No. 2, 2008

LUKOIL strengthens its positions on the African continent

In 1995, LUKOIL became the first Russian company to turn its attention to Africa’s huge hydrocarbon potential. The Company now has serious intentions to step up its business on the African continent.

Oil discovery in Africa

Africa’s current share in global oil production is about 12%. In addition, the world’s third biggest natural gas reserves, after Russia and Mideastern countries, are concentrated in the countries of Africa. According to leading oil and gas analysts, by 2010, Africa will account for 30% of the rise in the global recovery of liquid hydrocarbons and 25% of the liquefied natural gas.

The biggest investors in the energy sector of the African countries are Western European and American oil majors, though in recent years, Russian companies have also be showing a growing interest in the Black Continent. Among them, LUKOIL is the most active in this promising region.

LUKOIL has become the first Russian oil company to begin operations on the continent of Africa. In 1995, the Company acquired an ownership interest in the Egyptian oil company Meleya in the Western Desert. Since then, Africa has been one of the Company’s key operating areas. LUKOIL entered the project within the framework of the Russo-Italian joint venture LUKAgip. Upon acquisition of this JV at the end of 2004, LUKOIL’s stake in the concession went up to 24%. The other participants in the project are EGPC (56%) and IFC (20%).

In 2001, LUKOIL Overseas Holding acquired the oil-producing company Bitech Petroleum and became the operator of the Egyptian WEEM concession in the Hurghada area. Today, this is one of the Company’s most profitable oil production projects. Among the assets of the acquired company, apart from the Egyptian project, the Company received license areas in Morocco and Tunisia. In 2002, however, LUKOIL decided to reorganize the assets of Bitech Petroleum by selling the Company’s ownership interests in the Morocco and Tunisia oil projects. Thus, at that time, the Russian oil major focused on continuing work to develop the Egyptian block.

In 2001, LUKOIL recovered over 345,000 barrels of oil from the Meleiha field; in 2002, 700,000 barrels; and in 2006, 800,000 barrels. In 2007, at the Meleiha block in Egypt – one of the most profitable and efficient production projects of LUKOIL Overseas Holding Ltd. – commercial hydrocarbon reserves were discovered on the Gavaher structure. In April 2007, the concession agreement ratified by the Egyptian parliament came into effect to extend the contract until 2024.

The region of North Africa is a vital source and producer of oil and natural gas that has now acquired global significance. The share of Egypt, Libya, Tunisia, Algeria and Morocco within the structure of proved oil reserves amounts to over 85%. West Africa comes in second place with 13%.

Impressive prospects

LUKOIL is constantly seeking promising new overseas upstream projects. In recent years, the countries of West Africa have come to the Company’s attention.

The main oil-producing countries in the region are Nigeria, Angola, Equatorial Guinea, Gabon, Congo, Ghana, Cameroon and Cote d’Ivoire. The oil- and gas-bearing potential of Niger and Mali have so far been poorly explored.

In expert opinion, local fields are marked by attractive geological and field conditions: large reserves, thick pay beds with precise boundaries which provide for very high exploratory drilling success ratio, sometimes up to 70-80%. In addition, wells have high and super-high (offshore) well flow rates of up to 20,000 barrels a day.

West African oil is very light and sweet and, as a rule, has a low gas factor, which substantially cuts the operating costs of crude treatment and transportation. Major sales markets are located just a stone’s throw away – North America and Western Europe. All of this makes the operating and transport costs of local projects competitive even with the Arabian ones.

In July 2006, LUKOIL Overseas Holding signed an agreement to acquire from the private Nigerian company Oranto Petroleum International Ltd. a 63-percent ownership interest in the Production Sharing Agreement for hydrocarbon prospecting, development and production on the deep-water CI 205 block on the offshore shelf of Cote d’Ivoire, and became the project operator.

Block CI-205 with an area of about 2,600 km² is located on the deep-water shelf of the Gulf of Guinea, 100 km from the coast of Cote d’Ivoire. The block is geologically confined to the Tano basin, which has proved commercial reserves of oil and gas. The Baobab oil field, the biggest in Cote d’Ivoire, has been discovered 15 km away from the block. In the fall of 2007, LUKOIL Overseas Holding Ltd. undertook a study of the basic natural conditions of CI-205. In the event of commercial discovery of hydrocarbons, the CI-205 development period will be 25 years, with a possible extension for another 10 years.

The current parties to the Production Sharing Agreement on this project are Cote d’Ivoire, represented by the Ministry for Mining and Energy and the Ministry for Economics and Finance, and a consortium of investors consisting of LUKOIL Overseas Holding, Oranto Petroleum International Ltd. (27%) and the national oil and gas company of Cote d’Ivoire PETROCI Holding (10%).

From success to success

Consolidating its positions in West Africa, in April 2007, LUKOIL Overseas Holding signed an agreement with Vanco Energy for acquisition of a 56.66-percent ownership interest in three projects for geological surveying of promising offshore sectors in the Gulf of Guinea. In October 2007, after agreement on the transaction was okayed by the government of the Republic of Ghana, LUKOIL concluded the transaction.

Two sectors – blocks CI-101 and CI-401 – are located on the continental shelf of the Republic of Cote d’Ivoire and block Cape Three Points Deep Water – on the continental shelf of the Republic of Ghana. Like block CI-205 acquired by LUKOIL in 2006, all three sectors are situated in the deep-water zone of the Gulf of Guinea, 50 to 100 km away from the coast, at depths of 200 to 3,000 meters.

The total area of the blocks is about 15,000 km². The government-owned oil companies PETROCI Holding (blocks CI-101 and CI-401) and Ghana National Petroleum Company (block Cape Three Points Deep Water, Ghana) hold a 15-percent participatory interest. Geological exploration of blocks CI 101 and CI-401 is being carried out on the terms of a Production Sharing Agreement signed in September 2005. The exploration period is 5.5 years and provides for purchase and processing of the existing 2D seismic data, performance of additional 2D (already carried out) and 3D seismic surveys, as well as drilling of one exploratory well on each block. Geological exploration of the Cape Three Points Deep Water block is being carried out on the basis of the oil- and gasfield development agreement signed in August 2002. The exploration period is 7 years. In 2008, it is planned to drill one exploratory well on the block.

Good prospects are opening up for LUKOIL and other Russian companies on the African continent. One of the reasons is Russia’s substantial “trust capital” among many African countries. Back before the collapse of the USSR, Russian experts carried out a large amount of prospecting and geological exploration work on the continent. Over 50,000 specialists from African countries have now been trained in higher educational establishments of the USSR and Russia. Many of them hold key positions in government agencies and business in the African countries.

The Company is now paying attention to many African countries, particularly Angola, Somalia and Ethiopia, and their chief executives have recently expressed serious interest in LUKOIL participating in future projects in these countries. The likelihood of the Russian oil major taking part in new projects in Africa is very high, the Company’s positive experience in the production sphere and its active socially oriented business policy in the regions where it operates working in its favor in this respect.