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LUKOIL Discovers America
// Within Itself
Privatization
The Russian Federal Property Fund (RFFI) yesterday auctioned off the last remaining state-owned shares (7.59%) of LUKOIL, Russia's largest oil company. The American company ConocoPhillips paid nearly $2 billion for these shares, a record for the entire history of Russia privatization. The company has no plans to stop there and intends to increase its stake in LUKOIL to 20%, as well as develop fields in Russia and Iraq jointly with the Russian company. Conoco executives have received a guarantee at the very highest level that their investments will not disappear. LUKOIL has received assurances that the company will not suffer the same fate as YUKOS.
A Short Auction
The auction to sell the LUKOIL shares held at the RFFI building yesterday began 20 minutes late. RFFI officials assured everyone that they had settled the question of admitting contenders to the auction; meanwhile, there were places for only three participants in the room right from the beginning, although four applications to participate in the auction had been received.
As Kirill Tomashchuk, acting head of RFFI, explained, “one of the contenders was not admitted to the auction for failing to transfer the 450 000-ruble deposit on time”, as stipulated by the terms of the auction. The unlucky contender was Lyudmila Grossman, who submitted an application as a private individual. According to Kommersant's information, she was representing the interests of businessman David Guggenheim's firm, Dabir International.
Thus, three companies made it onto the list of auction participants: Springtime Holdings Ltd., which received number one; ZAO AKB Promsvyazbank (number two); and ZAO Promregion Holding (number three). At 12.24, Aleksey Knyazev, head of RFFI's privatization department, went over the rules of conduct in the room (the use of cell phones, photo- or video cameras, and dictaphones is forbidden during privatization) and turned the floor over to auctioneer Vladimir Korovkin, who was already well known for selling Slavneft nearly two years ago.
“Who wants to open the bidding?”, Korovkin asked. The Promsvyazbank representative raised a card with a number showing that the bank was prepared to pay $1.928 billion for the lot. After recording this offer, the auctioneer suggested that the other participants increase the price. A card with the number “3” was raised in total silence – Promregion Holding was prepared to pay $1.934 billion. “Who offers more?”, Mr. Korovkin asked again. “One billion nine hundred and eighty-eight million,” a woman sitting at the first table said loudly, raising a card with the number “1”. After counting to three as agreed, the auctioneer pronounced the lot sold. All of 2 minutes and 17 seconds had elapsed from the start of bidding to the final bang of the gavel.
As RFFI managers were signing the necessary documents to record the transaction, journalists were trying to find out who had taken part in the auction and who had won. LUKOIL vice president Leonid Fedun, who was present at the auction, said he had nothing to do with Promregion Holding and did not know which of LUKOIL's shareholders owned the company (Promregion's charter capital is formed from nearly 1% of LUKOIL's shares, and it represents the oil company's interests in a number of regional power companies). Promsvyazbank representatives refused to comment at all.
The woman representing Springtime turned out to be the president of the Russian branch of Credit Swiss First Boston Bank. Among her companions, the journalists recognized ConocoPhillips vice presidents John Lowe and John Carrig; and reports that the American company was the buyer of the 7.59% stake in LUKOIL poured from information agency newsbands.
In commenting on the results of the auction, Kirill Tomashchuk said the deal was the largest in the history of Russian privatization and lamented only that it had not reached “the nice round figure of $2 billion”. According to Mr. Tomashchuk, a purchase contract for the LUKOIL shares would be signed with the winner within five days, and the money had to be received in RFFI's account within ten days, whereupon “97% of this amount would be transferred to the budget” (the remaining 3% would go as commissions to RFFI). Deposits would be refunded to the other participants within three days.
Deputy Minister of Economic Development and Trade Andrey Sharonov noted that Vladimir Putin had approved ConocoPhillips' investments; James Mulva, the president of the American company, had acquainted him with plans to invest in the Russian oil industry in July. Leonid Fedun confirmed the general certainty that Conoco's investments would not be limited to purchasing the state-owned LUKOIL shares.
Long-Term Plans
Two hours before the presidents of LUKOIL and ConocoPhillips gave a press conference on the results of the auction, the companies distributed a statement about the formation of a “strategic alliance” and large-scale plans for joint operations. The companies signed a “share agreement” (according to LUKOIL president Vagit Alekperov, it was signed yesterday), which specifically states that Conoco's stake in LUKOIL shall not exceed 20%. James Mulva announced that his company would increase its stake in LUKOIL to 10% even before the end of the year by buying the missing shares on the market. ConocoPhillips hopes it will be able to do this through an offer to LUKOIL's non-American shareholders. The company is proposing that they sell the needed shares for the same price as the Russian government – $30.76 per share [the day before the auction, LUKOIL shares cost $31.80 on the Russian Trading System (RTS), but yesterday their price had fallen to $30.99).
According to James Mulva, Conoco expects to increase its stake in LUKOIL to 20% within 2-3 years. This will allow the American company to consolidate LUKOIL's reserves on its accounts. At the same time, Mr. Alekperov and Mr. Fedun emphasized that LUKOIL's managers are not planning to sell their shares.
