Debt-ridden Lukoil in expansion mode
By Vladimir Socor
Apparently undaunted by the financial and credit crisis, Russia's Lukoil
company has embarked on a vast program of expansion into European Union
territory. Where Russian state-controlled companies may encounter resistance,
Lukoil presents itself as privately owned. This distinction has, however,
become almost meaningless in practical terms in Russia. Moreover, Lukoil is
closely associated in a murky, parity-based, partnership with Gazprom's oil
subsidiary, Gazprom Neft.
Earlier this month, Lukoil and Italian energy group ERG signed a final
agreement on establishing a joint venture to operate the giant ISAB oil
refining complex on the island of Sicily. Presidents Dmitry Medvedev and Silvio
Berlusconi witnessed the signing
during Berlusconi's November 6 visit to Moscow. ISAB's processing capacity is a
staggering 16 million tons of crude oil annually, and it includes installations
capable of processing the Russian Urals blend.
Lukoil will pay a mere 1.35 billion euros (US$1.72 billion) for the 49% stake
because (as a key to the transaction) it guarantees to supply crude oil for
refining. Lukoil paid out the first tranche of 600 million euros on December 1
and is expected to complete the cash payment by next September. The joint
venture intends to focus on the production of diesel fuel, kerosene, and middle
distillates.
At the moment, Lukoil is negotiating to buy 29.9% of the shares of Spain's
Repsol, the national champion company for oil and gas. If carried out, the
purchase would turn Lukoil into the single largest shareholder in Repsol. The
Spanish construction conglomerate Sacyr Vallehermoso and the banks La Caixa and
Caixa Catalunya, owning 20% , 6.1% , and 3.8% of Repsol, respectively, have
been hit by the construction and financial crises and looking to sell their
Repsol stakes.
For unclear reasons Lukoil is first in line for the purchase. Sacyr
Vallehermoso at least has asked the Spanish government to support a bailout in
order to avoid selling its stake to Lukoil, but the Moscow-friendly Spanish
Socialist government says that it would not become involved in a business
matter.
Apparently, Lukoil is offering more than 9 billion euros, including 5.2 billion
euros for Sacyr's 20% and 4 billion euros for the two banks' combined 9.9%.
Conditions attached include: retaining Repsol's board of directors, limiting
Lukoil's voting share in Repsol to 20%, and paying a price higher than the
market price of Repsol's shares.
This last condition seems strange for Lukoil to contemplate in light of the
credit crunch. Lukoil is said to consider the far-fetched option of mortgaging
some of its oil reserves in the ground as a means of financing the purchase in
Spain. More conventionally, the Russian company seeks to borrow through a bond
issue and is crucially relying on Spanish banks to finance Lukoil's purchase.
Earlier this year, before the financial crisis struck with full force, Lukoil
completed the acquisition of 326 filling stations in the EU member countries
Belgium, Poland, the Czech Republic, and Slovakia. Those are mainly JET fuel
stations that Lukoil acquired from the American company ConocoPhillips, which
holds a 20% stake in Lukoil. As a new entrant in those countries, Lukoil
intends to expand its fuel distribution market shares and seems poised to take
advantage of the difficulties of Grupa Lotos in Poland.
In Slovakia, however, Lukoil's declared goals are modest: a market share
increase from 5% to 10% within the next five years. The Russian company will
market products from the Bratislava-based, Hungarian MOL-owned Slovnaft
refinery at least initially. It has declared an interest in close cooperation
with Slovnaft, which receives crude oil from the Druzhba pipeline. Lukoil also
abjures any ambition to become market leader or to build storage tanks in
Slovakia. In that case, Lukoil might even become interested (both from a
business perspective and politically) in continuing a substantial flow of
Russian oil through the Druzhba pipeline, whereas the Russian government had
proposed redirecting a large part of that flow northward to Russia's Baltic
ports.
In Croatia, on the other hand, Lukoil's plans are more ambitious. The Russian
company envisages expanding its market share from the 3% it now holds to 20% by
the end of 2011, aiming for a network of 150 filling stations through
acquisitions and building new stations. It also proposes to build an oil import
terminal and storage tanks on the Adriatic coast (likely to encounter
resistance on genuine environmental grounds). Such proposals spell the goal of
market dominance and the intention to compete against the Hungarian MOL.
In Russia and Kazakhstan, Lukoil is negotiating to buy BP's 6.6% stake in the
Caspian Pipeline Consortium's (CPC) pipeline, which connects Tengiz and other
Kazakh oil fields with the Russian Black Sea port of Novorossiysk. With a
current throughput close to 30 million tons annually and designed to carry more
than 60 million tons per year in the second stage, the CPC pipeline is key to
Russia's goal to absorb the lion's share of Kazakh oil. Russian sources
evaluate the cost of Lukoil's purchase of the BP stake at $2.5 billion.
In Venezuela, Lukoil has joined with Rosneft, TNK-BP, and Surgutneftegaz to
form a consortium for oilfield development in the Orinoco basin. The Russian
companies have begun negotiations with Petroleos de Venezuela on the terms of
that vast project. President Medvedev and his Venezuelan counterpart Hugo
Chavez announced this plan during Medvedev's recent visit to that country.
Meanwhile, Lukoil (unlike some other oil companies in Russia) says that it does
not plan any personnel reductions or wage cuts, despite the financial crisis.
The only declared cost-cutting measure is postponing Lukoil's plan to modernize
and expand its Neftokhim refinery at Burgas in Bulgaria at a projected cost of
$1 billion. That amount is exiguous, however, compared to Lukoil's overall
ambitions for expansion.
Lukoil has asked Russia's Vnesheconombank for $2 billion in credits toward
payment of Lukoil's debt arrears of some $6 billion, mainly for acquisitions in
2007. How the company can finance its vast plans for expansion remains a
mystery for now.
(This article first appeared in The Jamestown Foundation. Used with
permission.)
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