Vagit Alekperov, President of Lukoil, Russia’s biggest independent oil producer has said that his company’s overall investment through 2021 will top $100 billion, with upstream in Iraq, Central Asia, and the Northern Caspian requiring “colossal investment.” The program also envisions $12 billion being spent on gas projects over the next ten years, with three scenarios for that period due to be discussed in December. Alekperov told the press that he is counting on stable dividend growth for company shareholders – 15% of profits.

Investment

Russian oil company Lukoil’s investment until 2021 will come to over $100 billion, the company’s president, Vagit Alekperov, told journalists on October 25.

“The overall investment program will be a little more than $100 billion before 2021. A little more will be put into upstream, because projects involving work in Iraq, Central Asia, and the Northern Caspian in the next four or five years will require colossal investment,” Alekperov said.

That includes a $1.7 billion advance paid to acquire upstream assets abroad, he said. There is a reserve that has been put into acquisitions,” he said.

Lukoil will be investing $12 billion in its gas program over the next ten years, Alekperov said.

“We plan to increase the production of gas three-fold over ten years, to over 40 billion [cubic meters]. The investment program that will now be considered is $12 billion,” Alekperov said.

That increase will come from the development of deposits in Central Asia, the Bolshekhetskaya depression, the Astrakhan region, and the northern Caspian.

The board of directors at Lukoil will convene in December and review three options for the company’s 10-year strategy, Alekperov said.

Caspian

Lukoil plans to sign $1 billion worth of contracts within three weeks for offshore installations for the development of the Filanovsky field in the Caspian Sea, Alekperov said.

“In the next 20 days we will conclude three contracts totaling more than $1 billion for offshore structures at the Filanovsky field,” Alekperov said.

This will provide five years of growth for the Astrakhan shipyard, he said.

Lukoil announced in mid-October that it had placed an order for the construction of two structures for the Filanovsky oil and gas field.

The riser platform and residential module platform with walkways will be built at the Krasnye Barrikady shipyard in Astrakhan.

The riser unit is intended for connection of infield pipelines with external transport pipelines that will take oil and gas from the V. Filanovsky and Yu. Korchagin fields to onshore facilities. The residential module is intended for 125 people. The roof of this module will have a helipad.

The platform is expected to be installed offshore in 2013-2014.

In addition to the riser unit and residential module, the first and second start-up complexes at the Filanovsky field will include construction of a drilling and operations platform and central processing platform, the work on which is scheduled to begin at the end of this year or beginning of 2012.

There are also plans to lay more than 330 km of underwater and 350 km of onshore pipelines, and to build head onshore facilities in Kalmykia to receive oil, with a tank farm of 80 000 cubic meters. From the onshore facilities, the oil will go into the pipeline of the Caspian Pipeline Consortium.

Filanovsky is scheduled to come on stream in 2015, and achieve a peak annual output of more than 6 million tons of oil.

Lukoil found the Filanovsky field in 2005. It has C1+C2 recoverable oil and gas reserves of 153.1 million tons and 32.2 billion cubic meters respectively.

The Finance Ministry is inclined to support Lukoil in an experiment to apply additional revenue tax on the Caspian fields, Alekperov told the press.

“We would like to have a taxation system that would provide a long-term guarantee. We believe that the government and Finance Ministry have fears concerning additional revenue tax. We proposed to carry out an experiment on the additional revenue tax on fields that have a local economy and a local export component. So the Northern Caspian will work on the CPC [Caspian Pipeline Consortium]. Any economic model can be built there. It is transparent, clear and predictable. So we suggested that if there are doubts let us carry out an experiment – we will introduce the additional revenue tax instead of the solutions that currently exist. But in no case should there be a deterioration in the current economic regime that stimulates investment,” Alekperov said.

“We are holding talks, and the Finance Ministry is coming round. It also wants to have more than the one-off solutions that exist for underwater fields in certain regions, but a stable tax system,” he said.

It was reported earlier that Lukoil had proposed that its Caspian Sea projects and the Gazprom Neft – TNK-BP Messoyakh project should test out the additional revenue tax regime.

Romania

Lukoil plans to invest about $1.5 billion in oil production in Romania, the Russian oil major’s senior vice president, Vladimir Nekrasov said at celebrations for the company’s 20-year anniversary.

“We plan to invest about $1.5 billion in production in coming years if reserves are confirmed,” Nekrasov said.

He recalled that on October 19 the Romanian government passed a resolution allowing Lukoil to work off the country’s coast.

Investment in exploration, prospecting and updating reserves will total about $400 million in the next three years, Nekrasov said.

The discovery of an offshore field will make it possible to complete the formation of a vertically-integrated company in Romania, he said.

“We will process the produced oil at our own oil refinery, sell oil products through our own chain of filling stations, and burn the remaining oil products at our own power plants,” Nekrasov said.

