Russia’s largest non-state-owned oil company Lukoil revealed plans to increase its hydrocarbon production to 2.7 million bbls per day by the end of the current decade. At the same time, the company decided to cut back its investment projects from USD 75 billion to USD 60 billion. A number of low cost-margin projects for gas exploration are likely to be postponed indefinitely. 

Lukoil also has intentions to buy the interest of British Petroleum in the Lukarco venture. The company also plans to engage in bidding at the auction for access to the strategic Titov and Trebs fields – though Lukoil is likely to structure its offer in collaboration with a state company. The company is also planning to launch its operations at the West Qurna-2 oilfield in Iraq.

Plans for the future

By 2017 – 2019, Lukoil intends to increase hydrocarbon production to 2.7 billion barrels per day. Currently, the company produces 2.2 million boe (barrels of oil equivalent) per day. According to Lukoil’s Vice President Leonid Fedun, the new estimate is still lower than what had been planned before. The company’s total annual production during the years of 2017 to 2019 should reach 100 million tons.      

The company’s past 10-year strategy envisioned increasing daily production to 3.5 – 4 million boe, which would have put the yearly figure at 195 million tons. The extraction of liquid hydrocarbons was planned to increase to 2.9 million boe per day, putting the yearly figure at 145 million tons.

The new program is based on the price of a barrel of oil at USD 64 and an exchange rate of USD 1/ RUR 34. Under the previous investment program, oil price was estimated at USD 76, and capital expenditures were planned at USD 112 billion. USD 34 billion was set off for acquisitions. Later conservative schemes had oil prices at USD 36 to USD 44 and total investment at USD 78 billion. 

According to current plans, investment for 2017 to 2019 will be USD 85 billion, with 60 million earmarked for upstream and USD 25 billion for downstream development.

In the past year, profits before taxes decreased by more than USD 200 million – the company lost more than USD 100 million to settle a claim brought by the Federal Antimonopoly Service and another USD 100 million as a consequence of limitations on gas pipeline access.

According to Mr. Fedun, the company decided to put off its gas projects until later and to focus on ventures that are capable of producing high profits in the near term.

The company revised its priorities to delay exploratory work at several gas structures, including those in the Caspian region, the Central Astrakhanskaya structure, and Yamal. The loss of interest in pursuing those projects has its explanation in the rapid decline of gas use in Europe and the increase of non-conventional gas production in the U.S.

In the view of Mr. Fedun, Russia can encounter difficulties in gas exports in the foreseeable future. Nonetheless, despite lowered exploration activities, Lukoil expects that its gas production volumes will rise.  

The company’s investment in 2010 will be USD 6 billion, a figure that is lower than what Lukoil spent last year. Previously, Vagit Alekperov, Lukoil’s president, said that the company would keep the level of investment stable at USD 8 billion. In 2010, Lukoil will likely increase liquid hydrocarbon production by 2 percent.

With regards to plans for the future, the company intends to increase the production of gas to 700 000 boe a day by 2017 – 2019. Lukoil’s strategy calls for producing 58 percent of the gas in Russia. Cashflow from all gas projects is expected to reach USD 6 billion over the course of the next decade.

By comparison, in the first three quarters of the previous year, Lukoil’s gas production stood at 236 000 boe per day.   

Prices of oil

The base price of oil that serves as the foundation of the company’s 2010 program is estimated at USD 60 to USD 65 a barrel.

According to Mr. Fedun, 2010 promises to be a complex year for the company, as Lukoil is positioning itself very conservatively in devising pricing scenarios. With such a cautious outlook, company managers require adherence to strictest financial discipline. Leonid Fedun expressed apprehension as to the possibility of a new wave of the economic crisis in the middle of 2010. Notwithstanding the difficulties, Lukoil is committed to realizing its investment projects for 2010, including the exploration of the Korchagin section in the Caspian.  

Activities at refineries

Lukoil intends to increase the annual capacity of its refineries from 70.1 million to 72.6 million tons of oil by 2017 – 2019. The company wishes to increase its refining capacity to be able to accommodate at least three quarters of its crude oil production. Capex outlays for the company’s refining arms will be USD 25 billion over the period of the forecast. 78 percent of the total amount will be used for upgrading existing refineries in Russia.

The output of light oil products is expected to go up to 60 percent at Lukoil’s refineries and the Nelson index that indicates the investment intensity at a refinery and its potential value addition will rise to 9. The production of fuels that meet European standards will rise to nearly 40 percent, while fuel oil production will go down to 14 percent.  

The company’s investment in petrochemical production will amount to USD 4.3 billion. Most of the funds will be directed to the Caspian gas complex at Stavrolen. As far as other petrochemical projects are concerned, Lukoil has already finished renovating Saratovorgsintez facilities. At the same time, serious political uncertainty exists with respect to the Karpatnaftokhim enterprise. The Caspian plant will guarantee Lukoil the sale of 2 billion cubic meters of gas. Altogether, Lukoil’s electricity-generating concerns and petrochemical ventures will automatically buy 7 to 8 billion cubic meters of gas that the company produces every year.

Lukarco

Lukoil intends to facilitate the purchase of British Petroleum’s interest in the Lukarco venture. The deal is estimated to cost USD 1.5 billion. Lukoil’s became inclined to buy the stake in Lukarco after British Petroleum made an announcement to leave the Caspian Pipeline Consortium. The UK-based company complained that it would not have a sufficient volume of fuel to transport through the system to justify investment commitments.      

The Consortium’s stakeholders have already signed an agreement with British Petroleum for the company to leave the project. British Petroleum had a 6.6 percent interest in the project as a consequence of its two joint ventures – one Luckarco BV, a venture with Lukoil where the British company owned 45 percent, and the second Kazakhstan Pipeline Ventures, a joint project with KazMunayGas. The British company has already rid itself of the interest in Kazakhstan Pipeline Ventures – selling it for USD 250 million. 

Tenders

Lukoil is making preparations for taking part in an auction for the Titov and the Trebs field in the Nenets autonomous district. The company is likely to form an alliance with a state-owned petroleum company.

The Minister of Natural Resources Yuri Trutnev explained that the fields will be offered for production in the first half of the current year. The minister said that a proposal for allowing auctioning off the strategic fields will be brought forward before the Russian state authorities, although the final decision will rest with the Russian government.

The Anatoly Titov and the Roman Trebs fields are located in the Nenets autonomous district. The fields have been designated as strategic because of the vast reserves they hold. The Titov field is estimated to contain 132.8 million tons of oil, while the Trebs field is thought to hold 78.12 million tons of oil reserves. 

As far as Lukoil’s international ventures go, in December of 2009, the company won a tender to develop Iraq’s West Qurna-2 field in the second licensing round. Under the terms of the tender, the Iraqi state oil company is to receive a 25-percent interest in the project, leaving Lukoil with 63.75 percent and Statoil with 11.25 percent. The West Qurna-2 oil project in Iraq will require  USD 4 to

USD 5 billion in investment to achieve production targets of 400 000 barrels per day. The expected volume of production in the first 8 years is from 10 to 15 million tons of oil per year.

Dividends

As a general matter, Lukoil intends to increase its payment of dividends in 2010 in view of improved market conditions. While Lukoil’s managers have not yet stated the exact increase in dividends, Leonid Fedun did say that dividend payments will “definitely” be higher.