Lukoil News - 2007
News summaries from company press releases and from unaffiliated news agencies are provided below. The summaries are sorted by month and are further categorized as upstream news, downstream news, and business/finance news.
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• Upstream news:
- On January 26th, 2007, several Russian and foreign mass media sources published the incorrect information regarding the progress of the project on the Block A in Saudi Arabia (the joint project of LUKOIL and the national company Saudi Aramco). Therefore, the Press Service of LUKOIL would like to state the following: The abovementioned information is misleading and is not expressing the official position of LUKOIL. As for now, the studies in the well that was drilled in the Block A have not been completed yet. The drilling results will be officially announced in the joint statement of the project participants in accordance with the applicable procedure. LUKOIL confirms its commitment to the spirit and letter of the agreements with the Ministry of Petroleum of the Kingdom of Saudi Arabia and Saudi Aramco (including the confidentiality agreements) and intends to apply best efforts for further efficient implementation of the joint project of the Block A exploration and development.
- LUKOIL Group (subsidiary companies and LUKOIL’s share in output by affiliated companies) total hydrocarbon production available for sale reached 2.14 mln boe per day in 2006, up 12.2% y-o-y. Crude oil output of LUKOIL Group totaled 1.93 mln bpd* (up 5.8% y-o-y) or 95.235 mln tons. LUKOIL subsidiary companies produced 91.537 mln tons of crude, up 6.2% y-o-y. Oil production from international projects increased by 46.2%. Average flow rate per oil well reached 11.23 tons per day, up 1.4% y-o-y. Natural and associated gas output of LUKOIL Group available for sale was 13.61 bcm, which is 2.4 times more than in 2005. Natural gas output available for sale was 9.82 bcm, which is more than 5 times as much as in 2005.
• Downstream news:
• Business/Finance news:
- OAO LUKOIL Board of Directors held a meeting in Moscow to summarize preliminary results of the LUKOIL Group activities in 2006. In his report, OAO LUKOIL President Vagit Alekperov among other things pointed out favorable pricing environment which has developed in 2006 in the international and domestic markets of oil and petroleum products. Thus, 2006 average annual price as compared to 2005 increased by 20% for Brent oil, by 15% for diesel fuel in Europe, and by 19% for gasoline in Russia (VAT and excise taxes excluded). On the other hand, the year saw ruble consolidation, significant price growth of industrial product manufacturers and OAO Transneft tariffs increase as well as heavier tax burden, export duties in particular. Average annual export duties rate increased by 51% for oil, by 55% for light petroleum products, and the rate of Mineral Extraction Tax grew by 21%.
- LUKOIL net income was $6,442 million in 9M 2006, which is an increase of 34.2% y-o-y. EBITDA was $10,178 million, which is 32.9% higher y-o-y. Revenue from sales rose by 27.9% to $51,459 million. The increase in net income was due to favourable market conditions, increase of hydrocarbon production and refinery throughputs, cost control, and refining margins growth. Growth of net income was held back by strengthening of the ruble against the dollar and growth of the tax burden. The Company’s tax expenses totaled $18.1 billion, up 36.8% y-o-y. Operating expenses rose by $943 million y-o-y. Main contributors to this growth were: real appreciation of the ruble against the dollar, which was 16.6% for the 12-months period ended September 30, 2006 (the effect of the appreciation exceeded $200 million); considerable change in operating expenses relating to crude oil and petroleum product inventory originated within the Group ($259 million); and increase in hydrocarbon lifting costs primarily due to the production volumes growth ($391 million). (In accordance with Company accounting policy, operating expenses associated with production of marketable products are accounted at the time of sale. Therefore, increase of product inventory entails proportional reduction of operating expenses, and vice versa.)
- ConocoPhillips, the oil company, said it planned to repurchase as much as $1 billion of its stock after it tightened capital expenditures in the wake of falling oil prices. About $750 million of stock will be bought in the current quarter, the company said. In December, ConocoPhillips cut its 2007 capital spending plan by 25 percent, to $12.3 billion, after last year's purchase of a stake in Lukoil of Russia. ConocoPhillips issued stock last year to help pay for its $35 billion acquisition of Burlington Resources in March, sending the diluted shares outstanding up 19 percent.
- The LUKOIL Group completed a deal to purchase a 34% stake in OOO Geoilbent. Thus, LUKOIL consolidated 100% of OOO Geoilbent. An appropriate approval by the Federal Antimonopoly Office of Russia was obtained on January 12, 2007. OOO Geoilbent develops the Severo-Gubkinskoye, Prisklonovoye and Yuzhno-Tarasovskoye fields in the Yamal Nenets Autonomous District and undertakes prospecting and exploration on a number of lisence blocks. As of the beginning of 2006 its recoverable reserves for the ABC1 category were 29.8 million tons of oil and 68 billion cubic meters of gas, and 43.9 million tons of oil and 19.6 billion cubic meters of gas respectively for the C2 category. Oil production in 2006 amounted to 1,201 thousand tons.
• Upstream news:
- LUKOIL Overseas (OAO LUKOIL 100% subsidiary) discovered prospective oil amounting to over 100 mln bbl in theMedina structure of the exploration Condor block (Colombia). It is the first discovery made by Russian oilmen in the Western hemisphere. At the present time preparation is underway to launch commercial production at the field. Meanwhile, the project has already started bringing financial return. Approximately 4 ths bbl of top quality Columbian Vasconia crude which was gained during test drilling at Condor-1 well, was sold to North American consumers. Condor project is being implemented by LUKOIL Overseas (70%) and Ecopetrol National oil company (30%). The agreement on Condor block was signed on April 7, 2002. It provides for exploration activities at the block for 6 years; in case of a commercial hydrocarbon discovery the agreement forsees field development for 22 years. LUKOIL Overseas Colombia Ltd. is acting as operator of the project. The total block area is 3,089 sq km. The block is situated in the foothills of the Andes in the western part of Llanos oil and gas basin and is one of the largest exploration blocks in Colombia.
- Followed the results of deep exploration drilling on Tukhman structure, Contract area Block A in the Kingdom of Saudi Arabia LUKSAR discovered hydrocarbon accumulations.
LUKOIL Saudi Arabia Energy Ltd. (LUKSAR) was established on March 01, 2004 with eqiuty participation of LUKOIL Overseas (80%) and its National partner, Saudi Aramco (20%). The office of LUKSAR is based in Al-Khobar (Eastern Province of Saudi Arabia). The term of Agreement between the Government of Saudi Arabia and LUKSAR for exploration periods and production period shall not exceed 40 years from the effective date March 07, 2004. The Contract area is located in the northern part of Rub Al-Khali, south of Al-Ghawar, which is a major oil field not only in Saudi Arabia but also on a global level. Total area of the Block A is approximately 30,000 square kilometers.
- During the visit of Russian President Vladimir Putin to Qatar, His Excellency, Abdullah Bin Hamad Al-Attiyah, the Chairman and Managing Director of Qatar Petroleum, and Mr. Vagit Alekperov, the President of LUKOIL, have signed a Memorandum of Understanding regarding cooperation in the area of exploration, development and recovery of oil and gas fields. Under the Memorandum of Understanding, the Parties will work together to identify frameworks to explore possible opportunities for mutually acceptable participation in oil and gas projects within the territory of Qatar.
• Downstream news:
- LUKOIL and Visa International completed the pilot stage of installing VISA card GPRS terminals at the Company’s filling stations. At present, GPRS terminals operate at 37 LUKOIL filling stations in Saint-Petersburg and Moscow. In two year’s time, LUKOIL plans to install such systems at over 500 gas stations in Moscow, Moscow region, Saint Petersburg, Leningrad region, Krasnodar territory and other cities with the population above 1 mln people, as well as on federal highways. GPRS technology makes the process of Visa payments quicker, more convenient and efficient. It accounts for 98% connection reliability. Earlier, in some areas transactions were not possible on account of wire lines unavailability or unfeasibility of their installation, today, however, wireless terminals allow for economic activity in such areas as well.
- Vagit Alekperov, President of OAO LUKOIL, attended a ceremony devoted to commissioning of a gas-filling station at OOO LUKOIL-Nizhnevolzhsknefteprodukt. The gas-filling station will provide the Company’s multifuel filling stations and the population of the region with a high quality liquefied petroleum gas (LPG). To start with, LPG bottles will be sold at 30 LUKOIL filling stations inVolgograd and Volgograd region. The LPG filling station is equipped with nine 20 cu m capacity tanks. Production capacity of the gas-filling station is 15,000 tn per year. Modern equipment made by the German company FAS Flussiggas-Aulaugeu GmbH is installed at the LPG filling station. A carousel-type unit enables filling of 100 bottles per hour. If required, its capacity can be increased to 350 bottles per hour. Liquefied gas is delivered to the filling station via pipeline from OOO LUKOIL-Volgogradneftepererabotka. The propane-butane mixtures used for utility and transport constitute over 60% of LPG produced by LUKOIL. Other LPG resources are used in petrochemical production.
- Vagit Alekperov, OAO LUKOIL President, and Valery Serdyukov, Leningrad region Governor, have signed a Cooperation Agreement in Saint Petersburg between the Government of the region and the Company.
Among other things, the document specifies the main trends of the parties’ cooperation for further development and upgrading efficiency of the fuel and energy complex in Leningrad region, its production capacity growth, steady fuel and lubricant supply of the region’s enterprises, institutions and community, improvement of environmental situation. The parties also agreed to cooperate in development of the railroad infrastructure near Vysotsk LUKOIL-II, a distribution and transshipment unit, to provide maximum freight turnover. Moreover, the parties plan to cooperate with federal and regional regulatory and inspection authorities to construct the fourth stage of the distribution and transshipment unit Vysotsk LUKOIL-II.
