Lukoil failed to get a blockchain in the Shah Deniz project

Lukoil will reduce its stake in the Azerbaijani Shah Deniz project in the Malaysian company Petronas, the Russian company said. It will fall from the previously stated 15.5% to 9.99%, and the deal amount from $ 2.25 billion to $ 1.45 billion respectively. Its closure is expected in January 2022. “The signing of these changes was the result of negotiations with partners in the Shah Deniz project on the implementation of preferential rights,” – said in a release.

Lukoil now owns 10% of the Shah Deniz offshore gas condensate offshore project. The operator of the project is the British BP, which owns 28.8%. Another 19% in the Turkish TRA, in Petronas – 15, 5%, 10% belongs to the Azerbaijani SOCAR and Iranian NICO, another 6, 7% – the Azerbaijani SGC.

The Shah Deniz gas condensate field is located on the shelf in the Azerbaijani sector of the Caspian Sea, 70 km southeast of the Absheron Peninsula. Its area is about 860 square meters. km, reserves are estimated at 12 billion cubic meters. m of natural gas and 240 million tons of gas condensate. The field was discovered in 1954, industrial production has been underway since 2006. The project is implemented under the production sharing agreement (signed and ratified in Baku in 1996). According to the results of last year, 181 billion cubic meters were extracted at Shah Denis. m of gas and 3.6 million tons of gas condensate. From 2018, the project is in the second stage of implementation (Shah Deniz-2), which plans to increase gas production to 26 billion cubic meters. m, and gas condensate – up to 5 million tons.

Lukoil’s intention to buy out its stake in Petronas was announced in October 2021. Thus, the Russian company planned to raise 25.5% in the project (blocking package). But December 9 BP exercised its preemptive right of redemption as the project operator and acquired 1.16% from the Malaysian company, thus increasing its stake to 29.99%. As Interfax-Azerbaijan reported, the deal is estimated at $ 168 million and is expected to be completed by the end of January 2022.

After that, the Azerbaijani SOCAR also bought from Petronas another 4, 35% of its shares, thus increasing its participation in the project to 14, 35%.

Recently, Lukoil has increased its activity in the Caspian Sea. In particular, in late September, the company announced that it would participate in the development of offshore deposits “Kalamkas-Sea” and “Khazar” in the Kazakh sector. At the same time, it announced the acquisition of BP 25% in the exploration project SWAP (Shallow Water Absheron Peninsula) in the Azerbaijani sector of the Caspian Sea.

The Caspian Sea has become strategically important for Lukoil, said Ronald Smith, a senior analyst at BCS Global Markets. He agrees that work in the Caspian Sea is of strategic importance for Lukoil. In the Shah Deniz part, BP’s actions, according to the analyst, hindered the implementation of Lukoil’s plans.

Dmitry Marinchenko, senior director of the Fitch Ratings natural resources group, adds that Lukoil already has experience in the Russian segment of the Caspian Sea, and from the point of view of geology it is a familiar region for the company. In addition, the project is particularly interesting for Lukoil in terms of the principles of sustainable development (ESG), as it is gas, while in Russia the company mainly produces oil, adds Marinchenko.

At the same time, according to the expert, the key decisions related to the future of Shah Deniz will be made by BP as the project operator.

According to Marynchanka, for Lukoil the struggle for 25% in the project has not been lost yet: the company may try to buy the missing interest from other participants. The expert also did not rule out that BP’s decision not to allow the Russian company to increase its stake in the blockchain may be due to BP’s desire to later sell its stake to Lukoil, but at a higher price.

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