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Interview

Gati Saadi Al-Jebouri – VP & Head of Middle East Upstream, LUKOIL

27.03.2017 / Energyboardroom

Gati Saadi Al-Jebouri, VP & Head of Middle East Upstream for LUKOIL, discusses his professional transition into the upstream segment of the value chain, the company’s impressive expansion internationally over the past 20 years as well as the strategic plans for continued growth moving forward. He also discusses some of the company’s flagship projects in the region and how they plan to leverage on those successes to grow their regional presence.

Previous to stepping into your current role, your responsibilities focused more on the downstream and trading activity. How have you found the transition into more of the upstream activities?

“Business today is focused around building relationships and long-term partnerships with your customers, suppliers and clients. You have to build relationships with the government authorities with whom you are working, and with the NOCs, and with contractors that will execute your projects.”

In 2010, when we signed our contract in Iraq and the president of LUKOIL moved me onto the project, the first reaction that I had was what a different world! I had some knowledge and understanding of the upstream business from when I was working at KPMG, however, it was still a transition.

The trading business of LUKOIL, which I ran for five years, is an environment of very quick decision making and risk taking based on these rapid decisions. Initially, coming into the upstream business was frustrating as the decision making process took much longer, and that was a shock to the system. However, one thing that was very similar was the need to build relationships, as business today is focused around building relationships and long-term partnerships with your customers, suppliers and clients. You have to build relationships with the government authorities with whom you are working, and with the NOCs, and with contractors that will execute your projects. You need to understand them, and they need to understand you. Today, I am very used to this, and the thought of having to take a decision within a few minutes is almost scary.

Can you give a strategic overview of LUKOIL’s expansion internationally over the past years, and what current regions or segments are driving the most growth at the moment?

We started more than 20 years ago investing outside of Russia, expanding our international presence. We believe that LUKOIL is a truly international oil company and that is why more than we started active investment in the downstream business, and we grew significantly into a position where we pretty much had a presence in virtually every single Eastern European country and eventually in certain Western European countries like Belgium.

On the upstream side, we truly started in 1995, when we made the first acquisitions and projects in Egypt and Kazakhstan, then in 1996 we began operations in Azerbaijan, and in 2004 we entered Saudi Arabia. In 2010 we entered Iraq, and today it is the cornerstone of our Middle Eastern operations. In 2012, we expanded our presence in Iraq with Block 10, and only very recently announced a very positive result from that exploration. In 2017-2018, we hope that we will be growing further, with one possibility being the projects that we are looking at in Iran.

Today we are divided into three regional hubs. The Dubai regional office looks after the Middle East and North Africa, whereas our Houston office looks after West Africa, North and South America and Europe. It does not seem logical from a geographic point of view, but there is logic behind the split. The European and West African operations are all offshore exploration, and that is why our Houston office looks after them. In West Africa, we have projects in, Nigeria, Cameroon, Ghana in addition to Romania and Norway in Europe and Mexico in Americas. Finally, our third region looks after our central Asian business with projects in Kazakhstan, Uzbekistan and Azerbaijan. As you can see, we are truly becoming a global, international oil company.

We have invested quite a lot of money in exploration. Previously, in many instances, we were taking on the majority of risk ourselves. When you do that, and when you are successful, you get all of the benefits from that. However, the downside is that, if you are taking all of the risks, there are fewer projects that you can do, there is a limit to the amount of capital that you can invest. In that sense, it was unfortunate that we did not use those same funds that were invested in more projects at a lower percentage through sharing with partners.

Have we had a successful operation in West Africa? Not necessarily, but it has still been a positive experience. These activities have given LUKOIL the expertise, the knowledge of working in West Africa, which enables us today to have very interesting projects in Cameroon, Nigeria and now we are working with partners such as Chevron and Hess. We have spent money, we have invested in the region, and the projects that we are doing today will enable us to reap the benefits in the future.

Recently we have seen a shift in focus from LUKOIL to the upstream segment of the value chain, particularly with your activities in Iraq. What was the rationale behind this, and how are your operations in Iraq progressing?

Downstream investments are pretty much complete. What I strongly believe is that we have to look for opportunities to grow the business, and those opportunities have to be in areas which generate the best economic return for our shareholders. Today’s economic environment is such that returns in the upstream business appear to be better than what they have been in the downstream business on a medium to long term basis. Certainly, we have been instructed, and we do see, a strategic approach by LUKOIL to grow the upstream business across the board, but in particular in the Middle East.

