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Russia: Lukoil makes a comeback

SO FAR, results are only preliminary, but it looks as if, after several years in the doldrums, Lukoil?s oil output is at last beginning to grow again. And, as the Russian major with by far the biggest stake in huge greenfield developments, Lukoil seems poised to surge ahead of its competitors in the Russian production league.

In the first quarter (Q1), Lukoil increased oil production by 7.4% compared with the same period a year earlier, to 1.65m barrels a day (b/d). Output at the company?s foreign projects grew by 20.4% to 65,000 b/d, from 54,000 b/d in Q1 2003. Figures have been improved by the consolidation of Lukoil subsidiaries. But improved efficiency at existing fields, together with application of more sophisticated recovery techniques, especially in Lukoil?s core western Siberia licence areas, are also helping to bring in incremental oil.

Among the new ventures, Lukoil?s oil projects in the Timan Pechora Basin, in northwestern Russia, are showing double-digit growth in output, although yields from the area are still small. Lukoil is also investing in exploration in several other new areas, including the north Caspian Sea, where five fields have been discovered, the Yamal area of Arctic Siberia and the north of Tyumen province. Lukoil estimates that these new areas have already added some 1bn barrels of oil and 1.5 trillion cubic metres (cm) of natural gas to its reserves portfolio. By 2010, the company expects to be producing over 1.2m barrels of oil equivalent from these new regions.

More investment is needed in new oil provinces if Russia is to avoid a drop in production by the end of the decade. Lukoil forecasts that output from existing Russian fields can continue to grow only until 2008 and that now is the time to begin developing alternative areas.

For now, the outlook is rosy. Oil production is climbing by around 11% a year, while some companies, such as Sibneft and Yukos, have been notching up close to 20% production increases for several years, thanks mainly to improved efficiency and advanced recovery techniques in western Siberia.

Lukoil was Russia?s unchallenged number-one producer throughout the 1990s. The vision of Yukos rapidly closing the gap spurred Lukoil to launch a restructuring plan in 2002, the benefits of which are now beginning to emerge.

Yukos? fortunes took a turn for the worse following last October?s arrest of the company?s founder and former chief executive, Mikhail Khodorkovsky, on charges of tax evasion and fraud. The Yukos case has not yet played out and its continuing trail of scandal is discomfiting for all Russian business, especially oil. Government officials have repeatedly stressed that the privatisations of the 1990s will not be overturned. But many suspect that Khodorkovsky will end up losing at least part of his Yukos empire. Others might later share his fate.

Other oligarchs have not rallied to the defence of Khodorkovsky or of Yukos. Lukoil has even sought to highlight differences between itself and its embattled competitor.

In a speech in April, Lukoil?s president, Vagit Alekperov, stressed that while his company?s priority is, and always has been, to act in the interests of Russia, the oil industry works best under private ownership. However, privatisation had a different impact on Lukoil than on some of the other majors, which fell into the hands of businessmen with backgrounds in finance rather than oil, Alekperov pointed out. ?Lukoil and Surgutneftegaz continue in the best traditions of the Soviet oil school, combining with the best world practices in the oil business. Professional oil producers, refiners and traders form the core of these companies? personnel,? he said.

?There are other models of oil company management in our country. However, I don?t want to discuss their advantages and disadvantages here. I just want to stress that we must not judge all oil industry privatisations in the same way,? he said.

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