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CASPIAN ENERGY's INFORMATION ON LUKOIL AT A GLANCE
The LUKOIL company was founded on April 5, 1993 by a special order of the Russian Government. Before it, the company's subsidiary enterprises presented separate entities, which became joint-stock companies, and received the status of a subsidiary one in accordance with the laws of the Russian Federation.
LUKOIL is currently one out of ten largest among major oil companies in oil production (in 1998 the company produced 63 million tons of crude oil).
The LUKOIL oil company is one out of the largest ones in the world in proved oil reserves. It holds stocks entirely or has a share in projects for tapping oil fields in West Siberia, the European part of Russia, the countries of near and far abroad.
The contract of the century in Azerbaijan became one out of the first large international deals entered into by LUKOIL abroad. The company takes a 10 percent interest in the project. LUKoil also has a 10 percent share in other large project for prospects in the Caspian Sea offshore Azerbaijan. The project is intended to explore and develop the Shah - deniz area. LUKOIl has already invested over $200 million in Azerbaijan's upstream oil industry. Now nine subsidiary enterprises owned by LUKOIL operate in Azerbaijan. They are in various sorts of activities - transport, insurance, social area. etc.
The CASPIAN ENERGY editorial board : Mr. Alekperov, the crisis in the world market has bad impact on the activities of the world' oil companies. What are your forecasts for further developments ?
Vakhid Alekperov : Over the past year LUKOIL has been engaged in curtailing investments in drilling operations and cutting high-cost and low-profit projects and so on. We suspended the upgrade of a refinery in Volgograd for two years. Last year's operating incomes amounted to 2 billion rubles. If we further will conduct the same investment policy, this fiscal year will bring in profit as well.
In current year we will pursue a very tough policy. When we exercised our budget for this year, operating expenditures on oil production are planned to be $10 a barrel. And whatever happens, this year's deterrent will be highlighted as the optimum way to provide the commercial viability.
As to the forecasts for the years till 2,005, we expect oil price will average $13 a barrel, after 2,005 it will be $16 for a barrel if the oil market environment, production and consumption volumes are taken into consideration. Our calculations are very close to the predictable performances, which have been developed by other oil companies.
CASPAIN ENERGY edit. board : Will LUKOIL further expand its business abroad ?
V.A. : Yes, we will do it. We have recently bought an oil refinery in Odessa as an object for investing. We also intend to take part in the corporatization of a Bulgarian oil processing complex and to acquire Bulgaria's oil distribution network.
C.E. ed. board : What is a probability of the merger of LUKOIL with other companies, for example, Gasprom ?
V.A. : As yet we do not deal with a question of the merger with Gasprom. We have an agreement on strategic partnership with this company. But today we regard a number of Russia's oil companies as potential objects for absorbing them by LUKOIL.
CE ed. board : How did the Balkan crisis influence the business of company led by you ?
V.A. : The Balkan crisis has no repercussion on LUKOIL's business in either U.S. or Europe. Now we do not have the risk to lose money in Yugoslavia because we did not put the money into the country's economy.
Russia's attitude toward Yugoslavia was clearly stated by the Russian Ministry of Foreign Affairs and as a matter of fact, today we see the outbreak of the Russian nation's patriotism and it is fully understood.
As for the risks connected with the potential formation of an union of three countries, if a political agreement is sealed, we will deal with only the economic aspect of the matter.
CE ed. board : Are LUKOIL's economic plans influenced by the current political instability in Russia ?
V.A. : Any citizen of our state can talk over both President and Government. Each person draws his inferences and makes his statements on its own. Russia is today an absolutely legal state. And it is difficult to say about any instability.
CE ed. board : Is still there a threat that commies will come to power ? What will occur in this event ?
V.A. : There is no ground for a communistic system to be restored in Russia today. Any revolution is a natural calamity but we are unable to predict a tornado..
Our company is building its business both within Russia and beyond its bounds on the basis of economic considerations, which we apply in regards to western countries.
There are regional, financial, technical, political risks everywhere but peculiarities and a degree of their influence on LUKOIL's projects are various. For instance, in Russia the development of a region depends on what gubernator (governor) is elected. The same is observed in both C.I.S.' countries and far abroad. As applied to our activities, we introduce appropriate data on these regions in an algorithm and on this basis we pursue our own economic strategy in a given region.There is no ground for a communistic system to be restored in Russia today. Any revolution is a natural calamity but we are unable to predict a tornado..
CE ed. broad : Taking into account your experience in establishing a vertically integrated oil company in Russia, what pattern of privatization would be the most acceptable to SOCAR today ?
V.A. : At the first stage a controlling stake (50 percent plus one share) must be owned by the State, at the second stage a gold share, i.e., the right to take a decision, must belong to the State. So selling off SOCAR partly, the State can attract large financial funds to both its budget and development of SOCAR.
The introduction of the gold stock controls the business activity of the strategic enterprise within the republic, i.e, it is so called right of veto imposed on a change in capital.
After at first 49 percent and then all 100 percent of stocks will be owned by an investor, the State will need no longer to hold a large block of shares as having appropriate tax regulations and controlling the business activities of the fuel and energy sector's enterprises, the government will be able to ensure the biggest inflow of the revenues to the republic's budget. In Russia the process has passed during 7 years, these transformations will take 5 - 10 years in Azerbaijan.
