No. 1, 2010

Interview of Sergey Sipunov, Director of the LUKOIL Overseas B.V. representative office in Venezuela

Political and economic cooperation between Russia and Venezuela has developed rapidly in the last few years. In the wake of intergovernmental ties, contacts between Russian and Venezuelan companies are being forged. LUKOIL in particular is stepping up its operations on the continent of South America.

Q: The creation, announced in Moscow in October 2008, of the National Oil Consortium (NOC), which includes five Russian companies aiming at joint operations in Latin America, was a landmark event. What will happen now to the projects begun by Russian oil companies in South America long before the consortium was formed?

A: This is probably more a question for the Russian companies' head offices. We are just the representative office of one of them and in no way do we go beyond our modest role. At the moment, we are operating on the premise that neither the 678 km2 Junin-3 block that LUKOIL has been deeply involved with since 2005, nor the TNK-BP certified Ayacucho-2 block fall within the NOC's geographical or resource purview. The possibility of transferring these assets to the consortium's area of operations can't be excluded, however. In this case, the resources of these blocks would be joined together in the enormous potential of working with Venezuela to bring LUKOIL, Gazprom Neft, TNK-BP, Rosneft, and Surgutneftegaz investors under the same umbrella. Russia's presence in the key sector of Venezuela's economy will grow even stronger. References to this can be found in Russian-Venezuelan documents and in statements by company CEOs.

As you know, however, oil producers are a law-abiding lot. We adhere strictly to both the spirit and the letter of today's laws.

Q: What is the upshot of all this?

A: Mainly that we as an individual company don't slow the pace of our planned ventures in Venezuela. As is well known, they are the result of the agreement signed in July 2008 between LUKOIL and PdDVSA for joint exploration of the Junin-3 block, which has to be done before we adopt a development scenario. We plan to approve our business plan on the basis of that survey. It is also going to be an important milestone in our combined efforts on the road to creating a joint venture.

Q: In other words, even today, against the backdrop of a rising tide of news about the consortium, the gradual development of LUKOIL's strategy for Junin-3 is continuing apace?

A: Yes, and all of our colleagues in the consortium are well aware of it.

Q: Does then company's Caracas office abide by this commitment as it did by the block's reserves estimation schedule some time ago?

A: Right; it would be entirely correct to say that developing the Junin-3 block was and still is a binding requirement under our contractual obligations, though it was noted with all due caution in an August 2005 letter to LUKOIL from Rafael Ramirez, Venezuela's minister of energy and oil, that the invitation we were sent to take part in the quantitative assessment and certification of the block's reserves gave us no guarantee that we would subsequently be allowed to join in the production phase of the project. We interpreted this initiative as a serious summons to collaborate.

Q: Would you remind us of how things unfolded?

A: In October of that year, our obligations with regard to the block were written into the agreements signed in Puerto La Cruz. By May 2006, the results of the initial phase of the estimation effort, printed in a 196-page report, had been highly appreciated by our partners. Next came the stratigraphic drilling stage, and after that, the collating of all our data. This helped the independent auditors from Ryder Scott to certify the block in May 2008, by order of Venezuela's oil and energy ministry. Having mentioned this on July 7 of this year in his interview with the RIA-Novosti news agency, LUKOIL President Vagit Alekperov emphasized: "We did the geological survey and certified the block's oil reserves. They total around 600 million tons."

Many of the approaches to the Junin-3 block have already been agreed to or at the very least discussed. In particular, these include figures, coordinated at the Intevep oil and energy institute, from running models that simulate production by the cold and hot methods, along with huge sections of the business plan dealing with ecology, infrastructure, and social responsibility.

Q: What impression did LUKOIL Overseas employees make during all these consultations, negotiations, and brainstorming sessions?

A: The opinion of our colleagues in the PdVSA as to the qualifications of our experts remains positive. The Company's good name, reputation, and prestige in Caracas are beyond all doubt. It would be no exaggeration to say our mobile team of experts turned out to be a model team. Along with the sterling work of our qualified experts in all sectors, Moscow remembered one other factor: virtually all our workers are fluent in Spanish. You won't see this kind of thing in every regional office. With all the LUKOIL Overseas employees working long-term in Caracas speaking the language of the country to perfection, the people here also take a friendly view of us. The effect of being able to communicate well, and of becoming a permanent new part of the living fabric of Venezuela has frequently been noted with pleasant surprise by the Russian ministers, State Duma deputies, and heads of oil and gas companies who come here. Venezuelan President Hugo Chavez himself has had nothing but praise for Russians. As our colleagues in the PdVSA say, we are clearly a model of business presence.

Q: How have LUKOIL Overseas' efforts to strengthen its image in Venezuela gone?

A: We've presented ourselves not so much as world-class oil producers, but as socially responsible people, and just as true friends of the country. The range of our charity projects and our partnership in campaigns on various levels speak for themselves. On the Orinoco, in the state of Delta Amacuro, we launched a flotilla of nine state-of-the-art ambulance motor boats. Over the last four years, they've saved hundreds of lives in the coastal villages of the Guarao Indian tribe. We expanded and modernized the Eusebia Balsa kindergarten in Sementerio, Caracas's poorest quarter.

LUKOIL Overseas helped Venezuela hold Russia Days, the main event of which was a program of visits by Metropolitan Kirill, elected Patriarch of Moscow and All Russia a short time later. We sponsored concerts dedicated to the 60th anniversary of the establishing of diplomatic relations and a number of other dates. These were just some of the events LUKOIL Overseas took part in. I'd add that in the local club of oil and gas players, the Venezuelan Hydrocarbons Association (AVHI), the voice of our company, as one member of the community of industry professionals, rings with confidence and dignity. This, I'm sure you know, is also important under conditions of the innumerable obstacles complicating the implementation of Caracas's strategic plans in the energy sector.

Q: In a word, even what sometimes seem individual LUKOIL Overseas projects in reality become calling cards for all of Russia.

A: We hope in every way that this is the case. That is why we are particularly proud of what we have already done and are ready to put it all in the national piggy bank of the NOC, provided we have the appropriate long-term contracts. Even though the forms of Russia's investment presence in Venezuela might change every now and then, the ultimate objective is still the same. The Magna Reserva project, which should raise the volume of the country's known oil reserves by 235 billion barrels thanks to the Orinoco Strip, is a high priority for all of us. So the different tacks and other course corrections for the big ship of Russia's oil companies en route to this promising region might sometimes vary, but the final port of destination remains unchanged: the Orinoco.