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Russia's Lukoil not seeking additional compensation for OPEC/non-OPEC output cut deal extension

Russia's second-largest crude producer Lukoil has not asked for any additionalcompensation in return for curbing production in line with the extension tothe OPEC/non-OPEC production cut deal, CEO Vagit Alekperov said Friday.

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"We are discussing legislation governing the oil industry in Russia overall,but we are not separately discussing any compensation on the production cut,"he said.

Ahead of the OPEC/non-OPEC meeting Thursday, some analysts questioned whetherRussian companies would continue to support the output cut deal.

Although it has benefited producers by boosting prices, the longer theagreement is in place, the greater the risk that they may be forced topostpone the launch of greenfield projects in order to meet their obligations.

"Subsoil resources in Russia belong to the state, and decisions taken by theministry are obligatory for us. Today we are discussing the issues, and ofcourse the market has to be balanced, stocks are high and the ministry'sdecision is aimed at stabilizing the oil market," Alekperov said.

He added that the structure of implementation of the deal in Russia, where thecuts were shared out across companies proportionally, will not change.

"The volumes won't change," he said.

On Thursday Lukoil officials said that they will continue their strategy ofbalancing out higher output at greenfield sites with lower production atmature fields in West Siberia and Timano-Pechora to meet their obligationsunder the OPEC/non-OPEC deal.

Alekperov said that, when the agreement is lifted, the company can bringadditional production volumes back on stream quickly.

"We think wells where output is limited, we can bring back into production inaround two weeks," he said.

Alekperov added that he hopes Russian producers will meet with the energyminister again at the end of the spring to discuss the state of the market.

RUBLE DYNAMICS

Another potential risk for Russian producers linked to extension of the dealwould be a strengthening in the ruble to dollar exchange rate, which would seecosts rise and income fall in ruble terms, analysts have said. Alekperov saidhe does not currently see this as a problem and does not expect the ruble tostrengthen significantly.

"Today we do not see that the ruble is directly dependent on the oil price,the ruble is in free-float," he said.

When oil prices fell sharply in 2014, Russian producers were cushioned to someextent by the fact that the ruble weakened significantly against the dollar.With their income largely in dollars and costs largely in rubles, this allowedcompanies to minimize the financial impact of the price drop. Russia'staxation system also helped companies to weather the storm.

Alekperov said that a crude price of $60-65/b suits OPEC and non-OPECcountries alike.

"Therefore we need to agree to be restrained so as not to repeat the mistakesof the mid-2000s," he said.

Lukoil is including an oil price of $50/b in its budget for 2018.

TALKS WITH IRAN

Lukoil is also in talks with Iran to participate in two major onshore oilfield development projects -- Ab Teymour and Mansour -- as well as widerinvestments in the country, Iranian oil minister Bijan Zanganeh said followinga meeting in Vienna Friday. It will join Denmark's Maersk for thedevelopments.

"They told us that they are going to be joint with Maersk. We asked them tosend a letter to us. The two companies are due to give us their proposals,"Zanganeh said.

"We discussed ways to develop [Iran's] oil industry with Lukoil to use theirresources, management and technology in our fields and also trade," he said.

The talks also involve expanding crude and products trading.

"Because we are expanding our crude oil and oil products with Lukoil. Theytake crude and products from us and we want to do a joint marketing work forproducts. They sell us a certain volume of gasoline in north Iran which isimportant for us to be able to supply gasoline cheaper," Zanganeh added.

At the moment, a relatively small volume of gasoline is sent to Iran's NICOIntertrade Co. at the country's Caspian Sea port of Anzali. Lukoil alsoreceives oil directly from state-owned National Iranian Oil Co. for itsrefineries in Europe.

"They will decide the volumes between themselves. This is to diversify ourmarkets and customers," Zanganeh said.

--Adal Mirza, adal.mirza@spglobal.com