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4 Feb, 2009 08:57

Lukoil banks on breaking ice being worth the price of oil

Lukoil has launched a brand new icebreaker to use in the Barents Sea. As the company creates a new fleet to boost operations, analysts warn oil and gas development in the region could freeze if the oil price stays low.

The icebreaker cost Lukoil a hundred million dollars. In keeping with Russian tradition a priest blessed the new vessel with holy water. Dr Jeffrey Roberts, from Impivaara Securities, believes it could take more to generate profitable business from the asset.

“Well I think that the Barents sea will just freeze over economically, so its good thing to have a new icebreaker!! What I’m worried about – We are going to have depression with deflation, and until exports recover – from China and the far east – there won’t be recovery, there won’t be demand for oil.”

Lukoil has already cut its investment program by 30%, but says it still plans to sustain output this year. Its oil fields in the Arctic will remain a priority according to Vice-President Anatoly Barkov.

“Even if we cut our output, we won’t do it in this region because of low temperatures. It’s easy to shut the well, but it won’t be possible to resume production then.”

But current oil prices won’t generate enough cash for Russan producers to develop the vast Arctic reserves any further according to Dr Jeffrey Roberts.

“The supply of oil, cheap oil, is running out. And I think the only place to get new supplies of oil and gas is actually Arctic Russia. It needs the big fields to be developed. It needs, really $50 – $80 per barrel, which we won’t get for maybe ten years.”

Lukoil predicts an oil price of no less than $50 per barrel this year. The icebreaker could help Lukoil deliver from its future offshore oilfields in the Arctic. The company is banking on a recovery in the world energy prices to fund new projects. If that doesn’t happen, the ice on the Barents Sea could stay unbroken for many years to come.