He said Lukoil has already invested about $1 billion since it began working in Romania. The money was invested in downstream assets.

The Romanian government has ratified concession agreements for the exploration and development of two blocks in the Romanian sector of the Black Sea – Est Rapsodia and Trident – with the consortium of Lukoil (80%; the operator) and Vanco International Ltd. (20%). The consortium won a tender for the project that was held in June 2010. The concession agreements were signed with the National Mineral Resources Agency in February 2011.

Est Rapsodia and Trident are located in the Black Sea, 60 km to 100 km offshore at a depth of 90 to 1 000 meters. The nearest population center on the coast is the city of Sulina in the Danube River delta. The blocks have a total area of about 2 000 square km. There are plans to conduct 3D seismic surveys in 2012 in order to clarify the geological structure of the blocks.

The contract was to be signed for a period of 30 years; however it could be terminated earlier, after the exploration phase, if no oil deposits are found. Exploration could take three to ten years.

Lukoil owns the Petrotel oil refinery in Romania with capacity of 2.4 million tons, as well as a chain of 300 filling stations.

Lukoil is working with Vanco Energy on two deepwater projects in the Gulf of Guinea in West Africa.

Production

Lukoil, which has been experiencing a decline in total oil production in Western Siberia, plans to boost its production of oil and gas by 50% over a ten-year period, Alekperov said.

“We plan to boost total oil and gas production by 50% over ten years and reach an immense result, 170 million tons of hydrocarbons a year,” he said.

Alekperov said at the end of September that the company plans to increase annual production from 100 million tons to 180 million tons of oil equivalent over a ten-year period.

Lukoil is now preparing a 10-year development strategy, Alekperov said, adding that the strategy should be confirmed in the near future, “possibly, even, at the upcoming board of directors’ meeting”.

Lukoil’s next board of directors’ meeting will take place on October 27. The meeting’s agenda includes measures used by the company for boosting shareholder revenue, as well as the development of the company’s gas production projects.

Lukoil plans to invest around 100 billion roubles in development in the North Caspian over a ten-year period, Alekperov said.

“The company will spend around 100 billion roubles in investment for the North Caspian in 10 years. This is the initial stage of production,” Alekperov said.

Lukoil has six fields in the North Caspian – Khvalynskoye, 170 km, Yuri Korchagin, Rakushechnoye, Sarmatskoye, and Filanovsky. The Korchagin field was the company’s first to start production last year.

The development of the Sarmatskoye and Zapadno-Sarmatskoye fields might start in 2016-2017 and 2029, respectively. The start of production at the Filanovsky field is slated for 2015.

In addition, Lukoil plans to build a gas-chemical complex in Budennovsk for processing gas from the North Caspian. The facility’s costs are estimated at around $4 billion.

He also said that Lukoil intends to improve the company’s dividend policy as it moves towards achieving its goal to grow shareholder value.

“In general, the company is aiming at increasing shareholder value. This is a whole range of measures that will be applied. It is also the company’s development strategy that we are now working more on and which, I’m confident, will be well-received by the investment community. And dividend policy and company openness for our shareholders,” Alek-perov said in comments on the agenda for the board of directors’ October 27 meeting.

“All of this complex of measures next year, we are sure, will provide an opportunity to augment the company’s value,” he said.

At the end of August, Lukoil Vice President Leonid Fedun said that increasing dividends for 2011 from those paid for 2010 would be possible only “with a favorable external situation.”

Dividends

Alekperov told the press that he is counting on stable dividend growth for company shareholders – 15% of profits.

“Dividend policy assumes the stable growth of dividends, not less than 15% of net profits,” Alekperov said.

He had said just recently that the company intended to improve its dividend policy.

In 2003, Lukoil adopted a policy, under which the amount of money put toward dividends should at least be 15% of net profits to U.S. GAAP. Per the company’s first ten-year strategy, which it presented to the market in 2005 (2005-2014), the plan was that by the end of 2014 the dividend payout would have increased to at least 40% of consolidated net profit. But a year later Lukoil offered a new ten-year strategy (2007-2016), in which dividend payouts were not mentioned. The company pays dividends twice a year.

According to Lukoil’s web-site, from 2006 to 2009 the company paid dividends of 15% of net profits to U.S. GAAP. There was a substantial jump for 2009, for which dividends represented 20.86% of net profits. Dividends increased to 59 roubles for 2010 from 52 roubles for 2009, but that only represented 18.3% of U.S. GAAP net profit.

Sergei Mikhailov, a member of Lukoil’s board of directors, purchased a stake in the company for 9.5 million roubles on October 19, Lukoil said in a press release.

After purchasing 5 548 regular Lukoil shares, Mikhailov’s stake in the company increased from 0.0587% to 0.0593%.

