Annual Report 2006
Acrylonitrile and other organic synthesis products
15,000 tonnes of sodium cyanide 青酸ソーダper year. DuPont technology
Budennovsk (Stavropol Region, Russia)
Polyethylene and other products
polypropylene unit with 120,000 tonnes dow technology
Polyethylene, vinyl chloride and other products
LUKOIL Neftokhim Burgas
Polymers and organic synthesis products
In September 2004, ConocoPhillips purchased a 7.6 percent stake in LUKOIL and signed an agreement that could increase this figure in the future to up to 20 percent.
LUKOIL's petrochemical business is the biggest in Russia and Eastern Europe. Company plants in Russia, Ukraine and Bulgaria make pyrolysis 熱分解 products, organic synthesis products, fuel fractions and polymer materials. LUKOIL meets a major share of Russian domestic demand for various chemicals as well as exporting chemicals to more than 50 countries.
LUKOIL has been steadily increasing production of chemicals with high valueadded (polymers, monomers and organicsynthesis products) over the last five years, in line with the Company's strategy for development of its petrochemical business. At the same time production of chemicals with low value added (pyrolysis products and fuel fractions) has been reduced. Output of polymers, monomers, and organic synthesis products grew by 11% from 2002 to 2006, while output of pyrolysis products and fuel fractions declined by 11%.
LUKOIL petrochemical plants produced 2.038 million tonnes of marketable chemicals in 2006, including 798,000 tonnes of polymers and monomers, 648,000 tonnes of organic synthesis products, and 584,000 tonnes of pyrolysis products and fuel fractions. Output included 447,300 tonnes of polyethylene (4.8% less than in 2005), 232,500 tonnes of propylene (2.7% less than in 2005) and 70,200 tonnes of polypropylene (3.3% more than in 2005). Overall reduction of petrochemical production volumes in 2006 was due to scheduled repair and upgrading work at the Company's petrochemical plants.
Price environment on petrochemical markets was favourable in 2006. Polyethylene prices increased by 17% in Russia and by 22% in Europe, and sale prices for polypropylene in Russia and Europe rose by 16% and 13% respectively. The market price for benzene rose by 21% in Russia and 12% in Europe. Net profit in the petrochemical sector was $96 million.
LUKOIL pursued its strategy for development of petrochemical business in 2006 with a number of measures for modernization of existing production and creation of new facilities. Capital expenditures in the petrochemical sector were $172 million.
LUKOIL continued work in 2006 to set up polypropylene production at the Stavrolen Plant. A polypropylene unit with 120,000 tonnes annual capacity was commissioned in the first quarter of 2007. It is the first such unit among the Company's petrochemical assets. Propylene feedstock is produced in the Stavrolen complex and supplied to the unit through a pipeline.
The Unipol process, which the unit uses, was designed by the US company, DOW Chemicals, and has fewer environmental risks than other production methods, since sources of harmful atmospheric emissions are avoided. The technology enables production of shockproof and frost-resistant polypropyleneas well as various modifications for use in medicine and agriculture. General-purpose polypropylene from Stavrolen will be supplied to Russian factories for production of fibres and threads, pipes, technical items, and consumer goods.
Capacity of the new unit is sufficient to meet all Russian demand for modern polypropylene grades.
Saratovorgsintez carried out installation of a unit capable of producing 15,000 tonnes of sodium cyanide 青酸ソーダper year. Commissioning is scheduled for the second quarter of 2007.
The production process is based on DuPont technology which is highly reliable and safe. Sodium cyanide is used in gold mining for separation of the metal from ore rock. Until now needs of the Russian gold mining industry, estimated at 20,000 tonnes per year, have been mostly met by import supplies. In 2006 Saratovorgsintez also carried out reconstruction of a phenol acetone production column in order to improve quality and efficiency of phenol production.
Karpatneftekhim plans to install chlorine and caustic soda production using membrane technology in 2007, enabling annual production of up to 200,000 tonnes of caustic soda.
Karpatneftekhim also intends to build a suspended polyvinyl chloride facility with 300,000 tonnes annual capacity.
