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Oil Off Limits to LUKOIL
// Resource Use
On Sunday, LUKOIL, the Oil Ministry of Saudi Arabia, and the state-owned company Saudi Aramco signed a gas production contract for the northern part of the Rub’ al Khali desert. Under the terms of the agreement, LUKOIL will sell nearly all of its production to Saudi Aramco, while at the same time LUKOIL is explicitly prohibited from producing oil from the field, even it the company discovers it. In spite of this, LUKOIL considers the project to be economic and is prepared to invest up to $3 billion in it.
LUKOIL won an exploration tender for block A26 in January. Operator of the field will be the LUKSAR Joint Venture set up on February 18 by LUKOIL (80% share) and Saudi Aramco (20%). The block has an area of 29 900 km2.
&Saudi Arabia’s gas reserves amount to 5% of total world reserves, or approximately 10 trillion m3, putting the country in fourth place according to this indicator. Saudi Arabia plans to increase gas production from 55 billion m3 per year to 85 billion m3 per year by 2008. The kingdom’s rulers have determined that they can attract foreigners to product the gas; however, according to Saudi Oil Minister Ali al-Naimi, there will be no oil production tenders for them.
In order to determine the winners for gas-producing blocks A, B, and C (LUKOIL took part in only one of these), the ministry used a formula that takes into account the number of wells a competitor proposes to drill, the amount of exploration work, and payment for geological survey information provided by Saudi Arabia. LUKOIL proposed to drill the most wells on block A (9) and received 218.5 points. ChevronTexaco was in second place with a proposal to drill five wells. ChevronTexaco tool part in all three tenders, but failed to win a single one: block B went to the Chinese company Sinopec, and block C went to a consortium of the Italian company Eni and the Spanish company Repsol YPF.
LUKSAR has five years to explore the block; and at the end of this period the company must determine where it will produce. The total field operating period specified in the contract signed on March 7 is 40 years, and the exploration area must not exceed half of the total area of block A.
Saudi Aramco reserves the right to buy up all gas produced by LUKSAR under take or pay terms for $22.70 per 1000 m3 if production volumes are between 4.3 and 9.1 billion m3 per year. At the same time, Saudi Aramco is committed to constructing a branch gas pipeline from the Master Gas System main running from the Red Sea to the Persian Gulf. Any gas condensate that LUKSAR produces may be exported at world prices, but again through Saudi Aramco.
Despite these restrictions, LUKOIL’s president, Vagit Alekperov, considers the project profitable for LUKOIL. After signing the agreement, he announced that the company would invest up to $3 billion on exploration of the block, if exploration yielded favorable results. The return on the project in this case will be no less than 12.5%.
According to the calculations of Aleksandr Kolomatsky, LUKOIL’s manager for the Middle East, the structure of the block A fields repeats the structure of the nearby Gawar oil field, the largest in the world, where the oil-bearing strata have a shallower occurrence depth than the gas-containing strata. According to Zaki Shinawi, director of the Oil Ministry’s department of the eastern provinces, if the company finds oil on the block, it “must continue on without touching it.” Minister al-Naimi was even more specific about what to do if the well flowed oil instead of gas: “It must remain dry.”
Petr Sapozhnikov, Riyadh
All the Article in Russian as of Mar. 09, 2004
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Photo: Sergei Mikheev