The LUKoil-ConocoPhillips Partnership.

LUKoil, thus having become a trans-national, is already 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 Iraq, it will be a major oil E&P venture.

These 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, 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 25% stake in LUKoil, ConocoPhillips would help the Russian major to expand overseas as well as in Russia.

LUKoil has the world's largest proven oil reserves after ExxonMobil, making it a prize for any oil major looking to book extra barrels. Speculation of a tie-up arose when ConocoPhillips' CEO James Mulva flew to southern Russia in July for unexpected talks with LUKoil CEO Vagit 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, the meeting was viewed as a vital Putin blessing for the deal.

Managers, led by CEO Alekperov and First VP Leonid Fedun, control about 30% of LUKoil, while up to 50% of the company's shares are traded freely Lukoil in London and Moscow. Sam Barden from Trust investment bank, which is close to Yukos, recently said he believed the Kremlin had given its blessing to managers to sell 18% of their shares to ConocoPhillips. He added: "The blocks would come from the stock controlled by current LUKoil management through its opaque structures, and Vagit Alekperov would then have a seat on the board representing ConocoPhillips, rather than himself".

A 25% stake in LUKoil, include the one the state is selling later this month, would cost ConocoPhillips more than $6 bn. Now ConocoPhillips is estimated to have about $1.8 bn in surplus cash, meaning it would need to raise additional funds to finance the purchase. But as world crude oil prices are high, ConocoPhillips would easily borrow the money from Wall Street on favourable terms.

The state's valuation of LUKoil is attractive by global and even by Russian standards. By paying $2 bn for the state's remaining 7.6% stake in LUKoil, ConocoPhillips would be getting reserves at only $1.70 per barrel, compared to $1.90/barrel price paid by BP last year for a 50% share in Russia's No. 3 oil major, TNK. But there could be fierce competition for this stake from among foreign as well as Russian companies, with Federal Property Commission on Aug. 26 having set the minimum price of $1.93 bn. Since this will be an open auction, the highest bid could be way above $2 bn.

The action paves the way for one of the most lucrative sell-offs in Russian history and offers the prospect of increased foreign investment in the strategically sensitive energy sector, despite concerns that actions against Yukos signalled hostility to outside ownership. Kiril Tomashchuk, acting head of the property fund, said he had received expressions of interest from ConocoPhilips and David Guggenheim Dabir, a fund. He appeared to exclude the chances of RosNeft, the state-owned oil group, from taking part despite fears by some observers that it would form the basis of a powerful new state energy holding company. Tomashchuk said no group with more than a 25% stake controlled by the state could participate.

The open auction is expected to be scrutinised, at a time when oil groups are balancing the need for new reserves against concerns that high oil prices are raising sellers' expectations too high. The sell-off of the oil group Slavneft was also held by auction, but widely criticised for excluding all serious contenders except SibNeft and TNK, which bid jointly to win. The reserve bid is the highest ever set in Russia in cash terms, after a 25% stake in the telecoms holding company Svyazinvest of $1.87bn in 1997, and of $1.7 bn for 75% of Slavneft in 2002.