Lukoil commits $480 million to Uzbek fields

03/05/2010 | Simon Pirani

Lukoil, the Russian oil company, will invest $480 million in Uzbek natural gas fields this year as it moves to expand production from non-Russian assets

Lukoil, the Russian oil company, will invest $480 million in Uzbek natural gas fields this year as it moves to expand production from non-Russian assets.

The commitment was included in a programme of joint economic activity agreed last month between Russia and Uzbekistan and announced by Russian deputy prime minister Sergei Ivanov.

Grigorii Volchek, spokesman for Lukoil Overseas Holding, the subsidiary that manages activity in Uzbekistan, said this weekend that the bulk of the investment will go into the Kandym-Khazak-Shady project, which is now producing 3 billion cubic metres (bcm) of gas per year.

Kandym-Khauzak-Shady, which started production in 2007, produced 2.34 bcm in 2008, more than half of the marketable gas produced outside Russia by Lukoil.

Lukoil’s other major operations in Uzbekistan are at the South West Gissar field in Ustyurt, and in the Aral area, where exploration work is underway.

“It will be another five years before Kandym-Khauzak-Shady reaches its maximum projected output level”, Volchek told Emerging Markets. Much of the new resources will be spent on drilling wells and completing a gas processing plant at the field.

Volchek added that while the company had cut back long-term investments in 2009, as a result of the oil price dip and the economic crisis, producing fields in Uzbekistan had “scarcely been affected”.

The background to the expansion of Lukoil’s foreign investments is the continuing tug-of-war between the Russian government and oil companies over the level of taxation on production at home.

Newly-developed fields in east Siberia, the largest of which is worked by the state-owned oil flagship Rosneft, have been exempted from all taxes, until at least the end of this year.

Russian prime minister Vladimir Putin and Lukoil CEO Vagit Alekperov last week attended a ceremony to mark first oil being pumped from Lukoil’s operations in the Russian sector of the Caspian sea, and said that the government will also consider scaling back export duties there.

Lukoil’s Caspian fields – Korchagin, Filanovsky and some smaller deposits – have already been partially exempted from Russia’s other key tax, the mineral resources extraction tax.

Chirvani Abdoullaev, a Moscow-based oil analyst, said that investing more heavily in fields outside Russia is logical from Lukoil’s standpoint. “The opportunities for Lukoil to grow in Russia are limited. Putin mentioned this issue in his speech at the North Caspian field.

“In the absence of opportunities at home, Lukoil is looking for opportunities not only in Uzbekistan, but also in Iran, Iraq and west Africa.”

For the Russian oil companies, a further incentive to invest in central Asian gas is that the gas they produce in Russia can only be sold into the domestic market, as Gazprom has an export monopoly. Oil companies have also previously had difficulties gaining access to Russia’s gas transport infrastructure, also a Gazprom monopoly – although this is now changing.

Abdoullaev said Lukoil’s investment in non-Russian fields is “not back to the level of 2008, but is 10-15% up on 2009”.

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