ConocoPhillips buys stake in Lukoil, secures piece of Siberian oil joint venture

Petroleum News and The Associated Press

In a deal paving the way for future joint ventures, U.S. oil giant ConocoPhillips won the Russian government’s 7.6 percent stake in Russia’s Lukoil — the world’s No. 2 oil company by reserves. In the biggest privatization in Russia’s history, ConocoPhillips offered $1.988 billion, only a fraction above the $1.928 billion starting price in the Sept. 30 auction, which lasted just over a minute.

Immediately after winning, ConocoPhillips announced in a joint statement that it planned to increase its stake to 20 percent, which would allow it to record a share of the company’s reserves of 20.1 billion barrels of oil equivalent in its books. It also said it had offered to buy a 17.5 percent stake in a production sharing agreement allowing Lukoil to develop Iraq’s giant, 4 billion barrel West Qurna field, and would pay another $374 million to secure a 30 percent stake in a new joint venture to tap into rich Siberian oil reserves in the Timan Pechora region.

Under the terms of the joint-venture agreement, ConocoPhillips will make an additional payment for its 30 percent share of working capital and its 30 percent share of Lukoil’s capital investments in the joint venture fields after Jan. 1.

“The precise amount of the acquisition price will be established at closing,” ConocoPhillips said. “The joint venture will be governed 50/50 by Lukoil and ConocoPhillips, and is expected to be producing and marketing approximately 200,000 barrels per day of oil by 2008.”

Production from the joint-venture Siberian fields will be transported via pipeline to Lukoil’s existing terminal at Varandey Bay on the Barents Sea and then shipped via tanker to international markets. Lukoil will expand the terminal to 240,000 bpd capacity by 2007 with ConocoPhillips participating in the design and financing of the terminal.

Lukoil’s 1997 deal to drill at West Qurna has hinged on approval of the new Iraqi administration.

“Iraq is a wild card,” said Ronald Smith, oil and gas analyst at the investment bank Renaissance Capital. “If that ever comes off, both companies will be terribly tickled: no analysts include the Iraq numbers in their reports, though.” He said having a U.S. partner “wouldn’t hurt Lukoil’s chances” with West Qurna.

Russian President Vladimir Putin gave his tacit approval to ConocoPhillips’ bid at a July meeting with the heads of both companies. His blessing was interpreted as a signal that the Kremlin isn’t opposed to foreign investors tapping into Russia’s oil and gas reserves.

ConocoPhillips said the Lukoil transaction would not affect spending on any of ConocoPhillips’ previously announced or planned capital projects.