Archive

No. 1, 2006

Fikret Aliev
Special Representative of the President of LUKOIL in Azerbaijan, Georgia, and Turkey

AT A NEW LEVEL OF INTEGRATION


Azerbaijan continues to play an important role in LUKOIL's strategy

The history of establishing LUKOIL as an international company began with the development of Azerbaijan's oilfields. Over time, the company began operating in other regions of the world as well, but the Caspian region has not lost any of its significance. The Russian economy's leading company continues to strengthen its position in the Republic of Azerbaijan and is expanding the areas of its presence in different sectors of the country's economy.

Strategic orientation

LUKOIL first came to Azerbaijan in 1993 and soon became a player of note in the republic's fuels market. In 1994, the Company began operations in the exploration for and production of crude oil and natural gas. Despite the Company's withdrawal from a number of Azeri projects, the region continues to play an important role in LUKOIL's strategy.

At present, LUKOIL is implementing two large-scale upstream projects in Azerbaijan. It is one of the operators in the planned D-222 (Yalama) geological survey project and a major investor in the Shakh Deniz project, within which the production of gas and gas condensate was slated to begin by the end of 2005.

The development of the Shakh Deniz field, work on which began in 2003, is one of the world's ten largest current oil and gas projects. According to the estimates of those participating in the project (BP, the project operator, with 25.5%; Statoil with 25.5%; LUKOIL, State Oil Company of the Republic of Azerbaijan (SOCAR), TotalFinaElf, and NICO, with 10% each; and TRAO with 9%), the field's hydrocarbon potential is 1.05 trillion m3 of natural gas and 2.1 billion barrels (300 million tons) of gas condensate. Considering the size of the field, its favorable geographic location, and the engineering difficulties involved, Shakh Deniz is by nature a unique project. It will make possible to flexibly diversify the deliveries of gas needed by customers in Azerbaijan, Georgia, and Turkey.

The production of 178 million m3 of gas and 34 million tons of gas condensate is planned for the project's first stage, now being implemented.

Of major importance to the Company is the profitable marketing of its products; LUKOIL is therefore taking part in two downstream projects associated with the distribution of the Shakh Deniz gas. LUKOIL owns 10% of the South Caucasus Pipeline project and controls 8% of Azerbaijan Gas Supply, that country's gas distribution company.

Production will begin at the field in the fourth quarter of 2006, which means exactly ten years after the contract was signed. Stage One's peak production will be on the order of 9 billion m3 of gas. In the second stage, scheduled to begin in 2011, gas production will reach 16 billion m3 per year. Around 70% of the produced gas will be delivered to Turkey for planned re-export to the countries of Western Europe, while the rest will go to the domestic markets of Azerbaijan and Georgia.

The drilling platform should commence operations in April 2006. Two 100-km-long underwater pipelines, one 26 in diameter and the other 12, will be used to bring the gas and gas condensate ashore, respectively. The pipelines will join the TPG500 platform to the on-shore terminal at Sangachaly.

The TPG500 terminal should provide for a maximum production of 8.5 billion m3 of gas per year, of which Turkey, under the terms of the AzeriTurkish agreement of March 12, 2001, will get 6.3billion m3 of gas annually. For allowing the transit of Caspian gas across their territories, Azerbaijan and Georgia will get 1.5 and up to 0.8 billion m3 of gaseous fuel a year, respectively.

The AzeriTurkish agreement has been concluded for a period of 15 years, during which Turkey will get 89.2 billion m3 of Shakh Deniz gas. The 690-km-long South Caucasus Pipeline (SCP) mentioned above, the Azeri and Georgian sections of which are 442 km and 248 km long, respectively, will be used for deliveries of blue fuel to Turkey. The SCP will cost the consortium $1.2 billion (of which LUKOIL's share is $120 million). Another pipeline, 280 km long, should be laid to Erzurum by the time the agreement expires, but by the Turkish Botas company.

The SCP's initial transmission capacity will be 7.7 billion m3 of gas per year. Since each of the line's pipes is 42 in diameter, however, the export pipeline's capacity can be increased to as much as 20 billion m3 of gas annually by raising the power of its pump and compressor stations. The implementation of the project's second stage, during which it is planned to produce up to 16billionm3 of gas a year, will be possible after new contracts for the sale of gas have been signed.

The project could transform Azerbaijan into a major supplier of natural gas not only to Turkey, but to the European gas market as well.

Not by oil alone

The Company's operations are now integrated into different sectors of Azerbaijan's economy. Besides oil production and the marketing of petroleum products, LUKOIL is an active participant in the country's banking, insurance, and telecommunications business.

