RUSSIA - LUKoil Moving Into Turkey.

LUKoil is in negotiations with the Ankara government and regional authorities to build a network of petrol stations across Turkey as well as a major oil refinery. The Turkish daily Vatan on Aug. 29 reported that LUKoil would spend $1 bn opening 300 gasoline stations this year and $700 more in 2007. LUKoil then said it was looking to build a refinery on Turkey's Black Sea coast.

LUKoil spokesman Vladimir Semakov said there was a "mutual interest" from the Turkish government and the company in building the gasoline stations. "We have plans to expand our network in two or three years, but we haven't yet identified the number of...stations", Semakov said, adding: "The project is under discussion; it is not finalised".

By end-September, LUKoil will have two gasoline stations in operation in Istanbul, he said. Adam Landes, a petroleum analyst at Renaissance Capital, was on Aug. 30 quoted as saying: "It's clearly consistent with [LUKoil's] strategy to become ever more vertically integrated and expand overseas. Operations in Turkey would make a lot of sense".

The once-closed Turkish energy sector recently has been courting foreign investment. LUKoil is negotiating for tax relief for the refinery and gasoline stations. But analysts said there was no likelihood it would get preferential tax treatment in the increasingly competitive energy sector there. "We don't believe that Turkey will grant tax breaks", said Valery Nesterov, an oil and gas analyst at Troika Dialog. Turkey "won't welcome such a new competitor on the market".

Having a refinery and petrol marketing operations in Turkey makes sense because LUKoil would have to transport less crude oil and gasoline through the congested Bosporus shipping route.

LUKoil is hoping to benefit from highly profitable refining and gasoline sales. It recently failed in its attempts to buy Turkey's Tupras refining group (see survey of Turkey in down18TurkRefMay1-06).

Landes said that, given the current high price of oil refineries, LUKoil might prefer to build one from scratch. Nesterov said: "The company needs to expand its downstream business and expand it in other countries, not just in Russia. It's a promising business, I would say. You have to build a house brick by brick". LUKoil's market value would likely increase if fewer of its assets were concentrated in Russia.

LUKoil Eurasia Petroleum Chairman Fikret Aliyev, who also heads the Azerbaijan, Georgia and Turkey business units, on Aug. 29 was quoted as saying the company had done preliminary research for having a refinery in Samsun or in Zonguldak with a capacity of 160,000-200,000 b/d. Aliyev was then visiting Samsun's Governor, Hasan Basri Guzeloglu. The team included LUKoil Petroleum Co. Vice Chairman Ilham Rzayev, Deputy Vice Chairman Abulgas Klicmuradov and Strategic Development Department Vice Chairman Mikhail Antonov.

Aliyev said: "We have not finalised a decision to build the refinery in Zonguldak". He said the team was in Samsun to conduct preliminary research. The refinery will cost US$2.5-3 bn. Governor Guzeloglu said he was happy to welcome the delegation in Samsun with such an agenda, noting that a big refinery in Samsun was a very significant project. Guzeloglu said: "At a point where the criteria concerning the infrastructure and investment in Samsun are to be assessed, its...its importance for investment are noteworthy. The negotiations we had initiated before have now come to an important turning point".

LUKoil, thus having become a trans-national, is a partner of ConocoPhillips in a number of ventures, including an oil producing JV in northern Russia. LUKoil and the US major are negotiating upstream JVs in Russia and Iraq. In Russia, it will be in the far north and probably some other regions and could include integrated natural gas E&P ventures that would export the gas in LNG form to the US market, in which case the Russian gas monopoly Gazprom would have a majority stake. In Iraq, it will be a major oil E&P venture.

These JVs will add billions of barrels of oil equivalent to ConocoPhillips' portfolio. For ConocoPhillips, reserves are a top priority. As for LUKoil, it is interested in US downstream, including the Bayway refinery (see OMT of this week), and the LNG gas business.

ConocoPhillips is the third largest petroleum group in the US. It is a very aggressive company seeking to overtake ChevronTexaco through expanding JVs, such as the ones being negotiated with LUKoil. In return for a 20% stake in LUKoil, ConocoPhillips would help the Russian major to expand overseas as well as in Russia.

Among the private companies, LUKoil will soon have the world's largest proven oil reserves, making it a prize for any Western oil major looking to book extra barrels. Speculation of a tie-up arose when ConocoPhillips' CEO James Mulva flew to southern Russia in July 2004 for unexpected talks with LUKoil CEO Alekperov and President Vladimir Putin. Given that Kremlin displeasure is widely seen as having driven LUKoil's main rival, Yukos, to the brink of collapse under multi-billion dollars in tax bills (see OMT), the meeting was viewed as a vital Putin blessing for the deal.

Already by end-2004, when ConocoPhillips' stake in LUKoil was a mere 10%, the US major's addition to its petroleum reserves had amounted to 894m barrels of oil equivalent (oe). In its statement of reserves for 2004, ConocoPhillips said it was estimating the cost of the LUKoil reserves addition at $2.04 bn. The figures were based on LUKoil's end-2003 tally, without any provision for 2004 reserves additions which were considerable, but including adjustments to provide for 2004 production.

(ConocoPhillips then announced a preliminary net addition of 1.246 bn barrels oe to its 2004 proven reserves, giving its reserves-replacement ratio of 206%. That addition took the US major's total reserves base to 8.5 bn boe - excluding 300m boe previously associated with its Canadian oil sands operations. US accounting standards using year-end 2004 valuations had excluded billions of barrels of oil sands reserves).

One of the most important JVs in Russia is NaryanmarNefteGaz in Timan-Pechora, in the far north in which ConocoPhillips in June 2005 bought 30%, with LUKoil retaining 70%. This holds licences covering 10 bn boe of reserves and will begin producing in 2007. The output there will plateau at 200,000 b/d in 2008. It will export crude oil through the Varandey terminal on the Pechora Sea which is closer to the US market.

Managers, led by CEO Alekperov and First VP Leonid Fedun, control about 30% of LUKoil, over 50% of the company's shares are traded freely in London and Moscow. It was in mid-2005 that the Kremlin gave its blessing to managers to sell part of their shares to ConocoPhillips (see Vol. 63, DT No. 10).

LUKoil Leads In External E&P Investment: LUKoil was the first among the Russian oil companies to invest in E&P outside the country after the collapse of the USSR as it joined the Azerbaijan International Oil Consortium (AIOC).

AIOC was formed in 1994. LUKoil also joined the Shah Deniz consortium in Azerbaijan and led other ventures there, with Alekperov being of Azeri origin. But in 2003 it sold its 10% AIOC stake to Inpex of Japan for $1.33 bn (see survey of Azerbaijan in the current volume, Nos. 1-3).

LUKoil has doubled its stake in Shah Deniz to 10% as it bought ENI out of the LukAgip JV. It moved to Kazakhstan, where it joined the Karachaganak group and led other ventures (see survey of Kazakhstan in Nos. 4-6).