the RUSSIA oil & gas competitive intelligence report - Report Buyer

Russia Oil and Gas Competitive Intelligence Report 2010
Market Position
Russia’s largest private crude producer, Lukoil, had been in competition for the top spot with Yukos prior
to the latter’s liquidation. Lukoil now accounts for 18% of Russian oil production and 18.3% of refining
throughput, while boasting 1.3% of world oil reserves and 2.1% of global production. The bulk of the
company’s E&P assets are located in West Siberia, with smaller reserves in European Russia, Nenets
(Timan-Pechora) and the North Caspian regions. Lukoil holds stakes in E&P projects in Azerbaijan,
Kazakhstan, Uzbekistan, Egypt, Saudi Arabia and Colombia as well a contract for the second phase of the
giant West Qurna oil field in Iraq.
ConocoPhillips bid for a minority Lukoil stake in 2004, subsequently raising its interest in the company
to 20% at a combined cost of US$7.5bn. Lukoil and Conoco also created the 70:30 Naryanmarneftegaz
JV to develop the Yuzhno-Khylchuyu field in the northern Nenets region. Production began in mid-2008,
with output expected to peak at 150,000boe/d. Lukoil’s relationship with Conoco appeared to be
weakening in March 2010 when the US company informed Lukoil of its plans to sell half its 20% stake in
the Russian producer as part of a US$10bn divestment programme.
Strategy
Internationally, the company has refining assets in the Netherlands, Italy, Ukraine, Romania and Bulgaria,
and retail networks in the US and most Eastern European and CIS states. International operations account
for over 30% of Lukoil’s total refining capacity, 60% of its retail network and 4% of the resource base.
Lukoil has curtailed its growth ambitions for the 2010s under its new 2010-2019 strategic development
plan that was outlined in December 2009. The company will reduce annual capex to US$0.9bn from
US$1.2bn envisioned under the previous 10-year plan (2007-2016), until it better understands the
impending 'revolutionary changes' in the oil and gas industry, said Vice-President Leonid Fedun.
The biggest change in the 2010-2019 plan is a major reduction in upstream spending and output targets.
Capex on E&P will total US$60bn, 20% less than the target in the previous 10-year plan (2007-2016).
Consequently, Lukoil now expects oil production to reach only 2.7mn b/d by the end of the coming
decade, significantly below the 4mn b/d previously envisioned for end-2016. Furthermore, the company
is increasingly pessimistic over output prospects from its maturing fields. The new plan raises the
upstream capex earmarked for new generation projects from 39% to 57%, while investment in West
Siberia and Volga/Urals will fall by 30% in comparison with the old scenario.
The gas segment has also lost its shine for Lukoil. Fedun believes the impending 'acute glut' of global gas
supply will exert strong downward pressure on prices and will hurt the profitability of its non-associated
projects. Consequently, Lukoil will postpone gas developments in the Caspian and Yamal, previously
seen as some of its main growth regions. The new plan sees the share of gas in total production rising
from 10% in 2009 to 26% by 2019, against 33% previously envisioned for 2016.
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