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Lukoil - Caspian Corridor Conference 2014

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Presentation by Lukoil Vice-President Andrey Gaidamaka at the 2014 Caspian Corridor Conference held at the London Stock Exchange.

Presentation by Lukoil Vice-President Andrey Gaidamaka at the 2014 Caspian Corridor Conference held at the London Stock Exchange.

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  • 1. LUKOIL: Financial Results 2013 Vice-President Andrey Gaidamaka London, March 2014
  • 2. 2 Forward-Looking Statements • Certain statements in this presentation are not historical facts and are “forward-looking”. Examples of such forward-looking statements include, but are not limited to: – projections or expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; – statements of our plans, objectives or goals, including those related to products or services; – statements of future economic performance; and – statements of assumptions underlying such statements. • Words such as “believes,” “anticipates,” “expects,” “estimates”, “intends” and “plans” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. • By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. You should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, including our ability to execute our restructuring and cost reduction program. • When relying on forward-looking statements, you should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which we operate. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario.
  • 3. 3 Full Energy Cycle Vertical Integration LUKOIL – Going Global 39 countries LUKOIL in the world companies ratings: Oil, public (Fortune Global-500) №8 Energy (Platt’s) №11 All companies in the world (The Forbes 2000) №64 LUKOIL’s oil, % of the world: Production 2% Refining 2% Proved reserves 1%
  • 4. 4 Oil production growth +1.3% Finishing 1st stage of Filanovsky field infrastructure construction Final stage of West Qurna-2 field infrastructure 9 fields and 49 strata discovered – best result for the last 5 years Refineries modernization Coking unit in Perm (2.1 mln t/year) VGO hydrocracking in Volgograd (3.5 mln t/year) Catalytic cracking in Nizhny Novgorod (2.0 mln t/year) Expansion to Asia Pacific market Oil export via ESPO pipeline started. It allows to sell LUKOIL’s light oil as ESPO brand oil – with higher quality mark-up than for Urals oil High Ratings Fitch upgraded LUKOIL rating from «ВВВ-» to «BBB» with stable outlook 2013 Main Events
  • 5. 5 2013 Financial Highlights Excluding one-off non-cash effects Including one-off non-cash effects • Net income, $ mln 10,281 7,832 • Earning per share, $ 13.6 10.4 • EBITDA, $ mln 19,255 16,668 • Free cash flow, $ mln 643 643 • Debt / Capital 12% 12%
  • 6. 6 40 50 38 42 50 52 59 75 90 0 30 60 90 120 2006 2007 2008 2009 2010 2011 2012 2013 Dividend per share, rub. Interim dividends Level that corresponds to 15% CAGR Increasing Dividend Growth Rate In October we paid the second interim dividends – 50 RUB per share LUKOIL is to increase dividend payout ratio to 30% in the mid-term CAGR 15%E +27% +20% +25%
  • 7. 7 LUKOIL Presents High Financial Efficiency 8 16 21 24 30 0 5 10 15 20 25 30 Company Russia 3 Company Russia 1 Company Russia 2 LUKOIL Company Brazil 1 2013 EBITDA per boe of production, $* * Calculated excluding one-off non-cash effect 6 7 12 12 13 4 6 8 10 12 14 16 Company Russia 3 Company Russia 1 Company Brazil 1 Company Russia 2 ЛУКОЙЛ 2013 net income per boe of production, $ *
