FROM OIL TO CLEAN ENERGY

The Caspian region remains one of the strategic ones for the largest oil companies. Amid the existing situation on the European gas market, the significance of this region abundant with oil and gas reserves has increased for potential investors. Despite the absence of new companies in the region, there were surprises. The Russian oil giant LUKOil decided to expand its business in the Caspian region, where it has been present for more than decades. It began to actively increase its assets in the Caspian.

Focusing on the Caspian

The Kazakh authorities announced their intention to attract about $4.5 billion in the development of two oil fields in the Caspian Sea. “We start the development of large fields Kalamkas-Mohre and Khazar. Our strategic partner from Russia has been identified as LUKOil,” Kazakh President Kassymzhomart Tokayev said.

Earlier the British oil corporation BP announced its withdrawal from negotiations on the development of the Kalamkas-Mohre and Khazar projects due to the shift of its strategy towards renewable energy sources.

Authorities expect that the implementation of these projects will ensure the loading of the coastal infrastructure, as well as new service opportunities for the service providers in the region, which in turn will create new jobs.

However, the Kazakh shelf is not the only one in the list of new areas that LUKOil is planning to explore. In just two weeks, LUKOil has managed to conclude major contracts that will turn the company into the second largest player in the oil and gas market of Azerbaijan after BP. In September, it announced its entry into the Shallow Water Absheron Peninsula (SWAP) exploration project in the Azerbaijani sector of the Caspian Sea. The project provides for the development and exploration works in the shallow waters of the Absheron archipelago.

Then, the company unexpectedly announced the expansion of its activities in the giant Shah Deniz gas condensate field. The choice of projects is not surprising, since almost everyone knows about the role of Shah Deniz for the oil and gas sector of Azerbaijan and the region as a whole. As for SWAP, it is expected that the field will be at least as large and productive as the existing Azeri-Chirag-Guneshli field. Experts believe that LUKOil has well assessed the risks and the development of more oil and gas reserves by the company will add value to the image of the company in the eyes of investors. For LUKOil itself, these deals are a good opportunity to improve its presence in Azerbaijan.

New perspectives

LUKOil has been operating in Azerbaijan since 1994. It all began with the exploration and production of oil in the ACG block, but the company left the project completely in 2003. Prior to the latest deal, the company owned 10% in the Shah Deniz and South Caucasus Gas Pipeline projects. Since 1995, LUKOil has had its own network of more than 70 filling stations in Azerbaijan.

In 2018, the head of the company, Vahid Alekberov, announced LUKOil's interest in the project for the development of the Umid-Babek gas condensate block. In March 2019, the company showed an interest in the Absheron gas project with 350 billion cubic meters of gas.

In January 2020, SOCAR of Azerbaijan and LUKOil signed a Memorandum of Understanding for the exploration of the promising block Nakhchivan in the Azerbaijani sector of the Caspian Sea, as well as the promising structures Prikaspiyskaya-Guba and Goshadash in the shallow waters with total projected reserves of 110 million tons of oil and 85 billion cubic meters of gas.

Surprisingly, a year ago there were rumours about LUKOil's imminent withdrawal from all projects in Azerbaijan. These rumours were provoked by the company's decisions to reduce the staff in Azerbaijan as much as possible and to lease part of its head office.

In September 2021, LUKOil signed an agreement to acquire 25% of a 50% stake in the SWAP project from British BP. The deal is expected be closed in 4Q2021 after receiving the approval of the Azerbaijani government. The third participant in the project is SOCAR with a 50% share.

This decision was somewhat unexpected, because the interest shown by the company in recent years was mainly related to gas projects in Azerbaijan, while SWAP, as mentioned above, is considered a promising oil structure.

In August 2021, SOCAR and BP started drilling the first exploration well in the shallow waters of the Absheron archipelago. The depth of the well will be 2,424 m. It is expected to complete the drilling operations in 4Q2021, after which the operators will analyse the collected data. A total of three exploration wells are planned to be drilled on the contract area. However, LUKOil's entry into the project even before obtaining concrete results for the first well signals a very positive attitude of the company to the project.

Nikita Blokhin, Senior Analyst of Alfa-Bank, notes that LUKOil’s entry into a new project in Azerbaijan will ensure the company’s access to BP's offshore technologies. “Although SWAP is located in a relatively shallow area, the structure itself can lie at a depth of 3,000-5,000 metres, which is interesting because it can improve the company's global expertise,” Blokhin said.

Another unexpected announcement was the increase of LUKOil's share in Shah Deniz, since the company has never, at least publicly, announced such plans or interest. As a result, the company bought 15.5% stake of the Malaysian Petronas, agreeing to close the deal at $2.25 billion.

If successful, LUKOil's stake in the Shah Deniz project will increase from 10% to 25.5%. Other participants of Shah Deniz are BP (operator, 28.8%), TPAO (19%), SOCAR (10%), NICO (10%), and SGC (6.7%).

Interestingly, the cost of the project has grown exponentially over a decade and a half. Based on the parameters agreed between the LUKOil-Petronas deal, the entire Shah Deniz project can be estimated at $14.5 billion. In 2004, LUKOil paid the Italian Eni, its partner in LukAgip JV, only $143 million for the second 50% of the joint venture. At that time, the company that owned 10% of Shah Deniz was worth less than $300 million.