• Business/Finance news:
- The Board of Directors of OAO “LUKOIL” held on February 3, 2007 specified the list of candidates for election of the Board of Directors and Audit Commission at the Annual General Shareholders Meeting. The list of candidates was based on the nominees put forward by shareholders that own at least two percent of the voting shares. The following candidates were proposed to the Board of Directors by the shareholders: 1. Vagit Yu. Alekperov, President of OAO “LUKOIL”; 2. Igor V. Belikov, Director of the Russian Institute of Directors; 3. Mikhail P. Berezhnoi, General Director of the Non-State Pension Fund LUKOIL-GARANT; 4. Donald Evert Wallette (Jr.), President of Russia/Caspian Region, ConocoPhillips; 5. Valery I. Grayfer, General Director of OAO “RITEK”; 6. Oleg E. Kutafin, Rector of the Moscow State Academy of Law; 7. Ravil U. Maganov, First Executive Vice President of OAO “LUKOIL”; 8. Richard H. Matzke, former Vice Chairman of Chevron Corporation; 9. Sergei A. Mikhailov, General Director of OOO Upravlyayuschaya kompaniya Management-Consulting; 10. Nikolai A. Tsvetkov, Chairman of OAO URALSIB Management Commettee; 11. Igor V. Sherkunov, Chairman of the Board of Directors of ZAO Investitsionnaya Gruppa Kapital [Capital Investment Group]; 12. Alexander N. Shokhin, President of Russian Union of Industrialists and Entrepreneurs (employers).
- Igor Zaikin, Head of Department for Industrial Safety, Environment, Research and Technology of OAO LUKOIL, spoke at the conference titled ‘New Technologies to Solve Environmental Problems of the Fuel and Energy Industry’, which was held at Gubkin Russian State Oil and Gas University, Moscow. In his report, among other things he emphasized that the implementation of corporate programs aimed at providing environmental safety helped reduce environmental impact of LUKOIL companies considerably. For instance, specific indices of environmental impact for the Company are on average 1.5-2 times lower than industry average indices for the Russian Federation. Over the last decade, the use of associated petroleum gas has risen from 73% to 79%, over 4 mln tn of hazardous waste have been treated, over 8,380 km of pipelines have been overhauled, 2,752 slurry ponds have been liquidated, 3,270 ha of oil contaminated land have been resoiled.
• Upstream news:
- OAO LUKOIL has completed an evaluation and independent audit of its oil and gas reserves as at January 1, 2007. According to the data audited by Miller and Lents (USA), LUKOIL’s proved reserves as at January 1, 2007 are estimated at 20.36 billion barrels of oil equivalent (boe), including 15.93 billion barrels of oil and 26.60 trillion cubic feet of gas (20.33 billion boe as at January 1, 2006). In 2006 the Company had a 4.1% growth in proved reserves taking into account production. Thus, for seven years on end the Company has completely compensated the hydrocarbons production with the reserves additions. The evaluation of the reserves of OAO LUKOIL was performed in compliance with the US Society of Petroleum Engineers (SPE) and the World Petroleum Congress (WPC) requirements. The proved reserves included those volumes which are recoverable up to and past license expiry dates. The Company’s total reserves in all categories constitute 100% net reserves owned by the consolidated subsidiaries and net share in appropriate reserves of affiliates.
- Western Siberia (a 100% subsidiary of OAO LUKOIL) and OAO Aviadvigatel have signed a contract to construct a gas-turbine power station with the capacity of 72 MW to supply electric power to Vatyeganskoye oil field, one of the largest ones in the region. The power station is to be commissioned in December, 2007. Associated gas, produced in the Kogalymneftegaz fields, will be used as fuel. The power station consists of 6 gas-turbine power generating units.
• Downstream news:
- Vagit Alekperov, OAO LUKOIL President, Dmitry Kozak, Authorized Representative of the RF President in the Southern Federal District, Vladimir Katrenko, Deputy Chairman of the State Duma, Alexander Chernogorov, Governor of Stavropol Region and Yury Luzhkov, Moscow Mayor, attended an official ceremony in Budennovsk devoted to commissioning a polypropylene production unit at OOO Stavrolen, part of the LUKOIL Group.
The polypropylene production unit with the capacity of 120 thousand tons per year is the first facility of its kind in the LUKOIL Group petrochemical complex. Propylene, which is the main crude product for the unit, is produced at OOO Stavrolen and transferred to the unit via the pipeline. Design of the unit is based on the operational process Unipol which is developed by DOW Chemicals (USA). As compared to other methods of polypropylene production, this operational process is distinguished by higher environmental safety, since it contains no basic sources of air pollutant emission. The same technology will provide for production of high-impact and frost-resistant polypropylene, as well as different modifications used in medicine and agriculture. Polypropylene produced for general use will be delivered to Russian facilities to help manufacture fiber, pipes, mechanicals and consumer goods. The new unit will allow to satisfy the needs of the Russian market with modern brands of polypropylene.
- As reported earlier, on March 10, 2007 at 12:47 p.m. a fire broke out in OOO LUKOIL-Volgogradneftepererabotka ELOU-AVT-6 Unit (fuel production) and was brought under control 2 hours later. The incident resulted in no casualties. The environmental situation raises no concerns. The land was not contaminated. According to Vladimir Nekrasov, OAO LUKOIL First Vice President, who arrived at the refinery on the same day, equipment decompression could have caused the incident, which lead to immediate combustion of the petroleum products. Damages will be fully idemnified by insurance companies.
- Vladimir Nekrasov, OAO LUKOIL First Vice-President, and Erik Eberhardson, OOO GAZ Group CEO, have signed a cooperation agreement between the companies for 2007-2010. Among other things, the agreement stipulates that LUKOIL branded lubricants will be used for the first filling of GAZ automobiles. Under the agreement, the lubricants will become part of the engineering and design documentation. The parties also plan to step up cooperation in developing and certifying new types of motor, transmission and industrial oil to produce equipment for automobile assembly plants. GAZ Group will recommend LUKOIL branded lubricants to service stations and GAZ automobiles owners. OOO LLK-International (a 100% OAO LUKOIL subsidiary) will provide GAZ Group with systematic supplies of high quality lubricants to automobile assembly plants and service stations, and guarantee failure-free operation of conveyor, production equipment and service centers.
- Vagit Alekperov, OAO LUKOIL President, and Nikolai Shaklein, Kirov region Governor, have signed a cooperation agreement between the Government of the region and the Company. The main areas of cooperation were defined as expanding economic relations between business entities of Kirov region and the Company, supplying the region's consumers with high quality petroleum products, gas processing products and services, as well as construction of oil terminals and gas filling stations, rational use of natural resources and environment protection measures. In order to fulfill the above tasks, the Company will consider the possibility of placing orders for oil and gas production equipment at Kirov region enterprises, moreover it will finance complex environmental measures at its own sites, located in Kirov region. On its part, in compliance with the applicable law, the Government of Kirov region will support the Company in its effort to expand the network of gas filling stations using cashless settlement, including those which accept OAO LUKOIL-Inter-Card fuel cards.
• Business/Finance news:
- OAO LUKOIL Press Service reports that according to the resolution of the Russian Federation Government dated February 22, 2007 No.121, a number of senior officers of the Company and its subsidiaries were awarded the Russian Federation Government prize for science and technology 2006 and given the title of the Russian Federation Government Prize Winner for science and technology. The prizes were awarded for development and industrial implementation of efficient systems for geological and geophysical surveying and environmentally friendly technologies of offshore wells construction which allowed the Company to discover a new large oil and gas bearing subprovince in the Russian sector of the Caspian Sea and advanced preparation of the raw material base for oil and gas production.
- OAO LUKOIL Press Service is warning all interested parties against unscrupulous practices of Global Travels Limited, which is hiring employees to conduct work in the UK supposedly on behalf of OAO LUKOIL. In particular, Global Travels Limited is disseminating model contracts on OAO LUKOIL letterheads which are used illegally, and, indicating it a mandatory condition of employment, forces job applicants to provide advance payment for the services provided. Global Travels Limited sends contracts to job applicants via DHL or e-mail (firstname.lastname@example.org).
- OAO LUKOIL has mandated ABN AMRO and CALYON to arrange an unsecured US$ 250,000,000 Term Loan Facility (the ‘Facility’). The Facility is priced at LIBOR plus 0.40% per annum and has a five-year maturity. The Facility has been arranged to refinance the remaining part of the Company’s syndicated pre-export facility obtained in 2003. Thus, LUKOIL plans to restructure a part of its debt by replacing a relatively expensive secured facility with a less expensive unsecured one.
- In Kaliningrad OAO LUKOIL and OOO LUKOIL-Kaliningradmorneft senior management met local public organizations and representatives of legislative and executive authorities. The meeting was part of the Company’s second report on sustainable development for 2005-2006. The report is being prepared in conformity with the Global Reporting Initiative (GRI) ‘Sustainability Reporting Guidelines’ and the International Standard AA1000. The report will be published in September 2007.
• Upstream news:
- Vagit Alekperov, OAO LUKOIL President, and Vladimir Torlopov, Head of Komi Republic, signed Protocol No. 2 to Cooperation Agreement signed on November 13, 2006 by the Government of the Republic and the Company. The Protocol sets out main lines of joint cooperation in 2007. Among other things, in accordance with the reached settlement, in 2007 in Komi Republic OAO LUKOIL intends to provide crude production level of up to 8.1 mln ton and gas production level at 514 mln cu m. The plan for OOO LUKOIL-Ukhtaneftepererabotka is to produce up to 3.85 mln tn of petroleum products and to commission a tar visbreaking unit with the capacity of 800 ths tn per year. OOO LUKOIL-Severnefteprodukt will put 7 filling stations into operation. In addition to that, in 2007 the Company will hand over up to 50 ha of rehabilitated land to the state commission and process up to 50 ths cu m of oil sludge. OAO LUKOIL will also provide gas supplies for municipal utility use in Dzhebol field in the amount of up to .811 mln cu m and up to 150 mln cu m of oil gas to Pechora hydroelectric power station, and up to 14 mln cu m for housing and public utilities of Usinsk. The Company will also transfer an administrative building into ownership of Usinsk urban district to host a policlinic. The Company will complete development and reconstruction amounting to 12 mln rubles.
• Downstream news:
- Vagit Alekperov, OAO LUKOIL President, and Vladimir Yakunin, President of JSC Russian Railways, have signed a supplement agreement to the agreement on developing railway transportation infrastructure around LUKOIL-II distribution and transfer terminal on Vysotsky island (Leningrad region). Under the agreement, JSC Russian Railways will have reconstructed Vyborg traction substation, completed electric interlocking of Pikhtovaya railway station, installed automatic block system of the Vyborg-Pikhtovaya haul and performed other works by December 31, 2007, which would allow to increase petroleum cargo supply to the distribution and transfer terminal up to 12 mln tn per year. In 2005 freight handling capacity for the distribution and transfer terminal had been increased up to 7 mln tn per year, in 2006 it reached 9 mln tn per year.
