RUSSIA - LUKoil.

The largest oil group in terms of reserves and production capacity, LUKoil in 2002 is to grow by less than 3% compared to 27% planned by SibNeft and 23% projected by Yukos. But LUKoil prefers to remain conservative in its operations. Its vice president Leonid Fedoun was in April 2002 quoted by The Financial Times as saying: "We believe we should increase production in new fields (outside Siberia) because producing more in west Siberia involves extracting eight tonnes of water for every tonne of oil". He said the "radical" methods applied by SibNeft and Yukos were causing long-term damage to their fields "by boosting the intensity of exploration of fields with a high degree of water content".

LUKoil has a market capitalisation of $12 bn, more than 14 bn barrels of proven oil reserves, 1.6m b/d of production capacity. In 2001 it had a net income of $2.1 bn, compared to $3.3 bn in 2000 and $1.1 bn in 1999. The group's revenues in 2001 were $13.6 bn, compared to $13.4 bn in 2000 and $7.6 bn in 1999. Its accounts are now issued under US Generally Accepted Accounting Principles (GAAP). LUKoil's target is to raise its oil output to 2.8-3.2m b/d and gas production to 100 BCM/year by 2010-2015.

In July 2002 LUKoil revealed its ownership structure. It was forced to do that in order to get a listing on the London stock exchange, because the Moscow government intended to sell a 5.9% stake in the group; but the government later cancelled the sale because the company's value had fallen below a previously anticipated level. (LUKoil had long refused even to publish financial statements in line with US accounting standards). The main shareholders are as follows:

- The Russian government, 13.1%. Its cancellation of the 5.9% sale - which would have represented the largest ever offering of a stake in a Russian oil company - came despite an over-subscription by international investors. The government received orders for 16.5m American Depositary Receipts (ADRs), although only 12.5m were being put on offer. LUKoil's value on July 31, the day before the planned sale, settled at $14.22 per share. The government's asking price was said to have been $56 for each ADR, equivalent to $14 per ordinary share, in view of an announcement by LUKoil in the previous week that its profits for the first quarter of 2002 had dropped by 64.3% to $243m compared to $680m in the first quarter of 2001. - The US-based Capital Group, 10.8%.

-LUKoil's president and CEO, Azeri-born Vakit Alekperov, 10.4%. This means is a dollar billionaire on paper. He earns an annual salary of $1.5m, plus a bonus of up to $2.2m/year, which almost matches the wages of top executives in world oil majors like ExxonMobil and BP. He once said LUKoil could buy ExxonMobil "within 15 years".

- Nikoil, an investment bank linked to LUKoil, 6.7%. - Niloil's CEO Nikolai Tsvetkov, 5.3%. - LUKoil Vice President and close aide to Alekperov Leonid Fedoun, 4.6%.

A 258-page ADR prospectus published in July showed that, with the exception of these shareholders, LUKoil is controlled through a number of nominee trusts. The ultimate beneficiaries of these trusts are not disclosed. On Aug. 5 Petroleum Argus mentioned a Cyprus-based company, Reforma Investments, which it said had bought a 9% stake in LUKoil at auction in 1999. Argus quoted Russian government officials as saying top LUKoil executives were behind Reforma - noting that, if this was the case, Alekperov's personal stake could be larger than reported. The Financial Times on July 31 said: "A more diluted, less cohesive ownership structure might help to explain why, in the past, LUKoil has had difficulty in cutting costs, or articulating a clear strategy". It quoted Moscow-based analyst Eric Kraus as explaining: "LUKoil is a loose confederation of warring tribes". Kraus, an independence, once worked for Nikoil.

In early 2001 BP sold a 7% LUKoil stake it had inherited from Arco, which the Anglo-US major absorbed in 2000, in two tranches for $657m. The second tranche was oversubscribed by a factor of 42. Thus BP made a profit of $277m as Arco bought the stake for $380m. BP said the stake was too small to carry any decision-making influence in LUKoil. LUKoil has restructured and consolidated management and operations in Moscow this year in order to improve its profitability, following criticism from shareholders as operating costs were higher than those of other Russian oil companies.

It has appointed non-executive directors to its board for the first time. One of these is former ChevronTexaco deputy chairman Richard Matzke, advising Alekperov on development of LUKoil's upstream assets. Another is Mark Mobius, executive director of Templeton Investment Management, a firm which acts on behalf of Western stock investors and is one of the largest players in the shares of Russia's blue chip companies.

