Translated material
False start
Turkmenbashi did not approve of LUKOIL's plans to acquire Dragon Oil
Things are not going very smoothly for LUKOIL in the Caspian Sea. The Russian holding was going to acquire a stake in the Dragon Oil company, the only one conducting exploration in the Turkmen shelf area, but yesterday the oil workers admitted that the country’s leadership “did not support LUKOIL’s proposals for joint activities with Dragon Oil.”The meeting between Mr. Alekperov and the President of Turkmenistan, Saparmurat Niyazov, took place on Monday. Yesterday, the holding's press service reported that LUKOIL "presented to the head of the Turkmen state plans for conducting geological exploration work on the Caspian shelf of Turkmenistan." One of these plans was the joint development of offshore fields with Dragon Oil. This company is developing the Cheleken block (Pricheleken Dome, Lam and Zhdanov fields with total reserves of 70 million tons of oil and 62 billion cubic meters of gas). It is registered in Ireland, 52% of the shares belong to the Arab Emirates National Oil Corporation, the rest to minority shareholders. On the day of Mr. Alekperov's visit to Ashgabat, Dragon Oil said its board of directors had received "a proposal that could lead to an offer to purchase part of the shares" in the company. But in any case, Arab oil workers will retain their share in Dragon Oil. However, yesterday the company sent a statement to the London Stock Exchange saying that "the board is now no longer negotiating any potential proposals."
LUKOIL has already collaborated with Dragon Oil: the Russian company, which owns the Astra floating platform, drilled wells for it on the Turkmen shelf from the end of 2003 to March 2005 under a contract agreement. So LUKOIL had an idea of what the prospects were for these fields. Although experts assess the reserves of the Turkmen shelf section as very promising, the region remains poorly studied, so new geological exploration projects are quite risky.
Recently, LUKOIL already faced a problem when its project in the Caspian Sea did not live up to expectations. The company expected to discover significant reserves on the Azerbaijani shelf, in the Yalama region. The block's reserves were estimated at 140 million tons of hydrocarbons. According to the contract, the holding must drill two exploration wells. At the end of May, LUKOIL was the first to complete drilling. As the President of the State Oil Company of Azerbaijan (it owns 20% in the project) Natik Aliyev said, “the well did not reveal hydrocarbon reserves. Although LUKOIL does not show much desire to drill a second well, we will insist on this. The company argues its position by the fact that the structure of the formations allows us to judge the presence or absence of hydrocarbons in the entire area from one well.” LUKOIL’s difficulties in Yalama began from the very beginning of work. At the end of last year, the company, having started drilling, was forced to mothball the first well: at a depth of more than 1.6 thousand meters. (the total depth of the well was supposed to be 4.4 thousand m) there was a release of water and sand.
Apparently, the Turkmen authorities are ready to allow LUKOIL onto their shelf only if the holding company begins to explore new fields. In addition, Turkmenbashi set one more condition for the company. On Monday, the press service of the Turkmen leader reported that Mr. Niyazov invited LUKOIL to take part in the reconstruction of the country's largest Seydi oil refinery. Over the past few years, the Turkmen authorities have been actively trying to attract funds to modernize this enterprise, which will require about $1.5 billion.
LUKOIL is in no hurry to accept the proposal, saying only that it will study it carefully. However, traditionally, oil companies are not too eager to invest in oil refining: not a single oil refinery has been built in America and Europe over the past 30 years, because the payback period for investments in this industry is much longer than in the production segment.
In addition, experts note that other promising offshore areas offered to foreign investors by Mr. Niyazov are located in disputed territory with Iran, with which Turkmenistan does not have an agreement on the delimitation of the Caspian shelf, so political risks are also high.
LUKOIL does not yet know whether it is ready to take risks, but it is obvious that it was not possible to establish good relations with Turkmenbashi the first time. “Following the results of negotiations between Mr. Niyazov and Mr. Alekperov, a decision was made to continue working contacts between the state authorized body of Turkmenistan and LUKOIL,” the company said in a statement yesterday.