Archive

No. 3, 2012

VAGIT ALEKPEROV ,
PRESIDENT OF JSC LUKOIL

RETHINKING THE MOVEMENT VECTOR


In its third decade, LUKOIL intends to go over to intensive development based on the latest technologies

LAST YEAR, 2011, WAS A MOMENTOUS ONE for JSC LUKOIL. The Company entered its third decade and, in September, produced its 1.5-billionth ton of oil since its inception. For us, these are not just figures, these are the result of the work of several generations of oil workers and a guarantee of our continued active development.

TO RAISE WORK EFFICIENCY FUNDAMENTALLY

In 2011, we achieved record financial results with respect to a number of indicators. The LUKOIL Group's net profit reached $10 357 million, net profit per share went up by 21.4% and amounted to $13.3. We also achieved a record volume of free cash flow - $7240 million. Invested capital returns were at 14%. The Company's net debt fell by 28% or $2.5 billion. LUKOIL holds the most stable financial positions among the major Russian oil and gas enterprises.

For us, last year was a period for rethinking our development vector and determining in which direction to proceed in future.

For instance, many of the Company's fields are in the later stages of production, this having resulted, for the first time in the last 10 years, in a drop in production of hydrocarbons (by 4.4%). In response to this, we developed a new strategic program for 2012-2021. Accordingly, our main task is to be achieving stable dynamics of crude production, anticipated at a level of at least 3.5% a year. The main increase in production is expected within the framework of the promising projects in Iraq, Central Asia and the Caspian, as well as in the Yamal-Nenets Autonomous Area. Production increases will also continue in the traditional regions through development of reserves.

In order to achieve the targets set by the program, we need to raise work efficiency fundamentally. The problem lies not only in external factors, such as field ageing, lack of major new reservoirs, legislative barriers in obtaining licenses. These are all elements of extensive development - expansion. Yes, we will work actively in this direction, too - acquire assets, join new projects, work together with the government on eliminating restrictions on development of major fields and the shelf. But the resources for this development are not inexhaustible either, just like natural ones.

We are coming to a critical time: efforts must be concentrated on intensive development. First of all, more active use is required of new technologies. Since its inception, LUKOIL has spent considerable funds on strengthening its technological resources and has already achieved major successes in this direction.

The technological level achieved allows the company to operate under the most harsh conditions - both beyond the Arctic Circle and at huge depths in seas and oceans. We have ourselves implemented offshore projects in the Baltics, in the Barents Sea and the Caspian, in Ghana and Cote d'Ivoire. In connection with legislative restrictions, the LUKOIL Group is not currently able to apply its unique possibilities, its technological and financial potential in the Russian Federation. Even so, we hope that, in the near future, as a privately-owned Russian national company, we will receive equal rights with state corporations to develop the oil and gas resources on the territory of the country, including on the shelf.

THE DAILY SEARCH FOR BREAKTHROUGH SOLUTIONS

Intensive development is more, however, than just use of technologies. Approaches to management of business processes, to work with contractors and suppliers, to ensuring energy efficiency and economies of consumables, to reducing production and non-production expenditures - all these are in need of constant optimization.

As for investment, the biggest expenditures are earmarked for the program for the next three to five years. These are needed for initiating development of major promising fields. In particular, implementation of projects will be launched in Iraq (West Qurna-2), on the Caspian (Filanovsky oil field), in Western Siberia (Pyakyakhinskoye oil field), in Uzbekistan (Kandym group of fields) and in a number of other regions. A base will thus be established for stable growth of production for the next ten years.

In the Exploration & Production segment LUKOIL made substantial progress in 2011 with preparation for development launches at a number of new fields, and a total of 170 million barrels of oil equivalent of contingent resources were transformed into proved reserves as a result. Replacement of production by new proved reserves was more than 100% in 2011. In terms of proven reserves of hydrocarbons, the LUKOIL Group thus remains one of the leaders among both Russian and international companies.