  • 8. 8 Financial Results 2013 2012 Δ, % $ million Excluding one-off non-cash effects 2013 Including one-off non-cash effects 2013 141,452 139,171 2 Sales 141,452 141,452 (10,086) (9,359) 8 OPEX (10,086) (10,086) (36,137) (36,502) (1) Taxes other than income tax (including excise and export tariffs) (36,137) (36,137) 10,247 14,070 (27) Income from operating activities 13,025 10,247 10,458 13,723 (24) Income before income tax 13,236 10,458 7,832 11,004 (29) Net income 10,281 7,832 10.38 14.47 (28) Basic EPS, $ 13.63 10.38 16,668 18,915 (12) EBITDA 19,255 16,668
  • 9. 9 Adopted in 2012-2013 Taxation Amendments Developed by the Government in Collaboration with LUKOIL Hard-to-recover oil reserves • Reduced mineral extraction tax (MET) for low permeability reservoirs (Bazhen, Khadum, Abalak, Domanik, Tyumen formations) • Possibility to establish a special crude export duty (CED) for Tyumen formation was included in the legislation • Reduced export duty for high viscosity oil for 10 years New fields • Reduced oil export duties formulae for Caspian, Nenets, North Yamal-Nenets, East Siberian and shelf regions • A fiscal system designed for offshore projects of the 2nd category of complexity for the new Caspian projects Mineral extraction tax breaks • North Yamal-Nenets region: zero rate for 10 years or until 25 mln t of cumulative production Excise taxes • Euro-3 – Euro-5 gasoline differential above RUB 4,000 extending to 2014-2015 Mineral extraction tax for gas • Taking into account export opportunities and field complexity Source: Russian legislation
  • 10. 10 Hard-to-recover Reserves New law may cover up to 327 deposits with recoverable ABC1+C2 reserves about 2 bln bbl About 65% of all LUKOIL hard-to-recover reserves are within 13 projects: LUKOIL-Western Siberia: West-Kotukhtinskoe, Kechimovskoe, Kogalymskoe, Kochevskoe, Krasnoleninskoe, Pyakyakhinskoe, North-Kochevskoe RITEK: Aprelskoe, im. Vinogradova, Galyanovskoe, Sredne-Likhminskoe, Sredne-Nazymskoe Komi: im. Yu. Rossikhina LUKOIL hard-to-recover reserves Komi (3%) LUKOIL- Western Siberia (60%) RITEK (37%)
  • 11. 11 Current changes in Russian legislation allow LUKOIL to effectively increase hydrocarbon production Northern Caspian fields Initial recoverable reserves: >4.5 bln boe Nenets region fileds Recoverable reserves: >400 mln boe Hard-to-recover reserves Recoverable reserves: >800 mln boe Mineral extraction tax on gas Recoverable reserves: >3 bln boe Northern Yamal-Nenets region fields Recoverable reserves: >250 mln boe High viscosity oil Recoverable reserves: >116 mln boe
  • 12. 12 Tax Benefits Increase Unconventional Oil Reserves Attractiveness 31 51 56 56 83 94 105 0 20 40 60 80 100 120 Standard taxation Low permeability reservoirs (Vinogradov) Low permeability reservoirs (Bazhen, Abalak, Khadum, Domanik) High viscosity oil (Usinskoe) Shelf (Korchagin) Shelf (Filanovsky) High viscosity oil (Yaregskoe) Taxation and netback under $110/bbl oil price, $/bbl Netback Crude export duty (CED) Mineral extraction tax (MET) Netback is calculated as oil price less mineral extraction tax and export duty per barrel
  • 13. 13 Tax Initiatives Development in Progress Tax holiday extension for MET in Nenets region Export duty rates for petroleum products: • Lower gasoline export duties to the level of other petroleum products (66%) • Differentiation between export duties for fuel oil and other “heavy finished” oil products (coke, bitumen, etc.) • Shifting introduction of fuel oil protecting tariff from 2015 to 2017-2018 Practical approval of the financial result tax (FRT) Pilot projects on LUKOIL fields