This is the largest M&A deal of LUKOil in many years: the company paid more only for its own shares in 2010, when it bought out 7.6% of its capital from American Conoco for $3.44 billion.

Experts consider the expansion of LUKOil's participation in Azerbaijani projects quite natural, given the company's experience in the country. According to Dmitry Marinchenko of Fitch, LUKOil has been participating in the Shah Deniz project for a long time, hence it understands all the risks well. “LUKOil has extensive experience in the Russian part of the Caspian Sea. There are few opportunities for growth in Russia, so expansion in Azerbaijan seems logical,” the analyst notes. In his opinion, this will allow the company to increase the share of natural gas in its portfolio, given the growing interest of investors in natural gas as a more environmentally friendly type of fuel.

Vahid Alekberov believes that the increase in LUKOil’s share in the Shah Deniz project "opens up new opportunities for synergy in promising sectors of national economies."

Some experts believe that Russia will not only strengthen its presence in the region, but will also gain access to the export of the Caspian gas to Europe through the Southern Gas Corridor.

Caspian: our common home

The Caspian Sea is one of the strategic regions of LUKOil's operations. The company is developing two large fields in the Russian sector of the sea – Filanovsky and Korchagin. In addition, the company intends to launch operations on the Greifer field in 2022 with initial recoverable reserves of 39 million tons of oil and about 33 billion cubic meters of gas.

In addition to the Russian sector of the Caspian Sea, LUKOil is present in Kazakhstan after joining the Al-Farabi project with Kazmunaigas in June. Also, in October 2021 it was announced that LUKOil would participate in the development of the Kalamkas-Sea and Khazar fields in the Kazakhstani sector of the Caspian Sea.

At the same time, LUKOil is now discussing the possibility of obtaining operatorship in the Turkmen-Azerbaijani oil field Dostlug (about 50 million tons of oil).

“In the past 25 years, LUKOil has accumulated tremendous experience in the Caspian Sea, which is a strategic region for us. We have created a serious production and transport infrastructure here. And we are proud that the Caspian states, leaders of oil and gas production, trust our competence in the implementation of priority international projects,” Vahid Alekberov noted.

If all goes well, LUKOil will become the only company that will operate in all four Caspian post-Soviet countries. Iran may eventually find itself in this list too. Mr. Alekberov said back in June that LUKOil would be interested in returning to Iran after the last sanctions were lifted.

Not only oil

Along with the development of its traditional areas of activity, LUKOil is showing interest in the renewable energy sources (RES) sector in Azerbaijan. This is a very promising area for cooperation, given the plans of the Azerbaijani government to bring the share of RES in the total volume of electricity production from 17% to 30% by 2030. LUKOil is focused on the development of green energy in the regions of its presence with suitable climatic conditions and existing renewable energy support programs.

“LUKOil is our long-time partner; we work closely. Shah Deniz is not our first project. LUKOil is showing interest not only in oil and gas fields, but also in alternative energy. We consult and work together,” Azerbaijani Energy Minister Parviz Shahbazov said at the Russian Energy Week.

The company has a large portfolio of generating assets based on renewable energy sources: 6% of the total volume of electricity generated by LUKOil Group for sale as of the end of 2019. The production of RES makes it possible to reduce greenhouse gas emissions by more than 500,000 tons of CO₂ annually. The main RES assets of the group are four hydroelectric power plants in Russia with a total capacity of 291 MW, the power wind farm in Romania (84 MW) and solar power plants in Volgograd, Romania and Bulgaria with a total capacity of over 20 MW. The first stage of the Volgograd SPP (10 MW) was commissioned in 2018.

It is still unknown which direction LUKOil will choose for the development of renewable energy sources in Azerbaijan and the country's regions. The company can follow BP's example and implement a project in Garabagh or East Zangezur, both of which have a fairly good potential for the development of RES. Azerbaijani authorities are also interested in investments by international energy companies in green energy projects, primarily in these regions.

Ministry of Energy of Azerbaijan has already identified eight promising sites with a total area of ​​14,400 hectares for the development of the renewable energy sector in the liberated territories. This area will be used for the construction of solar power plants (7,200 MW) in six districts (Fuzuli, Jabrayil, Zangilan, Gubadli, Lachin, and Kelbajar). However, considering the use of part of these lands for agricultural purposes, the real potential of solar power plants will be more than 4,000 MW. For the construction of wind power plants in Lachin, two sites (8,000 and 4,300 hectares) were selected. One site (5,300 hectares) was selected for the same purpose in Kelbajar.

Thus, LUKOil is going to cover quite an extensive field for its operations. Also, the Russian authorities show interest in expanding economic cooperation with Azerbaijan. Russian Foreign Ministry spokeswoman Maria Zakharova said at a press conference on October 21 that Russian economic operators are ready to take part in the post-conflict reconstruction of the liberated territories of Azerbaijan.

“We are obviously interested in expanding the Russian business in Azerbaijan. We regard this joint work an important component of relations between Moscow and Baku. And we will help this in every possible way,” Zakharova said.

Russian Ambassador to Azerbaijan Mikhail Bocharnikov, speaking at the opening of the international exhibition Restoration, Reconstruction and Development of Garabagh, said that Russian companies are aimed at participating in projects in the liberated Azerbaijani territories. So LUKOil can become the next successful example of Azerbaijani-Russian cooperation in the liberated territories after KAMAZ. The only remaining thing is to decide on the project.