In its Third Quarter results published today, Lukoil has given the following update on its operations at the West Qurna-2 oilfield:
On December 12, 2009, a consortium of a Group company and Statoil won the tender for development of the West Qurna-2 field in Iraq, one of the largest crude oil fields discovered in the world, with estimated recoverable oil reserves of 12.9 billion barrels (1.8 billion tonnes).
The service agreement for West Qurna-2 field development and production was signed on January 31, 2010 and then ratified by the Ministry cabinet of the Iraq Republic. After Statoil withdrew from the West Qurna-2 project in May 2012, the parties of the project are Iraq's state-owned South Oil Company and a consortium of contractors, consisting of a Group company (75% interest) and Iraq's state-owned North Oil Company (25% interest).
The Group launched the "Mishrif Early Oil" stage on the West Qurna-2 field and reached the planned production of 120 thousand barrels per day in March 2014. According to the service agreement, costs are compensated after this level of production is achieved and maintained during any 90 days within a 120-day period.
In June 2014, we met this term and from the second quarter of 2014 started to receive cost compensation.Accounting for the cost compensation within the West Qurna-2 project in the Group consolidated statement of comprehensive income is as follows. The crude oil sales revenue is recognized after the Iraqi party has approved the actual invoice for the spending quarter. The invoice total amount depends on crude oil production volumes and the market prices for crude oil during the period.
Subsequently, crude oil purchases are recognized based on actual crude oil shipments by the Iraqi party against its debt for cost compensation. Then this crude oil is either sold to third parties or supplied to the Group refineries and the respective sales revenues are recognized.
In the nine months of 2015, the Group accrued revenue from the West Qurna-2 project in the total amount of $2,423 million, consisting of cost recovery of $2,327 million and remuneration fee of $96 million, compared to the revenue of $2,629 million in the nine months of 2014.
This revenue was classified as crude oil sales revenue. Attributable amount of 7,558 thousand tonnes, or 51,843 thousand barrels, of crude oil was included in Group's crude oil production for the nine months of 2015 (3,902 thousand tonnes, or 26,761 thousand barrels in the nine months of 2014) that represented approximately 52% of total production from the field (58% in the nine months of 2014).
In the nine months of 2015, we received 7,009 thousand tonnes of crude oil from the Iraqi party as a debt settlement within the cost compensation. This crude oil at cost of $2,267 million was recognized in Cost of purchased crude oil, gas and products. Subsequently, we sold this crude oil to third party customers or delivered to our refineries.
During the nine months of 2015, the cost compensation increased the Group's EBITDA by $1,779 million ($2,264 million in the nine months of 2014).The project's target production level is 1.2 million barrels per day and the total term of the contract is 25 years.The Group is exposed to political, economic and legal risks due to its operations in Iraq.
Management monitors the risks associated with the projects in Iraq and believes that there is no adverse effect on the Group's financial position that can be reasonably estimated at present.