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back MON, DEC 10, 2012

Lukoil Confirms Lower West Qurna-2 Output Target

Russia's top private oil company Lukoil has lowered the production target level for its West Qurna-2 project in Iraq by 700,000 barrels per day and is currently in the process of formalizing the amendments with the Iraqi government.

Speaking at the Global Energy Intelligence Day (GEID) in Moscow last week, Andrei Kuzyaev, president of Lukoil Overseas, which operates the oil major's upstream projects outside Russia, said that production plateau of 62 million metric tons (1.2 million b/d) is to be reached by 2017. Under the original terms of the contract, Lukoil aimed to be producing 1.9 million b/d by 2017. That was the level Lukoil offered when Baghdad made the Russian major winner of the contract for the West Qurna-2 development at the end of 2009. Lukoil also asked for the lowest remuneration fee of $1.15 per each barrel of produced oil as part of its winning bid.

The change of the production target is in line with the policy of the Iraqi government, which, reacting to complaints from international oil companies (IOCs) about tough terms of the service contracts, agreed to lower the levels stipulated in the original contracts. Concerns about future global oil demand also factored into Baghdad's decision to reduce output targets.

Speaking at the Oil & Money conference in London last month, Iraqi Deputy Prime Minister Hussein al-Shahristani said the new overall production plateau would be in the range of 9 million-9.5 million b/d by around 2017-20 as opposed to an ambitious 12 million b/d by 2017 targeted originally during Iraq's first two licensing rounds (IOD Nov.14'12).

Al-Shahristani also said the lower plateau level would extend production over many years. It remains unclear for how long Lukoil's contract for West Qurna-2 would be extended as the amendments are still to be formalized. The original contract for West Qurna-2 was signed for 20 years with the right to prolong it for another five years. The peak output of 1.9 million b/d was to last for 13 years. Lukoil is to start early production from the field at the end of next year at 150,000 b/d, rising to 400,000 b/d in 2014 (IOD Dec.6'12).

Meanwhile, Lukoil's first executive vice president for exploration and production, Ravil Maganov, told reporters Thursday that the Russian company must inform Exxon Mobil and the Iraqi government about its interest in acquiring a stake in the West Qurna-1 project by Jan. 15. The US supermajor is divesting its 60% stake in the project -- now producing 420,000 b/d -- in favor of more lucrative production sharing agreements in the semiautonomous Kurdistan region of northern Iraq.

Maganov failed to say whether the Russian company tends to a positive decision on West Qurna-1. He only noted that "we have access to the data room and are carefully studying what has been done and how much has been spent." He also said that there are other companies looking at the asset, although they are not numerous.

According to Kuzyaev, Lukoil's experts are now considering possible synergies from simultaneous participation in West Qurna-1 and West Qurna-2 schemes. It is expected that Lukoil would try to attract a partner for the developments.

In response to criticism that if Lukoil joins West Qurna-1, it will increase its financial risk in southern Iraq where majors like Exxon and Statoil are exiting, Kuzyaev said at GEID that the massive production expected from West Qurna was worth it. The combined peak output from West Qurna-1 and West Qurna-2 was expected to reach 4.2 million b/d under the original terms. However, the target of 2.3 million b/d initially set for West Qurna-1 is expected to be lowered as well.

Nelli Sharushkina, Moscow

This article first appeared in International Oil Daily

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