ConocoPhillips is thought to be close to signing a major agreement to acquire Russia's 7.59% stake in OAO Lukoil—that country's second largest oil and natural gas company—for $1.7 billion, according to several news reports last week.
Analysts see the pending deal as a positive development following months of negative publicity stemming from the Kremlin's aggressive campaign to rein in Russia's largest oil company, OAO Yukos, and its now-jailed CEO, Mikhail Khordokovsky (OGJ, July 26, 2004, p. 28).
The controversial criminal prosecution related to alleged tax evasion and other legal moves against Khordokov- sky and his high-flying company has spurred a wave of apprehension worldwide as to the future viability of foreign investment in Russia's oil and gas sector. Some even saw the specter of renationalization creeping into the picture in a nation seen increasingly as an important alternative oil supply source to the troubled Middle East.
Decree signed, meetings held
Russian Prime Minister Mikhail Fradkov July 22 signed a decree that authorized the state to sell its remaining interest in Lukoil as a single lot at auction sometime during the third quarter.
For months, Russian press reports have suggested that ConocoPhillips would be interested in bidding on the stake.
The Wall Street Journal (WSJ) reported July 23 that chief executives from ConocoPhillips and Lukoil met July 22 with Russian President Vladimir Putin.
The International Herald Tribune (IHT) reported that just hours after Fradkov signed the aforementioned decree, Putin met with Lukoil Pres. Vagit Alekperov and ConocoPhillips CEO James Mulva in Russia.
At the meeting, Putin reportedly was viewed as approving of any deal between the oil firms. A ConocoPhillips spokesman confirmed that Mulva met July 22 with Putin.
"ConocoPhillips has a long and rich history of successfully doing business in the Middle East, Russia, and the Caspian region, and we have built strong and mutually beneficial relationships within the industry and with government.
"We are committed to a long-term presence in the region," the spokesman told OGJ.
When asked about ConocoPhillips's possible bid for a stake in Lukoil, the spokesman said, "We do not comment on market rumors."
Itar-Tass news agency reported Alekperov as saying, "We've been working on the Northern Territories projects [with ConocoPhillips] for a long time, and on [July 22] discussed them with [Putin] for the second time. We have briefed the president on the implementation of these projects and got his approval to continue with them."
The Northern Territories project entails development of as much 4 billion bbl of oil in fields discovered during the Soviet era in Northwest Russia's arctic region.
Deal details
According to both the WSJ and the IHT accounts, the deal would include creation of a 50:50 joint venture in the Komi region of Northwest Russia. ConocoPhillips also would reportedly supply as much as $3 billion in investments "over a period of years," which would provide Lukoil with much-needed capital to expand in that region.
IHT quoted Paul Collison, an analyst at Moscow-based investment firm Brunswick UBS, as saying, "If there's a deal that involves not only equity, but [also ConocoPhillips's] involvement in Lukoil's Russian operations and vice-versa, it will go a long way to somewhat mitigating the damage caused by Yukos."
ConocoPhillips also reportedly might buy additional shares from Lukoil managers or other Lukoil shareholders to boost its stake, according to the newspapers' reports.
IHT reported the Lukoil sale would be Russia's largest privatization deal this year, worth about $2 billion at current market prices. Lukoil's market capitalization stands at roughly $23 billion.
Hope for investment
For prospective investors in Russia's petroleum sector, the Kremlin's approval of a Lukoil share sale, as well as Putin's apparent support for such a deal, offers some hope for renewed investment from foreign oil and gas companies. But concerns linger.
"The open auction in September would be the first privatization in the sector since the widely criticized sale of [OAO] Slavneft shares in 2002," noted Washington, DC-based analyst PFC Energy in its Caspian Business Intelligence information service.
Optimism over the Lukoil deal, however, "does not cancel out concern over the fate of Yukos," PFC said. "Putin's insistence on keeping silence over the judicial process has raised the risk of a damaging shutdown at Yukos oil fields if a takeover by another operator does not take place soon."
Putin's support for a deal between ConocoPhillips and Lukoil would seem to reflect "long contacts and synergies between the companies rather than an effort to steer the deal," PFC noted, adding that ConocoPhillips, at this time, "is believed to be alone in the runningU."
"For ConocoPhillips, the investment is an opportunity to reverse the diminishing returns from its 12-year-old Polar Lights venture in Timan-Pechora, now producing about 28,000 b/d of oil, in addition to setting a clearer path for the neighboring $4 billion Northern Territories project after the chance for production-sharing agreement legislation was foreclosed last year," PFC said.
Currently, ConocoPhillips is partnered with Lukoil in the Northern Territories project and is a former partner with Lukoil in Polar Lights.
"Many possibilities have been suggested for Lukoil synergies, including an asset swap that could give it a refinery in the US market, as well as joint development efforts in Iraq," PFC noted.
