Lukoil's Profitability Challenges in a Volatile Oil Market: Navigating Geopolitical and Structural Risks

Lukoil, Russia’s second-largest oil producer, faces a perfect storm of structural and geopolitical headwinds that threaten its long-term profitability. In 2024, the company reported a 26.5% drop in net profit to 848.5 billion rubles ($10.1 billion), driven by asset impairment losses, deferred tax reassessments, and a 16.5% decline in operating profit to 1.19 trillion rubles [1]. While revenue rose 9% to 8.6 trillion rubles ($102.1 billion), this growth was offset by collapsing refining margins, OPEC+ production quotas, and refinery downtime caused by Ukrainian drone strikes [1]. These challenges are compounded by a 2025 corporate tax hike to 25% in Russia, which further erodes margins [1].

The energy sector as a whole is grappling with a bearish outlook. OPEC+’s decision to prioritize volume over price—increasing output by 411,000 barrels per day in June 2025—has exacerbated oversupply concerns, pushing Brent crude prices below $70/bbl [3]. Meanwhile, U.S.-China trade tensions and Middle East conflicts have created a volatile pricing environment. For instance, Israeli airstrikes on Iranian infrastructure in June 2025 briefly spiked Brent crude to $78.50, only for prices to retreat as de-escalation efforts unfolded [3]. Such volatility undermines Lukoil’s ability to plan for stable returns.

Geopolitical risks loom large. U.S. sanctions targeting Russian energy giants, including Lukoil, aim to reduce Moscow’s ability to fund its military operations in Ukraine. These measures could cut Lukoil’s exports by 0.5–1 million barrels per day and reduce its annual revenues by up to $10 billion [2]. Sanctions on financial systems, maritime infrastructure, and petroleum services have already fragmented global oil markets, forcing Asian buyers to rely on “shadow fleets” for discounted Russian crude [2]. This fragmentation increases operational complexity and exposes Lukoil to reputational risks as Western investors distance themselves from sanctioned entities.

Lukoil’s strategic response includes diversifying into renewables and natural gas, with projects like a 2 MW solar plant in Kazakhstan and expanded green energy use in its operations [5]. However, these initiatives face headwinds. The energy transition is a “disorderly process,” with 75% of energy executives still investing in fossil fuels despite climate pledges [1]. Lukoil’s pivot to cleaner energy is further constrained by Western sanctions, which limit access to advanced technologies and capital.

Investors must weigh these risks against Lukoil’s resilience. The company’s 2024 dividend proposal of 541 rubles per share suggests confidence in maintaining shareholder returns despite challenges [1]. Yet, the broader energy landscape is shifting. KPMG’s 2024 CEO Outlook highlights that geopolitical complexity and economic uncertainty are now the top risks for energy firms, with only 28% of executives expressing optimism about long-term profitability [1].

For Lukoil, the path forward hinges on navigating a multipolar energy world. While its investments in hydrogen, biofuels, and carbon capture align with global decarbonization trends [5], the company remains exposed to a sector where traditional and renewable energy will coexist for years. Structural challenges—such as declining output at mature fields and the need for costly technological upgrades—add to the pressure [3].

In this context, investors should adopt a hedging strategy. Futures contracts, geopolitical risk insurance, and ESG-aligned portfolios can mitigate exposure to price swings and regulatory shifts [4]. However, Lukoil’s long-term viability will depend on its ability to adapt to a world where energy markets are increasingly shaped by politics, not just economics.

**Source:[1] Lukoil Profits Drop Nearly 30% in 2024 Amid Asset Losses, Higher Taxes [https://www.themoscowtimes.com/2025/03/26/lukoil-profits-drop-nearly-30-in-2024-amid-asset-losses-higher-taxes-a88485][2] U.S. Sanctions on Rosneft and Lukoil: Geopolitical Risks [https://www.ainvest.com/news/sanctions-rosneft-lukoil-geopolitical-risks-energy-market-implications-investors-2508/][3] Oil Market Report - June 2025 [https://www.arbatcapital.com/post/oil-market-report-june-2025][4] Geopolitical risk and oil prices - European Central Bank [https://www.ecb.europa.eu/press/economic-bulletin/focus/2024/html/ecb.ebbox202308_02~ed883ebf56.en.html][5] Lukoil's Global Expansion: Strategies, Challenges, and Market Positioning [https://www.linkedin.com/pulse/lukoils-global-expansion-strategies-challenges-market-positioning-gwwsc]