Andrei Gaidamaka, Lukoil’s director of strategic development

E&P: What does the industry need to know about Lukoil as an operating company?

Lukoil is the largest private oil company in Russia. The company’s primary resource base is in Western Siberia, while its refineries, gas processing, and petrochemical plants are located in Eastern Europe and Russia. In Russia, the biggest refineries are in Nizhny Novgorod, Volgograd, Perm, and Ukhta.

Today Lukoil has approximately 1.2% of global oil reserves and 2.3% of global oil production. The company is one of the largest in the Russian energy sector, with over 18% of total Russian oil production and 19% of total Russian oil refining.

Although many people are not aware of it, Lukoil is an international company with operations in almost 40 countries. We are moving rapidly toward our goal to be one of the largest international oil companies.

E&P: How is Lukoil coping with the drop in commodities prices?

Russian oil companies were able to generate profits when prices were at (US) $10 per barrel in 1999, and today Lukoil is still comfortable with oil prices at around $40 per barrel to support earnings growth. We believe, however, that market fundamentals support a fair oil price in the range of $50 to $80 per barrel. Any overshoot or undershoot of that range is likely to be temporary.

E&P: Will Lukoil see significant profits this year?

The answer to this clears up a misperception about the profitability of Russian oil companies. Although profitability is forecasted to drop internationally in 2009, it’s likely that Russian companies will not experience the loss to the extent that most of our international competitors will. There are two reasons for this. One is because the ruble has significantly devalued. Many industry observers do not appreciate the extent to which the fundamentals of Russian oil companies improve when the ruble devalues. The fact is that 88% of Lukoil’s opex is ruble-based.

The second thing working in our favor is that, as of January 2009, Russian taxation has been significantly altered. Taxes are something that we have discussed with the Russian government for some time. Our view was that upstream taxes were too high for sustainable increases in upstream output. This point was somewhat more difficult to make five years ago, when production was growing by 10% per year. But even then we knew it to be an issue. Now, with production falling, they have been far more receptive to our point of view.

The Russian government has realized that it is not in anyone’s interest to perpetuate falling hydrocarbon production in the country. We expect more steps to follow.

E&P: In what types of projects will Lukoil be investing?

The company has a large greenfield portfolio, mostly offshore, that we are currently realizing.

Even during the current international financial crisis, we have sufficient internal cash resources to pursue these developments. We have a total capital spending plan of $6.5 billion this year, and that budget may be revised upwards if the oil price environment improves.

We already produce more than 2 MMb/d, and we are growing production. We plan to grow our refining as well and will continue to expand our retail in 2009, crisis or no crisis.

E&P: Where are your primary operations?

Lukoil operates all over the world. We operate in almost 40 countries. This is a point I want to bring to the forefront. Lukoil is not a national oil company; it is a private international operating company. We have an enormous amount of resources to bring to the table. Today, Lukoil is responsible for 2.3% of global oil production and approximately 0.7% of global gas production.

In 2007, Lukoil began production in Uzbekistan, and today, we produce approximately 60,000 b/d there. In 2008, we launched the Y-K (Yuzhnaya-Khylchuya) field in Russia, where we have a 70% interest (ConocoPhillips has the remaining 30%). This 0.5 Bbbl field has the potential to produce some 150,000 b/d, with a flow rate per well at a few times the national average. We are increasing production as we speak. This field is one of the reasons our 2009 production will continue to grow.

Lukoil was able to get this project off the ground as an operator. We have the experience from upstream to build a pipeline through the permafrost. We built an ice-resistant offloading terminal and a tank farm in the Arctic Sea. So we have proven that we can operate in harsh arctic conditions.

An interesting fact about this project is that it is a 100% export-oriented development. In terms of delivery, it is closer by half to the US than the Gulf states. Moreover, it is difficult to transport fuel to Russia from the Y-K because it is not connected to the pipelines running south into the continent. We can only bring it offshore to the Barents Sea, and once it is loaded onto a tanker, it is actually easier to ship it to Europe or the United States than to Russia.

In 2009-2010, we also plan to invest in our biggest offshore Caspian fields, the Korchagin and Filanovsky fields, which lie in the Russian sector. With these additions, we expect our production to increase by more than 250,000 boe/d, mostly oil.

In 2011 we plan the startup on other fields, Kandym and S-W Gissar, in Uzbekistan. They are expected to add another 200,000 boe/d, primarily gas.

When added together, the numbers are quite significant. I would say that Lukoil has a world-scale immediate pipeline of greenfield projects.

E&P: Are there additional projects on the drawing board?

The most exciting thing coming up is a completely Russian project that will develop six fields in the Northern Caspian. Work is underway and will go into 2010s.

This project is distinct because it is the first project of scale for which a private Russian company — not a state-owned company — has been able to do everything from scratch: the seismic, interpretation, exploratory drilling, and now production.

This was not a Soviet discovery. There have been allegations that private companies moved in to take over fields that were discovered previously using “the People’s money.”

We can show that, prior to our arrival there, there was absolutely nothing. We risked capital to find it, and we discovered a group of fields that we expect to have production potential of over 250,000 boe/d at peak. Production will start in 2009.

This represents a decade of work. Keep in mind that there was no lack of international companies looking for reserves in the Caspian. And you don’t hear about a lot of successes.

This project shows that Lukoil is very competitive in an open environment where international oil operators are competing. One of our many strengths is that we continue to discover things where there had previously been nothing.

This project is completely offshore.

It is possible to see the progress on this site day to day from Web cams that can be accessed at www.lukoil.com.

E&P: What other expansion is being planned for the near term?

Lukoil is an international company, and some of our expansion will occur outside of Russia. The gas project in Uzbekistan is a good example. Lukoil is the first Russian company to launch a major gas project abroad. When this project reaches maximum production in 2015, it will produce 15 Bcm/year of gas — more than triple today’s production numbers. That is very large gas production for us. Moreover, there are two export lines from the field, one to Russia and one to China. Gas is sold
at the international price.

E&P: How significant is technology to your plans to expand E&P?

Technology is what Lukoil is about. We have a state-of-the art hydrodynamic modeling center in Moscow that we developed in cooperation with Schlumberger. It is an impressive achievement for us and one that we are proud of. And our success rate of nearly 100% in the Russian sector of the Caspian Sea shows the success of our technology in the field.

E&P: Is Lukoil likely to strike new partnerships with operators outside Russia as it has demonstrated with ConocoPhillips?

We are happy with our partnership with ConocoPhillips, and we are interested in pursuing new opportunities with them. However, this does not mean we are closed to cooperation with others.