PJSC LUKOIL
Q4 2020 Earnings Call Transcript

Published: 17 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the LUKOIL 2020 Results Presentation. My name is Courtney, and I'll be your coordinator for today's conference. [Operator Instructions]. I would like to inform you that questions from the press will not be accepted. And I will now hand you over to Pavel Zhdanov, Vice President for Finance, to begin today's conference. Thank you.

[Pavel Zhdanov:]

Good afternoon, ladies and gentlemen. Thank you for joining us today for this conference call on LUKOIL's results for 2020. On today's call, we have Mr. Vagit Alekperov, President and CEO of LUKOIL; Mr. Alexander Matytsyn, CFO; Mr. Vadim Vorobyev, First Executive Vice President for Downstream; and Mr. Azat Shamsuarov, First Vice President for Upstream. We will start with the presentation and then move on to the Q&A session. I would like to draw your attention to the fact that presentation contains forward-looking statements that are based on our estimates, assumptions and expectations. More detailed information is presented on the slide. Now over to Mr. Vagit Alekperov, President and CEO of LUKOIL.

[Vagit Alekperov:]

Good afternoon, ladies and gentlemen. Let me begin with the key topic for the past 12 months. Last year, the world faced the pandemic of COVID-19, the unprecedented challenge. In the new circumstances, people's health care became the top priority for everyone. LUKOIL was swift to take all necessary measures to protect its employees and customers alike. All of our entities set up special task forces, provided testing and ensured the availability of protective equipment and disinfectants. We also were able to help Russian regions and countries abroad where we operate. To date, LUKOIL has allocated a total of more than RUB2 billion to help fight the spread of COVID-19. By responding quickly, we were able to ensure steady operations across all of our fields, refineries and filling stations. As you may know, the pandemic has caused an unprecedented drop in demand and prices for hydrocarbons. We had to introduce considerable production cuts associated with the OPEC+ agreement and China's weaker demand for pipeline gas. We were also forced to cut down our refining volumes, owing to a market decline in margins and lower demand for petroleum products. Even against this challenging backdrop, we pushed ahead with our priority upstream projects, increasing their share in total production to 26%. We also continued installing new units at our refineries and improving our product slate. The share of high sulfur fuel oil went down to a record low of 7%. Today, we are proud to say that LUKOIL's business model has once again demonstrated its superior resilience to external shocks. By relying on the strong flexibility and great performance of our management team, we have been able to cope with all the challenges we faced, go ahead with our strategy and post some very strong financial results amid this tough environment. On a separate note, let me say that the company maintained a positive free cash flow in each of the 4 quarters of 2020. Also, we have maintained our strong commitment to sustainability principles and have been contributing to the United Nation's Sustainable Development Goals. Despite the cost optimization efforts, we did not downscale any of our environmental and industrial safety programs. Just like in previous years, considerable funding was allocated to social projects. In corporate governance, our key improvements were linked to the climate agenda. I would like to draw your attention to the planned enhancement of our Board of Directors' expertise in this particular area. The list of candidates to the Board of Directors for voting at the Annual General Shareholders meeting includes Mr. Boris Porphyria, member of the Russian Academy of Sciences and a renowned expert in the economics of climate change. We are currently in the process of updating LUKOIL's strategy with special emphasis put on climate change to have it better integrated into the company's strategy. Now let me talk about that in greater detail. We have now completed putting together our oil demand scenarios. In addition to the Evolution scenario we presented previously, we have also come up with the scenarios that we call Equilibrium, Transformation and 2-degree Celsius. This enabled us to arrive at a complete list of climate change factors and engage in a detailed analysis of risks and opportunities. Under the Evolution scenario, nations are expected to comply with the climate change obligations they have already taken on and also reflects the years to rejoin the Paris Agreement. The forecast that oil demand will peak in 2035, this scenario is currently the most realistic one, but does not deliver on the Paris Agreement goals. The Equilibrium scenario relies on the assumption of accelerated growth in renewable energy and the so-called negative greenhouse gas emissions. Within the range of scenarios from 1.5 to 2 degrees centigrade, we believe the equilibrium to be the most probable one as it strikes the balance between delivery against climate change goals on the one hand and the availability of energy on the other. This scenario requires strong legislative efforts to develop climate change regulations worldwide. The Transformation scenario is more drastic and expect the annual average temperature to rise by no more than 1.5-degree Celsius on the back of transformations in global energy and industry and energy efficiency improvement. Each of the scenarios we have looked into provides for a larger share of renewable energy and recyclable plastics and part of the transition to electric vehicles. Each scenario is a complex challenge for the global community. As one example, over the past 5 years, 150 gigawatts of renewable generating capacity were commissioned annually. Under the scenarios of 2-degree Celsius and transformation, this figure is projected to increase at least twofold and fourfold, respectively, by 2050. As you understand, a high share of electric vehicles is only attainable if we successfully address a variety of issues related to the manufacturing and recycling of batteries. Also, the key driver behind lower total booked greenhouse gas emissions across all the scenarios is massive expansion of negative emissions spurred by nature-based and technological solutions for carbon capture, utilization and storage. Today, these technologies are only beginning to emerge. It is extremely important to make sure that energy transition remains aligned with the other UN Sustainable Development Goals. To do that, we need to have alternative energy sources that are available, affordable and efficient. This way, we can not only gradually replace fossil fuels, but also provide the additional energy required to support the growing economy. Our estimates show that even under the transformation scenario, total energy consumption worldwide will be growing despite the rapid advancements in energy