  • 14. 14 Capital expenditures 4Q 2013 3Q 2013 Δ, % $ million 2013 2012 Δ, % 3,565 2,788 28 Exploration and production 11,808 8,973 32 2,459 1,947 26 Russia 8,325 7,085 18 1,106 841 32 International 3,483 1,888 84 830 766 8 Refining and marketing 2,715 2,007 35 455 487 (7) Russia 1,736 1,439 21 375 279 34 International 979 568 72 59 19 211 Chemicals 113 90 26 53 18 194 Russia 105 62 69 6 1 500 International 8 28 (71) 84 86 (2) Power generation 285 503 (43) 168 96 75 Other 513 277 85 4,706 3,755 25 Total (cash and non-cash) 15,434 11,850 30
  • 15. 15 2013 Results 2,166 2,170 2,202 2,16 2,17 2,18 2,19 2,20 2,21 2011 2012 2013 LUKOIL hydrocarbon production, mln boe per day +1.5% 0 10 20 2011 2012 2013 2014П Iraq Uzbekistan North Caspian Other upstream Downstream LUKOIL invests in new sources of growth +23% +29% LUKOIL capex, $ bln 15% 24% 29% 32% 1,5% -5% -3% -1% 1% LUKOIL Total Chevron Exxon Mobil Conoco Phillips Shell Eni Hydrocarbon production growth rate 2013/2012, %
  • 16. 16 Upstream Projects
  • 17. 17 0 25 50 2014E-2016E E&P capital expenditures, $ bln International projects Western Siberia European Russia E&P Capital Expenditures and Production in 2014-2016 Hydrocarbon production structure 2014E-2016E 15% 43% 42% International projects Western Siberia European Russia 35% 30% 25% 10% Iraq Kazakhstan Uzbekistan Other
  • 18. 18 Production Growth 0 600 1 200 2013 2016E Iraq Uzbekistan North Caspian, oil North Caspian, gas Other oil Other gas LUKOIL hydrocarbon production, mln boe 17% 4%
  • 19. 19 Major Investment Projects 200 550 750 2 600 Khvalynskoe Gas pipeline im.U.Korchagina im.V.U.Filanovskogo 350 450 1 500 Imilorskoe Bolshoe and Olkhovskoe (im. Vinogradova) Pyakyahinskoe Timano-Pechora North Caspian Western Siberia Capital expenditures in 2014E-2016E, $ mln 150 150 400 450 450 550 East-Lambeyshorskoe Im. Yuriya Rossikhina East-Sarutayuskoe Yaregskoe (mine) Yaregskoe (Lyaelskaya) Usinskoe (Permo-Carb.) Primary investment targets of the Company in 2014-2016
  • 20. 20 0 10 20 30 40 50 60 West Qurna-2* im.V.U. Filanovskogo Yaregskoe (Mine + Lyaelskaya) East- Lambeyshorskoe Im. Yuriya Rossikhina East- Sarutayuskoe Oshskoe Vinogradova Imilorskoe Oil production expected growth in 2014-2016 relative to 2013, Kbpd Main Oil Production Growth Contributors Calculated as expected production volume over 2014-2016 period divided by 1096 days less 2013 production volume divided by 365 days. Production volumes in tonnes of oil were translated into barrels using an average conversion rate of 7.33 barrels per tonne * Production volumes depend on oil price dynamics and compensation costs accounting Noth Caspian Timan-Pechora Western Siberia International projects ~ 130 ~
  • 21. 21 International Projects: West Qurna-2 (Iraq) 1Q 2014: 38 wells drilled 1H 2014: Start of commercial production, 120 Kbpd Key facilities to be launched: • Oil treatment unit • Export oil pipeline • Power plant Launch with 5%-15% budget savings
  • 22. 22 Korchagin and Filanovsky fields (Northern Caspian) 17 29 33 161 0 50 100 150 2012 2013 2014Е 2016Е LUKOIL-Nizhnevolzhskneft oil production, Kbpd +550% +73% 31 83 94 0 20 40 60 80 100 120 Standard taxation Shelf (Korchagin) Shelf (Filanovsky) Taxation and netback under $110/bbl oil price, $/bbl Netback CED MET Netback is calculated as oil price less mineral extraction tax and export duty per barrel
  • 23. 23 Exploration Success on the Caspian in 2013 Kuvykin field Due to successful exploration drilling in 2013 recoverable gas and liquid hydrocarbons reserves and resources increased to 1.5 bln boe (Russian standards) Kuvykin Rakushechnoye Korchagin Khvalynskoye Filanovskiy Caspian Sea