- Vagit Alekperov, OAO LUKOIL President, and Oleg Chirkunov, Perm Region Governor, signed a Protocol of Coooperation between OAO LUKOIL and Perm Region for 2007. The document was signed in the framework of the Agreement on Economic and Social Cooperation concluded between the Company and the Region in December 2005 for 5 years. Alexander Konovalov, Plenipotentiary of the President in Volga Federal District, participated in the signing ceremony. In accordance with the signed document, among other things, OAO LUKOIL took up the responsibility to construct gas pipelines to supply natural gas from Kokui field for consumers in Chernushinsk and Kuedinsk regions and associated gas from Magovsk and Tsepelsk fields for consumers of Krasnovishersk. In addition to that, in 2007 the Company intends to increase supplies of liquefied automobile propane/butane mixture. The partes have also reached an agreement to continue to organize contests of social and cultural projects held by OOO LUKOIL-Perm, including financing of a grants fund in the amount of no less than 25 mln rubles. Besides, OOO LUKOIL-Permnefteorgsintez 2007 budget stipulated funding of a sports center Neftyanik construction in the amount of 100 mln rubles.
• Business/Finance news:
- Vagit Alekperov, OAO LUKOIL President, and Sergey Lavrov, Russian Foreign Minister, have signed a Cooperation Agreement between the Company and the Ministry. Among other things, the parties agreed on cooperation in protecting foreign economic and geopolitical interests of the Russian Federation by developing partnership with international organizations of the fuel and energy industry and foreign oil and gas companies.
- Vladimir Nekrasov, OAO LUKOIL First Vice-President, and Vasil Kayumov, OAO KAMAZ Executive Director, have signed a Cooperation Agreement between the Companies for 2007-2010. Among other things, the Agreement stipulates that LUKOIL branded lubricants will be used for the first filling of KAMAZ automobiles. Under the agreement, the lubricants will become part of the engineering and design documentation. The parties have also agreed to pursue a unified engineering policy and sustain partnership in terms of petroleum, oil, and lubricant quality.
- Final competitions of OAO LUKOIL’s Fourth Spartakiada Games were held in Kogalym (Western Siberia).Vagit Alekperov, OAO LUKOIL President, Alexander Filippenko, Governor of Khanty-Mansi Autonomous District Yugra, and Vladimir Loginov, Vice-President of the Russian Olympic Committee, participated in the official opening ceremony of the games. About 350 sportsmen from 9 teams created based on OAO LUKOIL geographic presence, including Western Siberia, the Center, the Volga region, the North, the North-West, Perm, the Urals, the South and Overseas.
- LLK International B.V. (OAO LUKOIL’s 100% subsidiary) joined ATIEL (Technical Association of the European Lubricants Industry). ATIEL is a non-profit organization of engine oil producing companies and vendors operating in Europe. In addition to LLK International, 16 largest global engine oil manufacturers including BPCastrol, Chevron, ExxonMobile, Total, Shell and others have already become members of the association.
- Vladimir Mulyak, former Director General of OOO LUKOIL-Komi, was appointed OAO LUKOIL Vice-President and Head of the Main Division for Oil and Gas Production. Azat Khabibullin, former First Deputy of OOO LUKOIL-Komi Director General, was appointed Director General of the subsidiary. Dzhevan Cheloyants, former Head of the Main Division for Oil and Gas Production, was appointed Head of OAO LUKOIL Main Technical Division, which will include Industrial Safety and Environment Department, Science and Technology Division as well as Power and Energy Division.
- Ravil Maganov, First Executive Vice-President of OAO LUKOIL, spoke at the Russia-Germany Energy Forum. The speech was focused on energy efficiency in the oil industry. It accounts for the need to maintain high production growth rates given scarce energy capacities and increased tariffs for electric power. The first step to reduce production energy intensity is to create an effective system of accounting and valuating energy resources consumption. The energy saving program of the LUKOIL Group for 2006-2010 developed based on energy audit of producing subsidiaries envisages saving 1.6 bln kilowatt/hours of electric power (which corresponds to daily consumption in Germany, for instance). Estimates suggest that the economic results of Program implementation will amount to 1.7 bln RUR (65 mln USD).
- Vagit Yu. Alekperov, President of OAO LUKOIL, directly and indirectly owns 16.899% of the shares in the Company as at April 16, 2007. Leonid A. Fedun, Vice-President of OAO LUKOIL, directly and indirectly owns 8.3% of the shares in the Company as at April 16, 2007. In accordance with the new rules shareholders are required to disclose changes in their holdings after they reach certain thresholds. Notifications should be made when the size of holdings reach, exceed or move below such a threshold.
- Due to the fact that on April 19, 2007 the Gazeta daily in the article Mitvol Will Audit the Auditors incorrectly refers to OAO LUKOIL as a client of DeGolyer & MacNaughton, the Press Service of the Company would like to make the following statement: OAO LUKOIL has never used the services of DeGolyer & MacNaughton.
- LUKOIL publishes 2006 consolidated US GAAP financial accounts: LUKOIL net income was $7,484 million in 2006, which is an increase of 16.2% y-o-y. EBITDA was $12,299 million, which is 18.2% higher y-o-y. Revenue from sales rose by 21.4%, to $67,684 million. The increase in net income was due to favorable market conditions, increase in hydrocarbon production and refinery throughputs, cost control, and refining margins growth. Growth of the net income was held back by strengthening of the ruble against the dollar and growth of the tax burden. The Company’s tax expenses totaled $24.4 billion, up 30.4% y-o-y. Operating expenses rose by $1,170 million y-o-y. Main contributors to this growth were real appreciation of the ruble against the dollar (which was 19.3% for the 12-months period ended December 31, 2006) and increase in hydrocarbon output and refinery throughputs.
- The Board of Directors took resolutions related to holding of the Annual General Shareholders Meeting of OAO LUKOIL. In particular, it was resolved that the meeting shall take place on 28 June 2007 at 11:00 am at the Company’s headquarters in Moscow. The record date for the list of the shareholders entitled to participate in the Annual General Shareholders Meeting shall be 11 May 2007. The Board of Directors intends to recommend that dividends for the 2006 financial year be paid in the amount of 38 roubles per ordinary share (as opposed to 33 roubles in 2005). The shareholders will also elect the Board of Directors of OAO LUKOIL, consisting of 11 memebers, from the list of candidates approved by the Board of Directors of OAO LUKOIL on February 3, 2007
- OAO LUKOIL has successfully raised the syndicated unsecured US$ 250,000,000 Term Loan Facility. The Facility is arranged by ABN AMRO and CALYON and joined by other major international banks. The Facility pays a margin of 0.40% per annum and has a five-year maturity. It was pre funded by ABN AMRO and CALYON on April 23d and utilised same day to refinance in the entire amount the remaining part of LUKOIL’s US$ 765,000,000 syndicated pre-export facility arranged in 2003. The syndication was positively received in the market and closed more than twice oversubscribed. This represents a significant endorsement from the market of the strength of the LUKOIL credit for what is the lowest-priced 5-year unsecured syndicated loan to a Russian corporate to date. OAO LUKOIL elected not to increase the Facility amount and instead scaled back the banks’ commitments.
- OOO LUKOIL-Volgogradneftepererabotka AVT-6 unit which had suffered fire damage on March 10 2007 was put back into operation. The first lots of petroleum, kerosene, diesel fuel and fuel oil have already been delivered. As reported earlier, the fire was extinguished at the unit within 2 hours. The incident resulted in no casualties. The land was not contaminated. Equipment decompression caused the incident which lead to self-combustion of the petroleum products. The damage will be fully indemnified by insurance companies.
- A new wave of foreign competitive pressure is beginning to ripple through the United States economy, from companies in emerging markets like Brazil, Russia, India and China. These companies are seeking to become world-spanning multinationals
• Upstream news:
- LUKOIL Group total hydrocarbon production available for sale reached 2.24 mln boe per day in the first quarter of 2007, up 7.3% y-o-y. Crude oil output of LUKOIL Group totaled 2,005 th. bpd* (up 6.5% y-o-y), or 24.431 mln tons. LUKOIL subsidiary companies produced 23.755 mln tons of crude, up 7.4% y-o-y. Average flow rate per oil well at LUKOIL fields in Russia increased from 11.15 to 11.25 tons per day. Natural and associated gas output of LUKOIL Group available for sale was 3.58 bcm, which is 14.1% more than in the first quarter of 2006. Natural gas output available for sale was 2.54 bcm, up 16.6% y-o-y. LUKOIL refined 13.18 mln tons of crude at the Company’s owned and third-party refineries, which is the same as in the first quarter of 2006. Throughputs at the Company’s own refineries grew by 0.6% y-o-y, to 12.13 mln tons. Throughputs at LUKOIL’s own refineries in Russia increased by 5.5% y-o-y whereas throughputs at own foreign refineries decreased. The decrease of throughputs at the foreign refineries was due to a planned upgrade of the Burgas refinery and optimization of seasonal capacity utilization of the Ploiesti refinery.
• Downstream news:
- LUKOIL has started to recover losses from OAO Kapital Strakhovanie for the fire outbreak accident at ELOU-AVT-6 unit (fuel production) at OOO LUKOIL-Volgogradneftepererabotka which occurred on March 10, 2007.
• Business/Finance news:
- Standard & Poor's, a rating agency, has upgraded OAO LUKOIL’s long-term issuer credit rating and ratings of all its liabilities from BB+ to BBB-. The outlook is Stable.
- Vagit Alekperov, President of OAO LUKOIL, and Rustam Minnikhanov, Prime-Minister of Tatarstan Republic, signed a cooperation agreement between the Government of the Republic and the Company. Among other things, the agreement implies cooperation of the Parties aimed at improving efficiency of Tatarstan fuel and energy complex, providing mineral resource base development, as well as ensuring an efficient use of natural resources and regular supply of fuel and lubricants to companies, institutions and community of the Republic. The parties intend to cooperate in the sphere of geological exploration of reserves, hydrocarbon production and refining, development of petroleum products supply system as well as production and social infrastructure.
- Vagit Alekperov, President of OAO LUKOIL, and Jean Lemierre, President of the European Bank for Reconstruction and Development, signed an unsecured US$ 300 mln loan agreement to finance the LUKOIL Group’s Environmental Safety Program for 2004-2008. The syndicated loan consists of two tranches, US$ 150 mln each. The first tranche is provided by the European Bank for Reconstruction and Development at Libor +0.65% per annum for 10 years (A Tranche). The second tranche is provided by the commercial bank group at Libor +0.45% per annum for 7 years (B Tranche). CALYON Bank is lead arranger and book runner of the B Tranche. The attracted loan is the most extended long-term unsecured syndicated loan ever obtained by a private Russian company. LUKOIL also managed to reach a new level of the credit resources cost available to the Company on a long-term basis.
