No. 3, 2004

Alexander Pitersky


LUKOIL in the Republic of Komi: an impressive record of achievement

The development of the Timan-Pechora oil- and gas-bearing province is one of the key lines of LUKOIL's effort to boost oil production. What the Company has achieved over its five years in that Region leaves no doubt as to the reality of the targets it has set itself.

The background story

At the end of the 20th century the situation in the Republic of Komi's oil industry gave cause for serious concern - oil production plummeted, logistic support became erratic, and social tensions among oilmen kept mounting. As a result, on October 30, 1997, the general meeting of KomiTEK shareholders applied to the Yevroseverneft company to step in and help them along toward financial recovery and a breakeven.

In the same period, with the old oil and gas provinces of Western Siberia and the Volga area definitely nearing depletion, LUKOIL's analysts began to weigh all the pros and cons as regards expanding into new areas. The Timan-Pechora oil- and gas-bearing province attracted their special attention. The explored reserves of the Region's 190 fields stood at two bln. tons, and the Barents Sea shelf promised a still greater production potential.

That was why the LUKOIL management came to attach major strategic importance to the development of the Timan-Pechora province. Various approaches were considered, some of them way out of the ordinary, until the one and only one was finally arrived at. On July 9, 1999, the first-ever Agreement on Cooperation between JSC LUKOIL and the Government of the Republic of Komi was signed. The parties agreed to cooperate in the sphere of oil production, refinement, transportation, and petroleum products marketing in domestic and foreign markets, and to promote new technology research and development programs. That was just the first step followed by further more radical actions. On September 9, 1999, LUKOIL President Vagit Alekperov publicly offered to buy up to 100% of KomiTEK's shares. LUKOIL suggested an exchange of its convertible preference shares for KomiTEK's ordinary shares belonging to that company's shareholders.

The shareholders of KomiTEK met for an extraordinary general meeting on September 15, 1999, to dismiss the Board of Directors before the expiry of its term in office and to elect a new one. Besides, the meeting resolved that the agreement on the transfer of executive powers to JSC Yevroseverneft be terminated in view of a successful completion of talks with LUKOIL.

At the end of 1999, after the Ukhta Refinery, the Republic's oldest, had been absorbed by LUKOIL, the JSC LUKOIL-Ukhtaneftepererabotka Reconstruction Program for the Period of 2000-2005 was adopted. The program provides for the reconstruction of the catalytic reforming, atmospheric vacuum oil distillation and bitumen plants, the conversion of the AT-2 line to the viscosity breaking process and, besides, for the construction of a diesel fuel hydrodewaxing unit.

Ambitious plans

April 25, 2000, was a landmark in the history of the Republic of Komi's oil industry: on that day, the JSC LUKOIL's Board of Directors held a visiting session in Usinsk to discuss the Company's program for the development of oil production in the north of European Russia. The document was part of the Federal Target Program for the Comprehensive Development of Oil and Gas Resources of the Timan-Pechora Province for the Period Ending in 2005 and Beyond, drawn up by order of the Fuel and Energy Ministry of the Russian Federation. The LUKOIL program sets the following targets: increasing oil reserves by 227.5 mln. tons and those of petroleum gas, by 15.3 bln. m3 over the period of 2001-2010; bringing oil production up to 22.5 mln. tons in 2005 and 27.3 million tons in 2010, of which the Republic of Komi is to account for 9.6 and 10 mln. tons, and the Nenets Autonomous Area, for 12.9 and 17.3 mln. tons, respectively. A regional system of oil transportation by sea via the Varandey terminal on the Pechora Sea shore is to be set up, and the existing pipeline system carrying oil southwards expanded. High on the list of priorities are the updating of the Ukhta Refinery and increasing the depth of refining from 42.4% in 1999 to 55.7% in 2005 and to 73.3% in 2010; stepping up the output of petroleum products to 3.35 mln. tons (specifically, of light petroleum products to 1.63 mln. tons) by 2005; utilizing oil gas resources as raw material and fuel for the gas supply service to be installed in the Region. The program puts strong emphasis on guaranteeing social stability, improving the Company personnel's and the local people's working and living conditions, maintaining environmental safety and the ecosystem's sustainability.

Over the period of 2001-2010, LUKOIL plans to invest 134.2 bln. rubles in the realization of the program, of which 89.4 bln. will go into oil production; 13.5 bln. rubles, into prospecting works; 7.1 bln., into refining; 1.6 bln., into petroleum product supply; 15.8 bln., into the transportation system development; 4.4 bln., into the expansion of the oil gas utilization system; 2.4 bln. rubles, into social infrastructure buildup.

It is noteworthy that LUKOIL's Timan-Pechora oil- and gas-bearing province development program provides not only for direct investment in nature conservation in the region but also for special arrangements to prevent environment pollution in the process of oilfield construction and petroleum product marketing. Altogether, direct investment in nature conservancy and environmental safety arrangements will account for up to 30% of overall project spending. Remarkably, in the course of the program's realization over the period of 2001-2010, contributions to budgets of all levels will add up to 417.9 bln. rubles.

On July 13, 2000, Russia's mass media frontpaged the news that LUKOIL had drawn up the Komineft impact areas rehabilitation and oil spill prevention program for 2000-2005. The Company allocated about 700 mln. rubles for the realization of this program of eliminating the aftermaths of catastrophic oil spills caused, in particular, by the 1994 Vozey-Main Facilities pipeline rupture. LUKOIL plans to recultivate 695 hectares of polluted and derelict land and to treat over 220,000 tons of oil sludge accretions.

