RUSSIA - LUKoil Leads In External Investment.

LUKoil was the first among the Russian oil companies to invest outside the country after the collapse of the USSR as it joined the Azerbaijan International Oil Consortium (AIOC) that was formed in 1994. It also joined the Shah Deniz consortium in Azerbaijan and led other ventures there, with LUKoil's CEO Alekperov being of Azeri origin (see survey of Azerbaijan in the current volume, Nos. 4-6). LUKoil moved to Kazakhstan, where it joined the Karachaganak consortium and led other ventures (see survey of Kazakhstan in Nos. 7-9). It has upstream interests in the other Central Asian countries and in the Russian and Kazakh sectors of the Caspian sea.

One interesting venture is a LUKoil partnership in Uzbekistan with Itera, a private Russian gas marketing company registered in Florida. With each of LUKoil and Itera holding 45% and the state-owned UzbekNefteGaz (UNG) having the rest, venture has a production-sharing agreement (PSA) to develop gas and condensate reserves in the Bukhara-Khiva and Gissar blocks. This is in the south of Uzbekistan. The venture is also exploring for oil and gas in other prospective parts of the country. The explored reserves in Bukhara-Khiva and Gissar are estimated at 250 BCM of gas and 10m tons of condensates. The partnership will produce 8-10 BCM/y of gas and about 100,000 b/d of liquids from 2006 or 2007.

The group's external upstream interests of the group are now handled by LUKoil Overseas (LO), created in 1997 and in operation since 2001. Its CEO Andrei Kuziayev outlined LO's strategic goals to Petroleum Argus on Sep 9, 2001 as follows: "Possessing overseas assets gives Lukoil strategic advantages. Several years ago, Lukoil decided to crease an upstream division focused on international projects to ensure implementation of our strategic goal of setting up a transnational oil firm, which can compete on international markets". Asked why LO included Russian upstream assets, such as LUKoil-Perm, he said: "Transferring Russian assets to Lukoil Overseas is a way to finance this goal and implement international projects. Our Russian upstream assets are balanced, but if we need more we will acquire extra assets. Earlier this year (2001), 73% of Lukoil-Perm was transferred to Lukoil Overseas".

Kuziayev said Central Asia was LO's "strategic region and we will boost our activities there". On LO's negotiations over Iran's Khesht field, he said: "We are not satisfied with how these talks are going and we should be more active there. Also, we have not yet defined our attitude towards the proposed buy-back scheme, but we want to operate on this market and we will continue our work there. I think that in the near future, in a lower oil price environment, the buy-back deals will be more attractive for oil firms given a guaranteed return on investments". On Iraq, where LUKoil was the first Russian company to negotiate an upstream venture focusing on the West Qurna super-giant oilfield, Kuziayev said: "We are not going to violate UN sanctions. It is a political issue". LO will only launch its PSA at West Qurna "after all the issues are solved".

On the way LO functions, Kuziayev said: "Lukoil Overseas defines and approves strategy and draft proposals for upstream projects abroad. It also operates these projects. Lukoil controls how these strategic targets and goals are achieved and also provides funds. Lukoil delegates responsi-bilities and powers to us".

LUKoil Overseas Canada in 2001 took up around 80% of the common shares of Bitech Petroleum, according to Petroleum Argus of Sep 17, 2001. Bitech, a Canadian upstream company, has major assets in the northern Russian republic of Komi, where LUKoil has extensive operations (see Part 2).

LUKoil's Downstream Investments Abroad: LUKoil Holdings was the first Russian oil company to move into the US market and acquired the retail chain of Getty Petroleum Marketing (GPM) in late 2000. It bought the company for $71m and in Jan. 2001 took control of its operations. These consist of about 1,300 gasoline stations and tank farms in the north-eastern and mid-Atlantic US states, and a wholesale petroleum products distribution network. GPM became the first publicly held US company owned by a Russian firm. GPM is a remnant of the Getty Oil empire of the late J. Paul Getty. The stations have since been rebranded Lukoil-Getty with a red-and-white logo.

Vadim Gluzman, head of LUKoil's US operation, was quoted in Jan. 2001 as saying the company wanted to buy a 150,000 b/d refinery somewhere between Pennsylvania and Massachusetts to supply its Getty service stations. But LUKoil's Senior Vice President Leonid Fedoun, who holds 4.6% in the group, in Feb. 2002 was quoted as saying tough US environmental rules had deterred the company from buying a refinery. Instead, it is using Getty's tank farms to store its Russian crude, which it is getting BP to refine.

(In 1997, LUKoil had moved into the US through a joint venture with Food Lion Inc. for supermarket forecourt petrol stations. But that experiment proved disappointing).

Gluzman said in Jan. 2001 the company was also weighing the purchase of a Canadian chain of about 300 service stations and a marketing firm in the US south-east. No progress on these have since been reported.

LUKoil European Holdings (LEH), based in London, was formed in Jan. 2001 as the vehicle of the group's downstream acquisitions in Europe outside Russia. It has three refineries in each of Ukraine, Romania and Bulgaria. With these and its Russian refineries, LUKoil still can only process 40% of its crude oil production. Its aim is to raise this to 60% by acquiring additional refining capacity in East Europe. The group now has a total of about 2,700 petrol stations in Russia and abroad. It wants to raise them by 500 in East Europe. In 2001, LEH was negotiating to take over Avanti, a petrol retailer based in Austria which then was on the bring of bankruptcy

The group now is being radically restructured to bring its domestic and external refining and retail operations under a single division. The US and LEH operations will be under this division.

