Russia’s second-largest crude producer Lukoil has not asked for any additional
compensation in return for curbing production in line with the extension to
the OPEC/non-OPEC production cut deal, CEO Vagit Alekperov said Friday.

“We are discussing legislation governing the oil industry in Russia overall,
but we are not separately discussing any compensation on the production cut,”
he said.

Ahead of the OPEC/non-OPEC meeting Thursday, some analysts questioned whether
Russian companies would continue to support the output cut deal.

Although it has benefited producers by boosting prices, the longer the
agreement is in place, the greater the risk that they may be forced to
postpone the launch of greenfield projects in order to meet their obligations.

“Subsoil resources in Russia belong to the state, and decisions taken by the
ministry are obligatory for us. Today we are discussing the issues, and of
course the market has to be balanced, stocks are high and the ministry’s
decision is aimed at stabilizing the oil market,” Alekperov said.

He added that the structure of implementation of the deal in Russia, where the
cuts were shared out across companies proportionally, will not change.

“The volumes won’t change,” he said.

On Thursday Lukoil officials said that they will continue their strategy of
balancing out higher output at greenfield sites with lower production at
mature fields in West Siberia and Timano-Pechora to meet their obligations
under the OPEC/non-OPEC deal.

Alekperov said that, when the agreement is lifted, the company can bring
additional production volumes back on stream quickly.

“We think wells where output is limited, we can bring back into production in
around two weeks,” he said.

Alekperov added that he hopes Russian producers will meet with the energy
minister again at the end of the spring to discuss the state of the market.

RUBLE DYNAMICS

Another potential risk for Russian producers linked to extension of the deal
would be a strengthening in the ruble to dollar exchange rate, which would see
costs rise and income fall in ruble terms, analysts have said. Alekperov said
he does not currently see this as a problem and does not expect the ruble to
strengthen significantly.

“Today we do not see that the ruble is directly dependent on the oil price,
the ruble is in free-float,” he said.

When oil prices fell sharply in 2014, Russian producers were cushioned to some
extent by the fact that the ruble weakened significantly against the dollar.
With their income largely in dollars and costs largely in rubles, this allowed
companies to minimize the financial impact of the price drop. Russia’s
taxation system also helped companies to weather the storm.

Alekperov said that a crude price of $60-65/b suits OPEC and non-OPEC
countries alike.

“Therefore we need to agree to be restrained so as not to repeat the mistakes
of the mid-2000s,” he said.

Lukoil is including an oil price of $50/b in its budget for 2018.

TALKS WITH IRAN

Lukoil is also in talks with Iran to participate in two major onshore oil
field development projects — Ab Teymour and Mansour — as well as wider
investments in the country, Iranian oil minister Bijan Zanganeh said following
a meeting in Vienna Friday. It will join Denmark’s Maersk for the
developments.

“They told us that they are going to be joint with Maersk. We asked them to
send a letter to us. The two companies are due to give us their proposals,”
Zanganeh said.

“We discussed ways to develop [Iran’s] oil industry with Lukoil to use their
resources, management and technology in our fields and also trade,” he said.

The talks also involve expanding crude and products trading.

“Because we are expanding our crude oil and oil products with Lukoil. They
take crude and products from us and we want to do a joint marketing work for
products. They sell us a certain volume of gasoline in north Iran which is
important for us to be able to supply gasoline cheaper,” Zanganeh added.

At the moment, a relatively small volume of gasoline is sent to Iran’s NICO
Intertrade Co. at the country’s Caspian Sea port of Anzali. Lukoil also
receives oil directly from state-owned National Iranian Oil Co. for its
refineries in Europe.

“They will decide the volumes between themselves. This is to diversify our
markets and customers,” Zanganeh said.

–Adal Mirza, adal.mirza@spglobal.com

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