LUKOIL's current activities in the Timan-Pechora province pushed oil production up already in its first year there. In 2000, it produced 10.7 mln. tons of oil as against 10.4 mln. in 1999.

New developments

On March 27, 2002, JSC LUKOIL-Komi injected fresh blood into its Тtop echelonУ: Vladimir Mulyak, previously Chief Engineer and First Deputy General Director of the company was appointed its General Director.

On March 28, 2002, the Agreement on Cooperation Between LUKOIL and the government of the Region was signed in Syktyvkar by Vladimir Torlopov, Head of the Republic of Komi, and Vagit Alekperov, President of LUKOIL. The parties agreed, in particular, on giving the Company's subsidiares a hand in implementing their long-term programs for increasing the resource base, putting new oil and gas fields into commercial production, building new and updating the existing production, transportation, refining and gas processing facilities. An agreement was also reached on pursuing a coordinated research and development policy aimed at introducing advanced hydrocarbon production, transportation and refining techniques and processes. Under the agreement, LUKOIL undertakes to keep the Republic of Komi's retail petroleum products markets uninterruptedly supplied with gasoline, diesel fuel and other petroleum distillates and to go on expanding the petroleum products storage and marketing infrastructure, constructing new gas stations and modernizing the existing ones. The Company and its subsidiaries will carry on their efforts to rehabilitate the areas oil-polluted in previous years, draw up and implement mineral resources and environment protection programs. For its part, the government of the Republic of Komi has undertaken to be of service to LUKOIL in making the most of its investments in exploration and oilfield development projects.

In June 2002, LUKOIL-Komi underwent certain reforms. Now the oil production complex management process has been brought in line with the uniform LUKOIL standards, a group of companies which used to operate under the auspices of the KomiTEK oil company has been replaced by three oil and gas producing divisions (OGPD) Р Komitermneft, KomiArktikneft and Voyvozhneft. The Komitermneft OGPD, set up in place of former JSC Nobel Oil and JSC Komineft oil and gas production unit No. 2, is now developing the Usinsk field. The KomiArktikneft OGPD, which has brought former JSC KomiArktikoil and JSC Komineft's production units together, is producing oil from the Vozeyskoye and Kharyaginskoye fields. The Voivozhneft OGPD is carrying on in the same way as before.

According to Vladimir Mulyak, General Director of LUKOIL-Komi, such structure simplifies interaction between divisions, adds to the flow of money pattern's transparency, and makes for a more thorough spending control.

Never look back!

On September 15, 2003, JSC LUKOIL-Ukhtaneftepererabotka launched a new facility - the GDS-850 diesel fuel hydrodewaxing unit the construction of which had been started in 2001. The facility incorporates a sulfur separator and a unique system of oil gas flares (not to be found in any other refinery throughout Russia) which minimizes the exhaust of pollutants into the air. The GDS-850 unit's rated capacity is 850,000 tons of fuel a year. Its general designer,

JSC LUKOIL-Rostovneftekhimpro-ekt, had every cooperation of, and depended for equipment deliveries on, the well-known Russian and foreign companies such as Sevmash, Kurgankhimmash, Penzkompressor-mash, Sud-Chemie (Germany), BES (USA), KOCH GLITSCH (Italy), and others. Addressing the new unit's launching ceremony, Dmitry Tarasov, First Vice-President of LUKOIL, said: "LUKOIL is keeping abreast of the latest in production technology and continuously extending the range and improving the quality of its petroleum products. The hydrodewaxing unit going into operation at the Ukhta Refinery will produce environmentally-friendly arctic and winter fuels in amounts large enough to fill the needs of the Republic of Komi and the adjacent regions of Russia".

The following day witnessed another important event. On September 16, 2003, Vagit Alekperov, President of LUKOIL, and Vladimir Torlopov, Head of the Republic of Komi attended in Usinsk (Republic of Komi) the ceremony of commissioning an oil treatment unit (the Usa OTU) at the Kharyaga-Usa oil pipeline. The unit brought the JSC LUKOIL-Komi's oil collection, treatment and transportation system to completion. Previously, a preliminary water draining system at the Kharyaga field, booster pump station No. 7 (Vozey) and the Usa oil terminal had been put into service. It cost $150 mln. to increase the throughput capacity of a 150-km pipeline and to build the OTU. As a result, the throughput of the Kharyaga-Usa pipeline increased from 7 to 12 mln. tons a year. The reconstructed system is meant to upgrade petroleum containing fluid to the parameters of marketable oil and than to feed it into JSC Transneft's piping system through the Usa oil terminal custody transfer meter.

Besides increasing pipeline throughput capacity, the replacement of oil-containing fluid by dehydrated oil has enhanced the environmental safety of the oil production process bringing it into conformity with LUKOIL's production and ecological standards.

The report released by LUKOIL-Komi's press service on December 25, 2003, to the effect that the company's oilmen had met the production target for 2003 - 8,429 mln. tons - made quite a stir in the Republic. The preschedule fulfillment of the plan was made possible by a set of measures aimed at maximizing production efficiency - putting new wells on production, reactivation of suspended wells, oil flow stimulation. On the last days of December 2003, more than 150,000 tons of oil were produced over and above the plan. According to the Republic of Komi's Ministry of Industry, the Republic's oil companies produced a total of 14.13 million tons of oil and condensate in the Timan-Pechora oil- and gas-bearing province which is 12.8% up on the 2002 level.

LUKOIL-Komi's companies are keeping their oil production rate high in 2004 on the run-up to the 75th anniversary of the Republic of Komi's oil industry. They have attained impressive heights, but they are raising their sights higher still.

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Oil of Russia, No. 3, 2004
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