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. Last Updated: 07/27/2016

LUKoil Looks Abroad as Investor Leaves

MTLUKoil chief Vagit Alekperov and Mulva announcing their strategic partnership in Moscow in September 2004.

LUKoil, the country's largest nonstate oil company, plans to spend as much as $8.5 billion a year to support production at home and double output at foreign projects from Iraq to West Africa, deputy CEO Leonid Fedun said Wednesday.

Capital expenditures will rise to $8 billion to $8.5 billion per year for the next couple of years, after dropping 38 percent in 2009 to $6.53 billion, Fedun said in a presentation in London.

About $3 billion per year will be invested in projects outside Russia during the next three years, said Andrei Kuzyayev, head of LUKoil's overseas production arm. Iraq and central Asian will provide the biggest output gains, he said.

LUKoil, with the most overseas assets among Russian oil producers, has looked abroad for profit and expansion because of Russia's tax burden and the preference that state companies enjoy in gaining on new projects.

"The company has focused on stabilizing output inside Russia and increasing output abroad," Fedun said. "There's one main reason for this, in West Africa, imagine this, the level of taxation is three times lower than that in Russia."

Foreign output will probably double to 446,000 barrels of oil and gas per day in 2015, Kuzyayev said. Profit may reach $1.5 billion that year, he said, after it slid 31 percent last year to $612 million. LUKoil's net income dropped 23 percent to $7.01 billion last year as the crisis damped prices and demand at the beginning of the year, the company said Wednesday.

Oil output may begin in 2013 at Iraq's West Qurna-2 field, which LUKoil plans to develop with Statoil. The Russian company plans an initial investment of $3.7 billion in the field, Kuzyayev said. After that, the project will use free cash flow from the field itself to fund development.

LUKoil and partner Statoil won the rights to develop the field in December after agreeing to pump 1.8 million barrels per day for a fee of $1.15 per barrel.

The company is also exploring West Africa, Saudi Arabia and Venezuela. Kenya is interesting, as is Uganda, although the company is "just looking" now, Kuzyayev said.

But the oil producer has abandoned work in Iran because of the threat of U.S. sanctions, although it may still return.

LUKoil, a minority partner in the Statoil-led Anaran project, took a $63 million impairment loss in December "due to the incapability of undertaking further works because of the threat of economic sanctions of the U.S. government," according to its 2009 financial statements.

The company is vulnerable to sanctions as it owns a network of U.S. filling stations with Houston-based ConocoPhillips, which plans to sell half of its 10 percent stake in LUKoil in two years.

"We aren't saying goodbye," Kuzyayev said. "It's just the principal position of our auditors and doesn't mean that we lose the rights to that project."

If political and economic conditions are favorable, LUKoil is ready to return to the project, Kuzyayev said.

The Iran Sanctions Act, intended to deny the oil-rich Persian nation resources to further its nuclear program or support U.S.-identified terrorist organizations, forces companies to choose between the United States and Iran. Companies investing more than $20 million a year in Iran's energy sector are subject to U.S. restrictions.

"Gazprom Neft is a safer option to maintain Russia's existing link with Iran than the more commercially exposed LUKoil," said Chris Weafer, chief strategist at UralSib. "Russia does not want to give up on its foothold in one of the top OPEC countries by reserve base nor to be seen as complying with U.S. pressure."

Gazprom Neft, oil arm of Gazprom, aims to develop Iran's Azar and Changuleh deposits. U.S. sanctions do not interfere with the company's plans, Gazprom Neft CEO Alexander Dyukov said in December.

LUKoil doesn't plan any "significant" acquisitions this year and isn't looking at additional European refineries after boosting capacity to an "optimum" 75 percent of oil production, Fedun said.