Integration of the new facility with production of vinylchloride monomer will significantly increase overall production efficiency.
A key project for implementation in the next few years is construction of the Caspian Gas chemical Complex, which will process natural gas and gas condensate, produced by LUKOIL in the Caspian region. The purpose of the project is to increase value-added by deeper processing of gas feedstock and to ensure efficient chemical processing of ethane, natural gas liquids and condensate. The Caspian Complex will refine natural gas and its components to produce basic organic synthesis products, polyethylene, polypropylene and other petrochemicals. Work on a feasibility study for the complex proceeded in 2006 and should be completed in the second quarter of 2007.
LUKOIL NEFTOCHIM BOURGAS AD is the biggest refinery in the Balkan region, with a big petrochemical complex. The petrochemical plant produces fuels, petrochemicals and polymers.
Since December 1st, 1999, 58% of its shares are hold by the russian oil giant LUKOIL.
The petrochemical plant has an annual capacity for the processing of more than 7 mil tons of crude oil, that is to say a daily capacity of up to 22.000 t.
Its major units are the Refinery Complex, the Petrochemical and Polymers production sites. The whole complex has its own power station, pipeline system, port infrastructure, and R&D center. It employs more than 9000 persons.
A new pipeline for fuel oil was constructed in the previous year at the aim to increase seriously the exportable volumes. Besides, 20 mil USD have been invested in 2000 for the maintenance and upgrading of the major petrochemical and polymer productions.
ConocoPhillips and LUKOIL Form Strategic Alliance; ConocoPhillips to Become Equity Investor in LUKOIL
ConocoPhillips and LUKOIL jointly announced today in Moscow, Russia, their agreement to form a broad-based strategic alliance in which ConocoPhillips will become a strategic equity investor in LUKOIL. The two major integrated oil and gas companies also announced the creation of a joint venture to develop resources in the northern part of Russia's Timan-Pechora oil and gas province and their intention to jointly seek the right to develop the giant West Qurna oil field in Iraq.
ConocoPhillips is announcing today that one of its affiliates was the successful bidder in an auction for 7.59 percent of LUKOIL's authorized and issued ordinary shares held by the Russian government for a price of $1.988 billion, or $30.76 per share. ConocoPhillips intends to initiate a tender offer outside the U.S. to non-U.S. LUKOIL shareholders for up to an additional 2.4 percent of LUKOIL's equity capital in the open market at a price of up to $30.76 per share upon receipt of U.S. Federal Trade Commission clearance for the equity investment in LUKOIL. ConocoPhillips will have proportional board membership including one initial director on the LUKOIL board. In addition, LUKOIL and ConocoPhillips have agreed that ConocoPhillips may increase its total ownership stake in LUKOIL up to an aggregate total ownership interest of 20 percent. These, and other governance issues described below, are the subject of a comprehensive Shareholder Agreement between LUKOIL and ConocoPhillips. ConocoPhillips is assuming it will report this investment in its financial statements using the equity method of accounting.
LUKOIL and ConocoPhillips have entered into a Shareholder Agreement that will govern ConocoPhillips' equity investment in LUKOIL. Under the Shareholder Agreement, LUKOIL will propose for shareholder approval amendments to its corporate charter that will require unanimous board consent for certain key decisions. The Shareholder Agreement limits ConocoPhillips' ownership in LUKOIL to 20 percent and also limits ConocoPhillips' ability to sell LUKOIL shares for a period of four years.
LUKOIL and ConocoPhillips plan to commence a comprehensive exchange of management in corporate and operating areas beginning in early 2005.
Upstream Partnership in
LUKOIL and ConocoPhillips also are announcing the creation of a joint venture (JV) with respective interests of 70 percent and 30 percent that will allow ConocoPhillips to partner in the development of LUKOIL's reserves in the northern Timan-Pechora area (north of European Russia). Under the terms of the joint-venture agreement, ConocoPhillips will pay to LUKOIL an acquisition price consisting of more than $370 million for a 30 percent interest in the JV oil and gas resources, together with an additional payment for its 30 percent share of working capital and its 30% share of LUKOIL's capital investments in the JV fields from January 1, 2004. The precise amount of the acquisition price will be established at closing. The joint venture will be governed 50/50 by LUKOIL and ConocoPhillips, and is expected to be producing and marketing approximately 200,000 barrels per day (BPD) of oil by 2008.