  • 24. 24 180 280 380 2012 2013 2014E 2015E 2016E Oil production, Kbpd Other Oshskoe East-Lambeyshorskoe Usinskoe (Permo-Carbon) Yaregskoe + Lyayel LUKOIL-Komi (Timan-Pechora) LUKOIL-Komi • 3P hydrocarbon SEC reserves 3.2 bln bbl (93% of LUKOIL in Timan-Pechora) • Yaregskoe and Usinskoe – LUKOIL’s major high viscosity oil fields subject to tax benefits • Oshskoe and East-Lambeyshorskoe – two largest 2014E contributors of LUKOIL oil production growth in Russia +30%
  • 25. 25 Denisovskaya Depression (Timan-Pechora) • 3 new fields and 12 exploration areas have been discovered within the block since 2008 • As of today, the Company has completed construction of main oil pipelines • Main development facilities are to be completed in 2014 +130 (3C) 2008 2011 2013 2014E-2016E 568 409 (3P) Bayandyskoe (flow rate 4.7 kbpd) East-Lambeyshorskoe (flow rate 5.5 kbpd) South-Bayandyskoe (flow rate 2.7 kbpd) Recoverable oil reserves, mln barrels Naryan-Mar Usinsk Ukhta Syktyvkar
  • 26. 26 Denisovskaya Depression (Timan-Pechora) 4 fields are planned to produce oil at Denisovskaya Depression in 2014-2016: Bayandyskoe, South-Bayandyskoe, North-Ipatskoe, East-Lambeyshorskoe Сonstruction at East-Lambeyshorskoe field in progress: • Oil treatment unit (to be finished in 4Q 2014E) • Power facilities (to be finished in 3Q 2014E) 10 12 17 23 2013 2014E 2016E 2021E Oil production, mln bbl
  • 27. 27 35 40 45 2013 2014E 2015E 2016E Oil production, Kbpd Unconventional Reserves: Usinskoe Field (Timan-Pechora) +15% • Oil proved reserves : 562 mln bbl • Tax benefits: zero MET rate for high viscosity oil • In 2013, drilling for realization of SAGD technology started. LUKOIL plans to complete 5 couples of wells and put the area into steam heating operation in 2014. • Construction of power center in progress. Starting from 2016, power center is to provide electrical power and steam for injection. Steam assisted gravity drainage (SAGD) 31 56 0 20 40 60 80 100 120 Standart taxation High viscosity oil (Usinskoe) Taxation and netback under $110/bbl oil price, $/bbl Netback CED MET Lyaelskaya area Netback is calculated as oil price less mineral extraction tax and export duty per barrel
  • 28. 28 Unconventional reserves: Yaregskoe field • 65 production wells to be drilled on Lyayel area of the field in 2014-2016 • Yaregskoe field is subject to tax benefits : • Zero mineral extraction tax • Export duty rate = 10% of standard rate 0 25 50 2012 2013 2014E 2015E 2016E Oil production, Kbpd х4 31 105 0 20 40 60 80 100 120 Standard taxation High viscosity oil (Yaregskoe) Taxation and netback under $110/bbl oil price, $/bbl Netback CED MET Netback is calculated as oil price less mineral extraction tax and export duty per barrel
  • 29. 29 Unconventional Reserves: Vinogradov field (Western Siberia) • Bolshoe and Olkhovskoe fields were discovered in 1984- 1986 and now united into a single field – Vinogradov with initial recoverable reserves of 560 mln bbl • 73% of reserves are in АС3 layer with large area (>1,000 km²), but small net pay (5 m) and low permeability (0.002 mkm²) • For the long time the reserves have been considered not economically feasible. After continuous pilot development program we have achieved sufficient well flows to ensure acceptable return on capital. • 33 production wells to be drilled and launched in 2014 Vinogradov 98 286 346 Best result of past years 500G well 2280G well Pilot program: Wells flow, bbl per day 2012-2013
