				37,648				36,809
Refining, Marketing, Distribution and Chemicals:
Western Siberia			5				6				3				5
European Russia			10,815				10,228				7,177				6,923
International			6,995				6,849				4,778				4,783
Total			17,815				17,083				11,958				11,711
Other:
Western Siberia			183				186				90				94
European Russia			3,927				3,951				3,528				3,491
International			178				189				110				123
Total			4,288				4,326				3,728				3,708
Total property, plant and equipment			78,823				76,153				53,334				52,228