Production of hydrocarbons in 2011 was 781 million barrels of oil equivalent, which is 4.4% less than in 2010. However, Company production levels should stabilize in 2012, including production levels in our main operating region of Western Siberia, and growth of hydrocarbon production is expected to resume beyond 2013. LUKOIL already has everything in place to ensure that this will happen, including a number of large and promising projects, unique experience of working in varied climate zones, and accurate geological and hydrodynamic models of practically all of our fields.

LUKOIL and Bashneft created a joint venture during the reporting year for development of the R. Trebs and A. Titov fields in Timan-Pechora. The fields fit well into the infrastructure, which LUKOIL has already created in that region. This synergy will give our partners and us the opportunity to develop these major fields in the most economically efficient way possible.

LUKOIL is continuing to develop actively its Refining & Marketing business segment. At the same time, the company is focusing its efforts on raising operating efficiency, increasing refining depth and the degree of conversion.

In 2011, the Group's refineries processed 1,073 thousand barrels a day. This is 3.1% less than a year before, but the drop in the parameter was envisaged by the company's plans and was explained by the Odessa Refinery being out of operation, a reduction in refinery loading in Bulgaria and Romania, as well as day-to-day planning for the purpose of minimizing operating losses.

There was a huge increase in consumption of gasoline in Russia during 2011 as a result of growth in car purchases. The Russian Government took various measures to address this situation, including introduction of the "60-66" system, which unifies export duties for light and dark petroleum products at 66% of the duty level for crude oil while keeping a higher rate of 90% for exports of gasoline. The new system encourages deeper refining of crude oil, which we have been working to achieve for a number of years and will continue to work towards in the future. The Company is planning to reduce output of dark petroleum products at its Russian refineries by 2.5 times in the next decade. Implementation of modernization projects should boost output of automotive gasoline at LUKOIL's Russian refineries by almost 1.5 times in the period to 2021 and refining depth at Russian facilities will approach 95%.

Work began in 2011 on construction of the first section of a gas-processing plant, which will be part of the new gas-chemical complex to be built at the site of LUKOIL's chemical subsidiary, Stavrolen. The complex will have an important role in achieving the task of maximum utilization of associated oil gas, as well as creating thousands of jobs and supporting growth of the entire economy in the surrounding region.

Much was also done during the reporting year in LUKOIL's Power Generation business sector. New generating capacities were brought into operation using high-tech equipment. The Group also began implementation of projects in the renewable energy sector. LUKOIL's plans in this sector include construction and operation of solar and wind generating stations in Bulgaria, Romania and Uzbekistan. In Bulgaria LUKOIL has already begun construction of its first large photovoltaic (solar energy) station with 1.25 megawatt capacity and with scheduled annual output of 1,500 megawatt-hours. A joint venture has also been set up with the company ERG for construction of wind farms in European countries where incentives for their construction have been established by law. If Russia passes a law to encourage development of renewable sources of energy, we are ready to implement similar projects in our own country.

As always, personal, environmental, industrial and social security remains high in the Company's list of priorities, and this is reflected in the Strategy, which has been prepared for the coming decade.

Planned measures include R&D work in the sphere of industrial safety and employee health, as well as training, instruction and raising the qualifications of LUKOIL employees. Improvements will be achieved through application of the latest information technologies and creation of a system for compulsory personnel training. LUKOIL strives to raise the living standards of its workers year by year, fully understanding that people are our most valuable asset and the key to our success. In 2011 LUKOIL was the winner of the "Best Corporate Project" nomination in the second national project competition, "Healthy Russia". The Competition was founded by the Russian Ministry of Health and Social Development as part of a Government program for promotion of healthy lifestyles among the Russian general public.

For our Company the coming decade will be one of daily invention and application of original, groundbreaking solutions in all business segments, as well as optimization of costs, new approaches to work with investors and shareholders, and fruitful cooperation with legislators in Russia and other countries where we do business.



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