- OAO LUKOIL Board of Directors held its meeting in Astrakhan. In accordance with the Federal Law of the Russian Federation for Joint-Stock Companies and in compliance with the Company Charter, 2006 Annual Report passed preliminary approval of the Board. The document is to be approved by the General Shareholders Meeting scheduled for June 28, 2007. At the meeting reports on activities of the Board of Directors, Audit Committee, Strategy and Investment Committee and HR and Compensation Committee were presented. Performance of the Board of Directors and its Committees was recognized as positive. The Board of Directors also reviewed Strategic Development Program of the LUKOIL Group for 2008-2017 aimed at ensuring dynamic production growth and hydrocarbon treatment with strict control over expenses and capital investment. The Program also includes a number of proposals aimed at low profit oil fields development optimization. In general, Strategic Development Program of the LUKOIL Group for 2008-2017 sets the following priorities: asset portfolio optimization; capital investment discipline; asset diversification; oil refinement capacity increase; speeding up development of natural gas reserves and further processing; power consumption reduction; labor productivity increase. The Board of Directors also reviewed the Company’s operating results and prospects in the Caspian region. Among other things, it was noted that the Company’s Caspian project is unparalleled in Russia’s modern subsurface use practice in terms of research, geological prospecting efficiency and importance of hydrocarbon reserve discoveries. Over a short period of time, starting from 1995, the Company has thoroughly studied the whole Caspian Sea region (its Russian sector) from the geological point of view, its total area equaling 63,000 sq km, without attracting state funding. As a result, a 100% confirmability of oil-and-gas content in the discovered structures has been reached, while prospect drilling efficiency amounted to 17.2 th tons per 1 drilled meter. Cost of 1 incremental ton of fuel equivalent was significantly lower that similar indicators of some of the world’s leading companies. In general, resource base assessment suggests that in the Russian sector of the Caspian Sea a new oil and gas subprovince was discovered. Over a short period of time a large resource base for oil and gas production has been prepared in the region which is of particular strategic importance to Russia. Exploratory drilling was performed at 6 structures, including Khvalynskoye, 170 km , Shirotnaya, Sarmatskoye, Rakushechnoe, Yuzhno-Rakushechnoe. Reserves at the discovered fields in the proved, probable and possible categories were estimated at 1.87 bln barrels of oil and more than 17 trillion cu feet of gas as of the end of 2006. Basic oil reserves (around 70%) are concentrated in V. Filanovskogo field, the largest one to be discovered in the country in the recent 20 years, while major gas reserves (around 40%) are concentrated in Khvalynskoye field. Hydrocarbon reserves of Khvalynskoye, 170 km, Yu. Korchagina, Rakushechnoe, Sarmatskoye and V. Filanovskogo have been examined and registered by the State Reserves Committee of RF Ministry of Natural Resources. Preliminary estimation suggests that state revenue from development of these fields will account for 1.1 trillion rubles (approx. 40 bln US dollars in current prices). In addition to the discovered fields, 7 new structures have been discovered and prepared for deep drilling in the North and Middle Caspian water area. Atash structure located in Kazakhstan water area in Atashsky license area has been prepared for deep drilling. In the coming five years around 20 prospect and exploratory wells are expected to be drilled in this area, a considerable scope of seismic work will be accomplished. Engineering solutions to develop fields and structures of the Caspian Sea are elaborated with account of natural, climate and environmental factors, such as ice conditions, seismic activity, conservation areas, gas flaring ban and zero discharge principle which complies with the Company’s environmental policy. Development of fields and structures of the Caspian Sea would require quite a large scope of construction and installation work. For these purposes, approximately 3,800 additional work places will be created in shipbuilding and other enterprises of the region. In addition to that, to run both onshore and offshore development companies, over 3,000 qualified specialists will be required. One of the key objectives of the program aimed at developing hydrocarbon resources of oil, gas and gas condensate fields of the Caspian Sea is setting up a production which would ensure deep treatment of produced resources to manufacture petrochemistry products, so highly demanded in the market.
- Vagit Alekperov, President of OAO LUKOIL, and Aleksander Dyukov, Acting President of OAO Gazprom Neft, signed a Memorandum of Understanding between the companies. Inter alia, the parties agreed upon joint implementation of oil and gas projects in the Russian Federation, which would cover the following: acquisition of rights related to subsoil use; geological study of jointly acquired reserves; exploration and production of hydrocarbons at jointly acquired fields; field construction, implementation of infrastructure projects, including construction of new and/or improvement of existing infrastructure facilities; transportation and marketing of produced hydrocarbons. To accomplish this, OAO LUKOIL and OAO Gazprom Neft intend to establish a joint venture in the form of a limited liability company, which is going to hold licenses for the relevant license areas. The parties will have the following interest in the charter capital of the Joint Venture: OAO LUKOIL will account for 49%, OAO Gazprom Neft will own 51%. The JV is to be managed on a parity basis.
- LUKINTER FINANCE B.V., an indirect wholly-owned subsidiary of OAO LUKOIL, has paid a semi-annual interest on Convertible Eurobonds. The aggregate amount of coupon payment totaled USD 65,467.50. The Bonds due in 2007 were issued in November 2002 and guaranteed by OAO LUKOIL. Total size of the issue is USD 350,000,000.
- Vagit Alekperov, President of OAO LUKOIL, Manfred Warda, Secretary General of IÑÅÌ (International Federation of Chemical, Energy Mine & General Workers' Unions), and Lev Mironov, Chairman of NGSP Russia (Russian Oil, Gas and Construction Workers’ Union) signed a third global (framework) cooperation agreement. The first global agreement with ICEM and NGSP was signed in May, 2004. At present, LUKOIL is the only Russian company to have signed such an agreement. By signing the agreement, LUKOIL committed itself to the UN Global Initiative as well as to the basic principles in the field of labor and environment, stated in UN and International Labor Organization conventions. In conformity with the agreement, LUKOIL plans to adhere to the principle of priority of employee health and safety over their production activity results.The Company also shares general responsibility for the impact its production activities may have on the environment and community.
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- Vagit Alekperov, OAO LUKOIL President, and Kirsan Ilyumzhinov, Head of the Republic of Kalmykia, signed a cooperation agreement between the Government of the Republic and the Company. Among other things, the agreement stipulates cooperation between the Parties on exploration and development of new oil and gas fields, production and treatment of crude hydrocarbons, development of petroleum product supply system, technical and social infrastructure. LUKOIL and the Government of the Republic of Kalmykia have also agreed to pursue joint research-and-engineering policy on integrating state-of-the-art equipment and technologies for hydrocarbon production, transportation and refining. The Government of Kalmykia intends to assist LUKOIL in providing land plots for construction of production facilities, including complex gas treatment plants in Chernozemelsky District. In accordance with the agreement, LUKOIL Group companies will supply petroleum products to wholesale and retail markets of the Republic of Kalmykia, and provide all the necessary equipment, in particular, by constructing new sites and reconstructing existing retail outlets.
- Vagit Alekperov, OAO LUKOIL President, and Yury Neyolov, Governor of Yamal-Nenets Autonomous District (YNAD), signed a cooperation agreement between the Administration of the District and the Company.
Among other things, the agreement stipulates creating favorable environment for geological survey, stepping up investments into exploration and prospecting of oil and gas fields, increasing crude hydrocarbon output, associated gas recycling capacities, as well as introducing cutting-edge technologies for oil and gas exploration, production, treatment and refining. The parties have also agreed to cooperate on implementing YNAD programs on environmental protection and stewardship of natural resources. The Agreement suggests that in 2007 OOO LUKOIL-West Siberia will spend RUR 32 mln on social projects. The parties also intend to cooperate on HR management issues, outsource contracting services to local companies, facilitate development of physical training and sports, promote mass, children, and professional sports, organize mass sports competitions, including international events, in YNAD, and implement YNAD large-scale cultural projects. In addition to that, OOO LUKOIL-West Siberia transfers Kar Nat resort located in Tarko-Sale into ownership of Purovskiy region administration on a gratis basis.
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- Vagit Alekperov, President of OAO LUKOIL, and Vasily Tarlev, Prime-Minister of the Republic of Moldova, attended an official ceremony devoted to commissioning the Company’s upgraded fuelling facility in Kishinev International Airport.
- LUKOIL held an international integrated exercise on tanker incident response in vicinity of OAO RPK-Vysotsk LUKOIL-II oil terminal (Leningrad region). Representatives of the Federal Agency of Marine and River Transport, State Maritime Administration of Russia, the Northwestern Regional Center of the EMERCOM of Russia (the Ministry for Civil Defense and Disaster Relief), Federal Service for Supervision of Natural Resource Usage, as well as special Finnish vessels Íylje and Seili attended the exercise. Representatives of public organizations were present, the event was covered by mass media.
- LUKOIL had a command and staff training on oil spill response in the vicinity of Varandey Oil Export Terminal (‘VOET’). Main goals of the training are: VOET staff drills for regional oil spill containment and response, estimation of the terminal equipment and opportunities for attracting regional forces and facilities in compliance with the Regional Emergency Oil Spill Response Plan in the Western sector of the Arctic.
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- An exhibition displaying work of I’m Drawing the Kremlin winners, a children’s drawing contest, was open in the Great Hall of the Armory Chamber of the Moscow Kremlin Museums today. The contest is held as part of a joint regional cultural and educating program of LUKOIL and the Moscow Kremlin Museums.
- OAO LUKOIL placed its Eurobond issue for the total amount of US$1bn split equally between 10-year and 15-year tranches. The 10-year US$500mn issue priced with a coupon of 6.356% at a spread of +145bps vs US Treasuries. The 15-year US$500mn issue priced with a coupon of 6.656% at a spread of +175bps vs US Treasuries. The issue was lead managed by Credit Suisse and Deutsche Bank. Application has been made to list the issue on the London Stock Exchange. The new issue is the highest-rated private corporate bond offering from Russia to date. After a successful international roadshow, the offering was well received by the market and achieved broad and diversified global distribution. Strong name recognition as well as strong demand for LUKOIL paper attracted orders over US$ 6 bn.
- LUKOIL completed creating a global cash management system as part of the Group’s Centralized Treasury. While creating the system, activities aimed at enhancing efficiency of cash resources use, improvement of liquidity planning, centralization of exchange transactions and financial market operations were held. Contracts with ZAO Citibank, Citibank N.A. and ZAO ABN AMRO Bank on complex banking using banking technologies of Citibank were also signed.
