No. 3, 2009

Oil of Russia magazine talks to Iskander Nasyrov, Vice-President of LUKOIL Overseas Holding for the Caspian region

In 1994, LUKOIL acquired its first assets on the Caspian - a 10% stake in development of the Azeri-Chirag-Gyuneshli field in Azerbaijan. In subsequent years, it actively expanded its presence in this strategically important region and today, Caspian projects constitute a key sphere of development in the overseas upstream sector for this Russian oil major.

Q: How would you assess the results of the work carried out by LUKOIL Overseas Holding in the Caspian region in 2008?

A: Quite positively. In 2008, we continued expanding production and developing current projects, and advanced actively in implementing the gas programs with respect to all Kazakhstan projects. Under the Kazakhstan Oil Act, oil production companies are prohibited from burning associated petroleum gas in flares, so all subsoil users have to introduce appropriate nature protection technologies.

The operating companies developing the Arman and Karakuduk fields in the Mangistau Region have fulfilled their programs of full associated gas recovery and started up corresponding equipment. On the other projects, we have received permission to extend the duration of the gas programs.

In 2008, we also managed to settle with the local authorities in Kazakhstan the question of raising the gas incineration charges. This issue was particularly urgent for the operating company Kazakhoil Aktobe, operating in the Aktyubinsk Region. A significant result for this company in 2008 was the signing of a contract for implementation of its gas program.

In addition, we are satisfied with the results of implementation of social projects in Kazakhstan. In particular, the Aray social partnership program that the Company is implementing in the Mangistau Region was highly appraised by the government authorities of Kazakhstan and allotted the Paryz award established by the country's President Nursultan Nazarbayev.

Q: What is the proportional contribution today of Kazakhstan and Azerbaijan projects to LUKOIL Overseas' aggregate hydrocarbon production figures?

A: The Kazakhstan and Azerbaijan projects account for over 95% of the Company's oil and gas condensate production, as well as over half the gas. In 2008, oil and gas condensate produced by LUKOIL Overseas amounted to 4.82 million tons. Kazakhstan's share is 4.47 million tons (92.7%) and Azerbaijan's - 146,700 tons (3%). Gas production amounted to 5 billion m³, Kazakhstan accounting for 42.1 % of this volume and Azerbaijan for 11.1%.

Q: What measures is LUKOIL Overseas taking to preclude any adverse impact by geological exploration and production operations on the Caspian's fragile ecosystem?

A: In all three sectors of the Caspian Sea (Atashsky, Tyub-Karagan and Yuzhny Zhambay - Yuzhnoye Zaburunye), LUKOIL Overseas is carrying out geological prospecting work in conjunction with partners. The Company's corporate policy is to minimize the impact of production activities on the environment and it is strictly observed in Kazakhstan.

The most vulnerable sector from the ecological point of view is the Zhambay - Zaburunye sector, which is located in a nature preserve zone in the northern part of the Caspian Sea. Alongside the general environmental requirements imposed during oil operations at sea in the Kazakhstan sector of the Caspian, additional restrictions have been introduced in this sector. In particular, during the period from April 1 through July 15, all production activities are completely prohibited there.

We abide strictly by the requirements set by the environmental legislation of the Republic of Kazakhstan. For instance, in accordance with the Environmental Code, business activities are prohibited in Kazakhstan without an assessment of their environmental impact. In this connection, our design documentation always undergoes government environmental examination. Public hearings are mandatory with respect to the EIA materials, the rights of citizens and public organizations to receive full environmental information thus being observed.

All work on the Caspian shelf is carried out on the basis of the zero discharge principle, that is, all industrial and waste water and waste in general from production and consumption is stored in special containers, taken to shore for burial or recycling. The Company imposes strict requirements on its contractors. Mandatory conditions applied in selecting them include international operation experience and use of state-of-the-art technologies and equipment precluding the possibility of polluting the Caspian.

Q: The LUKOIL management has repeatedly stressed the Company's interest in working on the shelf of Turkmenistan. Has any headway been made in this area?

A: Turkmenistan has considerable reserves of energy resources and is of great interest to LUKOIL. According to Western Geophysical (USA), for instance, forecast hydrocarbon reserves on the Turkmenistan shelf of the Caspian amount to 11 billion tons of oil and 5.5 trillion m³ of gas.

Two foreign companies, the British-Arabian Dragon Oil and the Malaysian Petronas, are currently conducting industrial oil production on the Turkmenistan shelf. Another two companies - Maersk of Denmark and Wintershall of Germany - are engaged in geological exploration. LUKOIL has made specific proposals to the Government of Turkmenistan concerning work on three promising blocks on the Caspian shelf. Our Company has considerable experience and modern technologies for developing Caspian hydrocarbon fields, since it has been engaged in developing the Russian sector of the Caspian for many years already. LUKOIL is prepared to speed up the negotiations and sign a contract.

Q: LUKOIL has traditionally engaged actively in charitable works in the regions where it operates. Which key charitable and sponsorship projects is LUKOIL Overseas implementing in the Caspian region?

A: We are particularly proud of the Aray (Dawn) social partnership program, which is a unique social initiative unseen anywhere else in Kazakhstan. Under the program, rural residents of the Mangistau Region compete for grants of up to $7,000 for developing small businesses and folk crafts. Our specialists carry out this work in a transparent and open manner, in conjunction with the local authorities and public nongovernmental organizations.

The Mangistau Region is the most western in Kazakhstan. This region is characterized by an unfavorable climate, vast semi-desert and desert areas, a low population density and difficult farming conditions. Rural areas have an underdeveloped social infrastructure and a high unemployment level. Implementation of the Aray project produced a multiplication effect - promoted rural business, created new jobs, increased the region's tax base, provided additional material support for families, and gave an impetus to development of culture and creativity.

Thanks to this program, new social infrastructure facilities have appeared in the rural regions of Mangyshlak - tailor's workshops, pharmacies, bakeries, hairdressers, vehicle service stations, computers centers, hothouses, cattle-breeding farms, fisheries, sports clubs, dance groups and drawing studios. And in the remote village of Kyzyl-Ozen, Kazakhstan's first rural puppet theatre has opened! Besides, it is noteworthy that it is the most socially vulnerable population strata - mothers with a large number of children, the unemployed, disabled and pensioners - who are most active within the scope of the Aray project.

Active charitable works and promotion of socio-economic development provide the Company with additional conditions for doing stable business. Let me note that the costs of charitable works in the Caspian region are direct, are not taken into consideration in production sharing agreements and are not obligatory. Our social programs are voluntary contributions to development of the regions in which LUKOIL Overseas operates.

Q: What are the long-term plans of LUKOIL Overseas in the Caspian region?

A: Under the majority of current production projects, we are continuing in our efforts to improve production management. Our plans envisage a further growth of oil and gas condensate production under these projects. With respect to large-scale projects currently in the growth stages - Karachaganak and Shah-Deniz - active work is under way with the government-owned oil and gas companies KazMunayGaz and SOCAR to elaborate variants for the further development of these projects.