No. 2, 2009


Oil of Russia magazine talks to Andrey Kuzyaev, LUKOIL Vice-President and President of LUKOIL Overseas Holding

In the difficult situation of the world economic crisis LUKOIL Overseas Holding is successfully optimizing its business structure and simultaneously improving the efficiency of its upstream oil and gas projects abroad.

Q: What is done by LUKOIL Overseas Holding to minimize the impact of the world financial crisis?

A: It is important to have a clear idea of your own prospects and to comply with the laws dictated by the market. If the market situation for oil and gas shows that we will have less money than expected, we should in the first place minimize both our own expenses and operation costs. And, finally, we should work more efficiently.

We are taking steps to cut down administrative costs, first and foremost. LUKOIL Overseas intends to reduce its administrative expenditures this year by 40%, and by another 30% next year. That means approximately a 60% cost reduction from the 2008 level.

We are focusing on the existing projects along with the optimization and reduction of costs related to business development. Optimization of the management structure is another agenda item. Two years ago, jointly with the Boston Consulting Group, we launched the Success project, the essence of which is as follows: the company is managed by a group of authorized persons, about 60 managers, while the rest of the staff provide them with support and services. Within the framework of this project we have made our management system more flat and halved the volume of document flow, the number of performance benchmarks, and reporting. The company has changed the system of delegation of powers and as a result our officers' terms of reference have been expanded to include, in particular, managers' right to sign major contracts and make asset management decisions on their own. At the end of the day, in this way a basis was formed for administrative cost reductions.

In addition to work optimization inside the Company, the focus is on cutting down investment and operation costs at least by 20%.

Q: What specific steps is LUKOIL Overseas taking to achieve this objective?

A: As we have quite a few prospecting projects, we can carry over implementation of some projects to a future period when, we believe, the cash and liquidity position improves. At the same time, we shall discharge our liabilities to the partners: the projects will be kept on schedule.

Moreover, we are negotiating price drops with service providers. For instance, as a result of the yearly tender campaign, many contractors have lowered prices for their services by 10 to 20%. These efforts are continued.

We pay close attention to oil and gas field development effectiveness. We have developed an asset potential appraisal program that would enable us, in the middle term, to increase oil production at operating assets by 20%. Our assessment of our assets' capacity is based on benchmarking, i.e. is made with reference to the best achievements in the world oil and gas industry. Thus, through the application of state-of-the-art technologies, we seek to achieve the highest possible level of production with the existing reserves. In implementing this program last year, we managed to increase production with less investment. This year, the upswing will continue to reach approximately a 7% increase in hydrocarbon production at the end of the year, primarily through oil production growth.

Q: Which of the projects promise production growth?

A: These are, in the first place, projects in Kazakhstan where a large part of our oil is produced. In Egypt, at the West Esh el-Mallaha (WEEM) block, we intend to prevent any considerable decline in production and at the Meleya field, we expect some increment. Production in the Khauzak-Shady gas field in Uzbekistan will be increased.

Q: Uzbekistan is becoming a key region of LUKOIL activities. Does the company plan any further expansion of its operations in the country?

A: In Uzbekistan, we have a lot of work to do in terms of exploration and appraisal of hydrocarbon resources: Ustyurt, Kandym, Khauzak-Shady, South-Western Gissar, and the Aral Sea. Recently,

detailed appraisal of the Shady structure has been completed with the resulting addition of new reserves - some 7 billion m3 of category 1 gas. Part of the structure goes beyond our contract area but in compliance with the law and under the production sharing agreement we hope to have the contract area extended. At the moment, a Khauzak-Shady appraisal program is being developed: while the field had been discovered more than forty years ago, its reserves proved much bigger than initially estimated.

At their last meeting, Uzbekistan and LUKOIL leaders discussed new opportunities in the field of prospecting. We are willing to do the job and discussing new blocks.

At present, negotiations are underway with service providers for the Kandym gas processing plant design, and I hope a contract will be signed and design work commenced before long.

Q: What is LUKOIL Overseas' stance on the D-222 project in Azerbaijan?

A: Having discussed the future of the project with GdF-Suez, we decided to withdraw. The company has fulfilled its obligations to the Azeri side in full: seismics have been completed and two exploratory wells drilled.

Q: Is the company still interested in Turkmenian projects?

