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The largest oil group in Russia, LUKoil produces over 1.83m b/d of crude oil and condensate in Russia and its share of external E&P operations. This includes 1.73m b/d of crude oil and condensate in the Russian Federation. By July 2004, LUKoil had become second to ExxonMobil among the world's private oil groups in terms of proven reserves. According to an audit done in 2003 by the respected US consultant Miller & Lents, the group's proven reserves at end-2003 stood at 20.1 bn barrels of oil equivalent.

LUKoil on Jan. 13, 2006, published consolidated US GAAP financial accounts for the first nine months of 2005. Its net income was US$4,801m, up 55.1% year-on-year (y-o-y). At the same time, it said, total tax expenses exceeded US$13 bn, almost 85% higher than in the same period of 2004. Taxes paid in Russia (including mineral extraction tax, tariffs, excise etc.) in the first nine months of 2005 was 50.3%. It said the rise in net income resulted from favourable market conditions and from cost cuts. Growth of net income was restrained by a tax rise, a strengthening of the rouble against the US dollar and a rise in transportation costs.

EBITDA was US$7,657m, 46.7% higher than in the same period of 2004. Revenue from sales for the first nine months of 2005 was US$40,238m, up 66.2% y-o-y. Average lifting costs rose 7.1% to $2.72/b compared with the first nine months of 2004. But the strengthening of the rouble in the year to Sept. 30, 2005 was 15%, which meant average lifting costs fell by almost 8% in real terms.

LUKoil said it had managed to reduce average lifting costs in real terms thanks to a growth of the average flow rate per well from 10.65 tons/day in the first nine months of 2004 up to 11.04 tons/day in the first nine months of 2005, or by 3.7%. That was also thanks to "the restructuring of production assets".

Total capital expenditures including non-cash transactions were US$2,918m in the first nine months of 2005, an increase of 26.8% y-o-y. During the first nine months of 2005 the company produced 66.9m tons of crude oil, up 4.4% y-o-y. The daily production growth reached 4.7%, with organic growth of 4.4%. LUKoil's petroleum products output in the first nine months of 2005 was 32.8m tons, up 7.7% from the same period of 2004.

In the first nine months of 2005, LUKoil units exported 34.5m tons of crude oil (including purchased crudes), compared with 34.6m tons in the same period of 2004. The slight decrease was due to a growth of throughputs at LUKoil's Russian refineries and a reduction of domestic oil purchases.

In the first nine months of 2005, LUKoil sold 91m tons of crude oil and petroleum products, up 11.2% from the same period in 2004. The share of international sales (including the CIS market) in the total volume was 82.9% compared to 80.6% in the same period of 2004. Retail fuel sales increased by 30.8% in volume terms y-o-y, while revenues from retail sales grew 61.6%.

In a report which on Jan. 13, 2006, summarised preliminary results of the firm's operations in 2005 and its objectives for 2006, it said: "[At a board of directors meeting on Jan. 13] OAO LUKoil President Vagit Alekperov pointed out among other things that macro-economics in 2005 had an ambiguous effect on the LUKoil Group performance. On one hand, it resulted in favorable pricing trends both in the international and domestic markets of oil and petroleum products; on the other hand, [the] 2005 inflation index exceeded the expected level and the tax burden grew significantly.

"The hydrocarbon reserves increased as a result of exploration and prospecting by 160 mln TOE (tons of oil equivalent). The major oil reserves growth accounted for Russia (Nenets Autonomous District, Western Siberia and Perm Region). The main growth of gas reserves accounted for the Yamal-Nenets Autonomous District, after a large Nakhodka gas field was commenced. Oil and gas reserves increment is 1.5 the amount of their recovery. LUKoil intends to increase its hydrocarbon reserves in 2006 by 106 mln TOE.

"Exploration...enabled...[LUKoil] to discover 5 new oil, gas and condensate fields and 6 oil deposits in earlier...fields. Preliminary data suggest that oil production of the... Group, including equity interest of subsidiaries and foreign projects, came to 90.1 mln tons, including 86.3 mln tons in the Russian Federation and 3.8 mln tons abroad. Oil production increase in 2005 amounted to 4.5% against 2004. Western Siberia remains the largest oil production region. Gas production in 2005 increased by 17%...[on 2004] and exceeded 7.6 BCM. In 2006 LUKOIL plans to increase gas production by more than 40%, with the be produced in Nakhodkinskoye [gas] field.

"Oil exports of the LUKOIL Group in 2005 rose by 2.3% against...[the 2004 level] and amounted to 46.6 mln tons, including non-CIS countries (40.7 mln tons) and CIS countries (5.9 mln tons). Preliminary data suggest that oil exports using alternative (mixed) transportation [means] rose up to 8.1 mln tons, which is 11% more than the...[2004 volume].

"In 2005 natural, associated and stripped gas sold by the Russian subsidiaries of the LUKoil Group came to 4.1 BCM, which is 17% more than the corresponding indicator registered in 2004.

"Crude processing at the LUKoil...refineries (excluding the mini-refineries) in 2005 amounted to 47.4 mln tons, including 37.1 mln tons in Russia and 10.3 mln tons abroad. As compared to 2004, the total refining increased by 8.2%. In 2006 refining to remain at the level of 2005. In 2005 production of EN590 diesel fuel in the Russian refineries owned by LUKoil...reached 4.7 mln tons or 46.5% of the total diesel fuel production, which is almost 6 times the amount of...[2004]. Production of light petroleum products in the LUKoil...refineries rose to 53%, the share of high octane gasoline in the total amount of auto gasoline reached 79%.