Unfortunately, we do not know today the conditions and terms of SOCAR's privatization and its program. As far as my knowledge goes, the Government will not privatize SOCAR either in current year or next year. It could be one out of the most interest project to both sides. At the first stage a controlling stake (50 percent plus one share) must be owned by the State, at the second stage a gold share, i.e., the right to take a decision, must belong to the State.
CE ed. board : How will the monopoly of the combined company BP/Amoco/ARCO be reflected upon LUKOIL's operations in Azerbaijan in putting AIOC's large projects, the Shah-deniz project into practice ?
V.A. We confirmed our support for British Petroleum company's actions to unite management functions in projects for prospects off the Caspian coast of Azerbaijan, it will result in a considerable saving in money for all contractor parties in the projects.
CE ed. board : A year ago LUKOIL occupied the third place in investments in projects for developing oil fields in the Caspian Sea offshore Azerbaijan; today the Russian capital takes the 11th place in investments in the Azeri upstream oil industry after Anglo-American and Japanese contributions and LUKOIL is the 15th in this list. Does the distribution like this suit LUKOIL and will it be changed in the near future? Do you find the present situation objective as things stand?
V.A. You know that LUKOIL does not participate in any Derby on the Caspian. We simply did not choose yet an additional object in the Caspian Sea offshore Azerbaijan to invest in it as we consider it is either expensive or of no concern to us.
In addition, we get the opportunity to select projects in both the Russian sector and Kazakh sector of the Caspian Sea. We have today a large deposit for investing in the northern part of the Caspian Sea offshore Russia.
We have exclusive rights to exploration and further development of a huge block, the size of which equals to almost half Azeri sector.
It encompasses five promising areas that are estimated to contain recoverable oil reserves between 200 million to one billion tons. As yet we spudded no well but have already put up around $100 million for 2D and 3D seismic surveys. In addition to this, we got the right to the 100 percent development of this block.
For this purpose we have built in Astrakhan the Astra jack-up rig, the advantage of which is that a jack-up's part able to be slid out enables to drill not only exploratory wells but production ones as well. The sea depth there is not in excess of 50 meters. So our rig will allow us to cover all the northern portion of the Caspian Sea.
CE ed. board : How about LUKOIL's plans on the Shelf-7 rig upgrade ?
V.A. : The Shelf-7 drilling rig is on the stocks of a shipyard in Astrakhan. As we have a track record developed for a deepwater block, we will build the rig. The same concerns the Ispolin crane ship. As the investment activity on the Caspian fell down sharply, their commissioning is put off for a later time. Today there is no keen need to build the high-cost facilities like them.
CE ed. board : Why do you think the investment activity on the Caspian dropped ?
V.A. : Because we did not receive a confirmation of oil reserves in the Karabakh field. So we think over and appreciate geological information on the central part of the Caspian Sea. This information needs thinking out and other companies attend to it, too. Of course, beyond all doubt, there is big oil on the Caspian, it is simply necessary to reconsider an approach to geological exploration.
CE ed. board : Do you believe that one needs to review the conditions and terms of the exploration contracts ?
V.A. No, there is no need to do it. One simply needs to analyze geological materials in greater depth. Because of geological conditions having been evaluated badly, the contractor companies in projects sustained significant losses.
So today we dwelt on two projects. It is Azeri, Chirag, Guneshli and Shahdeniz.
CE ed. board : And how about implementing projects for the Govsany and Zykh fields on land ?
V.A. : We having so far been studied this project. As yet the LUKOIL's Board of Directors dis not draw economic inferences, i.e., a decision on the commencement of bringing the project into effect has not been taken yet. We think the upstream operations on these fields will be attended by the great risks. So we study them in more detail.
CE ed. board : Shell, Exxon, Chevron, Conoco, BP, Statoil have already been working on projects for development the country's upstream gas industry. What plans do LUKOIL have in this area ?
V.A. : LUKOIL works now on development of Azerbaijan's gas projects. We are in talks with the Azturkgas enterprise and set out to participate in its corporatization. Two gas processing plants in Russia are owned by LUKOIL. Currently, we produce and sell around one million tons of liquefied gas, i.e., we are the largest supplier of this sort of gas to the Russian market, with we developing our business activity in not only Russia but in the countries of CIS and far abroad.
CE ed. board : How do you think whether the issue of the uncertainty of the Caspian status can be considered to be de facto solved ?
V.A. I see no problems here. The issue cannot be considered finally solved today, because a legal agreement between the Caspian states has not been signed yet and a de facto situation is always conditional. And until the problem is resolved de jure, no generalized thing can be said.
CE ed. board : What Caspian oil and gas export transmission system in addition to the existing northbound and westbound oil export routes do you see as things stand ?
V.A. : We currently take a stand for any commercially viable Caspian crude oil pipeline network directed to any geographical point. We will use the Baku-Ceyhan pipeline with great pleasure if it is built without our money as so far we do not see crude oil quantities enough to load the Baku-Ceyhan line. On May 17 the first cubic meter of concrete was laid for the Tengiz-Novorossiysk pipeline under construction and in June 2,001 the first tanker at the port of Novorossiysk will be loaded with Tengiz crude oil.
CE ed. board : What fate will expect the Central Asian project for laying oil and gas pipelines running from Turkmenistan via Afganistan and Pakistan to the Arabian Sea ?
V.A. We do not have a concern in the project now. It is certainly perspective but very expensive. Besides, we believe oil producers, which are potential users of the pipeline, have to participate in it. And as yet LUKOIL did not find for itself an object for investing in Turkmenistan on the basis of purely economic considerations.
