Lukoil

COMPANY PROFILE

2014

Lukoil

+7 495 627 4444 | www.lukoil.com

Having much luck in Iraq LUKOIL has begun production at the West Qurna-2 oil field in Iraq. After overcoming significant challenges, the company is now producing 190,000 bpd. Total World Energy finds out more…

In 2013, it was estimated that 84,820,000 barrels of oil was produced every day, with a large percentage coming from just a handful of countries. You can probably imagine the names that topped the list, the usual players; Russia, Saudi Arabia, USA, Iran, China, Canada, Iraq, UAE, Venezuela and Mexico.

Sitting proudly at the top of the list was Russia, with an estimated oil production in 2013 of 10,900,000 barrels of oil every day. This is over 13% of the world’s total and around one million barrels a day more than the next biggest producer – Saudi Arabia.

And Russia’s success in the oil

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market is down to its innovation in both upstream and downstream activities with the country’s big name players sitting amongst the most wealthy and most influential on the planet – and not just in the energy industry.

The likes of Gazprom, Rosneft, TNK-BP and Surgutneftegas all fit this description but our focus this month lies with LUKOIL, the largest privately owned oil and gas company in the world by proved oil reserves and the third largest privately owned oil & gas company in the world by oil production.

LUKOIL produces over 2% of the world’s crude oil and one of the biggest Russian oil business groups

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with $139 billion revenue and net income in excess of $11 billion.

The company is implementing oil and gas exploration and production projects in 13 separate countries and one of the most recent developments has been realised in Iraq; a vital country by world oil standings and one of great importance to LUKOIL.

WEST QURNA-2 On March 29th 2014, LUKOIL launched production at the West Qurna-2 oil field in Iraq. An official ceremony was attended

by Hussain al-Shahristani, Deputy Prime Minister of Iraq for energy, Arkady Dvorkovich, Deputy Prime Minister of the Russian Federation, Alekperov, President of LUKOIL, members of the Iraqi government, Basra province authorities and representatives of major contractors.

West Qurna-2 – one of the largest oil fields in the world – is located in southern Iraq, 65

Lukoil kilometres from the town of Basra.

The field has 35 billion barrels of estimated geological oil reserves in two main formations – Mishrif and Yamama. Many reports consider West Qurna-2 as the second largest oil field in the world behind only the Saudi Arabia’s Ghawar oil field.

The Project is being implemented in three phases: Mishrif Early Oil (with a target production level of 400 kbpd), Mishrif Full Field Development (550 kbpd) and Yamama Formation Development (1.2 mmbpd). The production plateau will then be maintained at 1.2 mmbpd for 19.5 years.

The Development and Production Service Contract for the West Qurna-2 field was signed on January 31, 2010. The current participants of the Project are the South Oil Company of the Ministry

of Oil of Iraq (on behalf of the state) and a consortium of contractors comprising LUKOIL (75%) and the Iraqi North Oil Company (25%).

“LUKOIL aims to ramp up production at the field rapidly. We are already producing 190,000 bpd and are targeting 400,000 bpd by either the end of this year or the beginning of next year.

This is the first phase of West Qurna-2’s development. Today, it is the largest oil and gas project in Iraq. In 2014, it will increase oil production in Iraq by 15%,” explains Fedor Klimkin, Press and Communication Officer for LUKOIL Overseas – a LUKOIL subsidiary which represents the company’s interests in the area of international oil and gas production.

Vagit Alekperov, President of LUKOIL said: “The start of production at West Qurna-2 is

strategically important for LUKOIL. Starting up the field on a tight schedule and reaching the target production level underscores LUKOIL’s ability to independently and efficiently manage the implementation of complex largescale projects and reinforces our position as a global energy company.”

Klimkin says that development of the field is of strategic importance to both LUKOIL and Iraq.

Financially, the country is set to benefit significantly.

“Starting commercial production at the West Qurna-2 field is an important event not only for LUKOIL but also for Iraq itself.

West Qurna-2 presents truly immense opportunities: ramping up production to the target 1.2 mmbpd will rank West Qurna-2 among the world’s five largest fields

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in terms of production volume and will increase the overall production in Iraq by almost a third. The Iraqi budget shall receive total revenue of more than one trillion dollars over the project’s life (through 2034),” he says.

West Qurna-2 has provided a number of achievements for LUKOIL to be proud of and Klimkin says that the speed of starting production is a triumph that the company is particularly proud of.

“Our greatest success is starting commercial production at West Qurna-2 in record time,” he says.

“All field facilities supporting the start of production were built in two years’ time. According to IPA’s independent analysis, the West Qurna-2 Project is in the top decile for the global industry in terms of launch time (it was completed 20% faster than similar projects worldwide).