"Total investment expenditures in 2005 (according to the unaudited data generated using the corporate investment accounting method) came to US$6.9 bln, which exceeds the previous year indicator by 72%. Preliminary data indicates that the total amount of the 2005 taxes and levies paid to all levels of the Russian Federation budget amounted to RUR 469.1 bln or US$16.6 bln. The amount of deposited taxes and levies has increased by more than 1.7 times as compared to 2004.

"Positive results in all lines of business were achieved among other things due to further improvement of the corporate governance system. The restructuring program envisaging development of corporate relationship transparency between the and the non-core marketing businesses implemented during the period from August 2004 to October 2005 resulted in a 30% reduction of the total number of Russian organizations and entities of the LUKoil Group.

LUKoil Vice President Leonid Fedoun in April 2002 told The Financial Times: "We believe we should increase production in new fields because producing more in west Siberia involves extracting eight tons of water for every ton 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 been proven right as the number of water barrels coming out of each barrel of oil in west Siberia has increased at an alarming rate.

Unlike Mikhail Khodorkovsky who became a "billionaire overnight" in the 1990s and bragged about his ambitions to rival President Vladimir Putin, LUKoil founder and CEO Alekperov is an Azeri-born aparachik who has been extremely cautious and has never challenged the Kremlin or made political statements not in line with official Russian state policy. Whereas Khodorkovsky belonged to the category of capitalist billionaires among the "New Russians", Alekperov is known as a "red billionaire" who shuns publicity and never appears to be ostentatious (see who's who in Part 5).

LUKoil was structured in 1992. Its name derived from three production associations in west Siberia that were merged: LangepasNefteGaz (then with capacity of 275,000 b/d); UraiNefteGaz (87,000 b/d); and KogalymNefteGaz (475,000 b/d). In 1995 LUKoil took from Rosneft four producers which had agreed to merge with it: PermNeft (170,000 b/d); NizhnevolzhskNeft (52,000 b/d); KaliningradmorNefteGaz in the north-west (12,000 b/d); and AstrakhanNeft in the Russian the Caucasus (2,000 b/d). It began its vertical integration in 1993 by taking in one oil refining firm, VolgogradNeftePererabotka (with a 188,000 b/d plant at Volgograd but a usable capacity of 100,000 b/d). In 1995 LUKoil took from Rosneft three refining firms: PermNefteOrgsintez (278,000 b/d in Perm being partly used); a smaller plant at Novoufimsk, the Urals; and the large Ufa refining complex in Bashkortostan (whose capacity once was over 900,000 b/d but now is about 100,000 b/d). In late 1999 it got the 150,000 b/d Ukhta refinery as part of the KomiTek deal. LUKoil has been modernising these refineries so that, together with other plants acquired fully or partly elsewhere, its refining capacity has reached 1m b/d.

The group has built an oil products pipeline linking its Perm refinery, on the Volga River, to Moscow and other markets including Tatarstan. This has joined an existing line for products sales from Omsk refinery in Siberia to Europe, which enables LUKoil's units to expand in premium European regions. The group is building up a fleet for its shipping units, with one at Astrakhan where barge traffic along Volga links Russia's refining centres to the Caspian. The group includes construction firms and units providing various services, such as LUKoilNefteAvtomatika, RostovNeftekh-improekt, Uraiskoe, and VolgogradNefteProdukt-Avtomatika.

LUKoil was registered on the Russian stock exchange on April 5, 1993. It was not fully consolidated until 1995. It was the first to convert "daughter shares" into shares of the holding company and the exchange ended on Jan. 1, 1996. It was the first to enter foreign capital markets. Among foreign partners in its system is ConocoPhillips which is raising its stake in LUKoil group from 12.5% to 20% by end-2006. In the ConocoPhillips-operated Polar Lights in Russia's far north, LUKoil's AGD holds 30% and Rosneft has 20%. The US major holds 50%.

LUKoil is the first Russian company to have fuel retailing in the US and other major markets (see Part 4). LUKoil is branching into the power business. In late 2001 it set up a JV with the Russian power giant UES for electricity to be generated and sold where LUKoil has refineries. In July 2002 LUKoil revealed its ownership structure, with Alekperov holding 10.4% of the group (see LUKoil's detailed structure & background in Vol. 63, OMT No. 8).

OOO InfoTEK-Konsalt, one of Russia's leading consulting companies in the petroleum sector, on July 14, 2006, declared LUKoil a leader of the Russian retail market among oil companies of in this country. It said LUKoil had the largest number of filling stations in the Russian Federation (more than 1,500, without franchising), conducted efficient refinery upgrading, and produced motor fuels with improved performance and environmental properties.

LUKoil produces diesel under Euro-4 standard and gasoline under Euro-3 standard. In April 2006 LUKoil introduced gasolines branded EKTO-95 and EKTO-92 (clean fuels) with properties complying with Euro-3 standards and exceeding requirements defined by Russian state standards. To improve performance properties, a multi-purpose additives package is injected into EKTO gasolines which helps improve detergent, anti-corrosion and other properties. Application of EKTO motor fuels provides for safer operation of cars due to improved fuel combustion, increase of reliability and engine life, increase of motor oil life, noise reduction and lower engine vibration, decrease of wear-out of fuel injection system components, and prevention of coke formation in the injector.

Besides, the EKTO motor fuels close out premature failure of onboard diagnostics systems. Improved environmental properties of EKTO fuels provide for a significant decline in the release of carcinogenic emissions, sulphur compounds, nitrogen and other hazardous substances.
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Publication:APS Review Oil Market Trends
Geographic Code:4EXRU
Date:Aug 21, 2006
Previous Article:RUSSIA - Part 2 - The Oil & Gas Producers.
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