Jun 23, 2008 | 20:45 GMT

5 mins read

Russia: LUKoil's Arctic Venture

Russian oil firm LUKoil's new offshore terminal in the coastal village of Varandey came online June 20. For LUKoil — which is privately owned and is not yet under the Kremlin's direct control — the terminal is a major technological breakthrough that represents the firm's dynamism. It is also the Russian oil industry's first major venture into sending exports to North America by tanker.
Russian oil producer LUKoil's new offshore oil terminal in the Barents Sea, off the coast of the Nenets Autonomous District coastal village of Varandey, came online June 20. The first shipment of oil will be sent to the Newfoundland port of Come By Chance via the new ice-hardened 500,000-barrel tanker Vasily Dinkov, which was one of three tankers to be built specifically for the Varandey terminal. The terminal will have a capacity of 240,000 barrels per day (bpd) by 2009 and will allow LUKoil to export from its nearby vast Timan-Pechora oil and gas region. The terminal represents a significant technological breakthrough for the Russian oil firm. Furthermore, it affirms that LUKoil — a privately owned firm independent of the Kremlin's direct control — is the most dynamic part of the Russian oil industry. The terminal also represents the Russian oil industry's first serious foray into exporting oil to North America by tanker. LUKoil was, until recently, Russia's largest oil producer. It started playing second fiddle to the state-owned Rosneft, in terms of oil production, once the Kremlin allowed parts of Yukos Oil Co. to be split among various state energy companies at the end of 2004. Despite its precarious position as a private company in a very tightly monitored industry, LUKoil has been allowed to exist by the Russian state mainly because the firm's leadership follows the Kremlin's rules about staying out of politics (unlike Yukos, which was swallowed by Gazprom and Rosneft, the twin state behemoths of Russian energy industry) and is the most successful at bringing new projects online. LUKoil has also been willing to offer its expertise to Gazprom on increasing production efficiency. Another reason the Kremlin abides the LUKoil Group is the fact that it is highly productive. With its various affiliates, LUKoil produced 1.84 million bpd in Russia during 2006 and has seen increasing production in the past four years, while the rest of Russia's overall production has stagnated after an initial sharp increase at the start of the decade. The Kremlin is also keen on keeping LUKoil independent because it provides the kind of balance that Russian Prime Minister Vladimir Putin likes to see between Russia's competing energy behemoths. Putin is wary of any entity, whether political or economic, gaining enough power to quit taking orders from the executive branch in the Kremlin and is therefore content to see LUKoil profit as a thorn in Rosneft and Gazprom's side (at least for now). LUKoil's chairman and founder, Vagit Alekperov, has masterfully steered LUKoil's profits into long-term expansion plans that include development of new projects and fields. LUKoil's international expansion involves serious ventures in Central Europe, the Caucasus, Africa and even the United States (where LUKoil purchased the Getty Petroleum Corp.). It has a solid partnership with ConocoPhillips Co., which bought a sizeable portion of its shares (7.6 percent) in 2004, with an option to increase its stake to 20 percent in the future. ConocoPhillips has so far been the only Western firm to play a major role in Russian oil exploration without significant state interference. The Varandey terminal will allow LUKoil to export oil independent of Russia's state-owned pipeline monopoly Transneft. The alternative would be to pay huge transit fees to Transneft for the use of its pipelines and move its product to the already-established market for Russian crude in Europe, bringing LUKoil into direct competition with Rosneft. The Varandey terminal gives LUKoil its own export option close to its main oil-producing region and allows it to move its crude into the North American market, where it already owns the Getty chain of gasoline stations. The new terminal is also evidence of a significant technological transfer between LUKoil and ConocoPhillips. The know-how from its oil exploration in Alaska makes ConocoPhillips a valuable ally for LUKoil's Siberian ventures. Varandey will use the most groundbreaking technology in extraction and transportation, including the use of a stationary ice-resistant berth — a first for a major oil exporter. LUKoil is tapping into heretofore unexploited markets for Russian oil, primarily North America. The problem for Russia's oil exports from its Western fields has always been geographic. The Gulf of Finland is too shallow for large tankers, while the straits leading to the Black Sea — the Bosporus and the Dardanelles — are far too narrow. The only alternative, the Russian enclave of Kaliningrad, was never seriously considered because of geopolitical complications; Kaliningrad is surrounded by the anti-Russian states of Lithuania and Poland. But thanks to the gradually thawing Barents Sea, LUKoil's Varandey terminal is now a viable alternative for Russian oil exports. The sea surrounding Varandey is not completely ice-free yet, but the terminal is far enough off shore and its purpose-built tankers are technologically advanced so that it can ship oil to North America, or any other market, with few problems. With most of Russia's energy-exporting infrastructure under firm state control, LUKoil's new terminal will give it an important asset in maintaining its independence, for the time being.

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