RUSSIA - LUKoil Leads In External E&P Investment.

LUKoil was the first among the Russian oil companies to invest in E&P outside the country after the collapse of the USSR as it joined the Azerbaijan International Oil Consortium (AIOC) that was formed in 1994. It also joined the Shah Deniz consortium in Azerbaijan and led other ventures there, with Alekperov being of Azeri origin. But in 2003 it sold its 10% AIOC stake to Inpex of Japan for $1.33 bn (see survey of Azerbaijan in the current volume, Nos. 1-3).

LUKoil has doubled its stake in Shah Deniz to 10% as it bought ENI out of the LukAgip JV. It moved to Kazakhstan, where it joined the Karachaganak group and led other ventures (see survey of Kazakhstan in Nos. 4-6). It has upstream interests in the other Central Asian states and in the Russian and Kazakh sectors of the Caspian Sea. LUKoil is spending $13 bn to boost the share of the Caspian in its 50m t/yoe of its oil and gas production to 18% by 2020.

LUKoil's purchase of ENI's 50% in LukAgip (LA), in a deal announced on June 30 and to be in effect in the third quarter of 2004, gives the Russian major additional assets in Azer-baijan and a stake in Egypt. These consist of LA's 8% in the Azerbaijan Gas Supply Co., 10% in the South Caucasus Pipeline Co., which will be supplying Shah Deniz gas to Turkey from 2006, and 24% in the Meleiha E&P venture in Egypt.

LukAgip was formed in 1996 to help LUKoil branch into overseas E&P operations, with emphasis on Egypt and North Africa where Agip has a strong position. In an interview with MEED of April 9-15, 2004, LUKoil Overseas (LO) President Andrey Kuzyaev said the company intended to increase its participation in Egypt, where "we are dealing with a government that is highly organised in terms of attracting inter-national investment".

Uzbekistan: In the fall of 2003, LUKoil launched an investment project in Uzbekistan, for the development of Khauzak, Shady and Kandym groups of oil and gas fields. These will become major producers within the next two to three years.

One interesting venture is a LUKoil partnership in Uzbekistan with Itera, a private Russian gas marketing company registered in Florida. With each of LUKoil and Itera holding 45% and the state-owned UzbekNefteGaz (UNG) having the rest, the venture has a production-sharing agreement (PSA) to develop gas and condensate reserves in the Bukhara-Khiva and Gissar blocks in the south of Uzbekistan. The venture is also exploring for oil and gas in other prospective parts of the country. The explored reserves in Bukhara-Khiva and Gissar are estimated at 250 BCM of gas and 10m tons of condensates. The partnership will produce 8-10 BCM/year of gas and about 100,000 b/d of liquids from 2006 or 2007.

LUKoil Overseas Canada in 2001 bought about 80% of the common shares of Bitech Petroleum. Bitech, a Canadian upstream company, has major assets in the northern Russian republic of Komi, where LUKoil has extensive operations.

In Iraq LUKoil has an important stake in the West Qurna oilfield. This is a super-giant which can be developed to produce more than 1m b/d. On June 28, as British forces handed sovereignty over southern Iraq to an interim Baghdad government, Alekperov was quoted by Interfax as saying LUKoil planned to extract the first oil from West Qurna next year. But there is no solid proof whether LUKoil had reached agreement with Iraqi officials on its rights over the field.

LUKoil spokesman Dmitry Dolgov was silent on whether the company had reached an agreement on this with the Oil Ministry in Baghdad. However he said: "I would assume Alekperov had reason to say we will be pumping oil in Iraq next year". Saddam's Baathist regime of Iraq scrapped LUKoil's 3.7bn deal late in 2002, months before the US-led invasion. Saddam's regime then accused the company of failing to meet its obligations to begin work. LUKoil said its hands were tied by UN sanctions then in force. But Kuzyaev told MEED in April: "When we had our latest discussion with the Oil Ministry in Iraq, we agreed not to comment from now on on developments on the project. What I want to stress is that we are waiting for a legitimate [freely elected] Iraqi government to be put in place [in 2005] before we continue our commercial negotiations".

In Iran: Kuzyaev in 2001 said of LO's negotiations over Iran's Khesht field: "We are not satisfied with how these talks are going and we should be more active there. Also, we have not yet defined our attitude towards the proposed buy-back scheme, but we want to operate on this market and we will continue our work there. I think that in the near future, in a lower oil price environment, the buy-back deals will be more attractive for oil firms given a guaranteed return on investments".

In Saudi Arabia: Alekperov, Saudi Aramco CEO Abdullah Jum'ah and Saudi Oil Minister Ali Naimi on March 7, 2004, signed a 40-year contract to explore for and develop natural gas in Area A in the remote Rub' Al Khali (Empty Quarter) desert. LUKoil said on March 4: "Probability of a commercial hydrocarbons discovery [in Area A] exceeds 80%".

The venture, Luksar, is 80% owned by LUKoil and the rest is held by Saudi Aramco. The gas field of 29,900 sq km Area A is in the northern part of Rub' Al-Khali desert. The JV will borrow $215m from Saudi Hollandi Bank, which is 40% owned by ABN Amro Bank, to fund a five-year exploration programme. Luksar has formed an 11-member board comprising eight from LUKoil, two from Saudi Aramco and a Saudi government representative. The board has appointed a LUKoil man as CEO of the JV. State-owned Saudi Aramco will buy the gas from the JV and build pipelines to customers. LUKoil will market condensate from the field.

Saudi Arabia has been seeking to attract foreign companies after it broke off talks in June 2003 with ExxonMobil over two gas JV, ending more than two years of negotiations. China Petroleum & Chemical Corp. and an ENI/Repsol partnership won contracts for two nearby gas E&P areas. Saudi Arabia needs gas to fuel power plants and water desalination stations and to increase production of petrochemicals as it expands economic development beyond pumping crude oil. International energy companies, evicted from Saudi Arabia decades ago, want to return to the world's top oil producer. A Shell/Total partnership in November 2003 won a similar contract to develop gas deposits within the Shaybah oilfield and the Kidan gas structures in Rub' Al-Khali.

LUKoil Overseas (LO), created in 1997, has been in operation since 2001. Its goals is to become "a competitive trans-national firm" (see Vol. 59, No. 13).

LUKoil is to produce 50 BCM/year of natural gas by 2010. In the spring of 2003, it signed an agreement with Gazprom on co-operation in Yamal projects valid until 2005. The main reason for this is that Gazprom is committed to buy gas from LUKoil at the entrance of the Yamburg compressor station. Under this deal LUKoil will supply Gazprom with 8.75 BCM/year from Oct. 1, 2005 to Dec. 31, 2006. This will move from the Nakhodkinskoye field to Gazprom's gas pipeline system at the price of $22.5 less VAT per 1000 cm. From 2008 on, LUKoil will produce up to 10 BCM/year at this field.

LUKoil has the biggest petrochemical asset base in Russia and East Europe. It meets a big part of domestic demand for various chemicals and is a leading exporter of chemical products to more than 50 countries in Europe, Asia, Africa and America (see DT No. 9).