efficiency. Importantly, none of the scenarios expects the use of fossil fuel to be fully discontinued. In the long run, oil will continue to be viewed as an important part of the global energy mix and an essential feedstock for consumer goods. As you know, the oil industry needs investments to continue replacing its resource base and to start developing new reserves as a way to prevent a fairly sharp drop in production. The slide you are now looking at shows that existing projects are insufficient to meet demand even under the transformation scenario. We see that our industry has been lacking investments for quite some time now, with the pandemic only making things worse. Limited access to capital as a result of the strong support that the financial sector has for the concept of energy transition is also reducing the industry's investment potential. However, unless there is ample investment in new projects, we might well face a shortage of supply as early as within the next 5 years. Potential implications include price volatility and hindered growth of the global economy. This is why, in the short term, it is impossible to have fossil fuels completely phased out, and that might even be hazardous. Against this backdrop, the global economy needs to focus on producing the most efficient barrels with the minimum carbon footprint during their production. And here, Russian oil offers some clear advantages. It has a low breakeven price and limited carbon foot print, while boasting the potential to deliver additional savings in energy, direct and indirect greenhouse gas emissions. This slide shows that Russian oil production is efficient under any climate change scenario, with the Arctic Shelf as the only exception. Importantly, the breakeven oil price under different demand scenarios is within a fairly narrow range from $40 to $50 per barrel in real terms. After looking into the climate change scenarios and associated risks and opportunities, we now see LUKOIL's mission in the global energy transition as being a responsible producer of hydrocarbons. We believe that with our competitive edge, the best thing we can do is to continue providing the global economy with the most efficient fossil fuel-based energy, while focusing on reducing its carbon footprint at the same time. To support this mission, we have identified 3 goals of our climate strategy and the objectives and tools related to them. The first goal is to continue expanding our core business of producing oil in Russia. Vital aspects here are an enhanced focus on efficiency and also reliance on a conservative scenario for oil prices and domestic carbon prices when making investment decisions. The second goal is to reduce greenhouse gas emissions that we can control. These are Scope 1 and Scope 2 emissions. To do that, we will be using a wide range of tools, including optimization of our assets portfolio. The third goal is taking part in climate initiatives and advancing climate opportunities. Here we look at a variety of areas, many of them also contributing to the first 2 goals. These areas include development of technologies to reduce emissions, improvement of the regulatory framework in Russia and research into low-carbon energy sources, such as biofuel and hydrogen. Given our extensive experience to date, another area is the delivery of economically feasible projects of commercial renewable energy. We see additional potential in our retail chain, which we can leverage to promote the idea of a low-carbon economy with our customers. We will also maintain our commitment to reforestation across our regions of operation, and we'll be looking into ways to expand the related programs. To support decarbonization and new low-carbon technologies, we are planning to establish a venture fund. Let me say that we fully share the ambition to achieve carbon neutrality by 2050 for the emissions that we can control. However, right -- so I mean, scope 1 and scope 2 emissions. However, right now, we do not see enough tools that would be sufficient to deliver against this ambition. We will continue looking into this matter, and we'll be working towards creating the right conditions to address it. We have ample experience with a variety of climate change-related matters, a focus of our attention for more than 15 years now. For example, LUKOIL has implemented a number of projects as part of the Kyoto Protocol, excelled in utilizing associated petroleum gas and in 2017, took on the commitment to achieve 0 routine flaring of associated gas. And since 2016, we have been consistently engaged in efforts to reduce greenhouse gas emissions, and our actual results are more than 2.5x better than the targets we set initially. Amid growing production, greenhouse gas emissions from controlled sources went down by 2 million tonnes with emission intensity in Upstream falling by 17% to 21 kilograms per barrel of production. By this metric, we currently outperform most of our competitors despite LUKOIL having a higher share of crude oil in its production. We have been developing renewable energy for more than a decade and have leading positions in Russia in terms of the share of green power that we generate. Last year, we did the first ever exercise of inventory taking of our sources of emissions and calculation of greenhouse gas emissions under international standards. This lays a crucial foundation for us to set targets and monitor emissions going forward. Just a week ago, we finalized the company's decarbonization program spanning all business segments. Today, we are ready to announce our new targets to reduce greenhouse gas emissions from controlled sources by 2030. Let me say here that these targets are based on existing laws and our current view of available technologies these days. They are ambitious. But already at this point, we know exactly how to achieve them. We aim to reduce emissions from controlled sources per unit of energy content by 20% as compared to the 2017 level, which is used as a baseline in accordance with the IPCC approach. This would mean a 10 million tonnes reduction in gross greenhouse gas emissions on a comparable basis. To achieve this goal, we will use a set of efficient initiatives focused primarily on energy efficiency improvements through energy savings, energy management and optimization of industrial processes. We also plan to generate renewable energy for our own needs, reduce methane leaks in hydrocarbon production and transportation and work on pilot carbon capture, utilization and storage projects. We will update our emission reduction targets in line with the evolution of technologies available, regulatory framework and other relevant factors. Once again, I would like to emphasize that we take a very responsible approach when dealing with climate change issues, and we will do our best to make maximum contribution into achieving global climate goal. Now thank you for your attention. I would like to hand over to Mr. Azat Shamsuarov, who will present our results in Upstream.

