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Lukoil turns to foreign upstream in quest for reserves replacement: CEO

Moscow (Platts)--12 Jan 2018 508 pm EST/2208 GMT


* Renews interest in West Africa * Expects Mexico Block-12 contract in 2-3 months * Studying fields for Iraq's fifth licensing round in May * Continues talks with Iran despite political turmoil; scraps oil swaps

Russia's second-largest crude producer Lukoil is ready to expand its upstream portfolio with new or recently acquired assets both in Russia and abroad, including in Iraq, Iran, Mexico and West Africa, as it seeks to replace its reserves to maintain crude production levels, CEO Vagit Alekperov said Friday.

"Yes, we are looking today at the projects that would allow us to compensate for the volumes we produce," he told reporters in a briefing. "Our own geological exploration allows us to replace about 70%-75% of that production. The remaining 25%-30% is a question of acquisitions."

Lukoil plans to direct 20% of its total 2018 investments, estimated flat on the year at Rb550 billion (around $9.7 billion), to international projects, he said, adding those investments will not be reconsidered regardless of the OPEC/non-OPEC deal in place.

"We are not changing our investment program based on short-term decisions to cut production. We understand it is of a short-term nature. But the investment cycle in the oil industry is rather long, so we will continue geological exploration in order to maintain and multiply our reserves," he said.

While maintaining its key focus on Russia, where it produces around 1.65 million b/d, Lukoil sees great potential in its existing and potential new African assets, Mexico's Block-12 exploration and development license that it won last year and which it expects to sign a contract on in two to three months, expanding on existing projects and entering new ones in Iraq and Iran, as well as cooperating with Kazakhstan on Caspian projects, Alekperov said. WEST AFRICA

The growth points include assets in West Africa, where Lukoil is making a comeback after it quit a number of projects including in Ghana, Cote d'Ivoire and Sierra Leone in 2015.

The company now considers the region one of its priorities and is boosting its activity in Cameroon and Ghana, and may consider buying into new already-producing assets in Nigeria, Alekperov said.

"We are working today at the provinces of West Africa. We made a range of mistakes there, which gave us experience. Today, these projects are rather well structured, our geologists understand ... their geology and have competencies in these countries. So this is our priority," he said.

In Cameroon, where Lukoil holds a 30% stake in the Etinde license offshore Limbe, which it acquired in March 2015, the company has taken an investment decision to drill two wells for geological exploration, he said.

While the company abandoned plans for an LNG project in Cameroon in early 2016, "there are new opportunities arising for gas processing, so the project is rather good," Alekperov said.

In Ghana, where it withdrew from the offshore Cape Three Points block in 2015 having discovered no commercial hydrocarbons reserves, Lukoil has retained one block developed jointly with Hess and is preparing proposals to the government to transition to the front-end engineering design stage and start development, he said.

"We have formed a block that is economically efficient. So far, we are only discussing the plan of how to present the feasibility stage to Ghana's government," he said.

The company has also started talks on potentially acquiring stakes from Brazil's Petrobras in two Nigerian fields, where it holds a 16% stake in the Akpo field and a 13% stake in the Agbami field, he said.

The discussions have just begun, however, and it is too early to give details or say whether that will happen, as Lukoil is looking for attractive project economics, Alekperov told S&P Global Platts after the briefing.

"We are studying all possibilities. For us today, outside of Russia, the economic indicators have to be higher than we have had here in Russia. When I say higher, I mean 15-20%. In Nigeria, they are so-so," he said.

Unlike Lukoil's other African assets, Akpo and Agbami are already producing fields, which would mean an immediate return on investment.

Lukoil, which is already working on a project with Chevron in Nigeria where the two found commercial crude reserves in 2015, expressed interest in additional assets in the country last year, when Alekperov traveled to the African country. MIDDLE EAST

Lukoil is continuing to look at expanding its upstream operations in Iraq and Iran, as well, Alekperov said.

In Iraq, where it already operates its key foreign asset, the West Qurna 2 field, Lukoil is negotiating with the government on conditions for further development of the field that would double its production to 800,000 b/d in 2024, he said.

Lukoil has presented its plan for production under the second stage, which besides volumes and timeframes includes the indicators that would improve the economics of this project, he reiterated.

The company is also considering participating in Iraq's license tender for new assets in May, he said.

"We bought the material for license round five in Iraq, and we will study all the fields. No investment decisions have been taken. We have time till May for our specialists to evaluate how well it reflects our strategy," he said.

The company has also completed 2D and 3D seismic exploration at recently discovered field at Iraq's Block 10, where it holds a 60% operating stake in a joint venture with Japan's Inpex, and is "happy with the results received."

The results prompted the Iraqi government to expanded the block's geography because the field stretches beyond the limits previously set out, he said, adding the company plans to start drilling at the block next year.

The company is continuing talks with Iran on entering the Mansouri and Ab-Teymur fields, despite recent political instability in the country, but seeks high economic returns for additional risks, Alekperov said.

"We believe in this situation, the project's economics must be above average," he said.

Lukoil presented Tehran with its proposals on the fields' development, and the discussion process is ongoing, he said.

"The situation is very difficult. But we do not stop for political factors. If there were some political restrictions, we would try to overcome them. But today, there are no such restrictions. The only limitations today are the projects' economics and the form of management," he said.

Lukoil has, meanwhile, given up on the idea of oil swaps with Iran as uneconomic, Alekperov said.

"The trading operations we wanted to do in the form of swaps between the Caspian and the Persian Gulf are unfortunately uneconomic. The conditions the Iranian side has offered do not satisfy the economics of our projects," he said. The company previously said it was interested in resuming the oil products swaps with Iran that it was engaged in before sanctions were imposed on Iran over its nuclear program.

Lukoil's other trading operations with Iran include joint projects in Shah-Deniz in Azerbaijan and separate local operations in crude sales and their delivery from Iran.

--Nastassia Astrasheuskaya, nastia.astrasheuska@spglobal.com --Nadia Rodova, nadia.rodova@spglobal.com --Edited by Lisa Miller, newsdesk@spglobal.com




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