"LUKOIL" is a vertically integrated Russian oil major that has the reserves and refining capabilities to compete with the largest oil companies in the world. Lukoil has recently seen vast variations in revenues from its refineries which are more vulnerable to the inherent volatility in the oil market. As a refiner, higher oil prices just mean higher costs and lower margins, a condition exacerbated by price-competitive nature of the refined petroleum industry. LUKOIL cannot pass the increasing input costs onto customers because they would simply move to a lower-priced refiner, so the company must deal with volatile margins - as seen by its recent revenue growth and simultaneous income decline. However, Lukoil's crude oil sales have stayed roughly flat, as they acquire companies to contend with decreasing proven reserves .
The majority of LUKOIL's exploratory operations occur in the Western Siberian region of Russia, where 60% of the country's oil and 90% of its natural gas reserves lay. While this affords the company a vast area of proven reserves to expand, it also means that the company is more heavily exposed to a maturing base. Western Siberia has been drilled for many years, and though it has a large quantity of oil under its surface, the speed at which the region is being exploited means that it will have a much shorter lifespan than other oil-rich regions with stricter production controls, like Saudi Arabia. LUKOIL has made efforts to acquire other exploratory companies in order to increase its reserves, since its own exploration has yielded fewer discoveries.
Russian oil infrastructure is controlled by state-owned conglomerates, and with the bureaucratic machine preventing efficient use of resources, they often create supply-chain bottlenecks that prevent oil companies like LUKOIL from being able to meet potential sales. However, the Russian state can also be a benefactor to LUKOIL, as it prefers to purchase its resources from domestic businesses. LUKOIL's position in the capitalist market puts it at risk of nationalization, as Russian leaders may decide that cheaper-than-market energy is more important to his country than the privatization of industry. On the international market, LUKOIL competes with the oil majors: Exxon Mobil, Chevron, Royal Dutch Shell, ConocoPhillips, and BP.
LUKOIL is a vertically integrated oil and gas company, and was originally one of Russia's national oil companies though it is now entirely privately traded.
Fiscal Year 2010 Summary
In 2010, LUKOIL's net income was $9 billion, a 28.5% increase compared to the previous year, with sales revenues of $105 billion, an increase of 29.4% year-over-year. These increases were due to higher hydrocarbon prices, in addition to the appreciation of the ruble against the US dollar, which affected average realized prices in Russia. During the year, LUKOIL's total hydrocarbon production available for sale reached 2.239 million BOE per day, a 1.2% increase year over year.
LUKOIL's Exploration and Production segment entails exploration, development, and production operations, primarily located in Russia.
LUKOIL's Refining, Marketing and Distribution segment includes refining and transportation operations, as well as marketing and trading of gas, oil, and refined products.
LUKOIL's Chemicals segment includes processing and trading of petrochemical products.
LUKOIL's Power Generation segment includes generation and transportation of electricity, heat, and related services.
LUKOIL owns and operates three major oil terminals: the Vysotsk terminal, the Varandey terminal, and the Izhevskoye terminal. Russia is the largest natural gas exporter and second largest oil exporter in the world. LUKOIL uses its terminals to cut transportation costs when exporting its crude out of the country; it also makes money by allowing other oil companies to use the terminals to export their products.
Estimates of Russia's oil reserves vary wildly, from 60 million barrels to 200 million barrels, though it is generally estimated that 60% of this is found in the Western Siberia region. Furthermore, 90% of Russia's natural gas production and 72% of its natural gas reserves are found in Western Siberia - an enormous amount considering Russia has the largest natural gas reserves in the world. LUKOIL produced 63.7% of its crude oil for the first three quarters of 2007 in Western Siberia. With so much of its production centered in one region, LUKOIL is exposed to a few unique trends. In an attempt to diversify some of its production, on January 11, 2010 Lukoil and StatOil teamed up to drill in one of Iraq's largest fields, the West Qurna, thought to have 12.9 billion barrels of oil. StatOil would have a 25% stake in the venture while investing 1.4 billion dollars, while LukOil would own the remainder on a site where production could reach 1.8 million barrels a day. 
Vagit Alekperov, president of LUKOIL, states that oil production in Russia will reach its peak in 2010-2011, and subsequently decline due to lack of enough incentive in geological exploration from the government, as expenses on new deposits discoveries are reimbursed only if proven successful. In addition, new fields are now signed away to the state rather than to a licensed holder, further discouraging exploration and resulting in a 65% decrease in geological exploration investments in 2010. Without government stimulating exploration, Alekperov says sustained oil and gas production will become difficult. Because LUKOIL produces so much in Russia, it will be adversely affected by a decline in oil production in the area.