[Azat Shamsuarov:]

Thank you, Vagit. Good afternoon, ladies and gentlemen. The company's production performance in 2020 was driven by external factors beyond our control. Average daily oil production declined by 9% year-on-year, driven by the OPEC+ agreement. Gas production saw greater cuts, dropping by 17.5% year-on-year due to lower production in Uzbekistan caused by a temporary decline in demand for pipeline gas from China. As a result, hydrocarbon production decreased by 12% compared to 2019. Despite external production constraints and a weak pricing environment, we continued implementing our priority projects in Russia to improve the company's production mix. The share of such projects in LUKOIL's total production reached 26%, which is 4 percentage points higher than the previous year. Let me share some highlights on our approach to handling oil production in the context of the OPEC+ agreement. Having to deal with production cuts more than 4 years, we have accumulated extensive experience in this area. The production cuts introduced in May 2020 was certainly more sizable than before but no different in terms of handling. We selected wells for shutting down based primarily on their economic performance, with a view to minimizing the impact on our financial results. Geological risks were also taken into account to avoid a negative effect on further development of our fields and their production potential. We also considered technical aspects to minimize the cost of shutting down and resuming production later on. When reopening wells, we relied primarily on economic criteria as well as is the case in reducing production. Since May last year and further to the instructions of the Russian Ministry of Energy, LUKOIL has added back 130,000 barrels per day at its production assets in Russia. We aim to recover the output as quickly as possible and with minimal cost. Restarted wells have not shown major technical issues or geological divisions. Currently, our spare capacity in Russia is 180,000 barrels per day. It accounts from more than 6,000 wells, about 80% of which are located in Western Siberia and Timan-Pechora. Throughout 2020, we maintained high drilling volumes to support our spare capacity. This approach was driven by expectations of a quick recovery in oil demand. However, at the end of last year, we decided to optimize the drilling program given the persisting impact of the pandemic. Our baseline scenario is to gradually reduce the spare capacity amid naturally declining production. This means that after the lifting of the restrictions, it will take us some time to recover our production back to the levels seen in early 2020. At the same time, we remain flexible as necessary, and we'll make further decisions based on the pricing environment and the OPEC+ agreements looking forward. Our material fields in Western Siberia have become key to balancing production amid external constraints. Furthermore, we continued improving efficiency at mature fields by optimizing costs, developing and rolling out new technologies and streamlining our development systems. The high price volatility and the climate change agenda make these efforts even more important. Western Siberia is the company's key test bed for trialing and scaling new technologies as they promise significant economies of scale in this particular region. Today, over 70% of our horizontal wells with multi-stage hydraulic fracturing are drilled in Western Siberia. It is here that we drill more 3-string wells and test neural networks. Our cost optimization efforts include a special program to cut production costs and a program to reduce drilling costs. An efficient way to cut drilling costs is a greater share of day rate contracts used instead of more expensive turnkey contracts. In 2020, day rate contracts used in our operations in West Siberia accounted for 11% of total meters drilled. And this year, we plan to increase their share to twice the amount, twice the 11%. As a result of our efforts, drilling costs per meter of horizontal wells in Western Siberia decreased by 7% year-on-year and by 4% for directional wells. In 2020, we significantly ramped up the rollout of horizontal drilling technologies for 3-string wells and small diameter wells. Our drilling operations for 3-string wells increased by 14% year-on-year across the group with a total of 83 such wells drilled. Their average cost of construction is 20% lower than for a standard well. The share of such wells in the company's new horizontal well stock increased to 24%. Let me remind you that we started drilling such wells relatively recently, like in 2018. The 3-string design is also used in multi-bore wells. Our first basic multi-bore well was spudded in 2018. And in 2020, we drilled as many as 34 such wells. This technology helps expand feasible drilling opportunities by reducing the risk of high water cut. Our drilling operations for small diameter wells almost doubled year-on-year with a total of 133 such wells drilled in 2020. Their share in the total number of newly drilled directional wells increased to 9%, up from only 3% back in 2017. Small diameter wells are twice as cheap to drill than standard ones. In the future, the speed of new well construction will also be boosted through the rollout of batch drilling, which has been successfully piloted at several of our fields. It is also worth reminding that we are actively developing digital technologies in Upstream. The intelligent field concept that relies on integrated models is already being applied at more than 60 of our fields. This is more by 40% than a year ago. Today, fields using integrated models account for more than 1/3 of our total production. The application of neural networks to manage production and flooding at the pilot sites of mature fields has driven highly efficient and plan to scale up technology. In terms of cutting energy consumption, we have achieved excellent results, partly by installing energy saving pumps to maintain reservoir pressure. They help reduce energy used by 15% compared to conventional pumps. Another tool for increasing energy efficiency is the use of proprietary downhole permanent magnet engines. In 2020, we installed more than 2,000 of such engines at our fields. To date, wells equipped with permanent magnet engines account for more than 60% of the company's entire well stock fitted with pumps. As a reminder, 3 years ago, their share was just about 20%. The initiatives I have just outlined helped to cut down operating and capital expenditures, which is key to our long-term strategy. This allows us to bring more reserves into production while also making our business more resilient in a volatile market environment. We have targeted cost reduction programs in place and are ahead of our targets in certain areas. For instance, in just 3 years, we managed to reduce our drilling cost per meter by 9% in nominal terms. Over the same period, our construction costs were down by 1%, while our operating production costs decreased by 2% in nominal terms. Furthermore, our costs are mostly denominated in ruble. So in U.S. dollar terms, the savings are even greater at more than 20%. In 2020, we launched continuous improvements program with -- which the constant application of which at our entities will help us further boost efficiency of operations. Now let me give you more detail on our priority projects. In 2020, the company's oil and condensate production Vladimir Filanovsky and Yury Korchagin fields in the Caspian Sea totaled 7.4 million tonnes, staying flat compared to 2019. The drilling programs helped us keep production at the target level. I would like to highlight our successful efforts to improve offshore drilling efficiency. Since 2016, we have managed to halve the time of production well construction, while also cutting drilling cost per meter by 1/3. As part of our third Caspian project, the Valery Grayfer field shipyards continue building the platforms. At the beginning of this year, the fixed ice-resistant platform was 65% complete, and the accommodation platform was 82% complete. Offshore jackets for both platforms have been already installed in the Caspian Sea. We plan to launch the field next year with a design production level of 1.2 million tonnes of crude oil per year. As for the Baltic Sea shelf, we have finalized the FEED work on the D33 field and have received all the necessary project approvals. We are planning to make the final investment decision shortly The field will have a design capacity of 1.5 million tonnes per year and may be launched as early as in 2023. We managed to deliver strong production growth from the field with hard to recover reserves. Over the last 5 years, production at key fields has doubled, with the largest contribution in absolute terms made by high-viscosity oil projects from Timan-Pechora. In 2020, these projects' total production increased by 6% year-on-year to 5.2 million tonnes. During the year, at the Yaregskoye field, we commissioned 21 SAGD production wells and 323 underground wells as well as new steam-generating facilities. 62 production wells were commissioned at the Permian deposit of the Usinskoye field. As a result of tax incentives behind -- being abolished from the first of January 2021, the fiscal burden on oil produced from the Yaregskoye and Usinskoye fields has increased considerably, compromising the return on investments into further production ramp-up from these fields. We hope that decisions will be made to support the economics of these projects and to allow us to go ahead with their development as initially planned. Until such decisions are made, we intend to focus on completing the current phases of their development. Let me say a few words about our progress in developing the fields with low-permeability deposits in West Siberia. Our three major low-permeability fields increased production by 35% year-on-year, while production at the Sredne-Nazymskoye field doubled. In 2020, we launched 186 production wells at these fields. We remain committed to implementing new efficient drilling technologies. As one example, the improved well design helped increase the drilling speed at the Sredne-Nazymskoye field by more than 30%, reducing the per unit drilling cost by 14% year-on-year. Import substitution is a major focus area where we also delivered some excellent results. Earlier this year, LUKOIL and Russian oil and gas equipment producer completed the development of the first Russian completion system for horizontal wells used in multi-stage hydro fracturing and began the implementation. Today, this is the only commercial use system made in Russia. Tests have shown better performance compared to foreign analogs, which will benefit the economics of developing hard-to-recover reserves. In conclusion, I would like to update you on our projects in Uzbekistan. As you know, in the second quarter, we had to cut production as our gas exports deliveries declined and then stopped completely. This was mainly attributable to a pandemic-driven fall in demand for Uzbek gas from China and also to a slump in LNG prices. Export deliveries resumed in September amid rising LNG prices in Asia and more attractive pricing of Uzbek gas. As a result, in the fourth quarter, the production at our assets recovered back to the designed capacity. Provided the situation is stable, in 2021, our production at the Uzbek field is expected to reach around 14 billion cubic meters of gas based on a 100% share. Thank you. And now I would like to hand over to Mr. Vadim Vorobyev, who will present our results in Downstream.