A: Absolutely. Jointly with the ConocoPhillips we take part in the negotiations concerning prospecting projects on three blocks on the Caspian shelf. For various reasons, including changes in Turkmenian law, the negotiations last longer than expected but we are willing to sign the contract. Now that new laws have been enacted, the negotiating process will hopefully go more vigorously.

In addition, as far as I know, the leader of Turkmenistan is expected to visit Russia and we hope that this will contribute to further cooperation between the two countries in the sphere of energy.

Q: What are LUKOIL Overseas plans in West Africa?

A: At the Cape Three Points Deep Water Block (the shelf of the Republic of Ghana) we have commenced the drilling stage using the Aban Abraham drillship. The first exploratory well will go down to a depth of over 2,000 meters. Never before either Soviet or Russian oilmen have drilled at such a depth. I would like to note that after a sufficiently large Jubilee field was discovered on the Ghana shelf with potential recoverable reserves of nearly 2 billion barrels, this region is among the most attractive for prospecting in the Gulf of Guinea area.

Q: How is the company's business in South America going?

A: Under the Junin-3 project in the Orinoco basin, we have completed a reserve appraisal, have it approved by the Ministry of Energy and Oil Industry, agreed our estimates of the expected production volume with the Venezuelan side. At the moment, we are carrying out a technological evaluation of the field facilities construction and field development project, and expect this work to be finished in the late summer. At the same time, we are engaged in the development and optimization of upgrader construction options for Junin-3 oil treatment.

Furthermore, a consortium of Russian companies - LUKOIL, Gazprom, TNK-BP, Rosneft and Surgutneftegaz - is considering participation in a tender for Carabobo blocks (the Orinoco basin). It has also been invited to make appraisal of a block in the Junin area with an eye to its subsequent development.

In Colombia, we used to pin our hopes on the Lengupa structure (the Condor project), but unfortunately we drilled a dry well. At present, we are drilling a second confirmation well at the Medina field within the bounds of the same project. Tests will be carried out soon to have our field development estimates confirmed. If the estimates prove correct, then within the next few years, we shall bring the field up to a planned production level of 500,000 to 700,000 tons of oil annually. This is a current estimate to be specified with time. Two wells will be put into operation this year.

We have another promising structure in the Condor project contract area - Guavio Este, where 3D Sparse seismic survey results are now being examined. Next year, we shall make a decision concerning the feasibility of prospecting drilling.

I believe that our prospecting program will sooner or later bring us great success. We have made essential discoveries even now, and we are engaged in their commercialization, for instance, in Saudi Arabia. Our discovery in Colombia (the Medina field) covers all our expenditures in that country, and a serious discovery has been made at the Anaran block in Iran, the Azar field. I am sure that geologists will secure good prospects for our Company in a number of prospecting projects.

Q: What is, in your opinion, the outlook for Block A in Saudi Arabia?

A: In Saudi Arabia we have drilled to date nine wells and discovered two major gas condensate fields, and we are discussing with the government potential commercialization of these reserves. The reserves we have discovered amount to several hundred billion m3 of gas. Moreover, there we have to deal with rather complex lower permeability collectors and for this reason technological solutions are critical.

In addition, we applied to the Saudi Oil Ministry to have the Block A prospecting period extended for one year to carry out detailed appraisal of the fields. After that we shall, hopefully within the current year, identify commercialization prospects for the reserves discovered.

Q: What would you say about activities of LUKOIL Overseas in Iraq?

A: In Iraq, we have passed a prequalification screening and will take part in a bidding tender. We shall focus on oil fields. Gas projects account for 60% of the LUKOIL Overseas portfolio and we need to increase the share of oil projects.

At present, in Iraq, we focus on setting up consortiums. We are considering an alliance with ConocoPhillips (USA) in the first place, as well as with a number of other foreign companies.

We still stand on our right to the West Qurnah-2 field and hold discussions with the Oil Ministry and the Government of Iraq.

We have strong hopes that the development of Russian-Iraqi relations would contribute to the settlement of this issue.

The Iraqi leadership decides the question of foreign investors' involvement within the bounds of the effective laws. A positive precedent exists already: old contracts - those of the Chinese CNPC and the Indian ONGC - have been newly signed as a result of bilateral negotiations, and are now about to be implemented.

LUKOIL is also willing to hold bilateral negotiations, resolve all problems and start implementing the West Qurnah-2 development project.

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Oil of Russia, No. 2, 2009
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