“That said, it

matched the industry average in terms of expenditures (investment to date is about four billion dollars).

Starting up the field on a tight schedule and reaching the target production level on time is an important achievement for us, because the short launch time of the first phase supports a rate of return for the project of at least 15%.”

The majority of LUKOIL’s production still comes from Russia with most activity concentrated in four federal districts: the NorthWest, the Volga, the Urals and the South. However, Klimkin says that overseas production is on the up.

“The share of overseas upstream projects in LUKOIL’s total production will reach a record 15% within the next two years, not least of all owing to the contribution of West Qurna-2.”

CHALLENGING PROJECT As you can imagine, starting any project in any industry in Iraq is a challenge with the regions

current political climate but a research, development, production and transportation operation that is set to last for over two decades takes the word ‘challenge’ to a whole new level.

“We had to execute the project in a genuinely challenging environment,” says Klimkin. “West Qurna-2 is a unique project in terms of complexity due to a variety of criteria. In the very beginning, the project team faced a lack of security, industrial infrastructure and local skilled manpower. The field area is densely populated: more than 70,000 people reside in the Contract Area. As such, about 80% of the land was used for farming. The rest of the territory is desert or marsh. We had to build the entire field infrastructure from scratch, and had to import the equipment and materials needed to construct the field facilities.”

Of course, LUKOIL undertook meticulous planning and research before beginning any activity in the area and today that planning is paying off with local people who have been trained by LUKOIL beginning to work on the field.

“In the very beginning of our field operations, we developed a set of measures to manage all risks and hence we managed to mitigate them effectively. We have avoided terrorist attacks and kidnappings. Over 4,000 pieces of unexploded ordnance have been found and defused. We gained access to the land by initiating the establishment of a governmental Land Compensation Committee. As a result, more than 800 land users have received fair compensations.

This set a historical precedent in Iraq. We addressed the lack of local skilled workers by creating a special training centre at the field.

The first batch of workers trained in this centre is now employed at West Qurna-2,” explains Klimkin.

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“Ultimately we managed to address the challenges we faced.

Our best experts and key resources were deployed on this project. All the company’s efforts were focused on its execution.”

SPECIAL INTEREST IN IRAQ Although West Qurna-2 has received much press attention since production began, LUKOIL is also involved in other projects in the region.

“In addition to West Qurna-2 development, LUKOIL is currently involved in another project in Iraq

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– exploration at Block 10 near the West Qurna-2 field,” says Klimkin.

On April 10th 2014, LUKOIL Overseas started a 2D seismic survey at Block 10 in the south of Iraq. Block 10, with a total area of 5.6 thousand square kilometres, is located in the territory of Dhi Qar and Mutanna provinces, 120 km to the west of Basra.

2000 linear kilometres of seismic surveys will be completed by the BGP Inc. geophysical company within 16 months.

The Mandatory Geologic Exploration Program at Block 10 is

scheduled to take five years, with a potential two year extension, and includes drilling one exploration well in addition to the 2D seismic survey.

Shares in the project are distributed as follows: 60% LUKOIL Overseas and 40% Japanese INPEX Corp. The Contract holder from the Iraqi side is the state-run South Oil Company.

“Seismic acquisition has recently been commenced at the block. We will start exploration drilling at the end of 2015 or the beginning of 2016. We hope to find commercial

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reserves of hydrocarbons,” says Klimkin.

The distance between Block 10 and West Qurna-2 less than 100 kilometres and Andrey Kuzyaev, President of LUKOIL Overseas says: “The two projects will obviously benefit from the synergy in terms of infrastructure, equipment and manpower mobilisation.”

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Away from Iraq, LUKOIL is showing no signs of slowing down its exponential growth. Recent announcements have demonstrated LUKOIL’s ambitions for the future.

On 23rd May 2014, the company announced that it had reached an agreement with Gazprom to form a strategic partnership which will benefit both companies in the long-run.

The partnership was agreed at the St. Petersburg International Economic Forum 2014. The document states that the parties intend to consider the possibilities of joint implementation of various oil and gas projects in the Nenets and Yamalo-Nenets Autonomous Okrugs,Address at the Russian continental Contact Details Physical

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Lukoil shelf, in the Caspian Sea, in East Siberia and the Far East, as well as in other regions to be further agreed on. The joint projects will cover such areas of activity as exploration, production, preparation, transportation and processing.

The parties also intend to work together on projects of exploration and production of hydrocarbons overseas.

The agreement also emphasizes environmental protection. Thus, the parties will strive for maximum cooperation in the area of efficient utilisation of associated petroleum gas as engine fuel for transportation vehicles.