[Vadim Vorobyev:]

Thank you, Azat. Good afternoon, ladies and gentlemen. 2020 presented a real challenge for the refining system. As a result of a sharp decline in demand primarily for jet fuel and motor fuels, the gross benchmark refinery margin went into negative territory during 2020. The high-quality of our refining facilities, operational flexibility and well-developed sales channels allowed us to largely offset the effect of the extremely weak market environment and end the year with a positive EBITDA for our refining portfolio in general. This performance is attributable to optimized efficiency, to optimized refinery utilization and yields as well as flexibility in maintenance scheduling and additional cost-cutting efforts. Having our own trading operations made a significant contribution to ensuring high utilization rates at our refineries when demand was at its lowest levels. Refining volumes declined by 15% year-on-year, a result much stronger than that demonstrated by many of our peers. For refineries in Russia, the reduction stood at just 9%. Our efforts to optimize the yield helped increase the share of mid- distillates to a record high of 51% while cutting the fuel oil yield to a record low of 7%. Continuous efficiency improvement at the existing facilities remain a pivotal part of our long-term strategy in the refining segment. This is achieved through a range of measures outlined in our regularly updated road maps. The measures are of an operational nature and either require 0 investments at all or have very short payback periods. More than 800 measures have been implemented over the last 3 years, with the combined effect of about RUB90 billion over 12 -- about RUB12 billion comes from cost savings. This effort is further supported by special projects launched at a number of our refineries and aimed at breakthrough improvements. The projects are well on track, and we intend to have them rolled out at our other refineries as well. Pandemic-driven mobility restrictions threatened to delay the completion of some of the new units at our plants. However, we have managed to overcome this challenge successfully. In January 2021, we launched a deasphaltization unit at the Volgograd refinery, fully in line with the schedule, which allowed us to increase the production of high-viscosity index oils and reduce per unit production costs. Lubricants production and marketing is a premium business that we're actively focused on. Our largest project for the construction of a residue refining facility at the delayed coker unit at the Nizhny Novgorod refinery is scheduled to be launched in the second half of this year. As of the end of 2020, the project was 86% complete. At this point, main items have been installed, and the pipeline's installation is nearing completion. The facility will complement the existing catalytic cracking units and will dramatically improve the production slate of the Nizhny Novgorod refinery. Given that this is the largest plant in our portfolio, the slate of the group will also see a major improvement. We expect the share of fuel oil in the group's output to fall below 4% and the light product yield to reach 75%. The Nizhny Novgorod refinery is also completing the construction of an isomerization unit, which is scheduled for launch as early as next quarter. The unit will increase the group's production of high-octane motor gasoline by more than 200,000 tonnes annually, using light naphtha as feedstock. At the end of 2020, the project was almost 90% complete. While we are on the subject of new projects, let me say a few words about petrochemistry. Two polypropylene units are currently at the design stage, one at the Nizhny Novgorod refinery and the other one in Burgas. Final investment decisions on both projects may be made as early as next year. The proposed joint capacity of the unit stands at 800,000 tonnes of feedstock annually. The units would -- could engage in production all spare propylene produced by these 2 sites as well as propylene from our refinery in Romania. On top of our own feedstock, another competitive advantage is the proximity to polymer processing hubs and premium markets of sufficient capacity. As for broader expansion opportunities for the petrochemical business that we announced earlier, we will be closely considering this matter when updating our strategy. Let us now turn to the sales segment. Due to significantly lower demand for motor fuels as a result of mobility restrictions, sales at our filling stations decreased by 10% year-on-year. The decline was most pronounced in the second quarter with volumes going down by 22% compared to the same period of 2019. We saw an almost complete recovery as early as in the third quarter. But towards the end of the year, the situation slightly deteriorated again as the second wave of the pandemic triggered new restrictions. Currently, the situation appears quite optimistic. As of February, retail sales are only 3% down compared to February 2019, with the decline in domestic sales standing at just 2%. Jet fuel was hit the hardest by reduced mobility. In the second quarter, our into-plane jet fuel sales fell by more than 70% compared to the same period of 2019, with the decline for the year standing at 46% year-on-year. Despite a positive trend as we see, into-plane jet fuel sales still remain considerably below their usual levels. We expect COVID-19 vaccinations to drive the recovery of demand for light petrochemical -- petroleum products while jet fuel might be the strongest performer on the back of a quick recovery of international air traffic. Thank you. I would like now to hand over to Mr. Alexander Matytsyn.

[Alexander Matytsyn:]