Starting at the end of September, Lukoil regularly reported that Mikhailov planned to acquire more shares. Since Sep-tember 22, Mikhailov acquired roughly

$300 000 worth of shares. Before that, his stake was 0.054%.

Lukoil’s managers said that the board of directors would consider the issue of increasing shareholders’ income at the October 27 meeting.

At the end of August, Lukoil’s Vice President Leonid Fedun said during a conference call that Lukoil could increase dividend payouts in 2011 due to a favorable external situation.

Iraq

Lukoil has begun exploratory drilling in Iraq, trying to fit it into plans for producing early oil, Alekperov told the press.

Lukoil is part of a consortium of companies developing the West Qurna field in Iraq. Lukoil owns 56.26% in the contract, Norway’s Statoil owns18.75% and an Iraqi state company owns 25%.

“We are hoping that all the tender procedures will be completed this year. The Iraqi Oil Ministry is interested in them being completed in November,” he said.

In this event, the company will be able to keep to plan for producing early oil at the end of 2013.

Lukoil had planned to commence drilling at the end of 2010, but this was moved to spring 2011 and, even later, to the summer and, then, the fourth quarter of this year. Initial oil production was expected at the end of 2012 but the company later moved this timeframe to the start of 2013. Target production of over 95 million tons should be reached in 2017.

Recoverable reserves at the West Qurna-2 field have been estimated at 14 billion barrels of oil. The field is located in Iraq’s south, 65 kilometers to the northwest of the city of Basra.

Odessa

Elsewhere, Lukoil has no plans to sell Odessa Oil Refinery, Alekperov said. Alekperov said that the company is in negotiations for processing oil at the refinery on processing terms.

“The economic situation on the Ukrainian market is not stimulating refining. This is nonsense. We have put these issues quite seriously to the Ukrainian authorities,” he said.

“We are looking at various options: the first option is processing at the Odessa Refinery for third parties. The second is to change the rules of play on the Ukrainian market. We still believe that Ukraine is interested in reviving the refining industry. The country is very well located geographically and could become a net exporter of petroleum products,” Alekperov said.

“We have one more problem preventing us from running the Odessa plant – the entire system of Ukrainian oil pipelines is filled with Azerbaijani oil. We have said we are ready to supply oil to the Odessa Refinery through the Transneft system and Transneft supports our efforts, but Ukraine needs to decide on the issue of assets inside the pipeline,” Alekperov said. “We are talking about a route through Kremenchug,” he said.

As reported, because of the economic situation on Ukraine’s petroleum products market, as well as the changes to oil supplies, the Odessa Refinery was closed in October 2010 due to poor efficiency. At the beginning of 2010 the refinery had already closed for 6 weeks for repairs. Production dropped 29.4% year-on-year in 2010 to 1.4 million tons.

Refinery owners in Ukraine are asking for special duties on petroleum products to prevent dumping from other countries, especially Belarus.

Lukoil-Odessa Refinery, part of the Lukoil group, operates the Odessa Refinery. It has projected capacity to process 2.8 million tons of crude per year.

Rotterdam

Lukoil plans to open an oil blending center in Rotterdam to supply its oil refinery in the Netherlands, Alekperov told reporters.

“We are now organizing a terminal in Rotterdam to prepare blended oil for delivery to the oil refinery in the Netherlands,” Alekperov said.

The refinery currently buys 15 to 20 grades of oil and blends them, he said.

The company now has Arctic Light oil that is shipped from Varandey, Alekperov said.

Next year, the company plans to finish building a bridge between Kharyaga and Varandey that will carry oil from the Trebs and Titov fields.

The company also has Urals crude in Primorsk, and will have a fairly substantial amount of heavy oil from the Yaregskoye field.

“In the next three years we expect to nearly double production there [in Yarega], which will require blending,” Alekperov said.

Vietnam

Vietnam’s government has approved the deal on acquisition by Lukoil Overseas of a 50% interest in the production-sharing agreement (PSA) for the Hanoi Trough-02 offshore block, and issued a respective certificate, Lukoil said in a statement.

The interest in the PSA was acquired from Quad Energy S.A., a private petroleum company, in April this year. At present, Quad Energy’s share in the PSA is 50%. Lukoil Overseas is the project operator.

The HT-02 block is located on the shelf of the South China Sea, in a shallow water zone near the coast. Exploration on the block has continued since 2007 and by now has resulted in identification of a number of prospects. Drilling of three exploration wells is planned on the block this year, with the first well to be spudded in by late October. A regional office of Lukoil Overseas has been established in Hanoi to operate the project.

Lukoil will be the fourth Russian company to operate on the Vietnamese shelf after Gaz-prom,  Zarubezhneft, and, more recently, TNK-BP.