LUKoil Ukrayina has 51% in oil refinery in Odessa which it got in 1999 for $49m and a pledge to spend over $850m on the plant, with $450m spent by end-2001. LU is spending $30m this year on modernising the refinery, and another $100m on expanding its network of filling stations in Ukraine. A new phase of building an oil tank farm is underway at Borispol, in the Kiev region, where a 12,000 t/y LPG terminal began operations last month. From there LPG sales are being extended to rival filling stations and to industrial enterprises under direct contracts. LUKoil moved into Romania in 1998 and bought 87% in the old 70,000 b/d Petrotel refinery for $300m. Before it was closed in late 2001, it was losing money because the government there failed to fulfill its privatisation and market deregulation promises. LEH in June embarked on a large-scale upgrade of the plant so it can produce high-value fuels in line with EU requirements and Euro-3 standards by 2004. LUKoil Romania is spending $30m to raise its service stations from 30 to 100 by end-2002. Its network could reach 250 outlets by 2005.

LUKoil moved into Bulgaria in 1999 when it bought 58% in the 125,000 b/d Neftochim refinery at Burgas for $509m. As a result the plant moved from a $200m 1999 loss to a $50m profit in 2000. LUKoil has to spend $268m on improving the refinery by 2005. It has 465 filling stations in Bulgaria.

In Poland, where it has 60 LUKoil-branded stations, LUKoil (49%) and Rotch Energy of the UK (51%) have jointly bid for 75% of the 90,000 b/d Gdansk refinery on the Baltic Sea. But the tender may be cancelled.

In April 2002 a consortium of Latsis Group, which owns the third biggest refinery Petrola in Greece, and LUKoil became the sold and preferred" bidder for a 23.17% stake in the state-controlled Hellenic Petroleum which is the largest refining company in Greece and has a 57% share of the Greek oil market. The partnership offered an unexpectedly high price, 453,889,000 euros (over $400m), for the strategic stake. OeMV of Austria, the other shortlisted group, failed to submit a firm offer. Earlier Yukos had withdrawn from the tender in February.

The partnership and the Greek Ministry of Development have since been negotiating the transactions. The ministry said that, under the terms of the tender, it intended to retain the management of Hellenic Petroleum with an equity of 37% to be left to itself. (The company's charter stipulates that the state must have a minimum 35% equity). The partners have been trying to reach a compromise formula whereby they would have a say in the firm's management.

Hellenic Petroleum has two refineries, a 135,000 b/d plant at Aspropyrgos and a 65,000 b/d plant in Thessaloniki, and the biggest number of filling stations in Greece together with a storage farm and terminal facilities. In March 2002 it announced plans to have a power plant built in Thessaloniki as a joint venture with Tractebel of Belgium and the Greek construction firm Aegek.

LUKoil's interest in having a stake in Hellenic Petroleum stems from its strategy to have a presence in the Balkans, which Fedoun describes as a market with "huge growth potential after the end of the Yugoslav war", and access to the Mediterranean. Greece's goal is to become the energy hub for south-eastern Europe and the fast-growing Balkan market. The Greek company would have access to LUKoil's huge oil reserves and its E&P expertise.

LUKoil has bid to buy 25+1% into the Croatian oil and gas group INA, whose prize assets are its Rijeka refinery on the Adriatic Sea and 400-plus filling stations. INA benefits from access to the Balkan markets and proximity to a deep-sea oil terminal in Omisalj, near Rijeka, and to the Adria crude oil pipeline which supplies two of INA's refineries with Arab Gulf and Libyan crudes. Adria connects Croatia's coast with Hungary to the north-east, where it meets the Druzhba (Friendship) pipeline's southern arm that takes Russian crudes. The other bidders are MOL of Hungary, OeMV, Edison of Italy and RosNeft.

For LUKoil, looking for stable markets for its crude, the INA opportunity does not come every day. The Russian state oil pipeline company TransNeft and the Russian oil producing firms are pushing a project to link Adria to the Druzhba system and thus allow Russian crudes to flow to Omisalj. This was in 2001 connected via Odessa to the high-quality oilfields around the Caspian Sea, where LUKoil has interests.

A Russian presence in this region is central to the project, with the line's capacity eventually to be increased by 300,000 b/d. A separate project by Serbia, Romania and Croatia calls for a pipeline linking Romania's Black Sea port of Constantsa with Serbia's Pancevo refinery and Croatia's coast. Yukos has a 49% stake in and managing Transpetrol, the Slovak operator which owns the Slovak part of the Druzhba pipeline (see the Yukos section on the next page). LUKoil CEO Alekperov told Reuters on Aug. 1, 2002: "We don't plan to bid for any more refineries in Europe or the US. For now, we shall concentrate on growing upstream production, particularly in Russia and the former Soviet Union. As far as downstream is concerned, we shall focus only on assets located on the corridors of our crude transport system - Eastern Europe, the Mediterranean and the United States. We are also modernising our own refineries so that we can compete in future on European oil products markets".

Of the external assets being acquired in East Europe, he said: "We can supply crude to these refineries and make them among the best refineries in Europe". He scoffed at East European fears of a Russian advance into their economies, saying: "there is no question of any threat. Everyone will benefit".