LUKoil in late 1999 bought the northern oil producer KomiTek in an all-stock transaction. This raised LUKoil production by 110,000 b/d and refining capacity by 150,000 b/d. Its oil reserves were raised by 1.62 bn barrels. In August 2001 LUKoil bought the interest of Aminex of Ireland for 10 oilfields in the far northern region of Timan-Pechora. Earlier in 2001 LUKoil bought a controlling stake in Northern Sea Shipping, which transports goods across the Arctic Sea. Its ships now transport equipment for use in the exploration of the Timan-Pechora fields, with their oil reserves estimated at 1.3 bn barrels.

Fedoun said in June 2002 LUKoil's proven reserves had reached more than 14.6 bn barrels of oil and over 100 BCM of gas. He said Caspian fields will add another 3.3 bn barrels of oil equivalent, two-thirds being gas. LUKoil's value of about 70 cents/b of reserves compares with BP's $9/b.

Now LUKoil has five fully owned refineries in Russia with a total usable capacity of 550,000 b/d at Volgograd, Perm, Novoufimsk, Ufa and KomiTek's Ukhta (see background in previous survey of Russia in Vol. 51, No. 7). These are apart from equity in refineries in the former Soviet Union and east Europe. In 2001 LUKoil became the first Russian company to invest in the US oil retail business as it bought Getty Petroleum (see Russian companies' external investments in Part 4). LUKoil now has over 150,000 employees, with its HQ being in Moscow. Oil production at LUKoil's Russian system averages about 1.4m b/d. Its gas production averages 4.5 BCM/year. In the first half of 2002, its gas production amounted to 2.15 BCM and LUKoil was thus the third largest gas producer among the oil companies. LUKoil is planning to become the second biggest gas producer and seller in Russia, next to Gazprom. It can easily raise production to 15 BCM/year within a short period. A further increase is expected within the next three years, when it would invest $1 bn in gas production and transmission.

According to LUKoil geologists, the Russian sector of the Caspian contains 4.5 bn tons of oil equivalent, with 2 bn toe in LUKoil's licence area to raise its gas production considerably. In late May 2002, LUKoil said its Caspian areas had the potential of over 3 TCF of gas and more than 1 trillion tons of oil and condensate. It will begin producing oil and gas in its northern Caspian block of Severny from 2005. LUKoil also wants to export gas to Europe. It is taking over a leading role in development of huge offshore gas fields on Russia's Arctic shelf, from which it intends to export gas in LNG form out of the Yaman Peninsula to North-West Europe. It plans to have its own fleet of ice-resistant LNG tankers.

In 2001 LUKoil acquired a 60% interest in Yamal's gas operating company YamalNefteGazDobycha (YNGD). YNGD's fields in the Yamal region, yet to be developed, are estimated to contain 170 BCM of gas. LUKoil intends to produce 60 BCM/year (5.8 BCF/d) from these field. According to LUKoil, Russia may face a gas deficit of 100-150 BCM/year by 2010, while domestic prices will rise from the current level of less than $15/000 CM to $35-45/000 CM. Vice President Fedoun says southern Russia will be take 60% of LUKoil gas, with Europe to import the remaining 40%.

LUKoil has consolidated its producing assets in west Siberia. In 2000 it merged the 50,000 b/d LUKoil-Perm with 58,000 b/d producer Vatoil, a JV of LUKoil and Cyprus-based Calgary Overseas Development. The 43,000 b/d LUKoil-AIK, a JV with LUKoil-Israel, was merged with Volgodeminoil in which the foreign partner is Wintershall. In the Arctic north, LUKoil-Sever was created in early 2000 to hold the company's stake in several projects. These include 50% in the $1.8 bn Northern Territories JV, in which Conoco holds 40% and the local LUKoil-controlled ArkhangelskGeolDobycha (AGD) holds 10%. AGD is the oil producer in the Arctic north. In July 1998, LUKoil sold 15.7% of its AGD stake to Conoco, the US major which has an oil producing JV with AGD and is LUKoil's partner in developing large fields in the Northern Territories.

LUKoil is to spend $4.6 bn on infrastructure and development of fields in the north's Komi Republic and Nenets region, where the known reserves are estimated at about 15 bn barrels. The aim is to boost production to 450,000 b/d by 2005 and 550,000 b/d by 2010. This could take LUKoil's total output to a target of 2.8-3.2m b/d. The west and north of Russia will account for most of LUKoil's oil production by then.