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Russia - LUKoil.

The second largest oil group in Russia, LUKoil is private. In July 2004 it became 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 20.1bn boe. These were reduced by 2011 to 17.27bn boe, however, made up of 13.4bn bls of oil and 656.56 BCM of gas. In 2011, it produced 2.14m b/doe. It plans to raise its output to 3.2m b/doe by 2021.

In its 2012-21 plan, Capex including licence acquisitions will be $150bn - against $8.5bn in 2011. The upstream will absorb over 80%, up from 61% in 2007-11. A big portion will be for projects abroad, including Iraq's West Qurna-2 and the Caspian (see Part 4).

LUKoil expects to generate free cash-flow of $10-11bn/y in 2012-21, against $7.24bn in 2011, despite the planned investment rise. The proportion of overall cash-flow devoted to dividends and share buy-backs will rise to 40% in 2021, from 23% in 2007-11. It plans to raise dividend payments by 25% in 2012 and aims for pay-outs at least four times higher than 2011's by 2021.

LUKoil's strategy has drawn a mixed response from investors, according to Petroleum Argus of March 16, 2012, which added: "Most of the gain from higher investment is likely to come towards the latter half of the 10-year period. And the strategy is based on an up-beat oil price outlook underpinned by what LUKoil Vice-President Leonid Fedun describes as OPEC's willingness to maintain prices at $100/b and higher'". Some Russian bank analysts described LUKoil's plan to generate $22-23bn in free cash-flow in 2021 at flattish oil prices as "presumptuous" or "fantastic", while Otkritie Capital said the strategy assumed a positive effect from the continuation of oil tax reform in Russia.

As well as bringing new projects on stream, LUKoil must stabilise production at mature fields in west Siberia, where output fell 4% in 2011. LUKoil plans to spend $25bn in west Siberia over the next 10 years without any new acquisitions, CEO Vagit Alekperov said, "which will not only allow us to stabilise the production profile by 2017, but even make some moderate gains". But a planned partnership with Rosneft has yet to materialise. He said the would-be partners had analysed several projects in the Black Sea, where Rosneft was looking for a partner to develop the deep-water Val Shatskogo block. But curbs on private firms taking part in offshore development prevented LUKoil's participation in an economically viable way.

LUKoil was formed in 1992. Its name derived from three merged production associations in west Siberia: 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 it had agreed to merge with it: PermNeft (170,000 b/d); NizhnevolzhskNeft (52,000 b/d); the 12,000 b/d KaliningradmorNefteGaz in the north-west; and AstrakhanNeft in the Russian the Caucasus (2,000 b/d).

LUKoil 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 Lukoil got the 150,000 b/d Ukhta refinery as part of the KomiTek deal.

LUKoil has modernised these refineries so that, together with other plants acquired fully or partly elsewhere, its refining capacity has reached 1m b/d. LUKoil is investing $24bn in modernising its refineries by 2024. Of this, it is spending $3bn/y in 2012-14, from 2.2bn in 2011. After 2014, the investment will begin to fall. Among its external refining ventures, LUKoil is raising its stake in the 320,000 b/d Erg refinery of Isab in Sicily to 80% in a deal closed in May 2012. It has the option of buying Isab's remaining 20% in this plant by October 2013 at the earliest.

LUKoil's refineries abroad include the 176,000 b/d plant of Burgas in Bulgaria. This is having a heavy-residue hydrocracking facility being built by Technip of France under a 900m contract signed in early 2012. The unit is scheduled to be on stream in January 2015 and will include a 2.5m t/y hydrocracker.

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. Apart from the Moscow exchange, now LUKoil's shares are traded in London. The company aims fokr a $1bn-plus listing on the Hong Kong exchange before May 2013 with the aim of raising capital in Asia/Pacific. It is also considering listing in Shanghai, depending on the market situation.

LUKoil's first quarter 2012 profits reached $3.79bn, up 7.7% on the first quarter of 2011, with higher oil prices having helped offset a slight fall in production. Its full 2011 net profit hat hit a record $10.4bn, with a year-on-year growth of 15%. The company's crude oil production in 2011 had slumped by over 5% to 1.84m b/d.

In order to gain access to premium offshore prospects in Russia, LUKoil is offering Rosneft (the favoured Kremlin-controlled giant - see omt8RusFirmAug20-12) partnership in West African ventures including deep-water projects in Ghana, the Ivory Coast and Sierra Leone. In return, LUKoil hopes to have access to Russia's arctic offshore.

LUKoil is purchasing from ConocoPhillips the latter's 30% participation in their Naryanmarneftegaz JV, which is developing the Yuzhno-Khylchuyu (Y-K) field in Timan-Pechora (Russia's far north). This follows disappointing results from Y-K. On stream since 2008, Y-K had been LUKoil's key output driver until 2009, when it was said to hold 509m barrels of crude oil reserves. But LUKoil in 2011 revised this figure down to 316m barrels, say-ing the geological assessment of ConocoPillips was not correct.

The sale leaves ConocoPhillips with just one asset in Russia, the US firm's operated Polar Lights in Timan Pechora, were it holds 50%, with its partners being LUKoil's AGD (30%) and Rosneft (20%). It seems that ConocoPhillips wants to get out of this venture as well. ConocoPhillips in 2010 sold its LUKoil shares back to the latter (see omt8RusFirms-Aug23-10).

LUKoil and GazpromNeft in late 2007 set up a 51/49 JV, Oil and Gas Company Regional Development. The accord was signed by LUKoil CEO Wagit Alekperov and GazpromNeft CEO Alexander Dyukov. The JV was to acquire rights for sub-surface use, geological surveys of sub-surface areas, petroleum E&P assets in Russia and abroad, field development, implementation of infrastructure projects, transportation and marketing of fuels (see background in down8RusFirms-Aug18-08 - see GazpromNeft profile on following pages).

LUKoil is the first Russian company to have fuel retailing in the US and other major markets (see Part 4 in omt10RusOverseasSep3-12). 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 CEO Alekperov holding 10.4% of the group (see LUKoil's detailed structure & background in Vol. 63, OMT No. 8).

LUKoil's board in early 2008 approved acquisition of a controlling interest in TGK-8, a power utility which is one of the major gas consumers in the Southern Federal District with the annual use reaching 6 BCM. Its power plants are in Astrakhan, Volgograd and Rostov regions, Krasnodar and Stavropol Districts, and the Republic of Dagestan. Rated capacity of electric and thermal power generation facilities of TGK-8 makes up 3,601MW and 13,366 Gcal/hour, respectively. The TGK-8 investment programme stipulated construction of plants with a total capacity of over 1,000MW within five years, including both construction of new power generation facilities, and replacement of retired capacities.

LUKoil 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 Volgograd-NefteProdukt-Avtomatika.

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.
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Publication:APS Review Downstream Trends
Geographic Code:4EXRU
Date:Aug 20, 2012
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