Gati Al-Jebouri: «The strategy is to grow, but not at any price» | 341 (December 2017)

The Managing Director of LUKOIL Mid East tells Oil Journal about the future oil price, LUKOIL’s goals in Iraq and his strategy for 2018.

2017-12-29 16:10 Views 1029

The Managing Director of LUKOIL Mid East tells Oil Journal about the future oil price, LUKOIL’s goals in Iraq and his strategy for 2018.

The global oil market is recovering, but are we seeing structural changes in 2017-18?

Gati Al-Jebouri: The market is recovering for several reasons. The most obvious one has to do with the agreement between OPEC and non-OPEC countries like Russia to reduce daily production by as much as 1.8 million barrels per day. This has brought down oil inventories worldwide. Twelve months ago they were above the fiveyear average; today they’re still at the high end, but within the five-year average range.

The second reason has to do with a change in expectations for shale oil growth over the next few years. There will be an increase in shale oil production in 2018, and it could be 800 thousand barrels per day or even a million barrels a day. However an important change is that investors, the financial institutions that support this business, have altered their strategy toward requiring better returns and a positive cash flow. That means future growth in shale oil production will not be as dramatic as it was thought possible just a short while ago.

Thirdly, we are feeling the impact of a reduction in capital expenditures. The dramatic drop in oil prices several years ago resulted in significant cost reductions by oil companies and, subsequently, a reduction in capital expenditures. Some estimates predict up to $1 trillion of expenditures were either cancelled or postponed over the last three years. Those changes primarily impacted not immediate production, but future production. And that future is becoming now. Those cuts will impact the growth of production over the next 2-3 years.

All of these factors are contributing to market stabilization and growth. In my interview to Bloomberg earlier this year, I forecast that we would be looking at $55-65 for Brent oil by the end of the current year. I’m a strong believer that without any material changes whether they will be in the oil sector, whether they will be geopolitical, we will be looking to 60-70 dollars during 2018.

OJ: Do you see any structural changes in the current trading system? For example, an increase in cooperation between state and private trading companies?

Gati Al-Jebouri: The trading world is highly dynamic. It’s driven by finance. It’s driven by the risk appetite of traders. It’s driven by state policy and politics. The joint venture (JV) between LITASCO, LUKOIL’s trading arm, and Iraq’s SOMO, which was created this year, is an exceptionally good example of how state trading companies can cooperate with international trading companies.

The JV was initially created to trade 2 million barrels every month, but has since been expanded to also deal with the supply to Iraq of petroleum products. What are the benefits for LUKOIL? We get additional volumes and became a bigger stakeholder in Iraqi oil inputs. In exchange, SOMO gets to have its staff trained at LITASCO in the fields of trading, finance, logistics and operations. No less important is that half of the profit generated by the JV goes to benefit the people of Iraq. This is a win-win situation, which we hope will be the basis for a long term relationship between SOMO and LITASCO.

OJ: What about situation in Iraq? How do you think Shell’s exit from Majnoon project will influence the Iraqi energy sector?

Gati Al-Jebouri: Whenever any investor takes a decision to exit a country, you have to question the reasoning, the justification and assess whether there are risks that they recognized that should be considered. In regards to Shell and Majnoon, we have to note that Shell has not exited Iraq. They’re continuing their considerable work with the Basra Gas Company.

It may be a case of Shell choosing to focus on the gas sector rather than the oil sector. It’s also likely Shell decided the economics of the Majnoon project are not attractive enough to justify the required financing. In the end it’s probably a combination of these factors. I don’t believe that Shell’s exit is a defining and highly negative episode for Iraq’s oil industry. But I would say that Iraq and other international oil companies should carefully examine the implication of such a decision.

Irrespective of Shell’s decision, Iraq, like any other country, must find ways to attract more investors and create a truly competitive environment that brings not only economic benefits, but, more importantly, technology and knowledge transfer.

OJ: What are LUKOIL’s goals in Iraq?

Gati Al-Jebouri: In 2009 LUKOIL won West Qurna-2 tender. This was an important step in a long-term strategy of entering the Iraqi market in its new environment. Since then we’ve won the 4th licensing round for Block 10 and made a major discovery of hydrocarbons at the Eridu field. I’ve already mentioned the JV with SOMO. We’re actively looking for new opportunities to grow the business in Iraq.

The strategy is to grow, but not to grow at any price. We will grow by entering profitable projects that generate good returns for our shareholders, positive cash flow for our company and added value for Iraq.

OJ: What are your goals as a Managing Director of LUKOIL Mid East?

Gati Al-Jebouri: I believe that LUKOIL Mid East (the company managing West Qurna-2) is going through its next phase of development. The first phase involved completing construction of all the facilities that today enable us to produce 400,000 barrels of oil a day. The second phase involved maintaining and stabilizing that production and ensuring we operate the field in a safe way in accordance with international best practices. We are continuing to do that and we’ve already seen very good results. The next phase will involve making sure that we build a strong management team. This will include transferring knowledge to Iraqi colleagues who can work at the junior and middle management level to create a truly international organization led by LUKOIL. This will ensure the positive development of the project.

Per a recent agreement between LUKOIL President Vagit Alekperov and Iraqi Oil Minister of Oil Jabbar al-Lueibi, we have to achieve 450 thousand barrels of daily oil production by 2019 and 800 thousand by 2024. This is the next stage in the growth of the West Qurna 2 project that is managed by LUKOIL.

OJ: Can we expect a stable and peaceful year ahead?

Gati Al-Jebouri: We always hope for a stable and peaceful coming year, and it is something that I wish to everybody – all our staff, their families, all of our colleagues in Iraq and all of our colleagues in the LUKOIL Group. I want to use this opportunity to wish everyone a very Happy New Year filled with joy, health, realized dreams and success for all.

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