Updated June 26, 2008

   First within ten years Lukoil has purchased an oil refinery in Europe: on June, 24 the company has purchased 49% in ISAB, the Italian oil refinery complex. How the company has managed to do this, how it compensates the oil extraction drop that has started this year and where it is going to operate, told in the interview Vagit Alekperov, Lukoil Company president and joint owner.

- This year Lukoil has first faced the extraction drop. Are you going to correct the strategy?

- Not yet. The planned oil extraction drop that takes place in Western Siberia today is a natural process. This year we will bring Yuzhno Khylchuyu field in Yamalo-Nenets autonomous district to full capacity that results in considerable extraction increase. The Caspian field development as well as new projects in Uzbekistan will allow us to increase the overall volume of hydrocarbons production, therefore the company plans and investments remain the same, and we consider that the approved parameters should keep.

- Concerning oil extraction volumes also?

- Situation with oil is more complicated. We take measures that will allow us to stabilize extraction in Western Siberia in the nearest two years. It is low productivity reserves development in particular.

- Can Eastern Siberia become a new region for Lukoil operation?

- It is an interesting province, but unfortunately, we cannot cover all territories. There is the development program and there are financial possibilities of the company. Field in the Caspian Sea, Timan Pechora province, Bolshekhetskaya depression are priority projects for us. And the financial potential we rely on within the nearest ten years will be overall involved, including our foreign projects.

- Can Lukoil take a loan?

- We consider that our debt load is balanced, and we would not like to increase it. And Russia’s tax system does not allow us to provide investments completely due to own resources. Even last year that had been rather favorable for oil companies, Lukoil received net income at around $10 billion, and investments totaled around $14 billion. However, the changes in tax legislation that are planned to implement on January 1, 2009, will enable companies to cut the borrowings volume to realize operating projects. But we do not consider Eastern Siberia in a mid-term prospect over single reason – the company financial possibilities. Moreover, we think that the objects we have are more economically effective today.

- Are you going to operate on the northern seas shelf?

- Obviously, our company is the only company in Russia that has self-mastered technologies of offshore fields’ development. I’m deeply persuaded that today the Russian companies are ready to establish consortia that would be engaged in full scale self-development of the unique fields in the arctic seas, as well as to conduct geological prospecting, as the shelf of Barents sea and Arctic Ocean is not examined yet.

- Can your joint venture with Gazprom Neft start to operate on the shelf?

- We hope so. Today we hold active discussion concerning particular fields that will enter the venture structure. The agreement is not limited to any particular provinces. But we do not discuss the shelf yet, and I think Timan Pechora could become the initial stage of this venture development. I would not name fields, as the discussion is a dynamic process. But three or four areas from our part and two or three from Gazprom part can enter the venture.

- Are you afraid of state limitations concerning participation in auctions for strategic fields?

- Of course we are. But it seems to me that today there should not be limitations in Russia concerning equity capital structure: whether there is the government in it or not. Lukoil is the national company and is the largest taxpayer, and it should have the same opportunities as our colleagues.

- You have 70% of stocks in ADR…

- But we pay taxes here. And it is the main criteria determining the company national identity.

- Does a private company have prospects of development in Russia?

- Sure. Each year we make some discoveries, take part in auctions. Lukoil has transformed from the national company into transnational one: our interests are in Central Asia and far-abroad countries. Opportunities to search for projects exist worldwide, and one has just to look for them more actively.

- So, is the core growth potential in the world?

- In the prospect of the nearest ten years the company will make its core investments – around 80% – in Russia.

- Lukoil has reduced oil supplies. Will it manage to change the situation?

- Core value of any company, working in raw material industry, is its supplies, therefore we actively conduct geological prospecting, and we have found a new field in Komi, in the Caspian Sea. The company will be provided with supplies to reproduce mineral resources.

- So, they will grow this year…

- They will grow overall. And oil supplies will probably stabilize. We will not succeed to develop the fields we have already found.

- What are your plans concerning extraction?

- We are planning a small growth – more than 1% – concerning oil.

- Has Lukoil already calculated how much it saves from new tax deductions?

- We know what changes are getting prepared as we participate in discussions. At the moment Lukoil can get around $1 billion more. I want to express my thanks to Igor Sechin, our vice prime minister, who calls oil companies to discuss issues related to taxation. Our, Rosneft, Surgutneftegaz and Gazprom Neft initiatives were almost all taken into account, but not all as we had wished, to balance our investment expenditures with our earnings. So, we hope that the northern seas as well as the bottom of other Russia’s seas will get to the tax system considered today. After all, development of the Caspian Sea and the Sea of Azov is also capital intensive and difficult from technological point of view.

- What offers have not been taken into account?

- At the moment rate reduction of Mineral Extraction Tax has not been taken into account fully. But still cut-off rate for tax calculation is set at $15 level per barrel, and we consider that it should be $24 in terms of the current expenditures growth. We continue discussions with the Ministry of Finance and the Ministry of Energy. I do not want to anticipate events, but hope the common sense prevails.

- Did you have contradictions with your partner ConocoPhillips concerning Lukoil development strategy?

- Lukoil develops as an independent company.

- What benefits gets Lukoil from ConocoPhillips?

