Lukoil targets Europe

By bne IntelliNews September 14, 2007

Derek Brower in London -

Gazprom isn't the only well-connected Russian company eyeing opportunities to expand its market position in Europe; Lukoil is also looking to ramp up its presence across the continent and feels the time is right. It also says it has up to $10bn to spend.

Leonid Fedun, the company's vice president of strategy, claimed Wednesday, September 12 that the fall in international stock markets over the last month has left the company in a better position to spend some of its cash mountain on acquisitions.

"The correction will affect our ability to talk [to potential partners]" he told journalists and analysts at a Lukoil presentation in London. "Today we can finally talk to sellers in the language of financial efficiency."

It isn't just the stock market that might help Russia's second biggest oil firm. Western integrated majors, which have operated the lion's share of refining capacity in Europe, are exiting the market in droves. Dwindling oil production in the North Sea and high taxes in the products market has hammered refining margins for the traditional big players, leaving Lukoil, a dominant refiner in the former Soviet Union, in a good position to capitalise.

With access to cheap reserves that it can pump to Europe, Lukoil sees the refining market in Europe as a source of growth. Fedun was recently quoted saying that if Lukoil could refine the oil it sells into Europe, instead of merely selling the crude, it could increase its revenue by $1bn a year.

That prospect is behind the company's programme of upgrading its existing refineries to European fuel specifications, believe analysts. The company says it will spend $1bn a year over the next 10 years on expanding and upgrading refining capacity. The 11m-tonne-a-year Burgas refinery, in Bulgaria, has already been upgraded, chief executive Vagit Alekperov said yesterday. A refinery in Odessa is being upgraded and will be due back on stream in before the end of the year. And work is also under way to bring the company's refinery in Romania up to spec, he added.

But it is the prospect of acquisitions that will excite the markets in Europe.

The Russians are coming

PKN Orlen of Poland is one target, while Austria's OMV and Hungary's Mol are also on the company's radar, along with refineries that other Western majors might shed on the continent. Mol is already facing a battle to resist a takeover attempt by its rival OMV, which already owns an 18.9% stake in the Hungarian company. Reports from Hungary have suggested the company might seek to engage Lukoil as a white knight in the battle.

Lukoil's potential influence over the EU's oil products market was demonstrated this summer, when it cut shipments of oil to German refineries. That prompted another bought of worries in European capitals about the reliability of Russian energy supplies. It also triggered comparisons with the disruption of Russia supplies to the Mazeikiu Nafta refinery, in Lithuania, where PKN fought off Russian rivals to buy the plant from bankrupt Yukos.

There may be some truth to the second comparison - in the absence of an explanation from Lukoil for the fall in exports, analysts say a dispute with German oil importers was the likeliest reason. But the first comparison was fatuous: Lukoil is close to the Kremlin, but is no foreign policy lackey - a description some commentators apply to state-controlled Gazprom and Rosneft. Indeed, Lukoil is eagerly expanding abroad. Alekperov proudly claimed that the company has the widest geographical portfolio of any Russian company. That offers a solid insurance policy in case its cosy relationship with the government in Moscow goes sour.

In the meantime, though, the company's close ties to the Russian government have brought Lukoil some tangible rewards. While President Vladimir Putin toured Asia and Australia earlier this month selling weapons and buying uranium, he took Alekperov for company. In Indonesia, Lukoil agreed a deal with Pertamina, the state oil company, covering joint exploration work in "several prospective blocks" in the country. Alekperov said reserves could amount to 150m barrels of oil.

Closer to home, Lukoil also has plans to increase its presence in Turkmenistan. Expanding its presence in the upstream sector of Central Asia and the Caucasus - the company is already active in Azerbaijan and Kazakhstan - will be key to its plans to export energy to China.

Alekperov said the Caspian region would remain a "priority" for the company. In the Russian north Caspian, where the company plans to drill new wells with Rosneft, reserves could amount to 7bn barrels of oil equivalent. The company also said "large volumes" of gas from its fields in Uzbekistan should be on stream by 2012. As with all of the gas the company produces in the CIS, it will probably have to sell these volumes to Gazprom. With a touch of whimsy, Alekperov speculated that the rules in Russia could change to allow the company to sell directly into the market.

Meanwhile, Lukoil blames a 4.8% fall in net income to $3.82bn for the first half of the year on an unfavourable tax regime. Russian export duty is calculated every two months and is based on the oil price, meaning any decline in the crude prices leaves a lag before export duty also falls. Alekperov told journalists that Lukoil had "helped design the [tax] rules. So we decided to stick to them."

The analysts' reaction was mixed. Erik Mielke, of Merrill Lynch, said the numbers were solid and should be a "modest source of comfort for the market." But beyond the reported half-yearly results, some were sceptical about the company's prospects in the upstream.

"Lukoil always says it is going to do great things in future," one said. "But I never hear them announcing that they've just brought on stream a big project."

Send comments to The Editor

Lukoil targets Europe

Related Articles

Latvia’s Citadele Bank pulls IPO

bne IntelliNews - Latvia's Citadele Bank has postponed its initial public offering (IPO), citing “ongoing unfavourable market conditions”, the bank announced on November 11. The postponement ... more

BOOK REVIEW: “Europe’s Orphan” – how the euro became a scapegoat for policy ills

Kit Gillet in Bucharest - The euro, conceived as part of a grand and unifying vision for Europe, has, over the last few years, become tainted and often even blamed for the calamities that have ... more

Mystery Latvian linked to Scottish shell companies denies role in $1bn Moldova bank fraud

Graham Stack in Berlin - A Latvian financier linked to the mass production of Scottish shell companies has denied to bne IntelliNews any involvement in the $1bn Moldovan bank fraud that has caused ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.