- LUKOIL used US$ 1 billion raised on June 07, 2007 from the first Eurobond issue to refinance a significant part of the Syndicated Term Loan Facility worth US$ 1.9 billion obtained in December 2005.
- LUKOIL publishes 1Q 2007 consolidated US GAAP financial accounts. LUKOIL net income for the first quarter of 2007 was $1,299 million, which is a decrease of 23.1% y-o-y, but an increase of 24.7% q-o-q. EBITDA was $2,432 million, which is 13.3% lower y-o-y and 14.7% higher q-o-q. Revenue from sales was $15,652 million which is 4.7% higher y-o-y. The Company’s results were affected by decrease in oil and petroleum product prices on international markets, growth of Russian export tariffs, strengthening of the ruble against the dollar in real terms and increase in transportation tariffs. However, negative impact of those factors was partly offset by expansion of Company’s activities and business optimization. Despite decrease in oil and petroleum products prices, the Company’s tax expenses increased by 9.8% y-o-y and totaled $5.6 billion.
- OAO LUKOIL held its Annual General Shareholders Meeting in Moscow today to approve 2006 annual report and financial statements based on the fiscal year results. The shareholders approved dividend distribution based on the Company’s performance in 2006 in the amount of 38 rubles per ordinary share (33 rubles in 2005). Amendments to the Company’s Charter and to Regulations on the Procedure for Preparing and Holding the Annual General Shareholders Meeting were ratified at the meeting. The meeting also approved a resolution on authorized ordinary shares in the amount of 85 mln shares, with the nominal value of 0.025 RUR each. The resolution enables the Board of Directors to decide whenever necessary upon the issue of additional shares to be used in asset acquisition transactions. The meeting also approved OAO LUKOIL’s membership in the SWIFT Russian National Association. The Board of Directors was elected by the shareholders.
- Chairman and chief executive of ConocoPhillips, James J. Mulva said, it’s unfortunate that the economic development and particularly energy development between Russia and the United States have not developed more quickly. Because it’s logical that Russia, with a great deal of natural resources, and a North American market that needs energy, that we should be working more closely to develop energy investment. For ConocoPhillips, our investment with Lukoil — as a 20 percent owner of Lukoil — has been a very good experience. Everything that Lukoil has indicated that they would do, as well as the Russian government, when we made the investment, has come to pass exactly as they have indicated. We look for the opportunities to invest more with Lukoil and Russian companies inside and outside of Russia, both upstream and downstream.
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- Kaliningradmorneft steelworks, a fabrication facility for metal structures used in construction, started loading onto sea-going barges a fixed offshore ice-resistant off-loading terminal (FOIROT) meant for the Varandey Oil Export Terminal (VOET). The FOIROT is an important element of the VOET, which is being constructed by LUKOIL on the Barents Sea coast in the Nenets Autonomous District. The fabrication and assembly of the FOIROT at the facility is reported to have lasted for 15 months. The VOET is designed for sea export of oil produced by LUKOIL in the north of Nenets Autonomous District. Currently, the Company is increasing the terminal capacity up to 12 million tons of oil per year. It is expected that after capacity of the terminal has been increased, the oil will be exported via the shortest route, including to the North American market. The upgraded VOET is to be commissioned in the fourth quarter of 2007.
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- LUKOIL has completed certification audit of its Unified Corporate Safety Management, Labor and Environmental Protection System (HSE System) to meet ISO 14001:2004 and OHSAS 18001:1999 standards. In 2001, LUKOIL became one of the first companies in Russia to undergo a certification procedure to comply with ISO 14001:2004 and OHSAS 18001:1999 standards. It was then that the Company resolved to certify its Unified Corporate HSE System. Having completed certification of its subsidiaries in 2006, LUKOIL and its subsidiaries underwent а certification audit aimed at certifying its existing Unified Corporate HSE System to meet ISO 14001:2004 and OHSAS 18001:1999 standards.
- Lukoil's chief executive, Vagit Alekperov, bought 18.35 million shares in the company for $1.4 billion. A board member, Nikolai Tsvetkov, sold 16.1 million shares for $1.23 billion. The purchase raises Mr. Alekperov's holding in Lukoil to 19 percent, closing in on ConocoPhillips's 21 percent stake. Mr. Alekperov and his deputy, Leonid Fedun, had earlier raised their combined stake to more than 25 percent, enough to control strategic decisions.
- The Board of Directors of OAO LUKOIL held a meeting in Moscow to resolve a number of issues related to corporate governance.
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- LUKOIL installed a base leg of the fixed offshore ice-resistant off-loading terminal (FOIROT) on the bottom of the Barents Sea meant for the Varandey Oil Export Terminal (VOET). The FOIROT is designed to fill reinforced ice-breaking tankers (DWT 70,000 tons). The FOIROT is a structure with a height of over 50 metres and a total weight of over 11 thousand tons which consists of a base leg with an accommodation module, a mooring cargo handling system (MCHS) with a jib, and a helicopter pad. Two barges were used to deliver the FOIROT to the site of installation. The project suggests that the FOIROT base leg will be secured to the seabed by 24 piles at the depth of 17 meters, 22 km offshore. Then the MCHS will be mounted on the base leg. The FOIROT will be connected to two underwater pipelines, 820 mm in diameter, whereby the oil will be fed from onshore tanks. After upgrading, the onshore tank capacity of the VOET will amount to 325,000 cu m
• Business/Finance news:
- LUKOIL Group (subsidiary companies and LUKOIL’s share in output by affiliated companies) total hydrocarbon production available for sale totaled 2.21 mln boe per day in the first half of 2007, up 92 th. boe per day, or 4.3%, y-o-y. Crude oil output of LUKOIL Group totaled 1,981 th. bpd* (up 4.1% y-o-y), or 48.53 mln tons. LUKOIL subsidiary companies produced 47.24 mln tons of crude, up 5.2% y-o-y. Natural and associated gas output of LUKOIL Group available for sale was 7.03 bcm, which is 6.1% more than in the first half of 2006. Throughputs at the Company’s own refineries in Russia grew by 10.1% y-o-y, to 20.61 mln tons, whereas throughputs at own foreign refineries decreased by 1.5%. The decrease of throughputs at the foreign refineries was due to a planned upgrade of the Burgas refinery. LUKOIL refined 25.15 mln tons of crude at the Company’s own refineries in Russia and abroad, up 7.8% y-o-y.
- LUKOIL became the first Russian non-financial company to become member of the Derivatives Market on Moscow Interbank Currency Exchange (MICEX). OAO LUKOIL is the largest Russian foreign exchange market player. LUKOIL’s monthly operations in Russia exceed 2 bln USD.
- LUKOIL has completed the implementation of a global planning system based on SAP software solutions. This system includes planning and budgeting modules, both short and long term, tools for assessment and approval of the investment projects, and for elaboration of the LUKOIL Group Investment Program. The planning system encompasses over 70 LUKOIL Group Russian and overseas companies operating worldwide. The system allows 2,000 employees from the Company’s subsidiaries and the Corporate Center to share a common information space for planning and budgeting, using unified templates and algorithms. It also assesses the feasibility of investment projects in compliance with the corporate standards and methodology. The system provides for coordination and approval of separate investment projects, investment programs and business budgets, within approved policies and procedures. A common database for investment projects, approved plans and budgets serves the basis for further monitoring of the implementation of these projects, and for operational analysis of the subsidiaries’ performance.
- Vagit Alekperov, President of OAO LUKOIL, and Evgeny Primakov, President of the RF Chamber of Commerce and Industry (the CCI), signed an information cooperation agreement between the Company and the CCI. Among other things, the document implies that the RF CCI as an internationally recognized organization will support LUKOIL in establishing business relations with foreign partners, mixed chambers of commerce and business councils of foreign countries. Another important area of cooperation will be aimed at creating a favorable legal environment for entrepreneurial activities. The Russian CCI has accumulated a vast scientific and expert potential, as well as a set of tools for efficient lawmaking at executive and legislative level. On its part, LUKOIL will provide the CCI with advisory support and expertise on the global oil and gas market development, on export of hydrocarbon, Russia-produced petroleum products and petrochemicals.
- The Board of Directors of OAO LUKOIL held its meeting in Moscow to sum up preliminary results of the LUKOIL Group performance in the first half of 2007, as well as to discuss budget performance and investment program progress report in 2007. As was reported earlier, the aggregate oil production of the LUKOIL Group (including production of subsidiaries and its share in the production of affiliated organizations) was 48.5 mln tn, including 45.6 mln tn in Russia , and 2.9 mln tn from foreign projects. As compared to the first half of 2006, oil production rose by 3.9%, including 3.7% Russian output growth and 8.2% foreign projects output growth.
• Upstream news:
- LUKOIL and PERTAMINA, the state petroleum company of Indonesia, have signed an agreement on joint study of several prospective blocks in the Republic of Indonesia. The agreement was signed in Jakarta as part of President of Russia Vladimir Putin’s visit to the Republic of Indonesia. The document signed enhances cooperation of LUKOIL and PERTAMINA that started in April this year with the signing of the Memorandum of Understanding covering issues of cooperation in the area of exploration and development of oil and gas fields. The agreement covers activities for the next 2 years and provides for the establishment of a Steering Committee and a joint technical group to study several prospective offshore and onshore areas in various regions of Indonesia. The purpose of the study is to evaluate and interpret data for further exploration and development of oil and gas blocks.
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- LUKOIL has published its Sustainability Report for 2005-2006. The document contains comprehensive information on key areas and operating indicators of the Company's performance, social and environmental activities in the regions of its presence: Kaliningrad region, Western Siberia, Perm, Volgograd, Astrakhan and Nizhniy Novgorod regions, Komi Republic and Nenets Autonomous District.
