AZERBAIJAN - LUKoil Operations & The Yalama JV.

On July 3, 1997, LUKoil signed a PSA to develop the offshore Yalama field, which Socar estimated to contain 365m barrels. The field is part of a giant structure lying in waters shared by Azerbaijan and the Russian republic of Dagestan. LUKoil has an 80% stake. Socar has the rest. (Arco had pulled out of this venture in 1999). LUKoil in November 2004 capped its first exploration well at the field because of water problems. The Russian company later concentrated on another area for drilling.

In September 2005 LUKoil decided to continue prospecting on the D-222 offshore platform in the northern part of the Azeri sector of the Caspian. But Russian specialists then said they believed the second well would also yield no results. However, Socar said LUKoil was to do additional seismic research in the contract area to identify a drilling site for the second well and thus confirmed its intention to continue prospecting on the D-222 platform despite the initial failure. Additional seismic research and the drilling of the second well were to be carried out in 2006.

Apart from its stakes in other Azeri ventures, LUKoil leads the project rehabilitating and developing the onshore Govsany-Zykh fields on the Absheron Peninsula at the cost of $250m. This is in partnership with Socar. The fields are said to contain 150m barrels of recoverable oil. About 12 wells have been drilled at the fields by Socar.

In the Russian sector of the Caspian, LUKoil in May 2000 began drilling a second exploration well to probe the Shirotnaya formation in the Severny block. This is where the Russian major said it found 2.2 bn barrels of recoverable oil from a Khvalynskaya formation at the beginning of 2000.

Onshore Absheron JV: In January 2001 LUKoil and Socar signed an agreement for exploration in an onshore area on the Absheron peninsula by the Russian company. LUKoil was committed to invest $250m in this project.

With the agreement finalised by the presidents of Azerbaijan and Russia, LUKoil also helped the Azeri side on working out guidelines for a demarcation of the economic borders in the Caspian Sea between Baku and Moscow. LUKoil's President Wagit Alekperov is an Azeri.

The offshore Absheron gas PSA was signed in Washington in 1997 for a JV led of Chevron (30%), and including Total (20%) and Socar (50%). Chevron drilled the first well in 2001 at the cost of $78m - the second most expensive well in the Caspian after Exxon's Zafar-Mashal well which cost about $150m - and found gas put at 1 BCM.

The two foreign partners have since decided to abandon this project and jointly offered to pay Socar a compensation - in 2003 said to be between $13-16m - rather than drill a second well to which they were committed. Since then Socar has not been able to find replacement partners or to proceed with the project on its own, because it involves gas in a remote area.