No. 1, 2005


Oil of Russia magazine talks to Boris Zilbermints, Regional Director of LUKOIL Overseas Holding Ltd. for Kazakhstan

Q: What, in your opinion, were the most impressive results LUKOIL achieved in Kazakhstan in 2004?

A: LUKOIL was the first Russian company to set foot in Kazakhstan as a participant of the Kumkol project. By now it has already invested over $1.5 billion in Kazakhstan's economy. LUKOIL participates in eight oil and gas development projects in Kazakhstan - four on land, and the other four (including the Khvalynskoye and Tsentralnoye fields under Russia's jurisdiction), on the Caspian shelf. Today, Kazakhstan's fields of Karachaganak, Kumkol and Tengiz, in which LUKOIL has a stake, account for 90% of LUKOIL's oil production outside Russia (over 3 million tons a year).

The Company's production rate in Karachaganak and Kumkol reached its peak last year. In 2004, the amount of hydrocarbons we got from the Karachaganak oil-gas condensate field (in which we have a 15% stake) is to top eight million tons as compared with 5.9 million in 2003. This is not the limit: in the coming year the Company expects a further rise in oil and gas production. The departure of the first tanker carrying LUKOIL-produced Karachaganak oil from the Novorossiysk terminal of the Caspian Piping Consortium (CPC) early in July 2004 is by right regarded as the highlight of the year. Crude oil is supplied to the CPC system via the 635-km Karachaganak-Bolshoy Chagan-Atyrau pipeline. The Karachaganak oil flow is expected to total 6.5-7 million tons a year in 2005 and to further increase in the long run.

In the Kumkol oil field, production grew more than 20% as against the 2003 figure to reach 3.4 million tons. Besides, a casing-head gas scrubbing and processing plant and a 55-MW gas turbine power-generating unit were put into operation in Kumkol in 2004 making it possible to produce large amounts of associated gas and to keep the commercial field supplied with cheap electric energy.

Q: The media report that the first exploratory well is to be spudded shortly on the Tyub-Karagan block. Could you specify when exactly the drilling starts and what is being done by way of preparations for it?

A: The Production Sharing Agreement on the offshore section of Tyub-Karagan oil field and a contract for the geological survey of the Atash offshore field were the first bilateral documents signed within the framework of the visit RF President Vladimir Putin paid to Kazakhstan in January 2004. A great deal has been done since January 9, 2004, when the project was formally registered. Our joint venture with the KazMunayGas National Oil and Gas Development Company of Kazakhstan - Tyub-Karagan Operating and Atash Company Ltd. - went into business in the Caspian town of Aktau, the Mangistau Region. A group of contractors, including Kazakhstan-CaspianShelf, Petro-Alliance, Western-Geco and Yuzhmorgeologia - completed a 2-D seismic survey. In Tyub-Karagan oil fields, the volume of work done constituted about 670 running km.

All the operations were performed in strict compliance with the requirements imposed by special ecological conditions on geological survey in the Kazakhstan sector of the Caspian. Public ecological hearings were conducted in Aktau in mid-April and early December 2004, within the framework of these requirements.

By now, survey data have been interpreted, the local geological structure ascertained and the location of the first exploratory well on Tyub-Karagan determined. Besides, we have completed the geological engineering explorations, drawn up drilling specifications, ordered well construction equipment and selected an insurer on a competitive basis.

Drilling will be started in April-May 2005, using the Astra semisubmersible drilling rig belonging to LUKOIL-Shelf. Drilling operations will be performed over four months 7 m under the water surface. The first exploratory well will be sunk down to 2,500 m. Further geological prospecting programs will be finalized on the basis of the information derived from the exploratory well. The project provides for drilling 83 production wells: 79 for oil and 4 for natural gas. Oil production in Tyub-Karagan oil field may start some time in 2010-2012.

As to the Atash sector, we did over 1,000 running km of seismic survey there. In 2005, the data obtained will be processed and interpreted with a view to bringing out promising oil and gas beds. The spudding of the first exploratory well there is scheduled for 2006-2007.

Q: LUKOIL is a tangible presence in Kazakhstan today. Does the Company intend to expand the sphere of its activities there?

