LUKOIL operating results for the period of 9 months 1998, ended September 30, showed an increase in production of oil and gas, exports of crude, throughput by outsiders for LUKOIL as well as output of selected petroleum products. At the same time, runs at LUKOIL refineries and exports of products declined. Number of oil wells and new drilling reduced.

Production of crude oil by LUKOIL group amounted to 47.4 million tons, a 2% increase year-over-year. Additional 1 million tons were produced by the main subsidiaries, joint ventures and affiliates both in Russia and abroad. The largest oil-producing subsidiary LUKOIL-Western Siberia extracted 32.5 million tons of crude over the period which is equivalent to 9 months 1997. LUKOIL saw increase in output by the regional producing divisions LUKOIL-Langepasneftegas (plus 3.0%) and LUKOIL-Uraineftegas (plus 3.1%) as well as LUKOIL-Perm (2.8%). Some subsidiaries and regional divisions reduced or maintained the same production of crude, namely LUKOIL-Kogalymneftegas (less 2.4%), LUKOIL-Astrakhanmorneft (less 3.3%), LUKOIL-Kaliningradmorneft (less 3.6%), LUKOIL-Nizhnevolzhskneft (less 0.6%). Amongst joint ventures the largest volumes were produced by Vatoil (2.0 million tons, plus 6%) and LUKOIL-AIK (1.2 million tons, plus 20%). LUKOIL-Western Siberia owns 54% of these ventures. Volgodeminoil, a joint venture of LUKOIL (50%) and foreign capital, was the highest on records in terms of growth rates. The venture develops fields in Volgograd region and produced 339 thousand tons over the period, 149% of the comparable 1997 statistics. The largest overseas oil producer with LUKOIL’s interest (50%) is LUKOIL-Kumkol which develops Kumkol field in Kazakhstan. The venture increased extraction of crude by 16% to 668 thousand tons.

It is worth noting that crude oil production in 1998 was strongly correlated with the markets behavior both domestically and internationally. In the environment of sharp decline of world oil prices and shrinkage in profitability, the Company had to abandon 4.5 thousand low-rated wells under cost control program. Besides that, some workover and drilling programs were revised to reduce capital expenditures. Over the reported period drilling activities lost 50% and amounted to 741 thousand meters, including 568 thousand meters in development and 173 thousand meters in exploratory drilling.

Production of natural gas increased by 16%. The growth was achieved mainly due to higher utilization of oil-related gas (to 77%) and due to the acquisition by LUKOIL of a 15% interest in the development of Karachaganak gas liquids field in Kazakhstan.

Over the period Russian subsidiaries, joint ventures and affiliates of LUKOIL shipped 18.6 million tons of crude onto international markets, 40% more than a year ago. An increase in sales, primarily explained by substantial reduction in overseas deliveries for state needs under intergovernmental agreements, resulted in redistribution of relevant volumes in favor of LUKOIL. 95% of total crude exports were delivered to non-CIS countries. Additionally to the exports, 1.83 million tons were shipped to Kazakh refineries under swap agreements with return of 1.96 million tons from Kazakhstan to Russian refineries.

Deterioration of market conditions in 1998 stipulated a 12% decline in throughput at 2 LUKOIL refineries. However, refining by outsiders for LUKOIL on a tolling basis increased by 10% as a result of diversification of LUKOIL downstream centers. Total refining runs equaled to 15.4 million tons and substantial improvement in quality of products and higher depth of refining (national complexity index) was achieved. Total output of motor gasoline rose by 4%. While volumes of vessel fuel, coke, sulfur acid and selected lubricants increased either, low value-added fuel oil production dropped by 20%. 2.75 million tons of petroleum products, or 53% of the 1997 exports, were shipped overseas, mainly to non-CIS countries.

The overall 1998 performance is expected to be affected substantially by the 4th quarter results. Recent depreciation of the national currency supported the efficiency of export-oriented sectors and competitiveness of domestic economy. Profitability of export sales of crude oil and petroleum products improved. This creates a positive impetus for a better usage by the Company of its production potential to upward its financial performance.

 

 

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