One of the immediate priorities for cooperation between Azerbaijan and Russia is, according to the leaders of both countries, increasing the volume of RussianAzeri trade from $800 million to as much as $1 billion per year. The NIKOIL investment and commercial bank (ICB), the founders of which are the NIKOIL financial corporation (with 60% of the founding capital) and JSC LUKOIL-Azerbaijan (with 40%), is contributing substantially to this goal.

NIKOIL ICB's developmental strategy calls for issuing credit to Azerbaijan's various oil and gas projects, and to other projects associated with them, plus stimulating financially the development of the republic's small and medium-sized businesses, along with the development of trading and industrial facilities.

Carrying out these tasks allows NIKOIL ICB to successfully perform its function as a financial bridge between Russia and Azerbaijan. NIKOIL ICB is actively providing credit to the many RussianAzeri trade projects whose founders are the NIKOIL financial corporation (with 60% of the founding capital) and JSC LUKOIL-Azerbaijan (with 40%). Today, NIKOIL ICB is a leading creditor of trade operations between Russian and Azeri commercial structures in both the industrial and agricultural sectors.

LUKOIL also deserves a great deal of the credit for the development of Azerbaijan's telecommunications system. The AzeriBritish joint venture AzEuroTel, among founders of which was LUKOIL Europe Ltd., was created in 1995. The company quickly introduced the republic to the latest communications technologies. More than $10 million was invested in the joint venture. Thanks to this investment, telecommunications equipment manufactured by England's GPT Co. (a part of General Electric of Great Britain) and featuring fifth-generation software was brought to Azerbaijan for the first time.

AzEuroTel's services are used by Azerbaijan's Office of the President and Cabinet of Ministers, and by the leading oil, financial, insurance, trading, medical, and other companies operating in the republic. In 1997, the JSC LUKOIL-Inform representative office joined in this work, providing high-quality institutional communications between LUKOIL's central office in Moscow and all of its subsidiaries in Azerbaijan.

In Azerbaijan today, AzEuroTel is actively introducing state-of-the-art technologies for wireless communications. The company was one of the first in the republic to offer consumers the opportunity to use DECT wireless and Nokia Actionetstandard multipurpose trunk communications.

LUKOIL capital in Azerbaijan is also present in the insurance business. JSC LUKOIL-Azerbaijan owns 30% of Ateshtyag, the republic's leading insurance company. One of the firm's main lines of operation is working to insure against oil company and consortium risks. The company accounts for more than 25% of the turnover in the country's insurance market. Virtually all of the land- and sea-based operations of foreign investors and SOCAR, including the construction of the Shakh Deniz offshore drilling platform and BTS-type pipeline, are insured by Ateshtyag.

Investments in the future

LUKOIL's operations in Azerbaijan include things other than business. The Company is actively involved in charitable work in the areas of science, education, health care, and culture.

LUKOIL devotes a great deal of attention to the Russian Orthodox Church's BakuCaspian diocese. In particular, LUKOIL is now a general sponsor of the project to resurrect the Cathedral of the Holy Myrrophores. The reconstruction of this Baku cathedral, which was destroyed by the Bolsheviks, is very symbolic. It was originally erected in 1905 with funds from the well-known Azeri oil tycoon and arts patron Zeinalabdin Tagiev.

LUKOIL is now also involved in the construction of the new FatimeyiZehra mosque in the village of New Gunesli, not far from the nation's capital.

The company is doing its best to strengthen friendly ties between Azerbaijan's Christians and Muslims. Sheik-Ul-Islam Haji Allahshukur Pashazade, Head of the Caucasus Muslims' Authority, and Aleksandr, Bishop of the Russian Orthodox Church's BakuCaspian diocese, have expressed their gratitude for this many times.

Another memorable event for the Company was the signing, in Baku in 2003, of the Agreement on Cooperation with the Azerbaijan State Oil Academy (ASOA).

The material and technical assistance LUKOIL provides to the ASOA helps maintain the high standards of its academic process. The Oil Academy is being transformed into a training ground for the professional workers the Company needs to carry out hydrocarbon projects in the Caspian region.

LUKOIL financed creation of a modern study center at the academy equipped with computer and multimedia hardware, and stocked with specialized literature. The ASOA's library collection has also grown by more than 300 academic and professional works for the training of petroleum industry workers. The Company is working alongside the academy to organize and perform scientific research.

Such examples of the Company's charitable work and patronage emphasize once again its interest in Azerbaijan. By the start of 2006, LUKOIL's charitable contributions and total investments toward the development of the republic's economy have exceeded $700 million. LUKOIL made a strategic decision to work in the region a choice based not just on Azerbaijan's potential but on the historical ties between the Russian and Azeri oil and gas industries. The Company's mission in the republic is to maintain and strengthen these ties.




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Oil of Russia, No. 1, 2006
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