September 8, 1998. - LUKOIL's board of directors gathered in Moscow on September 5th 1998 to discuss the implementation of the budget and of the investment program for 1998, and a strategic program to develop oil extraction in Arkhangelsk region and in the northern sector of the Caspian Sea.
A sharp drop in prices on oil and petroleum products, and serious tremors on the financial and stock markets are impelling the company leadership to review the initially-approved budget and investment program for the first half of 1998, the speakers said. The implementation of the investment program is also being hampered by an unfounded tax burden, first of all the current excise rate, and by an overstated ruble-to-dollar exchange rate.
Despite cuts in budget spending and the curtailment of the investment program, LUKOIL has scored major victories. In the first seven months of the year, the company produced 37 million tonnes of oil, 3.6% up from the same period of the last year. Gas production increased by 17.9%, including of oil gas by 6.1$, and oil exports increased by 41% and the depth of oil refining by 3.5%.
The company continued to implement promising projects in Russia and abroad. Sizeable stakes in the Central Fuel Company, in Romania's Petrotel oil refinery, in Arkhangelskgeoldobycha company and in the Stavropolpolimer petrochemical enterprise have been bought or talks on their purchase are being held. The reconstruction of the Perm and Volgograd oil refineries continues and a number of agreements with strategic partners, including the Conoco oil company (the U.S.), on the development of Russia's northern oil fields have been signed.
To save its positions on the market, the company has taken a series of measures to cut down operational expenses on oil extraction and on the sale of oil and petroleum products. The cost value of the extraction of 1 tonne of oil, in ruble terms, has been reduced by almost 14%, and of oil refining by 10.7%, on the basis of the performance of the company's two oil refineries.
LUKOIL plans to step up work to neutralize the negative impact of the price fall on oil and petroleum products, and of the current crisis on the internal financial and stock markets. The board of directors plans to draft and submit to the government proposals on adjusting the tax-payment schedule in the oil sector with due account taken of the length of the production cycle from oil extraction to sales and the receipt of payments, and on freezing ruble outlays at the current level.
The board of directors has approved the company's strategy in developing the hydrocarbon resources in the north of Russia's European zone, with a special emphasis on the Northern Territories chain of oil and gas fields, the Varandeisko-Medynskaya group, and the Tedinskoye and Eastern-Kharyaginskoye fields. In October 1998 the Company is to finish a feasibility study of the Northern Territories, so it might be entered on the list of oil and gas fields developed under production-sharing arrangements. A memorandum on LUKOIL's and Timan-Pechora Company Consortium's joint development of oil and gas fields in the north of Russia's European zone is to be drafted and discussed at a regular session of the Russian-American Commission for Economic and Technical Cooperation.
The board of directors has noted that since 1995 the company has accomplished an extensive prospecting program in the north of the Caspian Sea. As result of a tender, held by the Russian Ministry for Natural Resources, the company has received a licence to develop the Northern sector of the Caspian Sea, comprising four most promising oil fields. It has also obtained the Ministry's licence for installing a jack-up floating drilling rig and for drilling the first exploratory well on Khvalynskaya structure. The company has two floating drilling rigs and two service vessels, and is conducting talks on the acquisition of equipment for dealing with oil spills. The program for increasing oil production in the northern sector of the Caspian Sea has been worked out and is being implemented in strict accordance with the nature-conservation legislation and with due account taken of present-day know-how which helps minimize damage on the natural environment. In the period from 1998 to 2000 exploratory wells will be drilled, after which, if industrial reserves are discovered, the construction of the first stationary platform will begin. As considerable investment and a lengthy period for the geological prospecting of the Caspian Sea bed are required, the company thinks that all of the newly-discovered oil and gas fields should be entered on the list of oil and gas field developed under production-sharing arrangements.
Summing up the results of the session, LUKOIL President Vagit Alekperov said that the company's main task is to keep production spending at a level which ensures profitable oil production, refining and sale of petroleum products, and to optimize the marketing policy and the financing of priority investment projects in Russia and abroad, thus laying a foundation for stable development in crises and in the long-term perspective.
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