Thank you, Vadim. Good afternoon, ladies and gentlemen. Let me begin with the price environment. In addition to being a year when oil prices plunged to 20-year lows on the back of an unprecedented drop in demand, 2020 was also marked by exceptional price volatility. The average annual price of Brent crude oil went down by more than 1/3 year-on-year, taking a toll on the Upstream performance. By contrast, financial results in Russia were strongly supported by the devaluing ruble and the impact of the progressive tax scale. Mitigated by these factors, the decline in the average annual price of Urals crude in ruble terms was half of that seen in the international price. It is worth noting that the net price was more volatile going into the negative territory in March as a result of the tax lag effect. At the outset of the pandemic, gross margin in Downstream was improving quickly, driven by a drop in oil prices. However, inventory buildup in the light products market caused the margin to turn negative as early as in May, both in Europe and Russia. Throughout 2020, the average margin more than halved, which is the worst performance ever over the past decade. In Russia, additional pressure came from the damper mechanism for motor fuels. In this challenging environment, we still managed to post very strong financial results. Our natural drivers of resilience include an effective business model, high-quality assets, low production costs, flexible investment program and natural hedges. All of these helped considerably offset the negative impacts of the external environment on our financial performance. A major pillar underpinning our financial success was the hard work of our management team and its unwavering focus on efficiency improvement, thoughtful approach to production management and flexible optimization of refining capacity utilization. EBITDA for the year came in at RUB687 billion with free cash flow totaling RUB281 billion. In terms of the free cash flow, we exceeded our performance of 2015 to 2017 when the price environment was more favorable and production was higher. As Mr. Alekperov said, our free cash flow remained positive in each of the 4 quarters of 2020, including the most challenging second quarter. In the weak market environment, we managed to improve our positioning in terms of per unit financial metrics as compared to our competitors. Importantly, many of them posted a negative free cash flow for the year. This is the best estimate to LUKOIL's strong business resilience and ability to build shareholder value in almost any environment. Considerable support to our financial results came from the timely measures that we took to optimize our expenses across the board. Let me now focus on capital expenditures. In early 2020, we targeted a CapEx of around RUB550 billion, excluding the service project in Iraq. As the market environment deteriorated and production was subject to external restrictions, we responded by quickly optimizing our budget, enabling savings of around RUB80 billion the year even despite the devaluing Russian currency. The key driver behind the savings was the shift of expenditures in exploration and the early-stage upstream and downstream projects to later periods, primarily abroad. The optimization exercise hardly involved in Russian projects, with the actual investments in Russia demonstrating an increase year-on-year. In dollar terms, actual savings exceeded 20% of the original target or approximately $2 billion. Let me emphasize here that the optimization of CapEx has not affected the implementation of our key investment projects nor any of the core industrial safety and environmental aspects. Low production costs is a vital part of our resilience that needs an enhanced focus amid a weak market environment. We have always been paying great attention to this area and have now stepped up our efforts to improve efficiency as part of targeted programs. You can see the outcomes in our financial statements. Our total controllable expenses are down despite the market reduction in volumes and inflation, per unit lifting costs remain at the level of 2018. The same is true for per unit refining cost. Selling, general and administrative expenses fell by 4%. An important part of our efficiency improvement efforts is optimization of the governance model. In 2020, we launched a project to transfer routine functions from the corporate center to dedicated servicing subsidiaries to enable the former to focus on its strategic function and achieve an additional reduction in administrative expenses. We are also reorganizing the way we manage our downstream operations abroad. This is done by our LITASCO business using an integrated trader model. The new system will enhance the flexibility and efficiency of operations in a volatile environment, while also offering additional competitive benefits for this line of business given the European climate change agenda. On top of that, as a way to enhance focus on our core business and create additional shareholder value, we are considering potential divestments of our non-core energy business. We are currently looking into different options available, from sale to strategic investors, to having the energy company stock paid to our shareholders as dividends. Now let me traditionally turn to our strong financial position that we have been maintaining despite all the external challenges. As a major competitive edge, this provides us with additional flexibility and decision-making and enable us to develop our business fully in line with our strategy and to honor all of our obligations to lenders and shareholders. As of the end of 2020, our net financial debt was slightly above RUB120 billion, with financial leverage of a mere 0.2. LUKOIL's credit ratings and outlook stayed unchanged even amid the turbulent market. In May, we successfully placed 10-year Eurobonds for $1.5 billion and redeemed $1 billion of Eurobonds in November as per the schedule. In December, we paid RUB32 billion in interim dividends for 2020 based on the actual free cash flow for the first half of the year. We remain committed to our dividend policy. We believe it should be the most effective in our industry as it places no restrictions on our investment potential, creates no risks for our robust financial standing and provides for the optimal allocation of capital. On top of that, we offer superior transparency. As early as today, our regulations on the dividend policy already make it possible to estimate the final dividend for 2020, which stands at RUB213 per share. Taking into account the interim dividend paid to date, the total dividend estimate for 2020 is RUB259 per share. For objective reasons, this is below the 2019 dividend, but still above what was paid out for 2018. The Board of Directors will issue its recommendation on the final dividend in April. Thank you. I would now like to hand over to Mr. Pavel Zhdanov.

