No. 1, 2006


Oil of Russia magazine talks to Andrey Podbolotov, regional director of LUKOIL Overseas Holding Ltd. for Uzbekistan

By the year 2014 LUKOIL plans to increase its annual gas production seven times, which will mean an output of more than 50 billion m3. Such strategic plans of the Russian oil major will be facilitated by the active development of large gas fields both in Russia and abroad. One of the more promising regions abroad, important to the promotion of LUKOIL's gas business, lies in Uzbekistan.

Q: How would you appraise the oil and gas potential of the Republic of Uzbekistan?

A: Uzbekistan is one of the leading traditional producers of gas in Central Asia. Actually, it was there that the Soviet Union's gas industry originated in the 1950s. And Uzbekistan's hydrocarbon potential has not been exhausted by far. Furthermore, it is among the ten largest gas-producing countries of the world. At present, the country's total gas reserves are estimated at more than 6,000 billion m3, and the country's annual output of gas stands at about 60 billion m3.

More than half of the Republic's territory is considered promising in terms of prospecting for oil and natural gas. Geologists hope to discover large reserves of hydrocarbons in such completely undeveloped regions as the shelf and coastal zone of the Aral Sea, the Ustyurt plateau lying between the Aral and Caspian seas, and the Surkhandarya Region.

Besides, only about 60% of the country's almost 200 prospected hydrocarbon fields are being developed. Meanwhile, in their size many of Uzbekistan's deposits have been classified as unique, or extremely large, or moderately large.

Q: When did LUKOIL begin its activity in Uzbekistan?

A: It all began in the spring of 2001, when LUKOIL President Vagit Alekperov visited Uzbekistan and signed a document on basic principles and provisions of a future production sharing agreement (PSA). Then followed painstaking work to prepare a project feasibility study (PFS), as well as prolonged negotiations with the National Holding Company Uzbekneftegaz and the Republic's council of ministers concerning PSA and PFS particulars.

To speed up all that work the LUKOIL Overseas Holding Ltd. leadership decided, in late 2002, to establish its representative office in Tashkent, capital of Uzbekistan. The office was opened in January 2003.

A production sharing agreement between the Republic of Uzbekistan and a consortium of investors, comprising LUKOIL (90%) and the National Holding Company Uzbekneftegaz (10%), was signed on June 16, 2004, for a period of 35 years. The agreement concerned the lots of the Kandym group, Khauzak, Shady and Kungrad.

The PSA became effective on November 24, 2004. A company called LUKOIL Uzbekistan Operating was set up to implement this project. At the end of 2005 it had about 70 employees.

Q: At what stage is the implementation of the Kandym-Khauzak-Shady-Kungrad project today?

A: The present PSA is highly promising. Suffice it to say that the confirmed geological reserves of natural gas on the contract territory total 329 billion m3.

At present, two prospecting holes in the Shege area have been acquired as property of the Kungrad lot; 2D seismic survey is being conducted; work to interpret the material of geophysical research on some of the previously drilled prospecting holes and petrophysical research on the samples yielded by these holes has been completed, and so has a prompt estimate of the hydrocarbon reserves in the Shege structure. Over seven million dollars has been invested in the project.

As far as the Khauzak and Shady lots are concerned, a technological development scheme has been worked out and approved, and a technical assignment for designing the development of these lots has been drawn up. The designing has already been started. Furthermore, field 3D seismic survey is under way; group projects for the construction of exploratory wells have already been prepared. Investments there total more than 12 million dollars.

On the territory of the Kandym group of fields, wells are being reactivated and examined; a geological model of the Kandym field has been worked out; a technical assignment for designing a technological scheme of the development of the group of fields has been approved. Work is underway on a fabrication document. Moreover, preparation of the design plans and specifications for the construction of a Kandym gas works has been started. Investments there total about three million dollars.

Q: On what terms does the investors' consortium, which includes LUKOIL Overseas Holding Ltd., plan to sign with Uzbekistan's government a production sharing agreement on prospecting and developing oil and gas fields in the Uzbek part of the Aral Sea?