More than half of the global hydrocarbon reserves are in the Middle East, and the reality is that today we are one of the largest investors in Iraq, we have invested more than USD 7.5 billion in Iraq over the last seven years, and have achieved current production of 400,000 barrels per day. This is slightly less than all of Libya, and that is just one field. More than 85 percent of private oil companies in the world have less total production than we have in just this one field. It is a very large project, it is an extremely successful project as well, because unlike some of the other projects in the country, we arrived and there was just a field. The oil field had been discovered by Soviet geologists in the 1970s, but nothing had been done. It was just grazing ground, and today, it is like a small city, there is a huge processing facility for crude with a capacity in excess of 400,000 barrels. There is a power station of 126 megawatts, and we have a compound for our staff, which exceeds 1,200 people. Additionally, we have storage tanks, more than 100 km pipeline to the nearest storage tank facility where the crude is transported.

The other project that we have in Iraq is the Block 10, and on the 11th of February we completed the first exploration well, and we have just announced potential commerciality of the project. This year we will be drilling another 1-2 wells to carry out appraisal and to finally determine the reservoirs reserves and eventually create a development plan.

What have been the main challenges that you have faced with your operations in Iraq, and how have you worked to address them to achieve such success in the country?

Every day is a challenge operating in Iraq, and we have had some serious challenges where Iraq was not even paying. We had over 1.5 billion USD in overdue debts from Iraq for more than 18 months, which obviously represented a huge challenge. Once again, the numbers are huge in Iraq, and sometimes we forget that it does not matter how big of an organization you are, USD 1.5 billion is a huge sum of money. The problem was the fact that the Iraqis were not performing under their contract, they were not paying us on time, and it is hard to blame them, due to their financial and economic difficulties, plus the war with ISIS, which has placed a huge burden on them. However, to us, it still had a huge impact. The great news is that Iraq has done an amazing job over the last 12 months, and they have repaid us in full.

The Iraqi oil industry used to be a leader in the world, and certainly in the Middle East, looking back 30 or so years ago. Unfortunately, the Iran war and the sanctions against Iraq reduced the amount of technological exchange, they reduced the amount of managerial expertise and exchange of knowledge between Iraq and the rest of the world. The rest of the world moved forward, whereas Iraq stayed back a little bit. That has created challenges even today. The biggest problem is the lack of sufficiently qualified people. There is a great desire by the Iraqi government and the Ministry of Oil to create jobs for the Iraqi people. Unfortunately, there are not enough Iraqis that are capable of undertaking those jobs, meaning that we have to spend a lot of money, time and effort in training these people and developing them. The other aspect that is very difficult in Iraq is the security. For example, when we go to Iraq we constantly have armored vehicles and body guards. This is challenging both from an economic point of view, because security costs money, but also because it decreases efficiency.

Another difficult aspect of working in Iraq is the desire of Iraq to gain maximum benefit out of their resources, which is understandable. As a country they need to invest so much in their future development, they want to make the most out of their resources. However, Iraq needs to realize that the world has changed, even over the course of the last few years. There are projects around the globe which provide better economic returns, and provide better opportunities for investors. If we were in a situation in 2008 or 2009 of investors looking for insufficient projects, today we are in an environment of lots of projects, but not enough capital to invest in them. Therefore, countries that want to develop their resources need to be attractive enough for foreign investors, otherwise they will not go, they will go to markets where their capital is best utilized, giving the best return for their shareholders.

Today, LUKOIL produces just over 2.2 million barrels of oil and gas per day. our production from the Middle East, as a percentage of the total production, is about five percent. That is too low in my opinion. For a region that holds half of the reserves, a larger portion of our production should come from the Middle East.

What are some of the factors you take into account when evaluating potential projects, and regionally where do you hope to expand in the near future?

The first priority is economic return. We will grow where there is a good return on our investment and good utilization of our human resources. Block 10 in Iraq is a new opportunity that will require significant investment going forward once we start the development stage. Despite this, we believe that the economic returns that this project will yield are significantly interesting. We are interested in other projects in Iraq as well. For example, Iraq has recently stated that they will separate the Nassiriya refinery from Nassiriya oil field, and we would be happy to discuss developing this oil field if that is of interest to the Iraqis.

Iran is another country that LUKOIL, and many well as many others in the industry, have expressed interest in recently. How has this market entry strategy progressed?

Iran has a similar level of reserves to Iraq, and there are two specific projects in the country that we are looking at which we believe we can add significant value to the Iranians with respect to bringing those projects to their natural plateaus of production in a relatively quick amount of time. We have the capital to invest into developing those projects, and we believe that ultimately the commercial terms are favorable.

The Iranian Petroleum Contract has not been formally approved. Prior to this happening, it is hard to say definitively what the payment system will be. From my understanding, it will be a similar structure to Iraq, however, there are better economic terms. This gives an opportunity for the Iranians to attract foreign investors into the country, and it enables investors to allocate their investments towards Iran because the projects have attractive returns.

Looking more broadly at your MENA portfolio outside of Iran and Iraq, which countries is LUKOIL hoping to expand into further, and how do you believe you can leverage your success in Iraq to accomplish this?

