the RUSSIA oil & gas competitive intelligence report - Report Buyer

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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. © Business Monitor International Ltd Page 37
Russia Oil and Gas Competitive Intelligence Report 2010 In the downstream segment, Lukoil has also significantly reduced its planned expansion. The company hopes to achieve 1.45mn b/d of refining throughput by 2019, much less than the 2mn b/d envisioned under the previous plan. Capex on refining, power generation and petrochemical divisions will amount to US$25bn, with 78% of that figure earmarked for domestic projects. The investment will be channelled into upgrades and efficiency measures rather than capacity expansion. The new plan suggests Lukoil may curb its foreign downstream asset buying spree, which saw the company acquire more than US$4bn of refining and fuel retailing assets in 2007-2009, culminating in the payment of US$725mn for a 45% stake in a Dutch refinery from Total in September 2009. Rumours have been circulating that Lukoil may be interested in more European refining assets that the French major is considering selling, but the new downstream budget certainly leaves little scope for large purchases. The company's growth strategy for retail networks in Turkey and Eastern Europe may also be affected. Having reduced its capex, Lukoil will use the freed-up funds to concentrate on improving profitability and cash flow and raising dividends. The new emphasis on caution and shareholder returns mirrors that of its partner Conoco and goes against the generally resurgent mood of the oil industry. Latest Developments US major Conoco decided to sell its entire 20% stake in Lukoil in mid-2010. The company sold to sell 7.6% back to the company for US$3.4bn in Q310, and the remaining 60% will be sold on the open market by end-2011. Lukoil reported revenues of US$23.9bn and net income of US$2.05bn in Q110. Revenues increased from US$14.75bn in Q109, while profits were up 126.9% on the previous year. In April 2010 Lukoil brought the first oil field in the Russian sector of the Caspian Sea onstream with the launch of production from the Yuriy Korchagin deposit. Korchagin is one of Lukoil's six large discoveries in the Caspian, touted as one of Russia's new oil and gas frontiers. In December 2009, Lukoil gained full control of the LukArco vehicle after buying out its partner BP for US$1.6bn. The deal gives Lukoil a 12.5% stake in the Caspian Pipeline Consortium (CPC), a trunkline running from western Kazakhstan to Russian ports, and a 5% stake in the giant Tengiz field in Kazakhstan. Lukoil was planning to launch the Yuri Korchagin field in Russia’s sector of the Caspian Sea in early 2010. The field holds 570mn boe of possible (P3) reserves and is expected to produce 50,000b/d of oil and 1bcm of gas at its peak. Yuri Korchagin is one of the six large fields discovered by Lukoil in the Russian sector of the Caspian Sea since entering the area in 1995. To date, Lukoil boasts 100% exploratory drilling success in the Caspian, making it one of the high-growth potential regions for the company. In September 2009 Lukoil provided an update for its North Caspian project, announcing plans to produce 200,000b/d of oil and 6bcm of gas per annum by 2016. This is significantly below Lukoil’s © Business Monitor International Ltd Page 38
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