No. 1, 2008

Sergey Nikiforov,
Chief of LUKOIL Overseas' representative office in Uzbekistan, General Director of LUKOIL Uzbekistan Operating Company


The Khauzak gas field, LUKOIL's major project in the Republic of Uzbekistan, comes under commercial development

LUKOILs natural gas development program which is part of the Companys Strategic Development Program for 2005-2014, envisages a substantial rise in natural gas production in Russia and abroad before this decade is out. This Program comprises the following key elements: determining the optimum gas marketing strategy, an integrated approach to the implementation of new gas production projects, involvement in all the gas price formation stages from recovery and transportation to processing and marketing. Gas production ranks prominently among LUKOILs upstream overseas projects with those pursued in the Republic of Uzbekistan topping the list.

Off to a good start

On November 29, 2007, Sergey Ivanov, First Deputy Prime Minister of the Russian Federation Government, Rustam Azimov, Deputy Prime Minister of the Government of the Republic of Uzbekistan, LUKOIL President Vagit Alekperov, and Nurmuhammad Akhmedov, CEO of the Uzbekneftegaz, inaugurated the Khauzak gas field set up in the Bukhara Region within the framework of the Kandym-Khauzak-Shady-Kungrad project production sharing agreement (PSA). By that date the construction of the Khauzak gasfields startup complex comprising, as of now, 10 gas wells, five cluster sites, a gas collection system, gas preconditioning plant with a production capacity of 3 billion m3 a year, an export pipeline system, an internal and external power supply system and the field support base had been brought to completion. Investments totaled $330 million.

The agreement runs for 35 years, until the year 2039. Output is to be shared on a fifty-fifty basis meaning that the government is entitled to keep 50% of the gas produced.

Khauzak is part of the Kandym-Khauzak-Shady-Kungrad megaproject being carried out by a consortium of investors comprising LUKOIL Overseas (90%), and the Uzbekneftegaz National Holding Company (10%). Approved natural gas reserves in the contract area stand at 329 billion m3. Maximum annual production is to amount to over 11 billion m3 and expected to reach its peak by the year 2013, and the projects overall output may add up to 207 billion m3 of natural gas.

The project is being implemented by LUKOIL Uzbekistan Operating Company now employing more than 300 specialists. Naturally, the company needs its head office a land plot for which has already been allocated in the center of Uzbekistans capital and the building of which is on the drawing boards.

The project also provides for the construction of a modern gas processing plant in the contract area. Besides, plans are afoot for drilling more than 170 production wells and for laying more than 1,500 km of pipelines. In addition, two compressor plants, gas gathering stations, shift camps, high-voltage power transmission lines and a separate railroad track about 40 km long, motorways and access roads are to be built.

The project has created more than 350 highly-paid jobs and enlisted: by the year 2012 itsnumber is planned to be increased up to 1500. It enlisted, on a competitive basis, the services of numerous servicing and contractor companies, both foreign and Uzbekistan- based. Specifically, it has secured the cooperation of JSC Mubarekneftegazmontazh. Much credit goes to the Uzbekkhimmash company and the Chirchik Ferroconcrete Products Plant.

The Khauzak project developers set great store by environmental safety. Drill cutting waste interim storage and disposal facility (ISDF) has been constructed complete with a network of 12 monitor wells and four control stations. The ISDF deserves special mention because it is the first facility of its kind in Uzbekistan and one of the projects key environment protection structures in general. The ISDF will process 12,000 tons of drilled solids a year. Part of the solids processed will go into making cinder blocks a popular wall-making and finishing material. In this way, the modern concept of wasteless production will be put to practical use when developing Khauzak, Shady and, later, Kandym gas fields to raise the projects economic efficiency and to reduce its adverse impact on the environment.

Incidentally, it is worth noting here that ecologists were the first to arrive on the Khauzak contract area more than two years ago. They gave a thorough study to the local ecosystem and ecological situation and carried out an environment impact assessment program with extensive public participation. The Company is committed to the cause of keeping the environment healthy.

