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ConocoPhillips Acquires Russian Government's Stake in Lukoil

By Peter Finn
Washington Post Foreign Service
Thursday, September 30, 2004; Page E02

MOSCOW, Sept. 29 -- American oil giant ConocoPhillips has acquired the Russian government's 7.59 percent stake in Lukoil, one of Russia's largest crude producers, for $1.99 billion in the largest privatization deal in Russia's history, the chief executives of both companies said at a press conference Wednesday.

The two companies also announced a number of joint ventures, including a plan to seek the restoration of Lukoil's license to develop the West Qurna field in Iraq. ConocoPhillips will have a 17.5 percent stake in the field if Lukoil's rights, revoked by former Iraqi president Saddam Hussein, are restored by a new Iraqi government after planned elections in January.

The U.S. company bought a 7.59 percent stake in crude producer Lukoil for $1.99 billion. (Ivan Sekretarev -- AP)

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"The U.S. company's joining the project will reduce the financial risks and expedite the Qurna field's commissioning," said Lukoil chief executive Vagit Y. Alekperov, who added the two companies would accelerate negotiations in Iraq after elections there.

ConocoPhillips' investment, which was blessed by Russian President Vladimir Putin, may allay some concerns of foreign investors over the government's apparent intent to dismantle another oil major, Yukos Oil Co.

Yukos, formerly led by imprisoned tycoon Mikhail Khodorkovsky, may be stripped of its richest asset -- licenses to develop the Yuganskneftegaz oil field -- to meet a $7.5 billion tax bill. Many people here regard that action as punishment for Khodorkovsky's political activities. Khodorkovsky is separately on trial for tax evasion.

The Russian Ministry of Natural Resources will consider revoking the Yuganskneftegaz licenses at a meeting Thursday, a process that will take at least three months.

"Lukoil's management has shown sufficient loyalty to warrant a foreign partner," said James Fenkner, head of research at Troika Dialog, a Moscow brokerage house. "Do not get involved in opposition politics. That's the dividing line here."

"One way Putin could compensate for the collateral damage from Yukos was to embrace Conoco," said Paul Collison, senior oil and gas analyst at Brunswick UBS, which is organizing meetings between Alekperov and U.S. investors in coming weeks. "This is definitely going to give portfolio investors a lot more confidence."

ConocoPhillips follows BP PLC of the United Kingdom and Total SA of France in making large investments in Russian energy companies at a time when escalating world demand is forcing major oil companies to seek new sources of supply. The companies are moving in spite of concern among investors about the political climate.

Royal Dutch/Shell Group, Europe's second-largest oil company, also announced Wednesday that it is considering investing in a $10 billion project to develop a natural gas field in the Barents Sea with the Russian company Gazprom.

Wednesday's investment is "a huge transaction for Conoco and for Lukoil and really for Russia in light of what happened with Yukos," said an adviser helping the American company with the deal. "Hopefully, it sets a new tone by the government," said the adviser, who is not authorized to speak directly with reporters and thus spoke on condition of anonymity.

ConocoPhillips plans to raise its stake in Lukoil to 10 percent by the end of the year and can ultimately raise it to 20 percent under the terms of the agreement the two companies signed Wednesday. ConocoPhillips will initially be able to appoint one person to Lukoil's board and will have proportional representation on the board as its stake rises. The agreement also allows it to block major Lukoil acquisitions and investments, which require the unanimous support of the board, officials said.

"We have the support of the Russian and U.S. governments for the bilateral development of energy," said James J. Mulva, chief executive of ConocoPhillips. "We believe we are dealing with the leading oil and gas Russian company. . . . Good country citizen with respect to how they handle their affairs, pay their taxes. . . . Wherever we invest we have political risk, but we look at it and we are very comfortable."

Although Wednesday's acquisition came at a government auction, ConocoPhillips was clearly the favored candidate and the agreement to invest was a year in the making, Mulva said.

Mulva and Alekperov, a former deputy oil and gas minister in the Soviet Union who founded Lukoil in 1992, visited Putin in July at the Black Sea resort of Gelendzhik. At the meeting, Putin told Mulva that the U.S. company can "count on his support," according to Russian and foreign news reports.

"After the tragic events of Sept. 11, our two countries forged a strategic partnership in the framework of the counter-terrorist coalition," Alekperov said. This alliance brought about a "historic chance" for new joint-project cooperation, he said. "Today we are implementing it with our partners."

A senior U.S. official in Moscow also welcomed the deal. "Our economic relations have not been yielding as much fruit as we had hoped, particularly in the energy sector," he said. "Perhaps the news today . . . is a sign that things may be picking up."

In another joint venture announced by the companies, ConocoPhillips will take a 30 percent stake in the development of Lukoil's reserves in the remote Timan-Pechora area of northern Russia, where Alekperov said there are 131 oil fields and up to 10 billion barrels of untapped oil. The companies expect to produce about 200,000 barrels a day from the area by 2008.

"We see the province as a strategic bridgehead for further growth," Alekperov said.

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