Lukoil Prepares for Life Without Europe

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  • Lukoil, Russia’s largest independent oil company, is restructuring downstream operations in Europe because of sanctions and trying to sell its Italian refinery.
  • As Dubai effectively becomes the new headquarters for trading arm Litasco, Lukoil is also eyeing upstream expansion in the Middle East.
  • The departure of co-founder and CEO Vagit Alekperov, who remains a Lukoil shareholder, has fueled speculation of a state-led takeover of the firm.  

The Issue

With less than one month to go before an EU embargo on Russian crude kicks in on Dec. 5, Lukoil has a lot to sort out. EU and Swiss sanctions on Russia following its invasion of Ukraine, while not targeting Lukoil itself, have led the company to rejig its marketing operations and split its trading arm, Litasco, into two. But other problems, such as what Lukoil should do about its refinery in Italy, cannot be so easily untangled, while the company's future in Russia is also far from certain.

Split Decision

Lukoil’s days as a downstream player in Europe are coming to an end — and the company has to plan accordingly. Litasco, which Lukoil created in the early 2000s to market its own oil and handle third-party business in the Mideast, Far East and elsewhere, has been divided into two. Amid European sanctions, Litasco has delegated all Russia-related business to its office in Dubai, leaving its Geneva headquarters focused on supplying non-Russian crude to Lukoil's European refineries.

Energy Intelligence understands Lukoil has no plans to sell Litasco as it allows the company to remain active on the global market. It has, however, moved most Litasco staff to Dubai, a source close to the company says. The United Arab Emirates, which unlike Switzerland has placed no restrictions on Russian trade and finance, has effectively become Litasco’s new base, handling all of its Russian sales as well as its existing Mideast trading.

Litasco remains the largest non-state offtaker of Russian oil, and its volumes have increased in recent months, as it handles the crude of other Russian producers, most notably West Siberian giant Surgutneftegas. According to port data, Litasco lifted around 700,000 barrels per day of Russian crude in the first 10 months of the year as volumes increased sharply from the latter months of 2021. It also handles regular shipments of gasoil and fuel oil from Lukoil's Russian refineries. On the international front, it supplies third-party barrels across the Mideast and North Africa, including Iraq, and is also active in the Far East.

Italian Impasse

Lukoil retains a 45% stake in the Zeeland refinery in the Netherlands that is operated by French major TotalEnergies, but its biggest dilemma in Europe is what to do with the plants it owns. It continues to supply Urals crude to its Neftokhim plant in Bulgaria and the Petrotel plant in Romania, and the EU embargo on Russian crude has exemptions that will allow it to keep up those shipments for now.

But the situation in Italy, where there is no such exemption, appears unresolvable. Sources close to the matter say Lukoil wants to sell the 320,000 b/d Isab plant in Sicily because — the bumper refining margins of 2022 aside — it has generally been loss-making since the Russian company assumed full control of the plant in 2014. Lukoil, which forked out a total €2.4 billion ($2.4 billion) to buy Isab, is said to have rejected selling it to Vitol-backed US investment group Crossbridge. The chances of any sale going through are receding, as the Dec. 5 deadline looms, leaving the prospect of the refinery falling idle because Lukoil is unable to supply it with crude. The Russian volumes previously sent to Isab will likely have to find new homes on the open market.

It appears increasingly likely that the Italian government will have to intervene and, if needed, find a buyer for the refinery. There are existing laws which allow the authorities “golden powers” to protect strategic companies from foreign interests, but it is not clear how they will be applied. The worst outcome for Italy, and Lukoil, would be if Isab stopped operating altogether and left the Italian market short of products.

Looking Upstream

Lukoil is much less concerned about its global upstream portfolio, even in the current geopolitical climate. This is focused on the Middle East, where the company is the majority partner in Iraq's West Qurna-2 project, and on the Caspian, where it is involved in several projects in Russia, Kazakhstan and Azerbaijan. Energy Intelligence understands Lukoil wants to expand in the Mideast and has no plans to exit Iraq, where it has been involved since 1997. The company is awaiting approval from the Iraqi government on its plan to develop the Eridu field on Block 10, which is expected to bring Lukoil much higher profits than West Qurna-2. It is unclear whether Japanese partner Inpex will stay the course, however.

The Caspian also has scope for expansion. In Kazakhstan, Lukoil retains minority stakes in the giant Chevron-led Tengizchevroil joint venture, the Eni- and Shell-led Karachaganak gas project, and has contracts with state oil company Kazmunaigas to develop new offshore acreage, although the costs of executing those projects may be prohibitive. Azerbaijan is also a big focus: Last year, Lukoil increased its stake in the BP-operated Shah Deniz gas project from 9.9% to 15.5% and it is carrying out exploration work with state oil company Socar. In Turkmenistan, Lukoil is eyeing a role in the development of the Dostluk field, which for years has been disputed with Azerbaijan.

Most of the impetus behind Lukoil’s expansion in the Caspian came from Alekperov, the former CEO, who was born in Azerbaijan and knows the area as well as anyone. The big question being asked about Lukoil as a whole is what will happen to the company after Alekperov, 72, stepped down in April and was followed by other senior figures like Lukoil's vice president and co-founder Leonid Fedun. In September, Lukoil's then-chairman, Ravil Maganov, who used to be one of Alekperov's most trusted managers, died after falling from a Moscow hospital window. State-run Rosneft has never publicly stated a desire to take over Lukoil, but tightening Russian government control over the oil and gas sector makes that a distinct possibility.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Refining, Sanctions, Ukraine Crisis, Oil Trade, Trade
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