  • 30. 30 Unconventional Reserves: Vinogradov field (Western Siberia) • Average annual well flow rates were 367 bbl per day • 106 wells are planned to be drilled in 2015-2016, of which 33 horizontal • Tax benefits: mineral extraction tax rate = 20% of standard rate 31 51 0 20 40 60 80 100 120 Standart taxation Low permeability reservoirs (Vinogradov) Taxation and netback under $110/bbl oil price, $/bbl Netback Export duty MET Netback is calculated as oil price less mineral extraction tax and export duty per barrel 0,2 1 4 10 20 0 5 10 15 20 25 2013 2014E 2015E 2016E 2019E Oil production, mln bbl
  • 31. 31 Imilorskoe field (western Siberia) • Production drilling started in February, 2014. LUKOIL considerably ahead of schedule: the original plan was to start it in September, 2014 • 23 km of oil pipelines, 42 km of roads and a 74-m bridge across the Entl-Imiyagun River have been constructed, 4 well pads are under development, 3D seismic data is collected for an area exceeding 1.5 th. sq. km. • LUKOIL suggested Russian Government to include Imilorskoe field to Excess-Profits Tax pilot program Imilorskoe Kogalym - LUKOIL license areas 1 2 3 1 - Distance to a field oil pipeline 1 - Distance to trunk oil pipeline 3 - Distance to GCS "Kogalymskaya"1 2 3
  • 32. 32 Bazhen Formation: Sredne-Nazymskoe field (Western Siberia) Thermal gas injection technology (TGI) Area main results in the region of 219 well Initial oil in place, th. tonnes 7,885 Initial reserves in draining areas and matrix, th. t 2,140 Natural production (September, 2009), th. t 82 Natural oil recovery factor (under increasing pressure up to saturation pressure 117 atm) 4.4% Natural oil recovery factor (actual) under middle pressure 166 atm (September, 2009) 3.8% Current prodution th. t (September 1, 2013) 111 Total air injection (March 1, 2013), mln nm3 7 Current oil recovery factor (under increasing pressure due to TGI on the average up to 210 atm) 5.2% TGI planned oil recovery factor 40% Air-oil ratio, m3 per ton 240 oil kerogenmacrofissures In process of TGI Mixture of gases New fissures formation Oil production Oil production Oil production Air injection Oil Heat bank Miscible displacement area Before TGI Nondraining rock shattering
  • 33. 33 Downstream Projects
  • 34. 34 0 5 10 2014E-2016E Other Marketing abroad Marketing in Russia Refining abroad Refining in Russia 0 5 2001 2013* LUKOIL Capex in Refining and Marketing, $ bln Integrated Indicators of Refining in Russia * - Excluding non-cash one-off write-offs Calculated at current price level EBITDA, $ bln
  • 35. 35 Value Growth Driver: Refineries Upgrade 2015-2016 Perm - Modernization of low-temperature condensation and distillation unit Nizhny Novgorod - VGO catalytic cracking - Vacuum block Burgas - Heavy residues processing complex Volgograd - VGO Hydrocracking - Atmospheric-vacuum distillation unit
  • 36. 36 4,0 5,1 5,1 5,8 6,5 7,8 1,7 3,2 3,0 3,1 0 2 4 6 8 10 12 2010 2011 2012 2013 2014E 2015E Euro-5 Euro-4 Excise Differentiation Rewards High Quality Producers In the midst of excise fast growth, launching lower excise rates for Euro-5 since July 2012 provides an opportunity to obtain a significant economic effect in 2014-2015 and recover the investments for LUKOIL refinery modernization Source: Russian legislation 1,2 2,2 3,0 4,5 4,8 5,2 0,6 0,6 0,7 0,7 0 1 2 3 4 5 6 2010 2011 2012 2013 2014E 2015E Euro-5 Euro-4 x2.7 Diesel excise rate, th. rub./tGasoline excise rate, th. rub./t x5.0 + + Economic effect Economic effect