Gaibulla Abdullayev, head of Geology and Exploration of Oil and Gas deposits of the state-owned Uzbekneftegaz Company, states that foreign investment in exploration in Uzbekistan will reach over 1.9 billion dollars during 2010-2015. Among the foreign investors, the major companies interested include Lukoil, Gazprom, PetroAlliance and foreign CNPC International, China, Korea National Oil Corporation, South Korea and Petronas Carigali Overseas Malaysia.
In Russia, most petroleum transportation infrastructure is owned either by pipeline company Transneft or train company Russian Railways - both owned by the Russian state and both lacking the capacity to handle the all the natural gas and oil that is flowing out of the country. This capacity constraint prevents LUKOIL and other oil companies operating in Russia from being able to export oil as fast as they can, meaning the companies are losing potential export revenues. In LUKOIL's case, this has had a recent, material effect on its growth strategy; in October, 2007, the company canceled its plans to increase capacity at its Vysotsk terminal to 15 million barrels per year from the 12 million that the company expects to have shipped out of the port in 2007. 3 million barrels of crude at the company's average Mediterranean market price of $63.96 for the first nine months of 2007 means that the company will lose about $192 million in potential revenue from the canceled Vostok expansion alone.
In 2007, Russia's GDP grew 8.1%, compared to the United States' 2.2% and China's 11.4%. As a fast-growing, state-controlled capitalist economy, Russia's energy demand is also growing. This presents an opportunity for LUKOIL; as a state-controlled economy, Russia's government will give preference to Russian businesses when purchasing fuel and building power stations, and LUKOIL, as the largest privately-owned oil company in Russia, is positioned to benefit. The risk, however, is that the state may not want to pay the market price. Since LUKOIL is a publicly owned company, its executives are responsible to its shareholders, so they may not agree to sell oil at lower-than-market prices. In the present political climate, where President Vladmir Putin has near-authoritarian powers, LUKOIL is taking a significant risk. While Russia provides a great opportunity for shareholders, it's possible that going against the wishes of the Kremlin would lead to LUKOIL's nationalization, especially if the Russian state decides that it would prefer cheap energy and direct state income to foreign investment.
Since around 98% of LUKOIL's revenues come from refining petroleum products, the company mainly sees the bad side of rising oil prices. Most of the oil majors are heavily exposed to the upstream side of the industry, so higher commodity costs benefit more than hurt them, but LUKOIL's sales balance causes the reverse to be true, as crude oil is a petroleum refinery's primary input, and if oil prices rise then margins shrink. Despite the fact that the company can sell itself its own oil, removing the value added costs that are driving prices up, LUKOIL does not produce enough crude to meet its refining capacity, and must purchase expensive oil from other upstream producers.
Oil and gas prices have fluctuated heavily over the past few years, though the trend in 2008 is a rise in prices, with a barrel of oil trading in international market a day after the new year at just over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing demand has led to rising prices - and to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's oil can only be differentiated from another company's oil based on price. At the same time, refined petroleum products are also commodities. LUKOIL doesn't have the liberty to raise gasoline prices to pass the input costs on to customers because gasoline is a price-competitive product, so consumers would simply move to lower-price refiners. Fortunately for LUKOIL, however, the profitability of the current market for crude will drive increased exploration and production. If peak oil theory is just a myth, this should eventually cause production to rise and oil prices to fall.
In Russia, LUKOIL competes with state-owned heavyweight Gazprom. Other international companies involved in all aspects of the oil and gas industry (with a focus on refining) include:
|CONOCOPHILLIPS||ROYAL DUTCH SHELL||EXXONMOBIL||CHEVRON||BP||LUKOIL(1)||Eni S.p.A(1)||Total S.A.|
|Oil and Gas Liquids|
(Millions of barrels)
(Billions of cubic feet)
|Oil and Gas Liquids|
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates
|SUNOCO||CHEVRON||VALERO||EXXON MOBIL||Royal Dutch Shell||SINOPEC||WESTERN REFINING||ConocoPhillips||BP||LUKOIL(1)||Eni S.p.A(1)||Total S.A.|
|Number of Refineries (including partial interests)||5||18||16||37||40||17||4||12||17||9||N/A||25|
|Number of Retail Gas Stations||7,785||25,000||5,800||10,516||45,000||29,279||153||8,340||22,600||6,287||6,441 (in Europe)||16,425|
(1) Latest data is for 2007