Iraq and Iran are not our only targets in the region, we are also looking at opportunities in Kuwait, the UAE, Oman and are open to discussions in other countries as well, for example Qatar and Bahrain. The important thing to understand is that it would seem like we are a bit slow in developing our presence in the region. However, the reality is that we strongly believe that it is more valuable to prove to our potential NOC partners the value we have through realized projects and not through promises. This is why it was critically important to execute successfully the Iraq project, and it has been an amazing position to our CV. As a company, we have had hundreds of successful projects, predominantly in Russia. However, with our project in Iraq, we have proved that LUKOIL is capable of executing major projects in the Middle East.

“With our project in Iraq, we have proved that LUKOIL is capable of executing major projects in the Middle East.”

We had the IPA review our project in Iraq as well, and they marked it as one of the top ten projects in the world in terms of execution and results. They also said that it was a risky project, and that we were aggressive in how we executed it. To bring about 400,000 barrels of oil, which was added production, is much more than simply maintaining the brownfield projects. We executed this on budget and nearly on time, just three months late. Today, we have an ability to show, whether it be ADNOC or others, that we have the technical expertise and financial capability to execute complex and financially intensive projects in their countries. That is why now is the time for LUKOIL to start generating new opportunities on the basis of our proven success.

Have you found that being able to tout the success of your Iraq projects to be something that the NOCs in the region appreciate?

I believe they do, because they welcome discussion with us about potential participation in projects in the future. In the UAE we are in active discussions about potential projects, and we are actively looking at opportunities in Kuwait and Oman, where I met personally with the senior management of the energy sector as well as the Minister just recently. People are very busy, and if they did not respect and believe that we can execute projects for them, I do not think they would agree to meetings.

Recently we saw that two Chinese firms, China National Petroleum Corporation and the China Energy Company Limited (CEFC China), win concessions with ADNOC. What do you believe is the strategy behind these agreements, and how will LUKOIL work to benefit from it?

Basically, what everybody is trying to do is working to guarantee a client base for the crude that they produce. The last 3 years have proven very clearly that market share is not guaranteed, every single barrel of oil that you produce is not guaranteed to find a client. This is why many have started to believe that it is not enough to simply produce the oil, you have to have a guaranteed client base that will pay the oil. Due to this, I can understand the logic of ADNOC selling 12 percent to Chinese investors, who are a natural buyer of oil from the region. In this sense, I do not believe that we are competitors. One of the strengths that we have is that irrespective of what we ultimately decide to do with our downstream operations, we have 4 refineries outside of Russia, in Romania, Bulgaria, Italy and the Netherlands. Those refineries were in excess of 600,000 barrels a day in processing capacity. Therefore, we ourselves are also a significant buyer of crude, and can be seen as an outlet for the crude that is being produced.

More importantly, we have LITASCO, which is an international trading arm. As such, we are capable of finding a home for crude. LITASCO today is trading more than 3 million barrels per day of crude and products, of which more than 50 percent of the volumes traded is third party barrels. Therefore, we as an organization, have refineries that can process crude, we have an international trading arm with presence from Houston through Geneva and Singapore, that can ensure that the oil finds a home. Equally importantly, we have amazing technological expertise and knowledge from Russia, and we have proven that we can apply those in the region. We add value not only by being able to buy the crude or to trade or sell it, but also through being able to execute projects. I believe that the UAE, Kuwait and Oman will see a strong opportunity and benefit for involving LUKOIL so as to diversify the investors that they have. Any organization which diversifies its partners stands a better chance of reaping rewards, irrespective of what happens in the world.

“I believe that the UAE, Kuwait and Oman will see a strong opportunity and benefit for involving LUKOIL so as to diversify the investors that they have.”

One of the big topics of discussion in the regional industry at the moment is the upcoming offshore concessions by ADNOC in 2018. Are those opportunities that LUKOIL is going to pursue?

We certainly have an interest to grow our business in the region and we will look at all opportunities. We are very much aware of the offshore concessions that are expiring and need to be renewed, and we will certainly be looking at those very carefully. The economics of projects in the UAE are not very generous. They are fair in the perception of the Emiratis, and most probably they are right, because of the political and economic stability of the country is unmatched in the region. We have to understand what the economic returns of the upcoming concessions will be and whether they match our own targets and objectives. That being said, we are very interested in working in the UAE, and in Abu Dhabi in particular.

Looking forward, what are your goals for LUKOIL’s operations in the region?

Today, we are five percent of LUKOIL’s hydrocarbon production, and I would like to see that be above 20 percent. In terms of reserves, the region represents 20 percent of LUKOIL’s total reserves. I would also like that to double, because I feel that the opportunities are there. I think that LUKOIL in the Middle East has the potential to achieve those types of targets.

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