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Oil Company LUKOIL

Oil Company LUKOIL. Leonid Fedun Vice President 2001 Oil and Gas Conference New Horizons. London June 7-8, 2001. II. Launching Pad for Future Growth. Strong Reserve Growth. Proven Oil & Gas Reserves. Proven reserves up by 70% since 1995 Reserve growth has come from

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Oil Company LUKOIL

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  1. Oil Company LUKOIL Leonid Fedun Vice President 2001 Oil and Gas Conference New Horizons London June 7-8, 2001

  2. II. Launching Pad for Future Growth

  3. Strong Reserve Growth Proven Oil & Gas Reserves • Proven reserves up by 70% since 1995 • Reserve growth has come from • Continued exploration • Targeted acquisitions • Reserve base continues to shift out of the higher cost Western Siberia • Accounts for only 53% of proven reserves today • International reserves account for nearly 20% of total proven reserves* BN BOE Proven Oil & Gas Reserves Shift MM BOE *This includes estimated proven reserves in West Qurna

  4. Consistent Production Growth LUKOIL’s Production ‘000 BBL/day • Crude production up every year since 1995 • 33% increase over 5 year period • Annualized CAGR of7.9% • International production currently accounts for only 3% of total production • But growth rate is very high • Production outside of Russia has more than tripled from 1997 - 2000 Int’l production as a % of LUKOIL’s total production 3.0% 2.0% 1.0% 0.0% Russia International

  5. Average Daily Flow Rate(W. Siberia) • Marked improvement in operational efficiencies over the last 5 years • Average flow rates up by 15% in West Siberia • Efficiencies achieved through • Shut in of marginal wells • Continuing shift to higher quality reservoirs • Increased application of new technologies Improving Upstream Efficiencies BBL/day 75 70 70 65 61 60 55 1996 1997 1998 1999 Oil Production MM BBL New Technologies Traditional Technologies

  6. Strong Growth in Refining Refining runs‘000 BBL/day • Refining output is up sharply 70% increase since 1995 • International expansion has been key driver of our refining growth • Accounts for 2/3 of our growth over the last five years • Today accounts for nearly 40% of our refining throughput Int’l refining as a % of LUKOIL’s total production 30.0% 20.0% 10.0% 0.0% Russia International

  7. International Downstream Assets LUKOIL’s Primary Refining Assets Operating Data LUKOIL has built a leading position in R&M in South Eastern Europe Refinery Capacity Production Utilization Ownership MMTY MMTY % % Petrotel (Romania) 4.7 1.2 25.53% 51.00% Neftochim (Bulgaria) 10.5 5.3 50.48% 58.00% Odessa Refinery Plant (Ukraine) 3.8 0.9 23.68% 51.90% LUKOIL’s Primary European Refining Assets

  8. Advantaged International Assets Mediterranean Refining Margins 1995 - 2002E • Strategically advantaged refineries • low-cost crude supply • able to sell product to export markets • Strong regional refining margins projected through 2002 • Cost savings being achieved through refinery optimization • Upgrading underway to meet new EU specifications Urals Price 1995 - 2002E Morgan Stanley estimates

  9. Management of International Operations Upstream - LUKOIL Overseas Holding: • Moscow based • Headed by Andrei Kuzyaev • Manages upstream projects outside of Russia Downstream - LUKOIL Europe Holding • London based • Headed by Ralif Safin • Manages European downstream assets OAO LUKOIL LUKOIL Overseas Holding (London - Moscow) LUKOIL Europe Holding (London - Moscow) Safin European R&M USA R&M Caspian Iraq Kazakhstan

  10. World Class Reserves and Production • LUKOIL ranks as a world-class company in terms of reserves and production • Our expansion strategy will deliver greater international diversification on par with other oil majors 2000 Production (M BOE/d) 2000 Reserves (Billion BOE) Source: Company data

  11. 6 months, ended June 30 1998 1999 1999 2000 US$ MM 6,619 7,376 2,890 6,246 Total revenues (510) 1,692 325 1,887 Operating profit 877 1,249 108 1,735 Income before taxation 729 1,062 92 1,452 Net income 158 674 393 1,024 Cash and marketable securities (as of December 31/June 30) 2,074 2,497 2,156 2,705 Financial debt (as of December 31/June 30) 9,643 12,503 10,102 14,634 Total assets (as of December 31/June 30) Net cash provided by operating activities 752 1,426 235 1,688 (before changes in the working capital) Strong Financial Growth

