Lukoil in Royalty Talks with Uzbekistan

Russian giant Lukoil is in talks with the government of Uzbekistan about royalties and it has downgraded its production forecast for gas in the double land-locked central Asian republic, it said September 25.

CEO Vagit Alekperov was speaking at the inauguration of Uzbekistan’s South-West Gissar project September 25 which includes a 4.4bn m³/yr gas treatment plant, a gas pre-treatment unit and six gas gathering stations. This will allow gas production at the Gissar cluster up to the planned level of 5 bn m³/yr, Russia’s biggest private oil company said.

He said that “as of early September, 2017, the cumulative production of Lukoil-operated projects had reached 45bn m³.” Lukoil, with $6.5bn already spent, is the largest foreign investor in Uzbekistan and Alekperov said it planned to invest a further $3bn in Uzbekistan to boost gas output from 6.5bn m³/yr to 16bn m³/yr by 2021-2022. Of that, half will come from Kandym, 5bn m³/yr from Gissar and 3bn m³/yr from Khauzak.

This marks a downgrade from previous forecasts as Lukoil had planned to increase the output to 18bn m³/yr by 2020.

Source: Lukoil’s annual report

Some of the gas will go to China and the rest of volume will be used at home or delivered to Gazprom for transit to Russia. China imported 4.34bn m³ Uzbek gas in 2016, just over twice as much as it did the year before. It has a contract to import 10bn m³/yr Uzbek gas.

Lukoil’s new investment plan came as a Gazprom joint venture with state Uzbekneftegaz has recently tendered for a contractor to drill up to 400 wells, including 254 gas wells, over the next five years, aimed to add 54bn m³/yr gas to the production volume.

Neither the government nor Uzbekneftegaz has published oil and gas production statistics since 2012. But BP’s statistical review of world energy says that Uzbekistan produced 62.8bn m³ sales gas in 2016, about 8.4% more than 2015. Its gas exports were 11.4bn m³ last year. According to Lukoil’s annual report, Uzbekistan accounts for a quarter of its gas output, which is high-margin gas as it goes mostly to China.

The construction of the Kandym gas processing plant with an annual capacity of 8bn m³/yr began in April 2016.

Russian holds 88% of Lukoil’s hydrocarbon reserves, concentrated mainly in West Siberia. Offshore fields and high-viscosity oil comprise around 10% of the proved reserves. About a half of the proved reserves in international projects is located in Uzbekistan, where the Company is actively developing its gas projects.

Royalty talks 

Lukoil is negotiating with Uzbekistan to review the parameters of the contract for the Gissar gas project in connection with lower prices on export markets. Alekperov told Rossiya 24 in an interview that this had made the project less profitable.

"All investments are calculated at 14%-16% profit, but unfortunately with the price change on the international market, the project today shows low economic efficiency, but we are negotiating with the government of Uzbekistan to correct economic parameters, because the price has fallen sharply," said Alekperov.

"They understand us (the government of Uzbekistan)." The state changed the royalty scale so that a lower gas price means more for the investor and a higher price means more for the government. I am confident that we will reach an agreement with the government of Uzbekistan, and the rate of profitability will be 14%-16%," Alekperov said.

Dalga Khatinoglu