Alekperov and Aleksey Miller, Chairman of OAO Gazprom’s Management Committee, signed the agreement said that the deal will be important for both companies.

“The real outcomes of the longstanding cooperation between LUKOIL and Gazprom demonstrate its mutually beneficial effect for the businesses of our companies. The 2014-2024 Strategic Partnership Agreement offers new opportunities to both LUKOIL and Gazprom,” Mr Alekperov said.

Mr Miller commented: “We intend to promote mutually beneficial strategic cooperation with LUKOIL. Implementation of the current and would-be projects will considerably strengthen the economic potential of our companies.”

LUKOIL and Gazprom have a number of joint projects. One of them is gas supplies from LUKOIL’s fields in Bolshekhetskaya Depression and in the Northern Caspian Sea. Along with Kazakhstan, both companies are involved in the geologic exploration and development of Tsentralnoye oil and gas condensate field in the Caspian Sea. Additionally, LUKOIL © Shell and Gazprom share a project under

which associated petroleum gas from the northern group of fields of OOO LUKOIL-Komi is processed at Gazprom’s gas-processing plant in Sosnogorsk.

This month, LUKOIL signed a deal with Transneft to guarantee the supply of high quality fuel to the domestic market and to develop the pipeline system.

The parties have also agreed to increase the output of LUKOILVolgogradneftepererabotka refinery.

As part of the project, LUKOIL will partly finance the expansion of the pipeline network and will ensure the supply of diesel fuel

EURO-5 to the system of Transneft’s main product pipeline in the amount of at least three million tonnes per year over a 15 year long period.

Alekperov and Transneft President Nikolai Tokarev signed the agreement on May 30th 2014.

With LUKOIL now taking a strong grip in Iraq and continuing to grow its operations in its other locations, it seems that the future is bright for this innovative company, and with its position being the envy of most (in the world, not just Russia) it looks certain that operations in Iraq will be successful, for all involved

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“The only integrated energy company that serves the entire energy conversion chain” The Russian energy market is one of the most dynamically growing and at the same time one of the most competitive markets in the world and Siemens Energy Sector is leading the way in this space when it comes to providing products and services throughout the entire energy conversion chain.

The Energy Sector of German multinational engineering and electrical conglomerate, Siemens, is one of the most important and most widely respected organisations in the global energy industry.

Globally, the company is a leading supplier of a wide range of products, solutions and services in the field of energy technology. In the fiscal year 2013, the Energy Sector had revenues of €26.6 billion and a work force of approximately 83,500.

But what makes this company such a powerhouse? What sets it apart from the competition? Vice President for Siemens LLC Russia and Director for Siemens Energy Sector in Russia, Andre Petry explains that the company’s focus on efficiency and its ability to operate all the way up the energy chain is one of its major strengths.

“Siemens is the only integrated energy company that serves the entire energy conversion chain with products, solutions, and services, so it is the only company that provides solutions for all energy sectors including fossil and renewable power generation, power transmission and distribution and energy services as well as marketspecific complex solutions for such

industries as oil and gas and many others.”

He details the company’s operations in each area, hinting that Siemens is widely regarded as the industry leader across the board.

“Siemens Fossil Power Generation offers innovative technologies making energy affordable for the global society, and at the same time profitable for operators. By using innovative fossil power systems, scarce resources can be exploited with maximum efficiency. ”As for Renewable Energy, Siemens offers integrated solutions for wind power generation, hydropower (small hydro power and ocean power), as well as proven steam turbines and the entire range of auxiliary and ancillary system components and control systems for solar power generation.

“Siemens Wind Power offers solutions to meet both energy and environmental needs. Driving down the cost of wind power is our key target as we strive to make renewable energy independent of subsidies. Roughly 11,500 Siemens onshore wind turbines, providing more than 17,200 of clean, renewable energy, are currently in operation all over the world.

“As a global leader in Power

Transmission technology and a longstanding, trusted partner of public entities and private enterprises, such as utilities and grid operators, we have always been in the vanguard of technical development.”

Innovative products form the base of the company’s portfolio and in the power transmission sphere this portfolio includes: extraordinarily powerful and trendsetting DC transmission systems and innovative reactive power compensation systems for AC grids, complete grid access solutions, air and gas-insulated switchgear, turnkey substations, transformers for various applications, and high-voltage products, such as circuit breakers, surge arresters, disconnectors, and bushings.

In Russia, one of the world’s most important energy geographies, Siemens has taken on the task to support updating the outdated energy infrastructure.

“Taking into account that Russia’s energy assets are outdated up to around 60% (according to the Russian Ministry of Energy) there is a huge potential for implementation of modernisation and upgrade service packages in the market,” says Petry.

