Compromise for the Chinese

Vagit Alekperov will give CNPC a stake in Turgai Petroleum in exchange for another asset

LUKOIL is ready to give CNPC its share in the Kazakh Turgai Petroleum in exchange for participation in any other Chinese mining project, the president of the Russian company, Vagit Alekperov, said yesterday. This decision puts an end to more than two years of dispute between the companies over who should own the Kazakh asset. “We have found a mutually acceptable solution: CNPC will assign a part of its project in one of the regions of the world, equivalent to the part that we would be able to purchase in Kazakhstan,” Mr. Alekperov said. What kind of project it will be and when the companies will agree on an exchange, the head of LUKOIL did not specify. The company's press service notes that negotiations on this issue are already underway, but there are no agreements on specific projects yet.

Turgai Petroleum was created in 1995 as a joint venture between LUKOIL's 100% subsidiary Lukoil Overseas and the Canadian company PetroKazakhstan Inc (50% for each company) to develop the large Kumkol field in the Kzyl-Orda region of Kazakhstan. The deposit's reserves reach 24 million tons. In 2006, the joint venture produced 3.4 million tons of oil. LUKOIL estimated the value of its share in Turgai Petroleum at $700 million. The Russian company became dissatisfied two years ago when Canadian shareholders sold 100% of PetroKazakhstan to the Chinese state corporation CNPC for $4.2 billion. LUKOIL declared a violation of its rights as a shareholder of this joint venture: the constituent documents of Turgai Petroleum state that in the event of a change of control over an asset on the part of one of the shareholders, the second participant in the joint venture has a preemptive right to acquire the partner’s share. CNPC, as the Russian company complained at the time, did not approach LUKOIL with such a proposal. This was followed by long legal proceedings in international arbitrations. Last October, LUKOIL reported that the Stockholm Arbitration Court confirmed LUKOIL's right to purchase 50% of Turgai Petroleum. True, as Lukoil Overseas admits, this court decision was not final and the proceedings were not over yet.

This year, LUKOIL is trying to establish active cooperation with the Chinese state corporation. In addition to Turgay, the companies are collaborating on a project for geological exploration of the Uzbek part of the Aral Sea. Last Sunday, the company signed a strategic cooperation agreement with CNPC. As stated in the LUKOIL press release, within the framework of this document, the companies plan to organize joint work in promising projects for the production and processing of oil and gas in third countries, as well as establish cooperation in the supply of raw materials and their processing in China itself. So for now, LUKOIL does not intend to quarrel with China over the field’s medium-sized reserves.

LUKOIL notes that CNPC has many projects that are interesting to the Russian company. After all, the Chinese corporation operates in 26 countries around the world, including in regions where LUKOIL is already present, for example in Iran, Venezuela or Kazakhstan. In addition, it is possible that LUKOIL may offer CNPC to engage in joint development of the Turkmen shelf. In May of this year, the Chinese state corporation entered into a contract with Turkmenistan to carry out geological exploration and drilling work at the South Yolotan field, the reserves of which, according to geologists, may exceed 7 trillion cubic meters of gas. This event in Russia was viewed as a loss in the struggle for Turkmen mineral resources. Since the summer of this year, LUKOIL has been trying to enter the offshore fields of this country; in July, Mr. Alekperov even went to Ashgabat to meet with the current head of state Gurbanguly Berdimuhammedov, during which he managed to agree on work on three oil and gas blocks on the Caspian Sea shelf. LUKOIL has repeatedly spoken about the need to cooperate with foreign partners to share risks when implementing complex geological exploration projects.

Anna GORSHKOVA