  • 37. 37 Modernisation of LUKOIL Refineries Allows to Reduce Dark Petroleum Products Share Despite the oil quality change and operational downtime of units LUKOIL accomplishes 2012-2021 strategy for dark oil products reduction 12,2 12,3 11,1 10,6 7,6 2,7 6,8 4,5 4,2 4,3 3,0 3,4 19.0 16.9 15.3 14.9 10.6 6.0 2010 2011 2012 2013 2016E 2021E Fuel oil Vacuum gas oil Dark petroleum products production, mln t Nizhny Novgorod FCC launch 2.0 mln t Volgograd DCU launch 1.0 mln t Launch CDU, DCU, oil quality Volgograd VGO HCU 3.5 mln t, Perm DCU 2.0 mln t Nizhny Novgorod H-Oil 4.8 mln t 45.0 45.2 44.3 44.8 42.0 46.4 Refining throughput, mln t
  • 38. 38 Integrated Indicators of Marketing in Russia EBITDA, $ mln Growth of Marketing segment in Russia is determined by: • Marketing network extension in traditional regions • Creation of marketing networks in new regions • Average daily sales per gasoline retail station growth due to increase in efficiency • New aircraft refueling sites construction * - Excluding non-cash one-off write-offs Calculated at current price level 0 1000 2013*
  • 39. 39 Integrated Indicators of Power Segment 0 150 2013* Mid-term growth is determined by launching new facilities: • 2013 – combined cycle gas turbine unit-235 LUKOIL-Astrakhanenergo • 2014 – combined cycle gas turbine unit-135 Stavrolen ltd. LUKOIL-Stavropolenergo (December, 2014) • Expanding production capacity within launched facilities. * - Excluding non-cash one-off write-offs Calculated at current price level EBITDA, $ mln
  • 40. 40 Integrated Indicators of Refining and Marketing abroad 0 1000 2013* EBITDA, $ mln * - Excluding non-cash one-off write-offs Calculated at current price level
  • 41. 41 0 5 2013* * - Excluding non-cash one-off write-offs Calculated at current price level Refining in Russia Marketing In Russia Power Integrated Indicators of Refining, Marketing and Power Segments EBITDA, $ bln Refining and Marketing abroad
  • 42. 42 Environmental Safety is Our Priority LUKOIL presented a draft «2014-2018 Environmental Safety Program» Main goals: • Utilization of newly generated waste in a ratio of at least 1:1 • 95-percent utilization of associated petroleum gas by 2015 • Increased production of Euro-5-compliant eco-friendly fuel • Introduction of automated systems of industrial environmental monitoring • Compliance with national and international environmental requirements 1,5 2,3 3,6 4,5 1 2 3 4 5 1995-2003 2004-2008 2009-2013 2014E-2018E Environmental spending, bln USD Recultivation
  • 43. 43 2014-2018 Environmental Safety Program: • Reduction of air emissions by 100 th. t • Additional produced water conditioning 7 mcm • Reduction of water usage by 8 mcm • Waste disposal 900 th. t Including those accumulated before privatization 580 th. t • Remediation of disturbed and contaminated lands 115 km² • Liquidation of waste pits 1 th. • Maintenance overhaul and replacement 4 th. km • Diagnostics 31 th. km • Inhibitory protection 20 th. km Environmental Safety is Our Priority Air Water Land Pipelines
  • 44. 44 Conclusion • The Company moves from the stabilization phase to the growth phase, focusing on the long-term sustainable growth of production • LUKOIL received access to the strategic reserves of Russia and expanded significantly its resource base through exploration • Company operations are aimed at: - Value creation and accelerating growth of dividends - Increasing efficiency of operating activities - Cost control, and OPEX optimization - Maintaining conservative financial policy - Maintaining strong financial discipline • Dividends will continue to grow. Our goal is to increase shareholder value