Conoco buys 7.6% stake in Russian oil giant Lukoil

$1.9 billion deal boosts U.S. company's reserves

September 30, 2004|By BLOOMBERG NEWS

MOSCOW - ConocoPhillips will buy 7.6 percent of OAO Lukoil from Russia for $1.99 billion and might increase that stake, expanding its access to the world's largest oil- and gas-producing country as energy prices surge.

ConocoPhillips might boost its Lukoil stake to 20 percent in two to three years, Chief Executive Officer James J. Mulva said.

Russian oil output has risen 47 percent since 1999 as Lukoil, a top Russian crude producer, and other companies have rebuilt an industry that collapsed with the demise of the Soviet Union in 1991.

ConocoPhillips follows Britain's BP PLC and Total SA of France in buying stakes in Russian energy companies.

Another investment target could be OAO Yukos, the oil giant facing bankruptcy over a government demand for $7.5 billion in taxes and whose billionaire owner, Mikhail Khodorkovsky, is in jail awaiting trial.

"It's a very important benchmark for the market to have a Western oil major willing to spend big money in Russia," said William F. Browder, chief executive of Hermitage Capital in Moscow, which has $1.5 billion in Russian assets. "It will be viewed as an important counterweight to the Yukos saga."

Mulva and his Lukoil counterpart, Vagit Alekperov, visited Russian President Vladimir V. Putin in July in the Black Sea resort of Gelendzhik. At the meeting, Putin reportedly told Mulva that the U.S. company can "count on his support."

The government is seeking to allay investors' concerns after it arrested Khodorkovsky, Yukos' biggest shareholder, and demanded taxes and fines. The crackdown caused concern that Yukos' supply might be disrupted and contributed to a surge in oil prices. New York crude reached $50.47 a barrel Tuesday, the highest since the contract began trading in 1983.

The deal values Lukoil's oil and gas reserves at $1.32 a barrel. At 19.8 billion barrels, Lukoil's reserves are 2 1/2 times larger than those of Houston-based ConocoPhillips. Lukoil owns the Getty chain of U.S. gasoline stations, which are being converted to the Lukoil brand.

Under U.S. Securities and Exchange Commission reserve-accounting rules, which are stricter than the Society of Petroleum Engineers criteria used by Lukoil, the Russian company's proved reserves are probably closer to 9 billion barrels, according to Mark Flannery, a Credit Suisse First Boston analyst. Credit Suisse was a financial adviser to ConocoPhillips on the Lukoil deal.

ConocoPhillips, which plans to boost its stake to 10 percent by year's end, would probably book about 900 million barrels in proved reserves, Flannery said in a note to clients. The price of the stake implies a cost of $2.90 a barrel for those reserves, compared with the U.S. company's five-year average reserve replacement cost of $4.29, Flannery wrote.

Jennifer Rowland, an analyst at JP Morgan Chase & Co., pegged the ConocoPhillips' per-barrel cost for its share of Lukoil reserves at $2.60, assuming half of Lukoil's reserves will qualify as proved under SEC guidelines.

"If they are getting those reserves for under $3 barrel, it's a hell of a deal," said Shahid Ullah, director of international acquisitions, development and asset-management at Randall & Dewey, which last year helped ConocoPhillips sell Gulf of Mexico wells and Kerr-McGee Corp. divest stakes in Kazakh oil fields and a pipeline.

Russia is attractive to foreign oil companies because of the lower cost of its reserves. Middle Eastern nations that have oil that is relatively inexpensive to find and produce resist foreign investment in oil.

Russian oil production has surged as rising oil prices encouraged investment. The nation pumps more than 9 million barrels a day in crude, and its natural gas output is equivalent to another 11 million barrels a day.

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