The two men said that in the near future LUKOIL's board of directors would set a date for an extraordinary shareholders' meeting, at which representatives of the American company could receive one of the 11 seats on the board. There are plans to later increase American representation on the board in proportion to ConocoPhillips' stake in the Russian oil company's charter capital.
In addition, it is expected that the extraordinary meeting will approve amendments to the company statutes that will require the board of directors to make key decisions unanimously. Thus, ConocoPhillips will be able to guarantee the relative safety of its investments in LUKOIL. Especially since the company s expenditures are not confined only to the purchase of LUKOIL's shares – it will also have to pay for taking part in a joint oil production project in the northern European part of Russia.
The presidents of LUKOIL and ConocoPhillips also said that the companies were planning to develop 16 fields in the Timan-Pechora oil and gas province with combined potential reserves that LUKOIL vice president Ravil Maganov estimates at 10 billion barrels of oil. They expect to register a new company called RusKo in Russia by February 2005. RusKo will be built around LUKOIL subsidiary OOO Naryanmarneftegaz, with the addition of shares of the company Northern Territories (Severnye territorii; already exists as a LUKOIL – ConocoPhillips joint venture).
LUKOIL will become the owner of 70% of the shares of RusKo, while Conoco will own 30%. The Americans will pay LUKOIL $370 million for their stake. In addition, Conoco will contribute 30% of the working capital in the group of companies and 30% of the capital investments that LUKOIL makes in them as of January 1, 2004, as supplementary payments. According to Vagit Alekperov, the working capital of the companies whose assets will be part of the joint venture for 2004 amounts to 19 billion rubles; and Ravil Maganov estimates that capital investments will be $300-350 million per year. The parties have promised to give the exact figures when the transaction is completed. Mr. Alekperov estimates that the parties will invest a total of more than $3 billion in the project in the next ten years.
The Russian and American companies have further agreed that RusKo will be managed on a parity basis. It is expected that the joint venture will be producing nearly 200 000 barrels of oil per day by 2008. All production will be exported through LUKOIL's terminal in the settlement of Varandei on the shore of the Barents Sea. To this end, there are plans to increase its capacity to 240 000 barrels per day (i.e., to 12 million tons per year by 2007 as opposed to the current 1.5 million tons per year) with the direct participation of ConocoPhillips.
In addition, LUKOIL and ConocoPhillips announced yesterday that they were planning to conclude a supplementary agreement stipulating that LUKOIL will transfer to Conoco (free of charge according to Mr. Alekperov) a 17.5% share in a contract to develop the West Kurna-2 field. Of course, in order to do this, LUKOIL will have to confirm its rights to this field with the present Iraqi government.
If it is successful, LUKOIL will own the rights to 51% of the Iraqi field. Its partners will be the Iraqi government (25%) and the Russian state companies Mashinoimport and Zarubezhneft (3.25% each). Moreover, Vagit Alekperov and James Mulva have not ruled out the possibility that the companies will also collaborate in the United States, where LUKOIL acquired 795 service stations from Conoco this year (in New Jersey and Pennsylvania).
According to James Mulva, Conoco negotiated the deals with the Russian authorities and LUKOIL for nearly a year. He noted that they received the approval of the Russian and American governments and expressed confidence that LUKOIL and YUKOS would be in different situations and that Conoco's Russian partners would not be threatened with the problems that have confronted LUKOIL's main competitor (for now) in Russia.
Buyer and Seller
ConocoPhillips was formed as the result of the merger of two major American oil and gas producers – Conoco Inc. (founded in 1875) and Phillips Petroleum Company (founded in 1905). ConocoPhillips is the world's fourth-largest private oil refining company and is in eighth place in the world in terms of proven oil and gas reserves. According to information as of the end of 2003, it owns oil and gas fields with a total area of 21.3 million ha in 25 countries, produces in 13 countries, and owns 12 oil refineries.
The company's revenues on the results of 2003 were $105.1 billion (an 84% increase compared with 2002), and net profit was $4.735 billion. Total assets amount to $82.445 billion. It employs 39 000 people. Archie Dunham is chairman of the board, and James Mulva is president and CEO.
LUKOIL is the largest Russian oil company according to all production figures; it operates fields containing 1.5% of the worlds total oil reserves and accounts for 2.1% of world oil production. According to data as of the beginning of 2004, LUKOIL is in first place in the world among private oil companies in volume of proven oil reserves (16 billion barrels), second in proven hydrocarbon reserves (20.1 billion barrels of oil equivalent) after ExxonMobil, and shares sixth place with YUKOs in hydrocarbon production (1.7 million barrels of oil equivalent per day). LUKOIL is 11th among private and state oil companies in amount of net profit, 24th in sales, and 21st in amount of assets.
Denis Skorobogatko
All the Article in Russian as of Sep. 30, 2004
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