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LUKoil to lose the lead soon
Rosneft will become Russia’s leading oil producer in 2007

LUKoil produced 90 million tonnes of oil last year, remaining Russia’s leading oil company. State-owned Rosneft was second, with 82 million tonnes. But analysts say Rosneft is set to take over the lead in 2007. Rosneft’s 2006 figures do not include revenue from Udmurtneft and Sakhalin-1, and Rosneft is also expected to buy the production assets of Russia’s bankrupt YUKOS oil firm.

According to the Central Dispatch Board of the Russian Fuel and Energy Ministry (TsDU TEK), LUKoil remained Russia’s leading oil producer in 2006, reporting an output of 90 million tonnes (not including foreign projects). Rosneft was second, with 82 million tonnes. “TNK-BP’s production dropped 4 percent to 72 million tonnes after it sold Udmurtneft to Rosneft. And Surgutneftegaz increased its output to 66 million tonnes against the expected 67 million,” Natalya Milchakova, an analyst at the Otkrytiye brokerage, told RBC Daily.

Gazprom Neft’s production (not including its stake in Slavneft) stood at 33 million tonnes. If calculated together with a 50 percent stake in Slavneft and stakes in Gazprom oil producing units, Gazprom Neft’s output rose 31 percent to 59 million tonnes. “This means that Gazprom Neft’s oil production could double by 2010,” Milchakova said. YUKOS’s output dropped 4 percent to 22 million tonnes, and Tatneft’s production remained unchanged at 25 million tonnes.

Analysts say the results met expectations. The main intrigue – whether Rosneft overtakes LUKoil in production – will end in 2007. Rosneft is already leading in terms of production growth thanks to the acquisition of Yuganskneftegaz and projects in East Siberia. “Without the expected acquisition of YUKOS’s assets, Rosneft's production will rise 7 percent in 2007, while LUKoil’s output will increase by 3.8 percent,” says Artem Konchin, at ATON investment consultants. In 2006 Rosneft’s production growth was 1 percent more than expected, while LUKoil’s was 2 percent below expectations.

Konchin thinks Rosneft could catch up with LUKoil in terms of oil production in 2007, even without YUKOS’s assets, provided that Udmurtneft’s output is included (Rosneft and China’s Sinopec each have 50% in Udmurtneft). Oleg Maximov at Troika Dialog brokerage says the Central Dispatch Board’s figures do not include revenue from Udmurtneft and Sakhalin-1. Maxim Shein, chief analyst at BrokerCreditService, estimated Rosneft’s real production in 2006 at 91 million tonnes, which will allow it to catch up with LUKoil.

The acquisition of Samaraneftegaz and Tomskneft from YUKOS will raise Rosneft’s daily output by 430,000 barrels (59,000 tonnes). Based on the Central Dispatch Board’s data for 2006, putting YUKOS’s production at 22 million tonnes and Rosneft’s at 82 million tonnes, the latter is expected to raise its output by 14 million tonnes of oil in 2007, which is 16 percent more than LUKoil’s production (not including its foreign projects).

Andrei Gromadin, at MDM Bank, adds that Rosneft has long overtaken LUKoil in capitalization. “Rosneft’s capitalization currently stands at $90.6 million, while LUKoil is valued at $66.3 million,” he said.

Meanwhile, experts point to a number of risks. Apparently, Rosneft will buy new assets, but it is unclear whether it will be able to use them effectively, Shein warns. “Rosneft’s profit margins are falling, and it has to work to boost them,” he said. At the same time, he said LUKoil will remain the leader in Russia’s oil refining business.

Analytical department of RIA RosBusinessConsulting

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