Focus on the upstream | 334 (April 2017)

2017-04-26 20:23 Views 318

Dubai-based LUKOIL VP Gati Al-Jebouri: why the company is focusing on upstream operations, where it plans to expand in the Middle East and why just getting oil out of the ground is not enough to guarantee investor returns.

You previously worked in downstream operations and trading. How has the transition to upstream been?

When we signed our Iraq contract in 2010 and the President of LUKOIL moved me onto the project, my first reaction was that it was a different world! I had some knowledge of the upstream business from when I had previously worked at KPMG, but it was still quite a transition.

The trading business of LUKOIL (LITASCO), which I ran for five years, is an environment of very quick decision making and risk-taking. Initially, coming into the upstream business was frustrating as the decision making process took much longer. Business today is focused around building long-term partnerships with your customers, suppliers and clients. You have to build relationships with government authorities, National Oil Companies (NOCs) and the contractors that will execute your projects. Today I am very used to this, and the thought of having to make a decision within a few minutes is almost scary.

Recently we have seen a shift in focus from downstream to upstream segment of the value chain, particularly with your activities in Iraq. What was the rationale behind this, and how are your operations in Iraq progressing?

Downstream investments are pretty much complete. What I strongly believe is that we have to look for opportunities to grow the business, and those opportunities have to be in areas that generate the best returns for our shareholders. In today’s environment, these returns appear to be better in upstream, rather than downstream, in the medium- to long-term. There’s certainly a strategic approach by LUKOIL to grow the upstream business across the board, in the Middle East in particular.

Today LUKOIL is one of the largest investors in Iraq. We’ve invested more than $7.5 billion into the country over the last seven years, achieving our current daily production level of 400,000 barrels.

This is slightly less than the entire nation of Libya, and it’s coming from a single field. West Qurna-2 alone produces more oil than 85% of the world’s private oil companies do individually.

Today we are preparing to realize second phase of this project, which will enable us to increase production from the Mishrif reservoir to 550,000 barrels of oil. We will drill new production wells, increase generation capacity of our power station, and build more pipelines.

The other project that we have in Iraq is the Block 10, and in February we completed the first exploration well. We have just announced the potential commerciality of the project. This year we will be drilling two more wells to carry out appraisal and determine the reservoir’s reserves ahead of finally creating a development plan.

Focus on the upstream

What are some of the factors you take into account when evaluating potential projects? Where do you hope to expand in the near future?

The first priority is economic returns. We will grow where there is a good return on our investment and good utilization of our human resources.

We are interested in other Iraqi projects. We are also negotiating two projects in Iran and we believe we could bring to their natural plateaus of production relatively quickly.

We are looking at opportunities in Kuwait, the UAE, Oman, Qatar and Bahrain. It may appear we’re expanding slowly in the MENA region, but this is because we strongly believe in proving our value to NOC partners with realized projects instead of promises. That’s why the Iraq project was critical and an amazing addition to our CV. We proved that LUKOIL is capable of executing major projects in the Middle East.

We recently saw two Chinese firms, China National Petroleum Corporation and the China Energy Company Limited (CEFC China), win concessions with the Abu Dhabi National Oil Company (ADNOC). What do you believe is the strategy behind these agreements, and how will LUKOIL work to benefit from them?

Everyone is trying to guarantee a client base for the crude that they produce. It’s not enough to simply produce the oil; one has to have a secured client base that will pay it. Thus I can understand ADNOC’s logic in selling a 12% share to Chinese investors, who are a natural buyer of oil from the region. One of our strengths is that, irrespective of what we ultimately decide to do with our downstream operations, we have four refineries outside of Russia (in Romania, Bulgaria, Italy and the Netherlands). Those refineries offer in excess of 600,000 barrels a day in terms of processing capacity. Therefore, LUKOIL is also a significant buyer of crude, and can be seen as an outlet for the crude that is being produced.

More importantly, we have LITASCO, which is our international trading arm. As such, we are capable of finding a home for crude. LITASCO today is trading over 3 million barrels per day of crude and products, of which more than half comes from third parties. We also have amazing technological expertise and knowledge from Russia, and we have proven that we can apply those in the region. We add value not only by being able to buy the crude or to trade or sell it, but also through being able to execute projects.

I believe that the UAE, Kuwait and Oman will see the benefits of involving LUKOIL and thereby diversifying their portfolio of investors.

One of the big topics of discussion in the Gulf is the upcoming offshore concessions by ADNOC in 2018. Will LUKOIL pursue this opportunity?

We certainly have an interest in growing our business here. We are very much aware of the offshore concessions that are expiring and need to be renewed, and we will be looking at those very carefully. The economics of projects in the UAE are not very generous. They are fair in the perception of the Emiratis, and most probably they are right, because the political and economic stability of the country is unmatched in the region. We have to understand what the economic returns of the upcoming concessions will be and whether they match our own targets and objectives. That said, we are very interested in working in the UAE, and in Abu Dhabi in particular.

Focus on the upstreamLooking forward, what are your goals for LUKOIL’s operations in the region?

Today we constitute five percent of LUKOIL’s hydrocarbon production, and I would like to see that figure rise above 20%. The region already represents 20% of LUKOIL’s total reserves. I would also like that figure to double, because I feel that the opportunities are there.

GATI AL-JEBOURI Is a VP of LUKOIL and Head of Region 1 (exploration and production in the Middle East). Before coming to the Middle East, he worked as CEO of LITASCO, LUKOIL’s Geneva-based marketing and trading company, during 2005-10. He also previously worked for KPMG in Bulgaria and UK.

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