A: The agreement on creating an investors' consortium comprising the National Holding Company Uzbekneftegaz, LUKOIL Overseas, Petronas Carigali Overseas (Malaysia), the Korea National Oil Corporation (Republic of Korea) and CNPC International Ltd (China) was signed in Tashkent on September 8, 2005.

The consortium has entered into negotiations with the Republic of Uzbekistan on preparing a production sharing agreement on prospecting and developing oil and gas fields in the Uzbek part of the Aral Sea. Each member of the consortium has an equal share of participation. Discussion of the agreement on setting up a consortium began in May 2005. It is planned that the production sharing agreement will be signed in 2006, after which prospecting works will be started on the contract lot. During the last few years eight condensed-gas deposits were discovered in the Ustyurt region which includes the contract lot. Two of them – Vostochny Berdakh and Uchsay – have already been put into operation by the National Holding Company Uzbekneftegaz.

Geological survey carried out by Uzbekneftegaz and some other companies has proved that the Aral Sea has a great hydrocarbon potential. The estimated resources of the contract lot are about 1,000 billion m3 of gas; also, it is quite possible that new condensed gas reserves will be discovered.

Q: What are your company's long-term plans in Uzbekistan?

A: It is expected that the input of capital under the Kandym-Khauzak-Shady-Kungrad project will total about one billion dollars. The start of industrial gas production is planned for 2007. At the initial stage it is intended to produce 2.5 billion m3 of gas per annum, which will require investments amounting to 200 million dollars. During the 2007-2010 period LUKOIL will invest an additional 500 million dollars so as to bring the annual production of gas up to eight billion m3, starting with the year 2010. The raw material thus produced will be realized via the Gazprom main gas pipelines.

The maximum annual gas production level will be about nine billion m3, while the overall accumulated amount of gas produced during the PSA period may exceed 207 billion m3.

The project provides for the construction on the contract territory of a modern gas works with a capacity of six billion m3 per annum. Its first section is to be commissioned in the year 2011. Planned further is the drilling of 200 operating holes and the construction of more than 1,500 km of pipelines. Also planned to be constructed are two compressor plants, some assembly stations, work-team settlements, high-voltage power lines, a branch railroad line about 40 km long, as well as some highways and approach roads.

In the course of project implementation a large number of work places will be created and dozens of service organizations and contracting agencies, both domestic and foreign, will be employed.

Q: Oil exploration and production unavoidably involve the risk of causing ecological damage. What measures to protect the environment are being taken in the areas where your company is active?

A: Ensuring safe working conditions, protecting the health of our personnel and the population living in the areas where our production facilities are operating, and preserving the favorable environment, as well as rational use of the natural resources – are the priority goals pursued by our company. I wish to stress that our activity has been certified as corresponding to the requirements of such international standards as ISO 14001 and OHSAS 18001.

Created within the framework of the project and functioning successfully have been systems of ensuring industrial and environmental safety and labor protection. Based on the best practices here and abroad, these systems are fully in keeping with the existing international legislation.

Ecologists were the first to arrive at the contract lot. They carefully studied the local ecosystem and the environmental situation, and conducted and approved, with broad public participation, an assessment of the technogenic effect produced on the environment by the company's activity.

Q: Traditionally, in the areas where it operates, LUKOIL engages in charitable activities. What is the company doing in this respect in Uzbekistan?

A: The company adheres to the philosophy of socially-oriented business which regards profit as the main but not the only goal of a corporation.

The Social Code adopted by LUKOIL provides for the Company's undertaking voluntary obligations concerning its socially responsible actions in all areas where it is present. The activity of LUKOIL Overseas in Uzbekistan fully accords with these principles. We render material assistance to veterans of the Republic's oil and gas industry, the children's charity foundation called “You are not alone,” sports associations, medical centers (the Tashkent Institute for the Advanced Training of Doctors and the Central Hospital in the city of Gazli), the Ecosan ecological foundation, the Navoy Academic Opera and Ballet Theater, the Russian Cultural Center and many other social and cultural organizations.

The Caspian-Central Asia region in general and Uzbekistan in particular are becoming priority areas for LUKOIL's presence. The Company's social initiatives have a positive effect on its image in Uzbekistan, where LUKOIL is known as a serious business partner who is prepared to make long-term investments both in business and social projects.

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Oil of Russia, No. 1, 2006
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