- Vagit Alekperov, President of LUKOIL, and Jiang Jiemin, President of the Chinese National Petroleum Corporation (CNPC), signed a Strategic Partnership Agreement in Beijing. In accordance with the document signed, the companies intend to expand the interaction in the existing projects, as well as to co-operate in prospective projects of oil and gas production, development, refining and production of petroleum products in third countries. The parties will also discuss the opportunities of cooperation in the area of oil and natural gas supplies to China and refining of hydrocarbons within the country. In order to implement the Agreement, the parties will create a Joint Coordination Committee within two weeks. The Committee will meet at least twice a year to discuss and make decisions on development of an integrated plan and to draft agreements and relevant work plans for specific projects. Within the Committee, working teams can be created for resolving specific issues of joint activities. The parties will organize regular meetings of their managers, hold teleconferences, organize mutual visits of specialists and develop cooperation in the area of advanced training and continuing education of employees. At present, LUKOIL and CNPC are effectively working together in two joint projects in Kazakhstan. The companies are developing Kumkol field in Kyzylorda Region on a parity basis. The total production volume in 2006 was 3.4 million tons of oil and 119 cubic meters of gas. In North Buzachi project (Mangistau Region) LUKOIL has a 25% interest and CNPC has a 50% interest. In 2006 the production at the field amounted to 1.3 million tons of oil. Each company also has a 20% interest in the international operating consortium for exploration in the Uzbekistan part of the Aral Sea where maritime and land seismic 2D stage is expected to start in the nearest future.
- LUKOIL publishes consolidated US GAAP financial accounts for the second quarter and the first half of 2007. LUKOIL net income in the second quarter of 2007 was $2,517 million, which is an increase of 8.4% y-o-y and of 93.8% q-o-q. The Company has managed to achieve all-time record results despite less favorable price environment. Net income in the first half of 2007 was $3,816 million, EBITDA was $6,349 million, revenue from sales amounted to $35,781 million which is 7.7% higher y-o-y. The Company’s results were affected by decrease in oil prices on international market, strengthening of the ruble against the dollar in real terms and increase in transportation tariffs. However, negative impact of those factors was partly offset by expansion of Company’s activities and business optimization as well as by minor decrease in export tariffs and mineral extraction tax. Despite decrease in oil prices and tax rates, the Company’s tax expenses in the first half of 2007 grew by 6.6% y-o-y to $12 billion due to increase in export volumes and retail sales of petroleum products.
- LUKOIL ranked 6th among European, Middle East and African companies and 11th among global companies in the American energy agency Platts 2007 ‘Top 250 Energy Companies’ List. All companies were ranked by four main criteria, including asset value, revenues, profits and return on invested capital. Valuation was performed based on Standard & Poor’s database which is, like Platts, a unit of The McGraw-Hill Companies.
- President Vagit Alekperov of LUKOIL has been included in a group of Russia’s top business leaders whose activities span the country and have a significant impact on the national economy. This was the common opinion of some 400 experts involved in compiling a list of Russia’s best professional managers. It was the eighth time such a list was drawn jointly by the Association of Managers of Russia and the Kommersant Publishing House.
- OAO LUKOIL Press Service regards the statement released by INTERFAX-ANI on September 27, 2007 (19:47 Moscow time) incorrect. The statement unequivocally suggests that most of the Russian budget losses in the amount of USD 80 mln from uncollected oil export duties were allegedly caused by OAO LUKOIL’s reduction of its raw stock supplies to Germany. It is true that in the 2nd quarter of 2007 OAO LUKOIL supplied 1.061 mln tons of oil to Germany, with the scheduled export supply volume at 1.8 mln tons, and in the 3d quarter the Company supplied 1.24 mln tons, whereas the scheduled export supply volume was 1.8 mln tons of oil. In the mean time, OAO LUKOIL considered benefits of the existing pricing environment and promptly re-directed free oil volumes to other more lucrative export routes and paid respective export duties to the Russian budget. Thus, OAO LUKOIL hit the oil export target and is in no way liable for the losses of the state budget resulting from uncollected export duties in the 2nd and 3d quarters of 2007.
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- Vagit Alekperov, President of OAO LUKOIL, attended an official ceremony devoted to commissioning two new facilities at Petrotel-LUKOIL refinery in Ploesti, Romania. Power supply unit No. 4 with the capacity of 25 megawatt (MW) was commissioned at the refinery, increasing the total power capacity of the heat electric generating station up to 61 MW. It provided the refinery with a complete supply of electric and thermal power, and helped arrange thermal power supplies to Ploesti’s municipal facilities. The fourth power supply unit has been constructed by OOO LUKOIL-Energogaz, the Company’s subsidiary. Project investments amounted to over USD 24 million. Thus, the first stage of the heat electric generating station reconstruction was completed. The second stage envisages construction of a boiler unit with thermal capacity of 245 MW. It will use oil coke as raw material. At present, this type of fuel is produced at Petrotel-LUKOIL, which is considerably cheaper than the fuel oil presently used at the heat electric generating station. Technical characteristics of the new boiler unit to be commissioned in the first half of 2009 fully comply with the EU polluting emissions requirements.
- Ravil Maganov, First Executive Vice President of OAO LUKOIL, and Vladimir Nekrasov, First Vice President of OAO LUKOIL, attended an official ceremony in Perm today devoted to the commissioning of two new production facilities at the Company’s subsidiaries. Thus, С5-С6 hydrocarbon isomerization unit with a hydrofining unit was commissioned at LUKOIL-Permnefteorgsintez refinery. Expected throughput capacity of the unit is 470 thousand tons of crude per year. The unit produces isomerizate, a high-octane component in automobile gasolines. Its application will help Perm refinery reduce the demand for high-octane additives, increase production of high-octane brands of automobile fuel, and launch gasoline production in conformity with the international standard EURO-3.
• Business/Finance news:
- The Arbitration Court of Volgograd region ruled to impose pecuniary penalties in the amount of RUR 100,000 on OOO Moskva-Oil (Moscow-Oil) and RUR 100,000 on OOO Biznes-Tsentr-Volgograd (Business-Center-Volgograd) in favor of OAO LUKOIL for violation of its exclusive trademark rights, OAO LUKOIL Press Service reports. The court had previously found that these companies used symbols confusingly similar to OAO LUKOIL’s trademark at a gas filling station in Volgograd.
- Vagit Alekperov, OAO LUKOIL President, addressed Columbia University students in New York City. The Company’s CEO shared LUKOIL’s plans to increase hydrocarbon production and refining output in Russia and abroad.
According to Mr. Alekperov, production peak is unlikely to take place in the next few decades, however the share of the so-called costly crude oil (offshore, high-viscosity and oil produced from gas and coal) will be on the rise. At the same time, only continental shelf fields can ensure a tangible production increment. This is the reason why Russia is involved in the Arctic shelf border alignment and is establishing international consortia for its development. LUKOIL also intends to take an active part in the development of Russia’s Arctic and Far Eastern shelf, now that the Company has got vast experience in similar operations in the Baltic and the Caspian regions. LUKOIL’s Strategic Development Program provides for a considerable growth of key performance and financial indicators. Over the next decade the share of gas in LUKOIL’s overall production will rise from 10% to 30%. The Company’s foreign subsidiaries will account for one fifth of the production and half of the refining. Besides Russia, the key role in development of production activities of the LUKOIL Group will be played by the Caspian region, the Middle East, Africa and Latin America. The Company also intends to strengthen its positions on the mainstream markets of Europe, Asia-Pacific region and North America. The next step will be organization of direct supplies of Russian oil to the USA. At present, LUKOIL is completing construction of a unique transportation system in the north of Russia, which will allow to supply up to 240 thousand barrels of oil to the United States daily. LUKOIL can also deliver oil to the USA from its Latin America fields. A trial oil consignment (from Condor Field in Columbia) was exported to the USA earlier this year. Besides, the Company continues the appraisal of heavy-oil fields in Venezuela.
- OAO LUKOIL Press Service brings it to the attention of all interested parties that a counterfeit website at http://www.lukoil-online.com operates on the world wide web. It has no relation to OAO LUKOIL whatsoever.
- OOO LUKOIL-Kaliningradmorneft (OAO LUKOIL’s 100% subsidiary) announced 2006 environmental monitoring results of Kravtsovskoye oil field (D-6) in the Baltic Sea. The research suggests that the negative impact caused by drilling and production activities on the marine environment was not recorded in the monitoring area, nor were any changes detected in the state of the Baltic Sea. Local monitoring was performed near the fixed offshore ice-resistant off-loading terminal (FOIROT), regional monitoring covered the South-East of the Russian economic zone in the Baltic Sea and the Curonian lagoon coast. On OOO LUKOIL-Kaliningradmorneft’s request, to detect oil pollution promptly, satellite monitoring of the sea surface was continued. It was based on radar images analysis by ENVISAT (European Space Agency) and RADARSAT (Canadian Space Agency) satellites. Radar images were analyzed by Kongsberg Satellite Services, a Norwegian company. In order to analyze the images, a web-site was created which contained information on the date and time of satellite flights, a map with indication of the image spot, a report on pollution (if any), and the results of image decoding. This information became available to the customer within 1.5 hours after the satellite flight. In total, 183 radar images were taken and analyzed. The space monitoring revealed 87 spills, but none of them was detected near the FOIROT and subsea pipeline route. Sea vessels were found to be the main source of oil pollution.
- In connection with the information released by news agencies related to the Anaran project, LUKOIL Press Service announces that the work under this project is currently impeded because of the US sanctions against the Republic of Iran. The US sanctions can slow down the project’s further development when the Company’s investment exceeds USD 20 million.
- Viktor Zagvozdkin, Head of OAO LUKOIL Environment Protection Section, presented a report at the international conference held in Moscow. The conference was titled “Reclamation of oil contaminated areas, oil spill response, fire and industrial safety at fuel and energy enterprises: problems and solutions”. Among other things, he said that the Company had elaborated “The Concept of improving emergency prevention and response system to control oil and oil products spills” which was coordinated with the EMERCOM of Russia (the Ministry of the Russian Federation for Civil Defense and Disaster Relief). The activities aimed at improving regulatory control over emergency prevention are based on the Agreement “On Interaction in fire safety, oil and oil product spill prevention and response” signed between the EMERCOM of Russia and OAO LUKOIL on November 15, 2005.
- OAO LUKOIL Board of Directors approved LUKOIL Group’s Performance Indicators of 2008-2009 Mid-Term Plan and 2008 Budget and Investment Program. The 2008-2009 Mid-Term Plan performance indicators were developed as part of 2008-2017 LUKOIL Group Strategic Development Program which was approved by the Company’s Board of Directors in May 2007. The Draft Plan is based on a Brent scenario of 65 USD/bbl and the 25.5 RUR/USD exchange rate. It was approved by the Management Committee of OAO LUKOIL. Hydrocarbon production growth in 2008-2009 is for the most part attributed to commissioning of Yuzhno-Khylchuyuskoye field in Timan-Pechora and Khauzak-Shady natural gas field in Uzbekistan.
