Related Expertise: People Strategy

Managing Change in the Oil and Gas Industry

A Conversation with Vagit Alekperov, the President of Lukoil

By Hans-Paul Bürkner

Lukoil is the largest privately owned company in Russia and one of the biggest oil and gas companies in the world. Through its vertically integrated operations, the company controls all aspects of the value chain—from exploration, extraction, and production to refining and distribution—and employs more than 106,000 people worldwide.

Lukoil is celebrating its 25th anniversary this year. Vagit Alekperov has led the company since its inception, shaping it into one of the industry’s global leaders. Today, Lukoil has operations in Russia, the Middle East, Central Asia, Europe, and North America. Most of its employees are fluent in English, and many have internships at other major oil companies, including ConocoPhillips and Shell.

Alekperov recently sat down with Hans-Paul Bürkner, the chairman of The Boston Consulting Group. The following are edited excerpts of their conversation.

Historically, the major oil companies created outstanding value and therefore attracted a lot of interest by investors. But even before oil prices came down so drastically, the profitability of oil companies declined. What are the key reasons for this?

Indeed, in the years that preceded the crisis, the rate of return of our business was declining, as it was for the entire industry, in spite of the high oil prices. This was mainly due to the unjustifiably high prices offered to us by service companies on materials and services.

This prevented the industry from reaching its potential. Over the past ten years, the price of the services we bought doubled. The current crisis situation actually shows how fast our contractors and service companies can react to the new economic reality that their largest customers find themselves in. Within 12 months, we managed to reduce our expenses, and our contractors and service providers cut their prices by 30% to 40%. This macroeconomic situation and ongoing crisis gave us a chance to rethink with our partners how our industry will develop going forward. We are entering the postcrisis period with a new perspective, a strategic vision of the future of our industry. The world offers quite a lot of challenges for us in the next 30 to 50 years.

What do you see as the key priorities for leaders in the oil and gas industry going forward?

In the next few years, the growth in oil prices will not give us the advantage, the benefits that we experienced in the past. We should be focused mainly on the costs and what we spend and the efficiency of our operations at present. Our top priority now, just like for anyone else, will be to use the advanced technologies to ensure the fullest extraction of hydrocarbons while using better tools for preliminary studies of regions and areas where oil might be discovered in the future. In other words, we must keep up with the times.

What major initiatives have you been driving recently to modernize Lukoil, and what major transformations have you achieved? What were the hardest transformations to undertake?

The hardest decision I had to make was the restructuring, when we carved out all service companies that were historically part of Lukoil and had a total headcount of 70,000 people. That was the so-called noncore business, or service-related business. For me, as a person who was shaping the oil industry both in the Soviet Union and in modern Russia, this was a very difficult decision. Psychologically, morally—because for those people that was a huge step: to leave Lukoil behind and start working for private companies that grew out of our service subsidiaries. It took us five years to do that, and we got very good results from it. It helped us to build a competitive environment for our services as well as to focus on our core strategic areas of business.

Everybody talks these days about new breakthrough technologies in biotech, in alternative energies, in robotics, digitization. Everything seems to be changing. Is that also an opportunity for Lukoil, or are you largely independent of those developments?

The oil and gas industry is a huge customer interested in all kinds of innovation technologies. The oil fields of today are, as a rule, very complex. They are deep and located in remote areas, which is why new technologies are already being used by the oil industry. You can see that the major oil and gas companies are also producing alternative energy. No breakthrough in gas could be achieved without the unique developments made by Shell—which is why we’re not scared of those new developments, this so-called Third Industrial Revolution. We are already part of it.

Finally, what was the most difficult decision you’ve had to make, the most crucial moment in your professional life?

The most difficult decision was the decision to create Lukoil as a company during Soviet times. No one would support this idea, none of my fellow deputy ministers or the minister of oil industry himself. I managed to convince Boris Yeltsin to sign a decree on the establishment of Lukoil. That was the most difficult time for the entire country, when the entire political system was being dismantled—ditto the economic structure. Making the move from Soviet ideology to the ideology of modern Russia was a very hard time for everyone in this country. But the last 25 years have proven that I was right. The oil industry shows very good dynamics and demonstrates excellent results. 

Managing Change in the Oil and Gas Industry