Production from the joint-venture fields will be transported via pipeline to LUKOIL's existing terminal at Varandey Bay on the Barents Sea and then shipped via tanker to international markets. LUKOIL will expand the terminal to 240,000 BPD capacity by 2007 with ConocoPhillips participating in the design and financing of the terminal.
Partnership in Iraq
LUKOIL and ConocoPhillips will cooperate with the Iraqi government to confirm the validity of LUKOIL's rights under its production sharing agreement (PSA) relating to the West Qurna field in Iraq. Subject to confirmation of those rights, and subject to obtaining all required consents of governmental authorities and the parties to the contract, LUKOIL and ConocoPhillips expect to enter into further agreements regarding the assignment by LUKOIL to ConocoPhillips of a 17.5 percent interest in the PSA.
The transaction represents a strategic step for both companies, has the strong support of both the Russian and U.S. governments, and furthers bilateral energy development between the countries, including the potential supply of Russian crude oil and natural gas to U.S. markets.
For LUKOIL, the alliance is an affirmation of its status as Russia's leading international oil and gas company, and a global energy player. Additionally, LUKOIL will benefit from:
ConocoPhillips will gain further exposure to Russia's vast resource potential, where LUKOIL has leading positions in reserves and production. ConocoPhillips also will benefit from:
This transaction is compatible with ConocoPhillips' strategic and financial plans. It does not affect spending on any of ConocoPhillips' previously announced or planned capital projects.
LUKOIL's Board of Directors approved the key terms of the strategic alliance with ConocoPhillips as one of the strategic priorities of LUKOIL.
"This investment is consistent with our Exploration & Production strategy of increasing reserves and production growth in new legacy areas at attractive costs," said Jim Mulva, ConocoPhillips President and Chief Executive Officer. "ConocoPhillips has a long and rich history of successfully doing business in Russia and the Caspian region. LUKOIL has a well-deserved reputation as the leading international oil and gas company in Russia, and we are looking forward to contributing to and sharing in their future success."
"The new partnership with ConocoPhillips represents an exceptional opportunity to combine the talents and resources of two great companies for the mutual benefit of the shareholders of both enterprises. ConocoPhillips' investment in LUKOIL and LUKOIL's assets shows the confidence that ConocoPhillips' management places in the continuing growth of investment attractiveness of Russia and the Russian energy industry, and opens new opportunities for high-quality growth of LUKOIL," said Vagit Alekperov, LUKOIL President.
Credit Suisse First Boston (CSFB) and Citigroup Global Markets Inc. acted as financial advisors to ConocoPhillips on the transaction. CSFB is conducting ConocoPhillips' planned tender offer for LUKOIL shares. Compass Advisers, L.L.P. acted as financial advisor to LUKOIL on the transaction.
Akin Gump Strauss Hauer & Feld LLP acted as legal advisor to LUKOIL on the transaction, while ConocoPhillips was represented by Freshfields Bruckhaus Deringer and Wachtell, Lipton, Rosen and Katz.
ConocoPhillips' senior executives will join LUKOIL's senior executives at their previously announced press conference at LUKOIL's Moscow offices at 4 p.m. today. See LUKOIL's Web site at www.lukoil.com for details of this press conference, as well as presentation files and broadcast access instruction.
In addition, a meeting with LUKOIL and ConocoPhillips executives for securities analysts and investors is scheduled for Thursday, Sept. 30, 2004, at 2:30 p.m. at the St. Regis Hotel in New York City. A webcast of this meeting, along with an investor supplement and conference call details, will be provided on ConocoPhillips' investor Web site, www.conocophillips.com/investor.
ConocoPhillips is an integrated oil company with interests around the world. For more information, go to www.conocophillips.com.
LUKOIL is an integrated oil and gas company active in Russia and nearly 30 other countries. The company's main activities are oil and gas exploration and production, and production and sale of petroleum products. For more information, go to www.lukoil.com.