No. 2, 2008

The Russian oil major regards Venezuela as one of the world's most attractive oil-producing regions

In October 2005, LUKOIL Overseas Holding and PDVSA signed an oil prospecting agreement for the block JUNIN 3 in the Orinoco River basin. At present, the most responsible phase of a qualitative evaluation of the block’s reserves is nearing completion.

Untapped oil reserves of the Orinoco valley

Transnational oil companies enter the OPEC countries’ markets in different ways. In some places, the presence of such investors begins with an early launching and rapid implementation of major sectoral projects, and it is only with the passage of time that this effort assumes unique and recognizable identity of its own. In other words, it puts on a layer of sociopolitical and media components and becomes a segment of public life and international economic relations.

Alternatively, things may take a different course. Oil production on a field has not yet started, joint efforts have not yet returned a single cent but the creative challenge, social significance and repercussions of the budding joint action are already making themselves felt. What is more, they are clearly running ahead of future profits. As a rule, this PR-advancement effect manifests itself in countries with “revolutionary tectonics” – troublesome and in the throes of turbulent changes.

Such is approximately the story behind LUKOIL Overseas’ presence in the Bolivarian Republic of Venezuela. Even before launching its investment program, the overseas upstream projects operator of modern Russia’s first vertically integrated company struck firm roots in Caracas to become an inalienable element of the local oil and gas community. Being a full member of the Venezuelan Hydrocarbon Association (AVHI), it launched and practically carried through a number of social and charitable campaigns and organized major bilateral forums. Much is being done for an early launching of specific production projects – both on exploratory drilling sites and around the negotiating table.

The Russian investor’s current debut in Venezuela looks nothing like American companies’ business trip to the legendary piratical lake of Maracaibo in the 1920s. Those pioneers of big oil business in Venezuela were all but led by the hand to wells which generously yielded oil of light, almost gasoline fractions! It was not for nothing that many pumping units on those wells are still creaking like huge pendulums right in the patios near homes roofed with scarlet tiles.

The newcomers who arrived in Venezuela in the 21st century faced challenges of an entirely different magnitude. This is true for LUKOIL, the President of which, Vagit Alekperov, signed with the CEO of the Venezuelan National Oil and Gas Company (PDVSA) the Memorandum of Understanding in the Moscow Kremlin on November 26, 2004, in the presence of the Heads of State Vladimir Putin and Hugo Chavez.

The document stipulated that in the Bolivarian Republic of Venezuela Russia’s giant is to concentrate on the labor-intensive and costly development of one of the heavy and super-heavy oil fields in the Orinoco River basin (alas, light hydrocarbon reserves are running low in Venezuela). Reclaiming the swampy Orinoco savannah flooded over by half-yearly high waters is no easy job. This region, hard-of-access to geologists and oil producers but expected to add 235 billion barrels of “black gold” to the nation’s oil reserves thanks to the ambitious Magna Reserva program, can be figuratively referred to as a land of dormant oil wealth.

Pending results

On August 18, 2005, Rafael Ramirez, Venezuela’s Energy and Mines Minister and PDVSA President, sent a letter to LUKOIL Overseas Holding inviting it to join in the nation’s effort to carry out the Orinoco project. Specifically, he sought the Russian company’s cooperation in quantitative evaluation and certification of oil reserves found in the Junin 3 block covering an area of 640 km². As in analogous messages to other foreign companies, Caracas provided no guarantees of Junin 3 block development rights being subsequently transferred to LUKOIL. Nevertheless, the Russian side has answered in the affirmative and is now faithfully fulfilling the obligations assumed.

As early as June 2006, a festive event was celebrated in Venezuela’s Intevep Oil Technology Institute in Los Teques, a town outside Caracas: a group of Russian geologists who had arrived in Venezuela just six months previously, completed the first phase of the evaluation project in cooperation with local specialists. A 300-page document containing preliminary information on Junin 3 resources was formally submitted to the top management of the PDVSA and received high acclaim from the Venezuelan side.

Now the second – the most complicated and labor-intensive – phase of the quantitative evaluation of the block’s reserves is nearing completion. This multidimensional effort consists mainly in the test boring of stratigraphic wells on the Junin 3 block. The boring is done using the PDVSA’s own facilities and at its expense. In just a short while, the reserves will be certified by independent experts on the basis of international standards whereupon, LUKOIL hopes, the stage will be set for a joint oil production venture.

Oil for the people

LUKOIL has also done much in Venezuela’s social sphere over its three years’ presence in the country. Here are just three characteristic examples.

In May 2005, a ceremony was held of handing over to the Ministry of Public Health of Venezuela and to the authorities of the Delta Amacuro State a flotilla of nine small, medium and large ambulance motorboats built and equipped at the expense of LUKOIL Overseas Holding. Those high-speed craft for rushing doctors, nurses and medicines to the farthest reaches of the Orinoco River’s estuary were set afloat to loud hoorays of thousands of enthusiastic onlookers. The long-awaited connecting link between mainland clinics and the Barrio Adentro delta-wide network of first-aid stations which guarao Indians depend on for medical care has finally materialized. This unique initiative has saved thousands of lives in that community of the Southern American selva’s aboriginals. Another important thing was that the ambulance motorboats were built and equipped with medical instruments and modern radio communication facilities by local companies only: Venezuelan manufacturers’ priority was meticulously observed.

In June 2007, on the eve of Hugo Chavez’s another visit to Moscow, Andrey Kuzyayev, Vice-President of LUKOIL and President of LUKOIL Overseas Holding, was elected Head of the Russia-Venezuela Council of Entrepreneurs. Andrey Kuzyayev took his election to that public office not as a matter of form but as a chance to engage in vigorous action: he came out with several constructive initiatives for the business communities of Moscow and Caracas to realize by joint effort. And here are the first significant results. Successful bilateral business forums were held, first in the Russian capital last September and then in the capital of Venezuela in November. Both were attended by hundreds of participants who held scores of sessions of specialized working commissions and signed important documents. Indeed, much of what was beyond even the influential high-level Intergovernmental Commission’s power has now gotten off the ground – commercial negotiations, business correspondence and communication, discussions of joint projects have livened up.

December 2007 marked the completion of an important construction project financed by LUKOIL Overseas Holding – this time in the very center of Caracas. A preschool children’s establishment named for Eusebia Balsa (a well-known children’s rights activist who had done much for the local kids) was inaugurated in one of the Venezuelan capital’s poorest and crime-infested neighborhoods. Top executives of the Venezuelan Public Education Ministry, Mikhail Orlovets, Russia’s Ambassador to Venezuela, and LUKOIL Overseas Holding. Vice-President for Latin America Mark Ralph cut the tape across the entrance to a two-storey building which became a model for a ramified network of analogous centers throughout the country. The kids (of whom there are 90 there, aged from one to 6 years) generously repaid the gift with smiles and songs. And their mothers, who have received special training and are now paid small wages, are giving a hand to professional nurses and activists of SENIFA – the National Family and Child Support Service. This goes to alleviate, even though slightly, the problem of unemployment – the greatest scourge of Venezuela.

The record of LUKOIL’s philanthropic and sponsoring activity in Venezuela confirms the Company’s commitment to the philosophy of socially oriented business.