LUKOIL may withdraw from Zhenis Operating LLP project in the Caspian Sea

LUKOIL may close one of the promising projects on the Kazakh shelf of the Caspian Sea – the Zhenis block – after an exploratory well drilled there turned out to be “dry”. The project was carried out by a joint venture between LUKOIL and Kazmunaigas, but exploration was financed exclusively by LUKOIL, which planned to spend $60 million on drilling the well. Under the sanctions that have limited partnerships with majors, Russian oil companies will increasingly go into risky projects.

The joint venture between LUKOIL and Kazmunaigas found no commercial reserves following drilling on the Zhenis block in the Kazakh sector of the Caspian Sea. LUKOIL owns 50% of the project operator Zhenis Operating LLP, the rest belongs to Kazmunaigas. Under the terms of the agreement, LUKOIL was supposed to finance the exploration of the project, and after the start of production, the expenses of the Russian company would be compensated.

The Zhenis block is located in the southern part of the Kazakh sector of the Caspian Sea. Sea depth in the drilling area is about 100 m. LUKOIL signed a contract with Kazmunaigas for this block in 2019, committing to invest $60 million in drilling a well and conducting 3D seismic. If work continues on the site, investments could amount to another $210 million.

LUKOIL is a key foreign partner of Kazmunaigas in the Caspian. In 2021, the Russian oil company received 49.99% in the Al-Farabi block exploration joint venture. In addition, Kazmunaigas plans to jointly develop another offshore project, Kalamkas-Sea, Khazar, Auezov. Its oil reserves are estimated at 67 million tons, and the total investment in development is $6 billion. In early February, the Kazakh authorities improved the conditions for investors in this project by agreeing on a so-called improved model contract. But the closing of the deal on “Kalamkas-Sea, Khazar, Auezov” has not yet been reported.

In Kazakhstan, LUKOIL owns shares in two active mining projects: Tengiz (5% share) and Karachaganak (13.5%). In addition, LUKOIL and Kazmunaigas have joint ventures in the Russian sector of the Caspian Sea to develop the Central (25% each) and Khvalynskoye (50% Russian companies) gas fields. LUKOIL is the largest subsoil user in the Russian part of the Caspian Sea, where it produces about 7 million tons of oil per year.

Given the limited prospects for a significant increase in production in the Russian Federation, including due to the operation of the OPEC + deal, LUKOIL has been actively interested in foreign projects for many years. However, EU and US sanctions have made Russian companies “toxic”, especially when it comes to partnerships with Western majors. Under these conditions, Russian oil companies have to limit themselves to buying assets in friendly countries. At the same time, although LUKOIL has the most experience of working on the shelf of all Russian companies, its foreign investments in this segment in projects at the exploration stage were mostly unsuccessful. Thus, the company failed to find significant reserves in West Africa, Romania, and Mexico.

Zhenis and a number of other projects in the Kazakh sector of the Caspian Sea have much in common: these sites were once transferred to foreign subsoil users, but they refused them.

Thus, the French Total withdrew from Zhenis in 2012, work on the Kalamkas Sea was carried out by NSOC (the operator of Kashagan, the main shares are held by Eni, BP, Total and Exxon), and exploration of the Khazar and Auezov fields was carried out by a consortium consisting of Kazmunaigas, Oman Oil and Shell, notes Sergei Kondratyev of the Energy and Finance Institute. He recalls that foreign investors have left the Caspian projects, pointing to the high level of costs and low return on investment in the presence of significant risks. The expert notes that, as Zhenis’s experience has shown, this can become a serious challenge for LUKOIL as well.

Dmitry Kozlov