And the service department of

Siemens Energy in Russia is again an industry leading set-up. “Our extensive global service network enables us to react quickly and promptly send experts on site, should an urgent situation arise. Siemens has strategically positioned its Russian service facility in Krasnodar. Our highly skilled service engineers are available 24/7 to help customers throughout Russia and assigned countries with their expertise on commissioning, service, and maintenance of Siemens equipment.

“From modernisations and upgrades, remote monitoring, lifetime extensions, and condition monitoring to logistical and turnkey service, we team with our clients to achieve optimal performance and maximise success,” Petry explains.

Realising the importance of Russia, and the surrounding area, to the global Siemens Energy business, Petry explains that a detailed strategy for the region has been adopted and the focus in the future will be on unlocking the areas great potential in an effective and efficient manner.

“Our main strategy directions in Russia, Belarus and Central Asia are: Localisation, Regionalisation, and Energy Efficiency. The Russia, Belarus and Central Asia Energy Sector plays a key role in and contributes a lot to modernisation of the energy sector in respective markets in compliance with the government programs.

“Russia has one of the biggest efficiency improvement potentials in the world. The Russian government is aware of this potential and has launched various programs to realise these savings.”

Gas transportation in Russia is now a benchmark for how things should be done and Siemens has played a major part in the development of the industry, supplying world-class equipment.

“The Russian gas transportation system is one of the best-developed in the world. It considerably outperforms conventional gas transportation systems elsewhere both in terms of gas streams and power supply © Shell The system comprises capacity. more than 160,000km of mainstream

pipelines and lead-away pipes, 215 line compressor stations with the total capacity of 42,000MW, six complexes for gas and gas-condensate refining and 25 underground storage facilities.

“Top-quality gas transportation requires world class-equipment.

To meet the needs of the Russian gas transport market, Siemens has established a plant for pipeline compressor manufacturing and packaging, which provides high-end pipeline compressors and packaging optimised for local needs,” says Petry.

While always looking to build new partnerships and push new boundaries, Siemens Energy is fortunate to already have some important relationships with other big names from related industries.

One of those big names is Lukoil and Petry expects the relationship to flourish.

“Siemens and Lukoil intend to develop partnerships not only in Russia but also in Azerbaijan, Uzbekistan, Kazakhstan, Bulgaria, Romania, Iraq, Saudi Arabia and Venezuela. We strive to realise our joint project transforming the efficiency of Siemens technologies into the business success and competitive advantages of our partner Lukoil.

Our collaboration in environmentally friendly power generation and efficient power transmission and distribution should stimulate the further sustainable development of the Russian economy.”

Lukoil operates in 13 countries and produces over 2% of the world’s crude oil. Siemens is one of the only companies that can offer a turnkey service through all areas of production, all over the world.

“The comprehensive portfolio of up-stream, mid-stream, down-stream applications available from Siemens, consisting of reliable, innovative, efficient and environmentally-friendly products, systems and solutions, extends across the entire oil and gas value chain. Moreover, because Siemens is one of the few companies to supply solutions to all areas of the oil and gas industry, we can work with our customers in developing cost-saving,

integrated solutions as a single source supplier,” says Petry.

“The key Siemens Energy project of last year for the Russian oil and gas industry is ‘Yamal LNG’. As you may know, Siemens is to supply SGT-800 gas turbines, compressors and service to our customer Yamal LNG, which is a JV of Novatek JSC, Total SA and CNPC. “Quite recently, in April 2014, we have won the tender for the supply of 28 E-Houses for ‘Yamal LNG’.

Fully equipped and pre-tested power equipment centres, E-houses are the optimal approach to install electrical power and control equipment for a fast and reliable power supply,” says Petry.

But Russia is not the only region where Siemens is seeing large scale opportunities. Huge contracts have begun around the world.

Answering specific questions about the Malaysian market Petry details projects that have recently kicked-off in Malaysia.

“Last year, Siemens Energy’s Oil & Gas Division was awarded a contract to supply turbo compressors and mechanical-drive gas turbines for the Petronas Bintulu Plant in Sarawak, East Malaysia. The project will help to improve overall plant efficiency and minimise gas flaring at this LNG facility. The plant will employ the world’s first gas-turbine-driven cryogenic-temperature BOG turbocompressor from Siemens.

“Another example last year was our contract for selling two H-Class gas turbines to Malaysia that will allow the TNB Prai combined cycle power plant to become the most efficient gas-fired power plant in South-East Asia.”

With more projects coming online all the time, the vision for this inventive company is being the pioneer in all fields where it is active.

Following its core values of being responsible, excellent and innovative is what has kept Siemens at the forefront of the industry for the past 160 years in Russia and 165 years in Germany, and its success looks set to continue.

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