Lukoil cast net offshore in Caspian

Lukoil, Russia’s largest privately-controlled oil producer which launched the country’s first oil and gas field in the Caspian Sea, is now casting its net wider. The company is lobbying hard to revive tax breaks, abolished July 1, to help it develop five other offshore fields in the waters.

With the Caspian Sea becoming an arena of competition among energy-hungry Asian states such as China, and Russia competing with Azerbaijan and Turkmenistan for supply contracts, starting the pumps in the Caspian has become a top priority. The Russian government clearly wants to put the failed bid to develop East Siberia into a major production centre behind.

The Filanovsky field, the biggest find in Russia in the last quarter century, with as much as 4.5bn tonnes of hydrocarbons beneath the water, has come as a shot in the arm for Lukoil. “That’s comparable to Azerbaijan’s offshore reserves, and double the estimated reserves of Turkmenistan,” says Vagit Alekperov, Lukoil’s CEO. As harnessing those reserves require massive investment, Lukoil will spend RUB340bn ($11.2bn) to build 28 drilling platforms and lay over 1,000km of pipeline over the next decade, says Alekperov. The company is banking on this field to halt its sliding production in recent years, as Western Siberian reserves dry up.

A report for the first half of 2010 showed its oil output shrank by around 1% compared with the same period in the previous year. Analysts from investment bank Alfa, however, say the full-fledged operation of the Caspian fields could stop this reversal.

Alexander Burgansky of Renaissance Capital points out that the Caspian fields will account for 13% of Lukoil’s total Russian crude output by 2015. For now, only the relatively small Yuri Korchagin field is up and running, with oil planned to flow from Filanovsky in 2014.

The Gulf of Mexico oil spill could not come have come at a worse time for Lukoil as offshore drilling is seen as not only a financial and technical challenge for relatively inexperienced Russia companies, but one of safety, environmental concerns and PR. Against this backdrop, Lukoil is “currently building Russia’s first specialised training centre for experts who work on offshore rigs, and emergency situations training will feature heavily,” says Alekperov.

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