LUKOIL fights cash flow, declining production as it signs gas supply agreement with Gazprom

By Oil & Gas Financial Journal staff 

On March 4, OAO LUKOIL, Russia’s largest oil company, and OAO Gazprom signed a gas supply agreement under which gas will be supplied from LUKOIL’s fields in the Bolshekhetskaya Depression, the Yamalo-Nenets Autonomous District and from the north of the Caspian Sea. 

Vagit Alekperov, president of LUKOIL, and Alexey Miller, chairman of Gazprom’s management committee, were on hand to sign the agreement in Moscow. 

LUKOIL will supply natural gas produced from the Bolshekhetskaya Depression fields to Gazprom in 2012 – 2016. The gas, expected to reach 8.35 billion cubic meters in 2012, will enter Gazprom’s gas pipeline near Yamburgskaya compressor station.

When LUKOIL starts gas production at the northern Caspian Sea fields, Gazprom will seek to accept all of the Northern Caspian gas in its pipeline system and will supply the same volume of gas to LUKOIL Group’s enterprises in accordance with the replacement plans. 

Cooperation between OAO LUKOIL and OAO Gazprom is based on the 2005 – 2014 General Agreement on Strategic Partnership signed in March, 2005. 

Cash flow, declining production
A March 4 report by VTB Capital, an investment bank with offices in Moscow, London, Singapore and Dubai, notes LUKOIL may finish the year strong, but its ability to deliver free cash flow and declining production remain concerns going forward. 

On March 10, LUKOIL is due to publish its 4Q10 US GAAP results. VTB Capital expects to see revenues at USD 26,863 million (up 11% year-over-year), EBITDA of USD 4,313 million (up 30% year-over-year) and net income of USD 2,468mn (up 43% year-over-year). 

And, while the company’s free cash flow increased from USD 1.4 billioin in 9M09 to USD 7 billion in 9M10 (attributed mainly to a reduced capital expenditure budget and a USD 438 million gain from a successful legal dispute completion with a joint ventures in Kazakhstan), VTB Capital believes the company will “inevitably see a deteriorating trend in FCF generation on the 1-3 year horizon,” nothing LUKOIL will either have to bear an accelerating production decline or significantly increase its upstream capex. 

Declining production remains a concern. In 4Q10, LUKOIL’s crude production edged down 3.2% year-over-year, compared to declines of 2.6% year-over-year in 3Q10 and 2.1% in 2Q10.

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