Lukoil’s role in Russia’s output cut compliance
Tuesday, Dec 12, 2017
The Russian independent is the country’s second largest producer and it will play an important role in the recently announced continuation of the OPEC/non-OPEC cuts. Zara Popstoyanova reports
 
The OPEC and non-OPEC decision to extend production cuts until the end of 2018 brought somewhat expected but bullish news for the oil industry. The Vienna meeting’s 24 participants committed to a 9-month extension of the December 2016 deal to cut production, from the initial expiry date in March 2018. The reduction will remain unchanged at 1.8 million bpd, 1.2 million bpd of which will be removed from the market by OPEC, with more than half of the non-OPEC cut of 600,000 bpd coming from Russia.

The agreement has a revisit option due in June 2018, which immediately poses questions about what will come to pass in the second half of 2018, particularly regarding Russia’s stance and its current level of compliance.

Unlike OPEC countries, where oil production is managed by NOCs, Moscow does not have the same control over output, owing to the penetration of private companies.

During 2016, 35-40% of Russia’s 10.96 million bpd of oil was extracted by private firms such as Lukoil.

The company is Russia’s second largest crude producer, responsible for 15.5% of all oil production in 2016, holding more than 500 exploration and production licences. It was one of the first companies to support the country’s efforts to rebalance the market, although others feared the loss of market share to US shale producers.

It would be naïve to assume that OPEC and Russia have become best friends during 2017; however, their common goals of boosting the crude oil price and reducing stock inventories have seen their interests align.

Last week, Lukoil CEO Vagit Alekperov said that planning an exit from the deal was just as important as curbing production in line with the deal, citing avoiding a supply deficit and the spread of a thriving environment for US shale companies. Indeed, Russia is inclined towards a shorter deal extension, especially once a sustained price of US$60-65 per barrel is achieved.

Vagit Alekperov, President and Founder of Lukoil with Charles Villiers of InnovOil
 
A look at Lukoil

The recently improved macro environment has had a near-immediate effect on Lukoil’s financial state. The firm has made a profit of 298.3 billion rubles (US$5 billion) in the first nine months of 2017, an 86.2% increase year on year.

Similarly, sales increased by 11.7% but hydrocarbon production fell by 1.14% to 2.3 million boepd owing to lower volumes of compensation crude oil from the supergiant West Qurna-2 field in Iraq. Excluding West Qurna-2, though, the company’s output grew by 2.3% year on year to 2.2 million boepd.

The field yielded Lukoil a net 10 million boe (36,630 boepd) during the first nine months of 2017 compared with 31 million boe (114,000 boepd) during the same period in 2016.

The reduction in West Qurna output came on the back of Iraq’s part in the OPEC production cuts and Lukoil reaching full cost recovery at the field on November 30, 2016. However, Lukoil’s overall asset base has seen output decline for several years, so any implied role of imposed cuts in this reduction would appear to be somewhat misguided.

This year Lukoil has been focused on developing the production growth potential from high-margin fields such as Vladimir Filanovsky, Pyakyakhinskoye and Yaregskoye. According to the company’s latest announcement on December 7, construction at Vladimir Filanovsky is now complete and drilling of the first production well under the second development phase has begun.

Gas output has risen to 20.7 bcm (76 mcm per day) during the nine-month period, mainly as a result of the start of operations at Gissar in Uzbekistan. In addition, the first train at Kandym gas treatment plant is scheduled for launch by the end of the year, while the second train is nearly 75% complete.

In terms of new exploration, Lukoil has gained a firmer position in Iran with the signing of a memorandum of understanding (MoU) with the National Iranian Oil Co. (NIOC) for geological studies and basin modelling of the northwest Gulf and southern Caspian Basin.

The Russian company is also in active negotiations about the development of Ab Teymour and Mansour onshore fields in the southwest Khuzestan province, though it may face competition from other IOCs, with Indonesia’s Pertamina and Denmark’s Maersk Oil – now part of Total – having previously shown in interest in the assets.
 
Downstream downturn

In recent years, Lukoil has scaled back its downstream operations in Europe in order to reinvest capital in higher margin upstream projects in Russia and overseas.

The producer has already divested much of its European retail fuel network and has mooted plans to offload shares in refineries in Bulgaria, Romania, Italy and the Netherlands. Recently, the company also said it might try to sell its crude trading division, Litasco.
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