[Pavel Zhdanov:]

Thank you, Alexander. Let me focus on some of the metrics of our financial statements. Lower hydrocarbon prices became the key factor driving revenue 28% down year-on-year. Other factors contributing to the reduction included lower volumes of hydrocarbon production and petroleum product output as well as a decline in trading volumes and retail sales. On the other hand, our revenue was supported by the ruble devaluation. EBITDA for 2020 came in at RUB687 billion, down 44% year-on-year. In the Upstream segment, lower EBITDA was the result of declining oil prices, the negative tax lag effect in Russia as well as forced oil and gas production cuts in Russia and Uzbekistan, respectively. The negative effect of these factors was partially offset by lower operating expenses, better production structure and ruble devaluation. Downstream EBITDA delivered a mixed performance. Refining results deteriorated significantly due to a lower margin and a strong negative inventory effect. We were able to somewhat mitigate these factors by flexibly optimizing throughput and yield. International trading, on the other side and quite on the opposite, delivered very strong results on the back of high price volatility. As a result, Downstream EBITDA outside Russia remained almost flat compared to 2019. Unlike most of our competitors, we ended the challenging 2020 in a positive net profit territory. Apart from the low EBITDA, our profit was adversely impacted by the noncash FX effect as well as an asset impairment loss attributable to the sharp deterioration in the market environment. Let me say that most of the impairments related to the assets in Uzbekistan and the ISAB refining facility in Italy, which was further impaired in the fourth quarter. ISAB write-offs were also recognized as part of the deferred income tax, resulting in a high effective income tax rate applicable to the group as a whole. The financial performance for the second half of 2020 confirms that LUKOIL is perfectly positioned to get the most benefit from the market recovery. We still maintain strong potential to ramp up production as demand rebounds and external restrictions are lifted. By developing our priority projects and further enhancing our production structure, we will be able to better capitalize on the recovery as a driver of our financial results. Today, the refining margin remains extremely low, but it is bound to recover if the situation in the light product markets gets back to normal. An improved environment in the refining market will bolster financial performance of the Downstream segment, while the launch of the new units and the associated enhancement in the product slate will amplify the positive impact from the recovery. We will also continue emphasizing our efforts to improve efficiency and cost cutting. Let me summarize the key strengths of our investment story. LUKOIL combines the best features of both Russian and international oil companies. Our benefits include low cost, strong investment discipline, clear focus on efficiencies, effective capital distribution, transparency, high level of disclosure and strong corporate governance standards. We prioritize adherence to sustainability principles and ability to successfully manage climate change risks and opportunities. We rely on a major resource base of superior quality and best-in-class refining facilities. On top of that, we aim to grow organically with a focus on Russia. Our ultimate goal is to deliver value to our shareholders. The company's performance in 2020 has once again confirmed its strong resilience to external shocks as a result of an effective business model with extensive vertical integration, combined with natural hedges, low leverage and flexible financial policy. At the end of our presentation today, let me turn to our plans for 2021. Our base case plan is to grow hydrocarbon production by 2%, excluding the West Qurna-2 project, assuming that current limitations on oil production in Russia remain unchanged. We will continue flexibly adjusting the utilization of our refineries, depending on the market environment, which we, however, expect to improve, with the resulting increase in our refining volumes. In 2021, we intend to launch 2 new units, both at the Nizhny Novgorod refinery. Our base case plan for capital expenditures is around RUB450 billion, excluding West Qurna-2, and we maintain a flexible approach to our investment program, and this plan can be adjusted upwards if the market environment is sustainably favorable. This year, as Mr. Alekperov has already said, we will be updating our strategy. This indeed is going to be an update, and not a revision, as we see no need for a fundamental transformation of our strategy and key priorities. We plan to present our updated strategy next spring -- spring next year. Thank you. This completes the presentation. We're ready to take your questions. And again, we can take a question on the phone as well as the webcast. We kindly ask you to send narrow technical questions directly to the IR team or through the webcast and we'll respond today. Now let's start with the phone line.

