You recently said that the OPEC+ agreement on production cuts should be more flexible given current oil prices. When should oil production be increased (and under what circumstances), and when should it be reduced?
I believe that a lot of great work was done: an agreement was reached to create a coordinating council. Thanks to this, the market is demonstrating the indicators that the parties were counting on when making the decisions on curbing oil production. But now the price is already too high, so it is necessary to increase production volumes. The steep drop in oil production volumes seen in certain countries is also pushing towards this. However, the system that was created over the course of this process should be preserved for the future.
I think that with a price of $75 per barrel, production should be increased by 50% of the level of the imposed restrictions. And if the increase in production does affect the price, it will be for the short term. In the medium term, it will recover because world oil consumption is growing, while commercial stockpiles are falling quickly. I believe that a price of $75 per barrel is the balance that has already been found.
Did your company learn a lesson from the price dropping to $30/barrel a few years ago? Did this lead to any internal changes?
Our strategy is based on the $50/barrel scenario and we are keeping it that way. We’ve created financial reserves in case the price goes down. They will let us pay dividends and make the necessary investments. So in the coming 2-3 years our investment cycle will not shrink.
Keeping in mind today’s price of $80/barrel, will you set more ambitious tasks to your managers?
We have different options to use extra revenues that we earn if the price is higher than $50/barrel. Having been bound by the OPEC+ agreement, we increased drilling in Western Siberia to keep production decline rates in 2020-2021 at less than a 3% level. Apart from that, we are looking at some upstream assets in order to buy them.
Are the proposals on the Iranian project ready? Who will be LUKOIL’s partners there? Can we expect a contract to be signed by the end of the year?
We chose one block in Iran and are examining the risks that have arisen again because of US foreign policy. The contract is not signed yet.Our legal team is assessing the potential outcomes of our participation in the project. We are not discussing the project with other IOCs because the block is quite simple and doesn’t require the creation of a consortium.
Is LUKOIL interested in gas trading on the international market?
Our trading company, LITASCO, is thinking of setting up a department to sell gas. We use traders, but right now we are at the beginning of the process. So far, we are setting the task of supplying generating capacity at our plants with gas. That's 500-800 million cubic meters of gas per year.
When will you start selling LITASCO shares to the management of the company? Or do you have other plans for your trading arm?
We constantly think about incentives for LITASCO's management. Its basket of operations contains more than 40% of LUKOIL's resources. Traders have to have incentives - either cash or a percentage of income, or they need to have a stake in the trading company's capital. The procedure for incentives via a block of shares has not yet begun. I think practically the entire staff, around 150 people, will be involved in the process
At the end of March LUKOIL beat other Russian oil and gas companies in terms of capitalization. Do you plan to maintain your position?
No, we don’t have such plans because our companies are different in size. The main asset of any oil and gas company is its reserves. Gazprom and Rosneft have giant reserves. LUKOIL can beat them from time to time by capitalization, but this leadership is not fundamental.
We still believe that LUKOIL is undervalued, so we demonstrate transparency, stable dividend rates, consistency in project development and a conservative approach to investment programs. Our updated strategy got very positive feedback from investors – LUKOIL shareholder value increased by almost 30%. And that’s not the limit.
We should match our international peers in terms of capitalization. As a Russian company, at present, we are limited by specific restrictions. We have problems with financing, as well as with bringing international partners to develop unconventional and deepwater fields. We need to admit that Russia doesn’t currently manufacture its own drilling equipment for 500 meters+ depths. This technology was developed abroad, but we use it here.
You recently said in an interview that it would take five years to prepare a future LUKOIL president. Is the process underway already?
Of course! See how many people work in our company. Every manager should think about his own successor. All of us should think about the future. A company doesn’t live a human life; it will be around for centuries. Look at our peers. These companies have existed for 100-150 years. Some of them started by selling kerosene. Some quit the market; others emerged. But I hope that the base that we created for LUKOIL is strong enough to make it competitive in the future.
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