- Enormous ones. First – its participation in our capital has increased our capitalization, as ConocoPhillips has purchased the interest part at the market. Second – we developed the program of personnel training with their consultants’ participation in the company. When it goes about issues we have to discuss, concerning participation in large international projects in particular, we can always address the best ConocoPhillips specialists and they have never refused to help us. And these consultations are for free. Third – ConocoPhillips experience on Alaska has helped us to construct Yuzhno Khylchuyu field from ecologically safe and economically effective point of view. We discuss projects in Turkmenistan together, constantly monitor the markets we are interested in – Gulf countries, Europe, from assets in downstream point of view. ConocoPhillips, seeing a synergy Lukoil receives in Eastern Europe, has sold us its assets – retail networks in Poland, Czech Republic, Slovakia and Hungary.

- Does agreement with ConocoPhillips allow attracting other foreign partners?

- We do not have deterrents that would have been fixed in the agreement. We can work with any company that can provide us with both technologies and advantages that ConocoPhillips cannot give us.

- Will Lukoil use the authorized stocks?

- It will, in order to purchase large assets. But today we can comfortably attract money from the market, and tax amendments will provide the company with the additional financial resource.

- Is Lukoil interested in China’s market?

- We did not consider China yet. As I have already told, the company possibilities are limited and it has enough projects currently. It is a logic step for Rosneft that is widely presented in Eastern Siberia. And this logistics is difficult for us, and we cannot build an effective technological chain.

- Does the company consider other Asian markets?

- We do not prepare projects currently.

- Do plans of works purchase on Cuba keep?

- Unfortunately, agreements’ signing on projects in Venezuela is postponed. We are constantly making corrections. Acts the country government passes today burden the economy. So, we cannot take a risk and consider these projects as a source to load the Cuban works. And to buy a works without logistics of oil deliveries is pointless.

- Are you going to leave Venezuela?

- No. We consider that this region has unique oil and gas reserves and Lukoil should stay here. In future, we are going to extract oil there and refine it in the region, as we are present at the US retail market.

- Is retail business profitable in the USA?

- Today these are low profitable projects. But we have to be present at the market of the country that consumes 30% of the world oil and where we realize 8 million tons of oil products a year. The project has development prospects related to our new refinery assets as well.

- Hungarian MOL fearing takeover of the Austrian OMV said it could ask for help the Russian companies. Did they address you?

- No. But we have interests in downstream in the Eastern and Western Europe, and in countries, where we could have supplied oil through Druzhba (Friendship) oil pipeline. I am convinced that energy safety declared by Europe can be provided by means of mutual integration of the Russian raw material base and target consumers of our products. In such a way, we will remove a great number of mediators, and buyers will purchase raw materials at more fair prices.

- Did you offer the German works to purchase oil without mediator participation?

- They say mediators’ participation is related to "the Russian risk". We ask them to specify, what "the Russian risk" is. They explain that it is charts’ stability, cooperation with the Ministry of Energy and Transneft, and mediators act as the so-called stabilizers. I consider it is unfair and we do not need mediators. Otherwise, our companions should have told us that mediator bribes someone to provide charts. But they do not say such things. So what mediator is for?

- So, the problem is with works…

- The problem is with distorted pictures of the Russian realities concerning oil transportation formed by mediators. I do not talk about offshore deliveries, as there are risks here and one should accumulate significant batches and direct them to the more efficient markets. And there are neither storms nor demurrages of vessel on an oil pipeline.

- Is Lukoil satisfied with annual export charts?

- They are more convenient, and we can plan relationships with our consumers, as well as logistics expenditures. If we order tankers for a year, we get discount on freight. We should keep annual charts, as when we cut expenditures and get additional earnings, we pay more taxes, and both the state and oil companies are interested herein.

- Recently you declared about the transaction of refinery purchase in Europe, first within ten years period. Why did not the company manage to do this for so long?

- There have been some complications. First – economic one. Lately there had been the unique margin on oil refining, so the price for these assets was rather high. Second issue – overall European Union mood concerning energy safety. But I consider our activity in Bulgaria a good example, where we own the only oil refinery in the country and where we have never been accused of monopolism. We managed to keep a competition environment: Lukoil owns just 300 gas filling stations in Bulgaria from 8 000, and sale price for refinery oil products is equal for everyone. All this permits us to tell our colleagues from Europe that our presence strengthens energy safety.

- Will Lukoil have problems with switching to Euro-3 standard regarding oil products in Russia in 2009?

- Lukoil can switch to new standards, but we consider that our colleagues should do this as well. Therefore, a switch should be prolonged, so they have enough time to prepare. We are all operating at one market that should get the gas of one standard and high quality.

- Do you plan to introduce petrochemical assets to the market?

- Not yet. But we prepare reorganization – management advancement, and our assets restructure including Saratov, in which Rosatom is interested. We have large petroleum chemistry in Burgas, but it has already become obsolete, as the technologies we use are more than 30 years old. Therefore the company actively discusses a strategy related to overall petroleum chemistry development: what stage of products redistribution we should keep, and what we should give others – small and medium enterprises. I hope that by the year-end we will form the strategy, and then it becomes clear, whether we will invest considerable means in petroleum chemistry and purchase large assets or develop it as "a tail" of oil refining.