A: We should like to do that, especially on the Caspian shelf. LUKOIL Overseas is interested in building up an integrated offshore operations support infrastructure, and we have reached full understanding with the Government of Kazakhstan on that score. We are moving fast enough toward our objectives because we have no disagreements or differences with Kazakhstan at contract preparation and realization stages. Today, all the above-mentioned projects are regarded as top priorities both by LUKOIL and by KazMunayGaz. The important thing is that Tyub-Karagan and Atash have become the first projects within the framework of the realization of the Federal Program for the development of the Kazakhstan sector of the Caspian. KazMunayGaz and LUKOIL are equal partners and operators in that promising project.

Notably, LUKOIL takes the lead among the foreign companies in the number of projects (eight, as already mentioned) it is carrying out in Kazakhstan. An important factor in cementing our business links is that Kazakhstan and Russia have a common border on the Caspian and, as a result, our social, economic, environmental and defense interests are closely intertwined. Of special importance is the fact that our two nations have largely similar mentalities and many historical roots in common and that Russia's and Kazakhstan's oil industries have been working in Odouble harnessO for more than a century now. All that makes us confident that LUKOIL has great prospects in Kazakhstan and that many other major joint projects are ahead.

Q: The outlook for the Caspian offshore oil production projects is seen as bright. Do you agree with such optimistic forecasts?

A: At the latest estimates, the proved and probable reserves of oil and gas condensate in the Caspian region amount to about 40 billion barrels, with the richest fields found in the north of the Caspian shelf.

At present, LUKOIL is active in the three most promising sectors of the Caspian shelf - Russian, Azeri and Kazakhstani. The boundaries between the sectors have been established in accordance with intergovernmental agreements on the fixing of the median line equidistant from these countries demarcating national sectors of the seabed within which each country exercises its sovereign right to exploit natural resources.

In the Russian sector, LUKOIL conducted, as part of carrying out various projects, the geophysical prospecting and seismic survey of the most promising areas and drilled several exploratory wells with positive results. In particular, commercial oil reserves have been struck in the Yury Korchagin and Khvalynskoye oil fields. Plans are afoot for surveying the Tsentralnaya structure.

In Azerbaijan, LUKOIL's stake in the Shah-Deniz project has been increased to 10%, operator's rights have been acquired, and its stake in the highly promising D-222 project has been brought up to 80%.

As to Kazakhstan, it leads the Caspian region in proved oil and gas reserves and in hydrocarbon production growth potential, accounting for 75% of the region's proved and probable oil and condensate reserves and 45% of its gas reserves. The enormous oil and gas field, Kashagan, was discovered in Kazakhstan's sector of the Caspian. The oil production rate in Kazakhstan is expected to reach 2.5-3 million barrels a day by the year 2015. The fact that no single well drilled on the Kazakhstan shelf of the Caspian has turned out to be dry speaks for itself.

In June 2004, addressing the 11th full session of the Foreign Investors Council with the President of Kazakhstan in the chair, LUKOIL President Vagit Alekperov said that the Company planned to increase the number of its projects in the Caspian

substantially and to bring LUKOIL's hydrocarbon production there up to 18% of the total by 2020. For that purpose, the Company's long-range development program provides for investments of up to $13 billion. So far, the Company has invested over $1.5 billion in Kazakhstan's economy alone.

Notably, the Republic of Kazakhstan, with its fabulous oil resources, is now rapidly developing, with foreign investors' participation, its transport infrastructure, which will enable it to diversify the directions of oil deliveries and to expand into new promising markets by setting up railroad and sea terminals, as well as constructing, purchasing and chartering oil tankers.

Q: Some analysts fear that the boosting of oil production in the Caspian region may give rise to serious ecological problems. How would you comment on these warnings?

A: It is a tradition with LUKOIL Overseas Holding Ltd. to give top priority to guaranteeing environmental safety as a strategic element of its business. Accordingly, the Company makes every effort to protect the health of its personnel and of the local population and to make its projects environment-friendly, particularly to leave the unique biosphere of the Caspian Sea intact. As a civilized business, we deem it our sacred duty to protect the natural environment from technogenic impacts. Let me emphasize that social responsibility is every bit as important to us as economic efficiency.

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Oil of Russia, No. 1, 2005
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