LUKoil's Changing Fortunes
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
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January 9, 2003
LUKoil's American Depositary Receipts hardly wavered but its Moscow-traded shares tanked yesterday by 5 percent on news that British Petroleum is pulling out of the Russian energy behemoth. BP was saddled with its share of the Russian oil giant when it bought ARCO two years ago.
LUKoil's oil production topped 75 million tons last year, up 20 percent on 2001. More than one third of its production was exported via Transneft to foreign clients, the bulk of it by sea or through the Druzhba pipeline. LUKoil Overseas Holding presented revenues of $1.4 billion. It produces c. 11 million tons of oil annually. LUKoil and its subsidiaries also extract and sell natural gas.
LUKoil likes to tout its image as a veritable multinational. But its cross-border expansion strategy is encountering mounting difficulties.
Last April, together with London-based Rotch Energy, it bid c. $1 billion for the Polish state-owned Gdansk Refinery and its web of 300 gasoline stations. The network controls one sixth of the Polish market. The deal was presented as synergetic: the refinery was supposed to process LUKoil's produce and the latter's tankers would be patched at the Gdansk shipyards. LUKoil pledged to purchase $500 million of Polish agricultural goods annually and to expand the capacity of the antiquated refinery by at least two fifths.
Yet, according to Business Week, LUKoil's chances to clinch the deal are "dimming fast", due mainly to a tide of Russophobia. Rotch Energy abandoned the fast sinking ship and joined a competing bid. As European Union membership looms nearer, Russia is relegated by its erstwhile - and distrustful - satellites to niche markets such as Serbia, Ukraine, and Bulgaria. Russia's second largest oil producer, Yukos' $150 million controlling stake in Lithuania's Mazheikiu Nafta refinery may be the only exception.
Even in these manageable, Russophile and traditional markets, LUKoil's performance is far from spectacular.
In December 2001, Russian president, Vladimir Putin, visited Greece, accompanied by LUKoil's chief, Vagit Alekperov. According to the Russian business weekly, Vedomosti, LUKoil expressed interest in purchasing the Greek state-owned oil company Hellenic Petroleum.
Hellenic owns refining assets in Greece, Montenegro and Cyprus. In 1999 it purchased the Okta Refinery in Macedonia but its reputedly murky dealings with the previous government of the tiny, landlocked country led to an on-going judicial and administrative review of the privatization deal.
According to RossBusiness Consulting, LUKoil teamed up with the Greek Latsis-Petrola Group in preparing a joint bid for 23 percent of Hellenic Petroleum at a valuation of c. $2 billion. But the LUKoil/Petrola consortium seems to be in disarray. According to the Greek daily, Kathimerini, it recently asked the Greek government to extend its deadline by one week "so that the consortium partners complete their own talks on sharing responsibilities".
Last month, LUKoil reluctantly disposed of its 10 percent of Azerbaijan's Azeri-Chirag-Guneshli oil field. It sold it for $1.4 billion to Inpex, a Japanese firm. According to the Moscow Times, this may have had to do with Alekperov's unwelcome political aspirations in the host country.
Russian firms are poised to benefit from any development in Iraq. They already secured deals with the tottering regime of Saddam Hussein. The Americans are alleged to have promised Putin to honor some of these commitments in a post-Saddam Iraq in return for Russia's support for a US-led military campaign.
The exception is, yet again, LUKoil. A $3.7 billion exploration and development contract it concluded was recently cancelled unilaterally by the irate Iraqis.
Still, Russian emerging dominance in the global energy market is irresistible - as is its seemingly inexhaustible pile of cash. It has the world's seventh or sixth largest oil reserves. Its cost of production is lower than Indonesia's, or Mexico's, let alone Canada's. Its oil industry is in private hands and, with the exception of LUKoil, run efficiently and rather transparently. Low domestic prices push producers to export.
Gazprom, Russia's gas monopoly, partnered with the German gas supplier Wintershall to create Wingas, a west European gas retailing outfit. It also acquired 10 percent of the UK-Europe gas pipeline and, through its subsidiary, Sibur, some assets in Hungary.
Romania's drilling company Upetrom was bought by the Russian united Heavy Machinery. LUKoil purchased Getty Petroleum and its 1500 gas stations in the United States. Another Russian energy leviathan, Yukos, took over the activities in Britain of the Norwegian oil service firm, Kaverner.
The 3000-mile Transneft Druzhba pipeline, which connects Russia to Ukraine, Belarus and central Europe is slated to link to the Croatian Adria pipeline, by way of Yugoslavia. This will provide Russian oil with improved access to both central European and Balkan markets.
LUKoil is carried by this wave of sectoral restructuring.
Last year, LUKoil won a government tender in Cyprus to develop a network of gas stations. According to Prime-TASS, the company already controls one quarter of the Cypriot market. Alekperov announced that LUKoil intends to branch into oil storage and transportation in this would-be new member of the European Union. It also owns and operates 80 pump stations in Bulgaria and has invested half a billion dollars there.
According to Christopher Deliso of UPI, the $700 million, 175-miles long Bourgas-Alexandroupolis line between the Black and Aegean seas is a joint project of the Russian, Greek and Bulgarian governments. Its capacity is projected to be 40 million tons annually. Both LUKoil - which owns Bourgas' Neftochim refinery - and Yukos are involved.
LUKoil is positioned to enjoy Russia's dawning age of dominance as an oil and gas producer and supplier with a quarter of western markets. But to do so it would need to render itself less fuliginous and better managed. A hostile takeover, with the blessing of the Kremlin, may be in the cards. It cannot be a bad thing as far as LUKoil's shareholders are concerned.
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