[Operator:]

[Operator Instructions]. The first question comes in from the Russian line, from the line of Karen Kostanian, calling from Bank of America.

[Karen Kostanian:]

I have two questions. One question concerns renewable energy efforts and green energy developments in general. Don't you think that these efforts would further lead to CapEx increases or larger CapEx spend looking forward? Is there any calculation available by how much your CapEx would grow in order to reach your green agenda targets? And my other question relates to all the evolution of the oil industry in the second half of 2020, the situation in the market has changed. Is there any reason to believe that the tax incentives would remain in place, given that?

[Vagit Alekperov:]

Well, our green focus is mainly about our own needs of energy because that would enable cuts in controllable emissions. We know this business quite well, and we have a number of related assets in Russia and abroad, and we are developing them. We are building a second phase of solar power plant at our Volgograd refinery, as an example. Currently, it's nearly 400 megawatts of commercially generated capacities contributing about 5% of our commercial power generation. Further development of this commercial capacity will be subject to availability of feasible and attractive projects. As you are aware, currently, such opportunities are limited. And we'll be working to create them. It's an important part of our climate strategy -- climate change strategy. It all depends on the regulations that are evolving in the countries of presence where we are considering such projects.

[Alexander Matytsyn:]

Indeed, decisions made in 2020 relating to the tax side of the business were indeed unexpected for the whole industry. We found it quite unexpected to have the tax benefits for high-viscosity oil withdraw -- withdrawn. We are still working with the Russian government and expect further changes to happen here with potential reversal. And we see not the risks, but the opportunities to get more barrels involved into production, which are not feasible for production today. We have constructive dialogue with the Russian government with mutual interest involved because every new barrel of production means more investments into Russian economy, more GDP and more taxes for the government. We, in turn, guarantee responsible approach to the reserve base. And by the way, the excess profit tax, especially for mature field is demonstrating good performance, and we see positive improvement here with the expansion of this tax, especially for the mature field. With the OPEC+ constraints removed, we expect more reserves to be involved in production so that we could use still the maximum of the opportunities we have on our end, and the government, in turn, will provide all the necessary tax benefits.

[Operator:]

The next question comes in from the Russian line from the line of Alexander Burgansky calling from Renaissance Capital.

[Alexander Burgansky:]

I have two questions, if I may. Question one, please update us on your gas production targets in Russia. I understand you had a strategy announced back in 2018. So you targeted 19 bcm in 2020 and then ramped up to 22 bcm and adding 10 more bcm by 2027. I'm wondering whether you can update us on your 2021 gas production target domestically. And my other question relates to the petrochemical business. You have mentioned two projects today to produce polypropylene, but I'm wondering why exactly you have decided to go ahead with polypropylene rather than other petrochemical products. Did you consider any other products before finalizing your decision with polypropylene? And how fast do you intend to ramp up your petrochemical capacities looking forward beyond the polypropylene project investment decision making.

[Azat Shamsuarov:]

Mr. Shamsuarov speaking. We have quite a lot of gas in Filanovsky [ph] and the Caspian Sea, with an additional upside remaining at 20 bcm per annum. By now, we have already identified other efficient technical and technological solutions that would enable us to produce -- to develop and produce gas efficiently and supply to the domestic market. In order to create further shareholder value for the company from gas production, we are considering additional options to improve our margins in the gas business with gas processing projects. So far, no investment decisions have been made. 2021 will see gas production grow by about 10%, mostly with the recovery of production or restart of production in Uzbekistan. Speaking of 2019, back in 2019, we started the pilot at South Messoyakhskoye field in the Yamal. In 2020, we commissioned the Khalmerpayutinskoye field with just a few wells, but nonetheless -- and as a result of these pilot projects, we will make further decision to develop the field. In 2021, we intend to launch a pilot at Solikamsk field. Considering gas fields on the Caspian Sea, as of today, we are considering various options to develop the Kuvykin field with the potential of up to 7 bcm per annum and Kulinskoye field with the potential of about 8 bcm per annum. With the Kuvykin field, exploration has been completed, and FEED could well be done by 2023. We are considering various options to monetize these gas reserves. And then we are further working to optimize the development and marketing costs.

