No. 1, 2005

Vladimir Kurashov,
Cand. Sc. (Techn.), Head of Engineering Department of JSC LUKOIL


LUKOIL introduces the latest in oil production and refining technologies

JSC LUKOIL is an innovative oil company continuously seeking ways to improve production methods, to heighten the depth of refining and exerting a sustained R&D effort in the spheres of oil production and petrochemistry. The use of advanced technologies keeps the Company in the forefront nationally and worldwide.

Blazing new trails

In its quests of novel solutions, the Company emphasizes stepping up the efficiency of prospecting works and adding to the proven oil resources. It is setting ever higher standards for the geophysical methods used at the prospecting and exploratory stages of oilfield development. Modern seismic survey techniques provide additional information about the specifics of the inner structure, lithology and properties of oil-bearing strata and, whenever necessary, about the prospect of their hydrocarbon saturation. Such information is essential for reducing the risks involved in prospecting and exploratory drilling, cutting down the number of dry or marginal wells and, in the final analysis, for raising the efficiency of prospecting works in general.

Last year's prospecting works resulted in the discovery of 13 oil fields, one gas distillate field, one oil and gas field and 14 oil accumulations in previously detected fields. Prospecting works efficiency amounted to 1,250 tons of conventional fuel per one meter of penetration (560 tons per meter in case of oil) as against 1,280 tons of reference fuel and 399 tons of crude oil in 2002, respectively.

As part of the efficiency enhancement effort, the Company is carrying out the Comprehensive Oil Development and Production Optimization Program for 2003-2005. At the first stage of the Program's implementation, the wells' flow rate was increased from 9.4 tons a day in early 2003 to 10.3 tons a day toward the end of the year, and to 10.7 tons a day in 2004; also the well water level went down substantially.

The deterioration of the structure of oil resources in many fields calls for the development and introduction of non-conventional technologies for retrieving hard-to-recover resources.

LUKOIL uses over 100 production technologies on its fields, with physical formation enhanced oil recovery techniques (EOR), primarily formation hydrofrac (542 operations

producing a total of 10 million tons of oil), responsible for a lion's share of its overall extra output (65%).

Over 5,000 formation EOR operations are carried out annually. As a result, extra oil production grew to 19,5 million tons in 2004 as against 13.1 million tons in 2000. On the whole, formation EOR accounted for over 23% of the Company's total oil production.

Efficiency priority

Owing to a more thorough well selection and technological innovations, hydrofrac operations efficiency was stepped up: in 2003, an increment in oil yield per operation amounted to 20.3 tons a day as against 18.9 tons a day in 2002.

Meriting special attention are the results of hydrocarbon material production technology innovations introduced at the final stages of field development ? primarily, the technique of drilling second inclined- or level-end shafts. In 2003, the Company's production units sank 55 second shafts with an average yield of 29.9 tons a day, adding 192,000 tons to their aggregate production figure.

A new technique of bed exposure on depressions protecting the bed from the adverse effects of drilling mud and cement slurry was introduced by LUKOIL on its Perm Region fields. The technique has made it possible to increase the well flow rate 1.5-2 times compared with conventional drilling techniques and half the new wells' payoff period.

State-of-the-art equipment for improving the performance of 1,600 producing and injection wells' automatic control systems was installed in 2003. Well operation trouble preventing, flow/intake rate and water content level measuring equipment was introduced.

The Company's refineries account for 16% of the gasoline, 18% of the diesel fuel and black oil and 25% of the aviation kerosene produced by the Russian Federation.

One of the leading domestic refineries LUKOIL-Volgogradneftepererabotka ? is situated in the territory of the Southern Federal District. The refinery has the key role to play in keeping Russia's southern regions supplied with fuel. It is the country's leading producer of base and motor oils. Following the completion of the first stage of reconstruction in 2003, the refinery launched the production of environment-friendly diesel fuel and high-quality base oils every bit as good as their foreign analogs. LUKOIL plans to invest a total of about seven billion rubles in the modernization of the Volgograd Refinery, to increase the crude refining factor to 95% and to attain top European fuel quality standards.