  12. Monitoring Key Ratios to Maximize Efficiency 6 months, ended June 30 1998 1999 1999 2000 All data shown as %, unless otherwise noted 1.15 1.69 0.14 2.25 Earnings per share, in US dollars 11.0 14.4 3.2 23.2 Return on sales 7.6 8.5 0.9 9.9 Return on assets 13.1 15.0 1.6 16.8 Return on equity 68.6 59.0 28.6 42.7 Sales on assets 11.0 13.4 2.4 31.2 ROACE 25.6 19.5 23.8 15.3 Net debt to net debt plus equity

  13. Rational Deployment of Capital • High rates of reinvestment are ensuring continued growth • Special emphasis placed on R&M investments over last three years • up by 35% • targeted at balancing production and refining capacity Annual Capital ExpendituresUS$ MM

  14. Proposed Dividend Payout and Share Swap LUKOIL Share Price Performance • LUKOIL’s dividend payout has grown steadily over the last four years • The proposed share swap will benefit all shareholders • Strong recent performance in the pref shares • Simplify share structure • More equitable distribution of future dividends Last Twelve Months, US$ per share LUKOIL Historical Dividend Payments US$ per share

  15. II. Growth and Efficiency Strategic Overview

  16. Upstream Strategy - Potential and Efficiency Growth • Continue steady production growth • Selective development of existing reserves • Opportunistic acquisitions • Lower production costs • Improve efficiencies in existing operations • Production expansion in lower cost regions (Timan Pechora, Caspian and Middle East) • Strengthen netbacks: Shifting production will... • lower transportation costs • increase proportion of sales in international market • improve quality of crude

  17. Sustainable Growth Strategies Prospective Growth of Oil Production Timan Pechora 2000 - 10.7 MM tons of oil 2010-2015Е - 20-25 MM toe Western Siberia 2000 - 50.8 MM tons of oil 2010-2015Е - 45-50 MM toe; 30-40 bn cubic m of gas European Russia 2000 - 14.2 MM tons of oil 2010-2015Е - 13-15 MM toe Caspian region 2000 - 2 MM tons of oil 2010Е - 15 MM toe 2015Е - 20-25 MM toe Iraq 2010Е - 15 MM tons of oil 2015Е - 20-25 MM toe

  18. Downstream Strategy - Open New Markets Expansion into Central and South Eastern Europe R&M • Exploit advantage as the low-cost crude supplier to region • Capture strong Mediterranean refining margins • Benefit from projected demand growth in region • Improve efficiencies through optimising operations among our regional refining assets

  19. LUKOIL’s Principal Areas of Operation Global Strategies: LUKOIL International Operations • LUKOIL is active today in more than 20 countries • Our main strategic assets are situated in • Western Siberia • Timan Pechora • The Caspian Basin • S.E. Europe • N.E. United States • LUKOIL’s most recent discovery in the Yamal region of Siberia will position us to become a major gas exporter

  20. Upstream: Expansion into Caspian Kazakhstan and Middle East Downstream: Expansion into Central Europe and Atlantic Basin Global Strategies: LUKOIL’s Regional Expansion • LUKOIL is rapidly expanding its downstream and upstream operations into neighboring regions • Upstream: • Caspian • Kazakhstan • Middle East • Downstream: • Central Europe • Atlantic Basin • LUKOIL is poised to become Russia’s first truly international oil major

  21. Global Strategies: Why Expand Beyond Russia? • Reduce our exposure to “single market risk” • Exploit competitive advantages • Low cost crude supplier • Superior knowledge of markets and geology • Shift production to lower cost reserves • Expand R&M business in markets with higher product prices • Capture margins further down value chain in markets supplied by our crude

  22. Global Strategies: New Markets Expansion into Atlantic Basin Marketing • Region will increasingly become net product importer • Upgrade our export-oriented refining assets to deliver to this market • Secure a market for future Timan Pechora production • Take market share from declining, higher-cost North Sea production • 2 MM BBL/day decline by 2010 North Sea ProductionMM BBL/day 2MM BBL/day declinein 2010

  23. Not less than 15% Crude Oil Production Domestic Refining To 600,000 - 700,000 BBL/day International Refining To 300,000 BBL/day Cost Control Lower than global average US$20 - 25 bn @ $20/BBL Sales Net Income US$3.5 BN Capital Investment US$2.5-3 BN p.a. Dividends 15-20% of net income Setting and Achieving Targets Corporate Growth: 2001 - 2005

  24. Leading the Way in Corporate Standards Creating Relative Value Among Peers • Commitment to upholding international corporate governance and transparency standards • Progressive dividend policy • Upholding minority shareholder rights • Shareholder rights charter • High-caliber international management team and ethical standards • Participation in educational and philanthropic programs • International sponsorship and brand-building