[Vadim Vorobyev:]

Mr. Vorobyev speaking on the petrochemical projects. To start with, that's a fast-growing market. There is clearly a shortage of plants in Russia. And again, LUKOIL has long been in this market as a commercial entity and in terms of production as well. You may be aware that we produced a lot of olefins in Budennovsk Stavrolen. And we have petrochemical production at our refinery in Saratovorgsintez [ph]. Now why polypropylene, why in Nizhny Novgorod and why in Burgas? I think I have tried to explain it during my presentation. It's because we have sufficient feedstock at 800,000 tonnes of polypropylene to be produced at both facilities. We intend to carry over that feedstock into a new conversion phase with a high margin. In this particular case, that's polypropylene. And secondly, Burgas and Nizhny Novgorod refineries are both closely located to the dedicated target markets with high consumption of polypropylene and polypropylene based products. And again, the capacities we intend to develop at these refineries would enable us to reduce the CapEx or to have more efficient CapEx for those two projects. Hence, we have bet those two projects with final investment decision pending in 2022, just like I said. As far as other projects are concerned, I have mentioned that during my presentation as well, we are considering other options. That's to say it's too early to discuss them as yet. And those that end up as part of our strategy will definitely be disclosed to you. As you hear from Mr. Zhdanov, it's going to be part of the strategy update in spring next year.

[Operator:]

The next question comes in from the English line from Mitch Jennings calling from Sova Capital.

[Mitchell Jennings:]

I have two quick questions. The first is on the impairment in the Downstream, if you could provide any color on that? And it looks like for the full year Downstream outside of Russia, impairments were about half, if that's correct? And the second is on the news this afternoon on changes to the damper mechanism calculations. If you have any thoughts on that, whether it will be positive for you guys going forward?

[Pavel Zhdanov:]

Thank you, Mitch. I'm going to try to answer the first question on the impairment. Mr. Zhdanov speaking. In 2020, we registered the impairment mostly related to Uzbekistan, that's about RUB36 billion worth given the worsening market situation. And secondly, ISAB about in Italy, that's about RUB60 billion across the year, most of which fell into Q4, again, because the economics for the facility went down given the lower marketing environment. And then the economic effect of the MARPOL was very different to our expectations. This loss does not affect our EBITDA calculation, nor does it affect our dividend calculation for 2020 based on the dividend policy.

[Vadim Vorobyev:]

And on the damper, Mr. Vorobyev speaking. Considering your second question, there is a wholesome change ongoing on the tax side industrial for the Downstream business. The current mechanism does look complicated with lots of formulas and elements in those formulas. But nonetheless, it's rather straightforward when one considers the rationale behind it and how it affects the industry. It's there. The whole mechanism is there to maximize production of light petroleum products and reduce the volatility of motor fuel prices. It's there to ensure a sustainable supply of the domestic market. Considering further changes in this mechanism, yes, we are working on that. This work is ongoing. We are currently, like today, we are discussing potential corrections into the damper mechanisms given the reduced demand and somewhat of an unbalanced or disbalance between the domestic prices and the net back parity price. It's still early to consider any outcomes yet. The discussion is soon to be finalized with some decisions aimed at stimulating the domestic market, first and foremost.

[Operator:]

The next question comes in from the English line from Henri Patricot calling from UBS. Please go ahead with your question in English.

[Henri Patricot:]

I wanted to ask a mere two questions around the strategy given this emphasis that you are putting on reducing emissions. So I was wondering if you can give us a sense of the implications for your production plans on the upstream, where you targeted some modest production growth over the next few years. Is that still the case? You think you can still grow production and cut emissions by significantly reducing the intensity? Or do you intend to keep production flat and maybe see decline later on? And secondly and partly related to that, would you still think about growing production inorganically? Or given this new focus on emissions and carbon intensity, is that something you'd no longer consider?

[Pavel Zhdanov:]

Mr. Pavel Zhdanov speaking. Let me try handling your question, considering our production plans against the backdrop of the decarbonization program that we have announced. The company has developed its decarbonization program not in order to reduce the production, of course, it's there to reduce the carbon footprint. However, our production growth plan is there as part of the existing strategy and the updated strategy, which we are working on across this year, remain in place. These plans are definitely affected by the external constraints, but there is no link between the production growth plan on the one hand and the decarbonization plan on the other hand. Considering further initiatives that could affect the company's plan to produce hydrocarbons, well, Mr. Alekperov mentioned it in his presentation. We believe that Russian oil and Russian reserves are special, given the low lifting costs and low cash cost. And given our intent to reduce the carbon footprint, there will be demand for this product in any environment. So there is no link between the two plans. I hope this answers your question.

[Operator:]

There are no more questions from the conference call. I would like to hand over to Pavel Zhdanov.

[Pavel Zhdanov:]

Well, we would like to thank everyone then. Thank you for taking part in this call. You may now hang up.