LUKOIL keeps improving its diesel fuel, gasoline, motor oils and jet fuels seeking to put them in a class with the world's best brands. Within the framework of its product quality improvement program, the Company is building up the production of high-grade gasolines and low-sulfur diesel fuels. The proportion of high-grade motor gasolines in total LUKOIL gasoline production increased 10,8% over the year and reached 61,3% in 2003. In the same year, the production of diesel fuel with a sulfur content of 0.05% and 0.035% increased, the share of low-sulfur diesel fuel in its total production amounting to 32% as compared to 23% in 2003. Production grew by more than one million tons over the year.

The LUKOIL-Nizhegorodnefteorgsin-tez Refinery in Kstovo has pioneered the production of the Jet Fuel A-1 in Russia and is now supplying it to the foreign airlines making regular flights to Russian airports. That was the first-ever Russian-made jet fuel to be accepted by Lufthansa AG (Germany) as standard fuel in April 2004.

The refinery's modernization will be carried on over the next few years with an eye to bringing crude refining factor up to 95% and producing European-quality fuel.

In September 2004, the T-Star hydro-cracking complex was put by LUKOIL-Permnefteorgsintez into commercial operation. Today the complex, which cost a total of 10.8 billion rubles to construct, is the only one in Russia. Another such complex is to go up in Nizhny Novgorod. The T-Star will help bring the Perm refinery's depth of refining to 82-92% and improve gasoline quality by reducing its sulfur content to 0.005%.

The Company employs advanced technological solutions in its petroleum products transportation systems as well. The Perm-Andreyevka petroleum products line 335.1 km long with a throughput capacity of 2.4 million tons of petroleum products a year ? the first non-public-owned line of its kind - was launched in 2002. In addition, commercial production of rustproof glass plastic pipes, extremely strong and resistant to aggressive media, was started in the Perm Region and in Western Siberia. Their use in oil fields will lengthen pipelines' service life to 25 years and over. The first phase of the export terminal in Vysotsk designed to transship 10.7 million tons of petroleum products a year went into service in June 2004 to increase export deliveries considerably.

Recently, the Company has completed the construction of a large transshipment complex in the village of Ilyinka, the Astrakhan Region. The throughput of the terminal in Tatyanka, the Volgograd Region, used by LUKOIL for the delivery of crude oil and petroleum products to Iran, is to be increased.

It is worthy of special note that LUKOIL has traditionally taken the lead in Russia in industrial and labor safety and environmental standards. The Company is carrying out a program of its subsidiaries' certification for conformity to international standards in the spheres of quality management (ISO 9000), environment protection (ISO 14001), industrial and labor safety (OHSAS 18001). This work boils down to the introduction of new technology, equipment and materials and a continuous upgrading of production process control efficiency.

LUKOIL was Russia's first company to be certified, as early as four years ago, for its environment protection management system's conformity to the ISO 14001 international standard. Environmental impact minimization is of particular importance now that the Company has got down to the development of offshore oil and gas fields, especially within the Arctic Circle where the natural environment is particularly vulnerable to human encroachment. LUKOIL's expenditures on environmental conservation measures in the Timan-Pechora province amounted to nearly 5.5 billion rubles over the past three years alone.

Science: locomotive of progress

LUKOIL's research and development program is geared to produce innovative solutions. Its R&D Complex presently comprises five institutes employing a staff of about 3,000 of whom 130 hold learned degrees. The institutes are equipped with the latest in laboratory gear, computers and software support packages, which the Company stints no expenses on. The R&D Complex is keeping the LUKOIL Group abreast of modern technological progress. In 2003, the volume of R&D work it did increased 2.1 times over 2000. In 2000-2003 alone, it carried out three billion rubles' worth of research and development projects for the LUKOIL Group.

The Company runs research and design institutes in cities like Volgograd, Rostov-on-Don, Perm, Kogalym, Ukhta. A special role to play has the Russian Innovative Fuel and Energy Company (RITEK) ? it is responsible for realizing a complete innovative oil production cycle and forms its own financial base to fund its further creative quests. Approved new technologies find practical uses in the LUKOIL's and other companies' oil production facilities. Innovative technologies accounted for an average of 35.5% of RITEK's output over a decade, reaching 49.1% in 2003.

LUKOIL depends for the implementation of its development strategy not only on its own technological advances but also on the best of what other Russian and foreign companies have to offer by way of leading-edge design solutions and highly-efficient equipment. An emphasis on innovation and every encouragement for trail-blazing research and development endeavors are prerequisites for the Company's successful performance in the 21st century.

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Oil of Russia, No. 1, 2005
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