  25. Predictability and Accountability Delivering for the Investment Community • LUKOIL has embarked on a regular process of reporting financial and operating results to the international financial community, which will include: • Interim publishing of US GAAP financial statements • By press release and over the web • Quarterly analyst conference calls for discussion of results • Semi-annual roadshows for discussions with investment community • Improved investor relations web site

  26. LUKOIL’s Competitive Advantages • Russia’s most balanced integrated oil company • Growing downstream presence provides cushion from downward oil price movements • Superior asset base • Growing geographical diversification • International experience unique among peers • International mergers and acquisitions expertise • Shares are legitimate acquisition currency • Strategic foothold in the North American downstream market • Financial discipline and reporting standards to judge opportunities according to strict strategic and financial return standards

  27. Sustainable Production Growth • Production growth well above the Russian average • Nearly a quarter of Russia’s 2000 production • Sustainable growth since the beginning of privatization (1995) • Sustainable growth of the share in Russian crude exports Crude Oil Production % of Russia’s total Crude Oil Export Sales% of Russia’s total

  28. Macroconditions for Growth • Economic growth. GDP growth tendency is not less than 3-4% p.a. Budget surplus. Growth of gold and currency reserves. Improved solvency and tax collection • Favorable market environment. Long-term supply and demand forecast under a regulating OPEC role shows that Russian crude oil price will be maintained at the level not lower than $18-20/barrels. Convergence of domestic and international oil and petroleum product prices • Improvement of legislation. Stabilization of the PSA regime is in its final stage. Enhancement of taxation regime, including taxation regime for oil companies. Nondiscriminative access of oil companies to gas transportation facilities • Complications. Inflation growth. Low pace of structural reforms in Russia

  29. LUKOIL’s International Operations. Case Study: Bulgaria • Operations launched in 1999. Largest refinery in the Balkans. Retail chain. 2001 revenues amounted to $1.5bn, an equivalent to 7% of GDP and 25% of tax revenues of the country • Active development of the Mediterranean markets (Turkey, Greece, Serbia, Macedonia and other countries) in the sphere of oil, petrochemical products and polymers. Annual sales growth by 3-15% • Over 2 years Neftochem became profitable. $120m of old debt was paid. Production of petroleum products in accordance with European standards. Output growth by 20%. Environmental safety • Attractive perspectives in terms of supplies of various types of products, including liquefied gas, in the Balkans and on the Black Sea. Raising of product quality to international standards. Joint integrated efficient development with Petrotel (Romania) and Odessa refinery (Ukraine)

  30. Focus Regions of LUKOIL Overseas Holding MAP • LUKOIL Overseas Holding participates in major projects in highly prospective hydrocarbon basins • Russia • JV mature production • Caspian & Kazakhstan • exploration • early production • Middle East • new ventures • North Africa • JV production

  31. Expanding Production Outside Russia • Efficiency • Diversify E&P portfolio • Find and develop new, lower cost reserves • Exploit LUKOIL’s competitive advantages • regional expertise • advantaged logistics • Mitigate “single market risk” • Goal: Increase share of international efficient projects in LUKOIL’s production portfolio Geographic Breakdown of Production, MM tons/year

  32. Strategic Interest in Getty Petroleum Marketing • Upon completion of Timan-Pechora and its associated refinery, LUKOIL plans to deliver gasoline to the United States East Coast • The sale of gasoline directly through controlled sites could enhance profit margins by 18 to 20% • Getty Petroleum Marketing ("GPM") key strategic strengths: • Over 1 billion gallons of annual gasoline sales • 1,300 retail sites in the northeastern United States • Strong brand recognition • Significant market share in core urban areas • The acquisition of GPM is expected to be the beginning of a significant expansion in the eastern U.S. retail market

  33. GPM: Growth Strategy • Ancillary Business Expansion • Formalize, modernize and revitalize “other uses” • New revenue streams • Mitigate earnings volatility • Support volume growth • Discretionary Spending • Internal growth • Image upgrade • Improve customer experience • Attractive return characteristics • Acquisitions • Ample opportunities • Increase utilization of distribution capacity more quickly • Capitalize on Parent Company Resources

  34. LUKOIL Going Global AGENDA • Introduction • Update on Company Strategy • Focus on International Growth • Upstream: Former Soviet Union and Middle East • Downstream: Eastern Europe and Atlantic Basin • Growth Targets • Update on Other Recent Developments • US GAAP Financials • Dividend and Proposed Preference Share Conversion • Corporate Governance Initiatives

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