• Upstream news:
- Vagit Alekperov, President of OAO LUKOIL, Sergei Ivanov, First Deputy Chairman of the Russian Government, Rustam Azimov, First Deputy Prime Minister and Finance Minister of Uzbekistan, and Nurmukhammad Akhmedov, Chairman of Uzbekneftegaz Management Committee, participated in the official ceremony dedicated to commissioning Khauzak gas field located in Bukhara region, Uzbekistan.
• Downstream news:
- Vagit Alekperov, OAO LUKOIL President, attended an official ceremony in Ukhta devoted to commissioning a tar visbreaking unit at OAO LUKOIL-Ukhtaneftepererabotka. Expected capacity of the unit is 800 thousand tons of stock per year. During the visbreaking, tar, i.e. residue of oil vacuum distillation, undergoes thermal treatment resulting in gasoline and commercial fuel oil. Implementation of this technology at Ukhta refinery will help increase vacuum gasoil production by 77% through reduction of fuel oil production. Total crude processing depth at the refinery will grow by 5 percentage points.
- OAO LUKOIL Press Service issues the following statement: due to the onset of winter, the Company’s refineries in Russia are being gradually converted to producing winter types of EN 590 diesel fuel depending on their location across various climatic zones.
• Business/Finance news:
- Vagit Alekperov, OAO LUKOIL President, and Pavel Ipatov, Saratov Region Governor, signed a cooperation agreement between the Company and the Region in Moscow. Among other things, the Agreement stipulates construction of LUKOIL’s new and reconstruction of existing petrochemistry, transportation, storage and marketing facilities, including expansion of the network of filling stations where noncash payment is possible. Under the agreement, within the scope of its technical capabilities, LUKOIL will satisfy consumer and commercial demand of the Region for petroleum, gas and petrochemistry products, providing the required product range and quantity. LUKOIL will also support development of Saratov Region industrial and research potential by engaging production, R&D and contractor companies operating in the Region. The Agreement also provides for LUKOIL’s environmental commitments and accident prevention efforts.
- Guided by American legal advisers, the Iraqi government has canceled a controversial development contract with the Russian company Lukoil for a vast oil field in Iraq’s southern desert, freeing it up for potential international investment in the future. In response, Russian authorities have threatened to revoke a 2004 deal under the Paris Club of creditor nations to forgive $13 billion in Iraqi debt, a senior Iraqi official said. The field, West Qurna, has estimated reserves of 11 billion barrels, the equivalent of the worldwide proven oil reserves of Exxon Mobil, America’s largest oil company. Hussain al-Shahristani, the Iraqi oil minister, said in an interview that the field would be opened to new bidders, perhaps as early as next year. The contract, which had been signed and later canceled by the Saddam Hussein government, had been in legal limbo since the American invasion. But the Kremlin remained hopeful it could be salvaged until this September, when Mr. Shahristani traveled to Moscow to inform officials there that the decision to cancel it was final, he said. The Russian government, newly emboldened in international affairs by its expanding oil wealth, is still backing Lukoil’s claim and protesting what it considers selective enforcement of contracts in Iraq.
- LUKOIL Group (subsidiary companies and LUKOIL’s share in output by affiliated companies) total hydrocarbon production available for sale totaled 2.18 mln boe per day in nine months of 2007, up 43 th. boe per day y-o-y. Crude oil output of LUKOIL Group totaled 1,967 th. bpd* (up 2.3% y-o-y), or 72.7 mln tons. LUKOIL subsidiary companies produced 70.8 mln tons of crude, up 3.5% y-o-y. Natural and associated gas output of LUKOIL Group available for sale was 9.95 bcm, which is 0.4% less than in nine months of 2006. LUKOIL production growth rates were impacted by the sale in the end of April of a 50% stake in Caspian Investments (former Nelson Resources), engaged in hydrocarbon exploration and production inKazakhstan, as well as by the limitations placed by Gazprom on natural gas intake.
- LUKOIL Press Service announces that Valery S. Subbotin, Head of the Main Division of Supply and Sales, has been appointed Vice President of OAO LUKOIL.
- Alexander Vasilenko, Head of LUKOIL PR Department, on behalf of the Company handed over the canvas The Evening Café by a famous Spanish impressionist Hermenegildo Anglada Camarasa to the Pushkin State Museum of Fine Arts in Moscow. The works of this painter are exhibited in the world’s largest museums, kept in private collections of European and American connoisseurs and are a ever-compelling attraction at Christie’s and Sotheby’s. Until now Russia had only one of his canvases exhibited in the Hermitage.
- LUKOIL Press Service announces that Ilya E. Mandrik has been appointed Vice President of OAO LUKOIL – Head of the Main Division of Geology and Development.
- Vagit Alekperov, President of OAO LUKOIL, and Alexander Filipenko, Governor and Chairman of Khanty-Mansi Autonomous Area (Yugra), have signed a Supplement Agreement to the Cooperation Agreement between the Company and the Government dated September 8, 2005. The ceremony took place in Khanty-Mansiysk on November 21. The Supplement Agreement defines the amount of financing for participatory construction of social facilities in Khanty-Mansi Autonomous Area municipalities in 2008. Under the newly signed Agreement, in 2008 the Company will allocate RUR 1,322.7 million for construction of social facilities and promotion of fitness and sports in four municipalities (Kogalym, Langepas, Pokachi and Urai) and in four districts (Nizhnevartovsky, Kondinsky, Sovetsky and Khanty-Mansiysky). The share of Khanty-Mansi Autonomous Area’s Government in this project will amount to RUR 1,447.109 million.
• Upstream news:
- OAO LUKOIL and OAO GAZPROM NEFT have established a joint venture, OOO Oil and Gas Company “Regional Development”. The relevant documents were signed by Vagit Alekperov, President of OAO LUKOIL, and Alexander Dyukov, President of OAO GAZPROM NEFT. OAO LUKOIL owns a 49 percent stake in the authorized capital of the joint venture, OAO GAZPROM NEFT has a 51 percent stake. The authorized capital of the enterprise will be comprised of monetary contributions. The joint venture will be managed on a parity basis. The joint venture will focus on acquiring rights for subsurface use, geological survey of subsurface areas, exploration and production of hydrocarbons, field development, implementation of infrastructure-related projects, transportation and marketing of produced hydrocarbon materials.
• Downstream news:
- OAO LUKOIL Board of Directors held its meeting in Moscow to discuss projects aimed at increasing Company’s shareholder value and measures aimed at improving performance of oil refineries and petrochemical companies of the LUKOIL Group. Among other things, it was agreed that increasing shareholder value was LUKOIL’s primary strategic objective. Investment and planning optimization in accordance with the world’s best practices is one of the ways to reach the objective, which will make it possible to enhance the quality, accelerate the planning speed and contribute to efficient implementation of the Company’s long-term strategy. Business expansion is one of the main feasible ways to increase the Company’s market value. Reaching expected operating indexes – ensuring competitive growth rates of hydrocarbon production, extension and upgrading of refineries, development of petrochemical and marketing units, and also of the electric power segment - will double OAO LUKOIL value. Commencement of accelerted development of the northern part of Timan-Pechora oil and gas province (Yuzhno-Khylchuyuskoye field) in 2008, development of the North Caspian fields in 2009, establishing partner relations with state companies, which would provide access to strategic fields, the upgrading and expansion of oil processing facilities and the establishment of an Electric Power Business Sector will be the largest projects in this sphere.
- Vagit Alekperov, President of OAO LUKOIL, and Nikolai Maksyuta, Head of Volgograd region, participated in the ceremony held in Volgograd today to mark the commissioning of an isomerization unit at OOO LUKOIL-Volgogradneftepererabotka. The installation will produce a high-octane component of automobile gasolines called izomerizate. Its application will enable the Volgograd refinery to start producing gasoline fully complying with the Euro-3 standard in 2008. The capacity of the new unit is 385 thousand tons of raw materials per annum. The operations and catalyst license was obtained from UOP (USA). Design and estimate documentation was elaborated by OAO LUKOIL-Rostovneftekhimprodukt and ZAO Neftekhimproekt (St. Petersburg). ZAO Globalstroy-Engineering acted as a general contractor for construction of the unit.
- ООО LUKOIL-Severo-Zapadnefteprodukt (OAO LUKOIL’s 100% owned subsidiary) and Toyota Motor Manufacturing Russia have signed a motor fuel supply agreement. Under the agreement LUKOIL shall deliver Euro-3 compliant Premium-95 gasoline to Toyota automobile plant located in Shushary (Leningrad Oblast) for the first filling at Toyota Camry assembly line. LUKOIL has been producing Euro-3 compliant gasoline at Nizhny Novgorod refinery since February, 2006. The Company’s Perm and Volgograd refineries will start producing Euro-3 compliant gasoline in 2008.
- ООО LUKOIL-Nizhnevolzhsknefteprodukt (OAO LUKOIL wholly owned subsidiary) has acquired ZAO Rostovneft distribution network. The transaction amount came to RUR 1.4 billion. The newly acquired assets include 55 filling stations and bulk plant facilities. Volgograd refinery will supply petroleum products to be marketed through these filling stations.
• Business/Finance news:
- Vagit Alekperov, President of OAO LUKOIL, and Elena Gagarina, General Director of the Moscow Kremlin Museums, opened an exhibition in Volgograd. Titled “The Moscow Kremlin in Volgograd. Treasures of the Russian History”, it is part of yet another joint educational project initiated by the Company and the Moscow Kremlin Museums. The exposition presents rare works of applied and decorative art, each of exceptional historic, artistic and material value. The exhibits include a ceremonial armor collection of the Russian tsars, firearms manufactured by Russian and foreign craftsmen, jewelry masterpieces of the 12-20th centuries, a porcelain collection dating back to the 19th century, the “Stables” treasury collection and a collection of textiles.
- LUKOIL publishes consolidated US GAAP financial accounts for the third quarter and 9 months of 2007. LUKOIL net income for the third quarter of 2007 was $2,482 million, which is an increase of 2.1% y-o-y. LUKOIL net income for 9 months of 2007 reached $6,298 million, EBITDA - $10,370 million (an increase of 1.9% y-o-y), revenue from sales amounted to $57,096 million which is 11.0% higher y-o-y. The Company results were affected by strengthening of the ruble against the dollar in real terms, increase in transportation tariffs, rise in tax expenses as well as reduction in prices for certain petroleum products. Negative impact of those factors was offset by expansion of Company activities and business optimization, rise in oil and petroleum product prices as well as by rapid growth of refinery throughputs and retail sales of petroleum products. While Urals price increased by 1.5% y-o-y and rates of main taxes were virtually stable, LUKOIL total tax expenses rose by 7.0% y-o-y, to $19.4 bln, due to rise in output, exports and retail sales of petroleum products as well as due to strengthening of the ruble against the dollar in real terms.