Background information

The Kandym group of gas fields has been in commercial operation for nearly 40 years now. Its gas is high in hydrogen sulfide and acid gas for which reason and, besides, owing to the technical and financial difficulties involved in gasfield construction and stringent industrial and ecological safety requirements the Kandym field remained, for quite a while, the only one left untouched in that oil- and gas-bearing province.

Otherwise, Kandym is a fabulously rich field, its proved natural gas reserves running into over 240 billion m3. As I have already mentioned, the project provides for the construction of a gas processing plant there with a rated capacity of an impressive 8 billion m3 of gas a year. Such plants have few analogs worldwide. The plant is to go into commercial operation in 2011. As of today, a geological model of the field has been developed and the Kandym gasfield construction plan approved. Development wells have been worked over.

Our activities in Uzbekistan are not restricted to this megaproject. We plan to further expand the scale of our efforts there. While implementing the biggest strategic investment project in that country we have launched a totally new venture there. In January 2007, after the Government of the Republic of Uzbekistan, represented by the Ministry of the Economy, and the participants in the Investors Consortium, LUKOIL Overseas included, had signed the appropriate protocol, the PSA on the exploration and development of the Uzbekistan section of the Aral Sea took effect.

LUKOIL Overseas partners in the new venture are the Uzbekneftegaz National Holding Company, Petronas Carigali Overseas (Malaysia), CNPC International (China) and KNOC Aral (Korea). All members of the consortium have equal stakes in the project. The PSA runs for 35 years. The project is managed by the Tashkent-based Aral Sea Operating Company.

Right now the PetroAlliance contractor is conducting offshore, transition-belt and onshore 2D seismic survey of the Uzbek section of the Aral Sea along the distance of about 2,300 linear meters, with the offshore area (depth: up to 40 m), the transition belt and the onshore part accounting for a third of the distance each.

Geological exploration will be conducted in two stages. At the first stage, seismic survey will be carried out and two exploratory wells drilled within the framework of a brief three-year program at minimum cost (about $100 million). The results will provide the basis for a feasibility report the approval of which will be followed by a coordination of the commercial terms of the PSA, whereupon the second-stage geological exploration work will be carried out.

Eight gas condensate fields have been discovered in the Ustyurt Region over the past few years of which the PSA contract area is part. Geological survey carried out in that region has revealed a high hydrocarbon potential of the Aral Sea.

Social involvement

Our extensive philanthropic and sponsorship activities are an important indicator of LUKOILs progress and its commitment to a new community-oriented business philosophy.

LUKOILs Social Code provides for the Companys free-will social involvement throughout the areas it is doing business in. LUKOIL Overseas public-spirited activities in the Republic of Uzbekistan are fully in line with these principles. We give the Bukhara College of Oil and Gas Industry a hand in equipping a computer classroom, render support to the veterans of Uzbekistans oil and gas industry, to the Junior Sports Promotion Foundation, to the Navoi Opera and Ballet Academic Theater, to the Russian Cultural Center and to a number of other social and cultural organizations. This philanthropic effort is gaining in scale from year to year.

The first Toshkent Bakhori International Opera and Ballet Art Festival held in 2007, of which LUKOIL was the General Sponsor, became a highlight of the Uzbekistan capitals cultural life.

Let me dwell on two of the numerous philanthropic actions held in the Bukhara Regions boarding schools. Hard-of-hearing children were given personal hearing aids, and visually impaired ones received computers with keyboards, monitor displays and printers for the blind. That opened for almost 400 kids a window into the world they are to live and work in.

To conclude, Uzbekistan is among the leading and traditional gas producers of the Central Asian region where the Soviet gas industry had its start in the 1950s. Today, Uzbekistan comes third in the CIS, after Russia and Turkmenistan, in natural gas production, and its as yet untapped resources hold big promise. Geologists expect a great deal from the areas waiting to be explored the shelf and transition belt of the Aral Sea, the Ustyurt Plateau and the Surkhandarya Region.

Although Uzbekistans natural gas potential is enormous, it was only thanks to a joint effort of Russian and Uzbek gasfield developers and to their supreme professionalism that the Khauzak field has been put into commercial production and its natural gas reserves made available to people. This is an impressive achievement paving the way for still more spectacular successes to come.

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Oil of Russia, No. 1, 2008
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