Lukoil: To the Middle East, and beyond

09 July 2004
Upstream oil installations are rarely showy affairs, and the West Esh el-Mallaha (WEEM) facility is no exception. Two storage tanks, a nodding donkey and a few prefabricated workers' huts are about the size of it. But the modest installation, which is plugged into a 32.6 million-barrel oil deposit beneath the Egyptian desert, has considerable significance for Lukoil. Concession rights to the area were granted in 1993, making it the first upstream investment by the Russian oil giant outside its old stamping ground of the former Soviet states. 'Since then, we have been looking at larger scale fields that we can develop quickly, and which are located close to our key markets,' says Lukoil Overseas president Andrey Kuzyaev. 'Egypt is not very big in terms of reserves, but the fact that it is so well positioned geographically means the efficiency of our reserves grows dramatically.'

Dressed soberly in suit and tie, Kuzyaev has more of the air of an investment banker than a wildcatter, but his career has been distinguished by ventures into unknown territory. Russian oil analysts say his appointment in 2000 to a newly created executive position in Lukoil came as a reward for his hard-nosed approach to the consolidation of assets in the farther-flung corners of the former USSR. Lukoil Overseas now has operations in Kazakhstan, Azerbaijan and Colombia, marketing itself as 'one of the few Russian firms that is positioned as a transnational company'.

Corporate consolidation still offers one route to overseas expansion - Lukoil sealed an agreement in late June to buy out Eni's share in their joint venture LukAgip, which has significant investments in the Caucasus. But the Middle East represents the most promising virgin territory.

'Over the next four years we plan to dramatically increase our exploration investment by about $400 million, and the main aim is to diversify our resources portfolio, getting closer to our key markets in the US and Europe,' says Kuzyaev. 'Lukoil is now an operator in 11 out of its 15 projects, and we expect our share of production to reach 70 per cent by 2010 - we don't need to prove to the world today that we are a qualified operator. At the moment we are searching for new projects in Algeria, Libya, Yemen, Oman, Qatar and the UAE, and this search should produce results sooner or later.'

Lukoil Overseas has already established a firm presence in Egypt, where, besides the WEEM facility, it also has operating wells at Meleiha, in the Western Desert, as well as exploration and production rights to two offshore blocks in the Gulf of Suez. Seven promising structures have been discovered in the Northeast and West Geisum concessions, for which a four-year exploration programme has been drawn up with a minimum contracted investment of $27.8 million. Their proximity to the WEEM facility, located on the other side of the coastal resort of Hurghada, will also enable any commercial wells to be tied into common infrastructure. 'We plan to start exploratory drilling before the end of year, and we estimate there to be a total of 228 million barrels of oil equivalent,' says Lukoil Overseas regional director Sergey Nikiforov. 'If we are successful, Lukoil could be contributing as much as 10 per cent of total Egyptian production.'

The company has also established a foothold in Iran, where it holds a 25 per cent stake in the Anaran concession. Drilling is now under way on the acreage, which has an estimated 130 million tonnes of recoverable reserves. Lukoil is also among the companies preparing to bid in mid-July for 16 new blocks, the first to be tendered as buy-back contracts linking exploration to production.

Despite its commitment to further overseas expansion, the company is still keen to mitigate the risks involved in entering new territory. 'We are going to expand our presence in Iran, as we consider it one of the most promising areas to

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