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President of the leading Russian oil company Lukoil started by saying that sanctions imposed on Russia have made access to capital market and technologies more difficult as well as attracting partners to carry out geologically and technically complex projects. Lukoil had to purchase France’s Total share in their joint venture due to impossibility for Total to work as a result of western sanctions.
Moreover, attraction of medium-term loans is hindered and Lukoil is now working on its own resources or short-term loans from Russian banks. We are actively engaged in dialogue with Korea EximBank to fund projects in Uzbekistan.
Alekperov noticed that sanctions will not affect short-term oil production as the company has traditional technologies and equipment. However, we will see an increasingly negative impact of the sanctions. He also added that Lukoil has no projects in the Arctic and on the deep water shelf of Russia of more than 150 meters.
Lukoil’s head said that Chinese banks are ready to give credits for purchase of oil or equipment, but these are the world’s most expensive credits and Lukoil does not use them.
lekperov stressed that existing tax system provides for withdrawal of superprofits. When oil revenues are high, the State ensures maximum returns. Still, when there is a sharp drop in oil prices the system is gentle as export duties and tax on mineral extraction are linked to the global oil prices.
In 2011-2012 the company was three times behind the western companies with regard to yields per barrel. Now the gap is 20-30%. On one hand the tax system is gentle, on the other it does not allow to get high returns to invest into large-scale projects. Alekperov also mentioned that inflation neutralizes devaluation effect.
Nevertheless, Alekperov highlighted that the tax system makes it possible to feel confident with a sharp decline in oil prices. Thus, the cut-off price is $24 per barrel and the company may make forecast regarding investment plans basing on analysts’ assessments of $30 per barrel and lower.
It was pointed out that Lukoil carries out stress tests – the company actively discusses medium-term program for 2016-2018. “The price determined in the program is $50 per barrel at 70 rubles per dollar and $60 per barrel at 66 rubles per dollar. In these scenarios Lukoil fulfills its obligations to shareholders. The difference between the two scenarios is volume of investment in large-scale projects and pace of their development. Here, Alekperov was referring first and foremost to the project of “West Qurna-2” (Iraq).
He also said that Lukoil’s oil production will not grow. “We want to stabilize production” – he emphasized. Lukoil produces 2.3 million barrels per day, “West Qurna-2” produces 450 thousand barrels per day. The next year Lukoil is set to begin production at Filanovsky project (Caspian Sea) and bring into production Pyakyahinskoe deposit (Yamalo-Nenets Autonomous Okrug in Russia’s Far North). But the projects will depend on how much funds the company will have to allocate.
Concerning a dispute with Rosneft (regarding a tender on the right to manage the natural resources in the Vostochno-Taimyrskoye oil and gas field) Alekperov said Lukoil is surprised emphasizing that in fact Rosneft filed a lawsuit not against Lukoil, but against the State itself. This territory is yet to be called a deposit of mineral resources as it needs great investment to become one. Lukoil needs the territory to conduct geological survey.
If private companies are allowed to develop the sea part of the Vostochno-Taimyrskoye oil and gas field, Lukoil will not consider its participation owing to the fact that the company is locked within license boundaries. Moreover, construction of the hydrological facilities is hampered; besides taking into account the local climate the construction may be impossible at all.
Alekperov also commented on alleged money laundering and tax evasion allegations against Petrotel Lukoil in Romania. He said that the company meets all obligations to Romanian government and even exceeded those as it has spent $500 million dollars on refinery instead of $200 million. He added that now the refinery is among the best in Europe. Tax service launched a probe into the allegations to find no violations.
Lukoil has been sent several proposals to buy the refinery, but denied due to the well-integrated position of the refinery into the technological chain.
Alekperov argues that it has become more difficult to work in the context of sanctions, but not worse. Furthermore, he said that Lukoil is ready to launch Karpatneftekhim facility in Ukraine, when given with guarantee that VAT will be recovered. With a relatively low income the calculated VAT will reach $60-100 million which is a great sum.
He told that operating in Russia is a priority given that there are projects to invest into. However, Lukoil’s priorities abroad are Mexico, Iran and Iraq. It is also co-working with Chevron in Nigeria. In Iran there is a process of legislation improvement as service contracts (not Production Sharing Agreement, PSA) are not attractive for the investors due to high oil prices and limited access to capital.
The issue of gas has also been raised. Today – Alekperov said – many companies are involved in gas production (like Novatek, Rosneft etc.) and have domestic consumers in regions far-off the gas extraction sites. Tariff transparency would enable a significant increase in efficiency or would let them “calm down” understanding that tariffs reflect real costs for Gazprom that transports gas. Lukoil values good relations with Gazprom and therefore would not take part in finding a solution regarding that issue.
Gazpron carries a great social “burden”, participates in gasification of villages and rural settlements, creates gas pipeline network etc – added Alekperov. Lukoil is also in favor of equal rights for exporters of Liquefied Natural Gas (LNG) saying that otherwise sustainability of the Russian industry is undermined.
In the forthcoming session of the Presidential commission on fuel and energy, the members of the commission will have to address a wide range of issues. First and foremost it has to elaborate a concept of legislation regarding operations at oil and gas deposits. The existing tax legislation on exploration is complex, there are many privileges but “we need a simplified method of tax calculation for all the country that would give entrepreneurs confidence for the medium-term prospective”. – Alekperov said.
In conclusion, he pointed out that he does not believe that the commission will decide on private investment access to the continental shelf, saying though that without the Arctic the future of the industry is not viable in the long run. He added that Lukoil and Gazprom are actively engaged in dialogue on setting up a joint venture.