- OAO LUKOIL Press Service would like to make the following statement: information released by some mass media with reference to a Company representative alleging that LUKOIL signed a provisional agreement with the Republic of Turkmenistan on development of three offshore blocks in the Caspian is not true.
- LUKOIL has become winner of the annual contest “Russia’s Corporate Donor - 2007” in the nomination “The Best Program to Ensure Most Efficient Trilateral Cooperation Between Businessmen, Non-Profit Organizations and Local Authorities”.
- A 1837 portrait of General Vasily Perovsky by the famous Russian painter Karl Brullov is returning to the State Tretyakov Gallery after the restoration works have been completed with OAO LUKOIL support. General Perovsky participated in the Patriotic War of 1812 and distinguished himself in the battles of Smolensk, Dorogobuzh and Borodino.
- LUKOIL press-service would like to make the following statement: Following the recent research by Troika Dialog (the version in Russian), claiming that LUKOIL net income for 9 months of 2007 “is 7.8 times less than that in the official financial statements” is a factual inaccuracy and, thus, accuses the Group’s top management of falsifying the accounts. The management of LUKOIL believes that this statement by Troika Dialog may have caused damage to LUKOIL’s business reputation and expects a quick denial of the statement. LUKOIL reserves the right to legal defense of its business reputation.
- In the scrub brush desert south of BUKHARA, Uzbekistan, an ancient Silk Road town, the natural gas wellheads are built on modest concrete platforms about the size of basketball courts. Because the gas is naturally pressurized, pumps are not needed to bring it to the surface. Pipes simply kiss the ground and gas pours through them. The issue is where the gas goes from there. After the breakup of the Soviet Union, the United States and its European allies sought to ensure that Central Asia’s enormous oil and gas wealth would flow through pipelines bypassing Russia. It was the latest version of the Great Game, the 19th-century contest between Imperial Britain and Czarist Russia for dominance in the region. Lately, however, the West is falling behind, as a torch lighting ceremony last month made clear. Executives from Lukoil, the Russian oil company, and government officials from Moscow had come to inaugurate the latest Central Asia gas field to come online. Developed by Lukoil, the Khauzak field is estimated to hold 400 billion cubic meters of natural gas, which Lukoil has sold in advance for the next 32 years to Gazprom, the Russian natural gas giant. Coming as some political developments in the region had renewed Western companies’ hopes of doing business in Central Asia, the Nov. 29 ceremony — held before a planeload of Moscow-based journalists flown in for the occasion — seemed tailored to remind the world of Russia’s lead in the new Great Game. The Bush administration has identified Central Asia as a promising alternative to the volatile Middle East as a source for oil and natural gas. As American officials pursue a policy of encouraging energy exports that bypass Russia, they are also trying to pry open Central Asia to Western oil investment. Russia is countering by raising its investment in Central Asian fields and pipelines. Much is at stake. Russia is the world’s largest natural gas producer and a major supplier to Europe. It relies on Central Asian supplies to meet these commitments. Flush with cash from their own oil boom, the Russians are investing heavily in new development, posing a challenge to Western companies like Exxon Mobil, Chevron and ConocoPhillips that are eager to expand their Central Asian operations. After an investment of $3.5 billion, the Lukoil project will tie together three natural gas and gas condensate fields by 2011 to produce 11 billion cubic meters of natural gas a year for export. In the three years since Lukoil signed the production sharing agreement with the Uzbek government for Khauzak, Uzbek politics have taken a sharp turn in Russia’s favor, shutting Western oil majors out of Uzbekistan. In May 2005, President Islam A. Karimov’s troops opened fire on a mixed crowd of escaped prisoners, gunmen and antigovernment demonstrators in a square in the Fergana Valley town of Andijon, killing hundreds in what human rights groups say was the worst massacre of street protesters since Tiananmen Square in 1989. The episode led to deep strains in diplomatic relations with the United States. Even before the shooting, human rights groups accused Uzbek authorities of abuses, including two incidents in which political prisoners were reportedly boiled to death in an Uzbek prison. Prospects for a Western role in the country’s natural gas industry waned. In contrast, Russian President Vladimir V. Putin visited Mr. Karimov in Uzbekistan after the Andijon shootings and endorsed his justification. In 2006, Lukoil expanded its presence here in a consortium with the China National Petroleum Corporation, Petronas of Malaysia and the Korea National Oil Company to explore a natural gas deposit beneath the dry bed of the Aral Sea estimated to hold more than one trillion cubic meters of gas. And in neighboring Turkmenistan, Mr. Putin secured an agreement in May to expand natural gas exports via a branch of the Central Asia-Center natural gas pipeline, which runs along the eastern shore of the Caspian Sea, north toward Russia. It was the most significant energy deal in that country this year. And this summer, crews from China, another country ascendant in Central Asia, began exploration drilling for gas on the eastern bank of the Amu Darya river, according to Mr. Stern, the Oxford Energy analyst. To be sure, in the 1990s European and American companies made great gains in Kazakhstan — which has emerged as the leading commercial power in Central Asia. Chief among those gains was Kashagan, the largest oil find in the world since the discovery of Alaska’s Prudhoe Bay in the 1970s. But the deal has been mired in dispute, with Kazakh authorities forcing a renegotiation of terms with consortium partners Eni of Italy, Exxon Mobil and ConocoPhillips of the United States, Royal Dutch Shell and Inpex Holdings of Japan.
- James Giffen likes to share the wealth. His generosity to friends is said to have included $180,000 for jewelry, $30,000 for fur coats, a luxury speedboat, two snowmobiles and lots of cash. Overall, according to prosecutors in New York, Giffen gave more than $78 million to senior officials in Kazakhstan, for which he was indicted on federal bribery charges in 2003. What makes his case most remarkable, however, is not the startling amount of supposed corruption. Nor is it Giffen’s unindicted co-conspirator, Nursultan Nazarbayev, the president of Kazakhstan. What truly sets Giffen apart is that he has claimed in his defense that he was an operative for the Central Intelligence Agency. As a close adviser to President Nazarbayev, who in the 1990s agreed to a series of large oil contracts with American firms, Giffen says he was moonlighting for the American government as, basically, our man in Astana. Giffen’s lawyers have called him a patriot who helped ensure that Kazakhstan’s reserves of oil and natural gas would be controlled by American rather than Chinese or Russian companies. And they have noted an oddity — after their client was indicted on charges that could land him in jail for the rest of his life, his supposed partner in bribery, President Nazarbayev, was welcomed not only at the White House but also at the Bush family compound in Kennebunkport. The case raises a number of questions, including this one: in an era of scarce oil, can America afford to punish anyone who cuts corners to win deals for American firms? In 2003, when oil sold for less than $30 a barrel, it was possible to believe we could have our anticorruption statutes and our cheap gasoline. Four years later, with oil going for $95 a barrel, it’s not so clear. The British government, citing-national security concerns, has called off an investigation into bribery of influential Saudis. Delays in Giffen’s case suggest that some federal agencies may be more concerned with protecting secrets than with seeing the prosecution go forward. Much of the pretrial evidence has been sealed, but what is known is that Giffen’s lawyers have asked for sensitive documents that they contend will show official approval of their client’s activities. As an instrument of resource control, bribery has been the recourse of corporate executives and government officials the world over. In the 1970s, after American firms admitted to spending hundreds of millions of dollars bribing foreign officials, Congress passed the Foreign Corrupt Practices Act to put an end to these antics. For many years, the F.C.P.A. was not aggressively enforced and many companies outsourced bribery to middlemen or joint-venture partners. But as the corporate social-responsibility movement grew its baby teeth, the Justice Department began to show more interest in corporate bribery overseas. About 60 F.C.P.A. cases are now being investigated or prosecuted. Belatedly, American oil firms are being asked to, well, refine themselves. Is it too late? The F.C.P.A. was passed when these firms were colossi in the energy world. Today, Congress and Exxon Mobil cannot set global norms on their own. They have to deal with a range of masters, competitors and rogues including Hugo Chávez, Vladimir Putin, Mahmoud Ahmadinejad, Hu Jintao, Gazprom, Lukoil, Sinopec and Eni. Desperate buyers — and this category now includes the United States — must compete against one another as they try to fulfill the wishes and needs of the autocratic sellers of petroleum. I saw this firsthand when President Chávez signed an accord in Caracas with a Chinese company that would launch a satellite for Venezuela. Chávez delivered a lengthy and rambling speech, during which he flapped his arms in the air like a loon and raved about the beauty of Chinese women, the greatness of Chairman Mao and the evils of free enterprise, warning that “capitalists are generating death.” The Chinese on the stage, who seemed unlikely to share all of their host’s notions, slightly nodded their heads in the quiet approval that was required. By lending support to the particularly dubious regime in Sudan, China clearly puts its energy needs above moral concerns. But the American government cannot avoid the contradictions of needing oil but wanting to get it, or at least be seen to get it, in moral ways. This predicament has been evident for a long time in our dealings with dictatorships in, for instance, Saudi Arabia and Angola. The Giffen case is a timely iteration as we fret on the threshold of $100-a-barrel petroleum. The choice is simple: Make painful but necessary changes to reduce our addiction to oil, or sink deeper into our moral sludge.
- To the Editor: ''Central Asia on Front Line in Energy Battle'' (Business Day, Dec. 20) doesn't mention one of the most important aspects of energy development in Uzbekistan: the general populace in no way benefits from it. The Lukoil-developed Khauzak natural gas field is typical of the focus of the Uzbek government on projects that generate export revenues for the regime rather than provide gas to the people of Uzbekistan. Uzbekistan's domestic gas pipeline network is in a moribund state, with huge losses from the system. The Uzbek government, rather than invest in fixing the system and ensuring domestic deliveries, shuts off gas to entire cities in the winter, leaving the people to fend for themselves or freeze. This is a major cause of discontent in the country. Meanwhile, some well-connected elites involved with the gas trade benefit from this situation. With all of the competition by outsiders to get a share of Central Asia's riches, they ought to realize the kind of system that they are perpetuating. What is even sadder: they likely already do, but do not care. The writer is an energy analyst for the International Crisis Group.
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