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Lukoil:
The Next Oil Superpower?
Lukoil's Alekperov: A New Global Giant
peoples.ru
Vagit Alekperov,
president of Lukoil
By
David A. Andelman and Heidi Brown
Russian oil giant Lukoil believes it can transform itself over the
next decade into one of the world's largest fully integrated energy
companies, with an enormous retail presence across the U.S. and
refining capabilities and oil reserves that extend far beyond Russia.
Lukoil's
senior executives believe all this can be accomplished largely
with cash it will generate from its operations, development of
vast fields in western Siberia and, for the first time, oil reserves
it is purchasing abroad, notably in Venezuela. The price tag is
huge: $72 billion at the low end, and up to $112 billion over
the next decade, depending on crude oil prices.
As the price
of crude has jumped over the last two years, Lukoil's investments
have expanded, including construction of a year-round, ice-free,
deep-water oil port in Murmansk that can handle very large crude
carrier (VLCC) tankers; a massive oil discovery in the Caspian
with an estimated 1.6 billion barrels of crude; and exploration
in some of the most remote reaches of eastern Siberia.
In
an interview with Forbes.com (see: below " Lukoil's Alekperov:
A New Global Giant"), the Lukoil founder and president Vagit
Alekperov said the final stage of the company's development would
its transformation into a multinational company. "We will
be one of the largest players in the energy [industry] among private-sector
companies," said Alekperov. "Everything in this company
has changed over these 15 years. We think differently, we work
differently and the perception of our company has changed as well."
American
consumers might notice the change themselves as some 2,000 Lukoil
gas stations appear on street corners across the eastern U.S.
and possibly further afield, with the company distributing some
2.5 billion gallons of gasoline each year. ConocoPhillips , which
owns 20% of the Russian company, will rebrand the final group
of Mobil stations it bought under a government-ordered divesture
after the Exxon Mobil merger as Lukoil facilities by Jan. 1, Alekperov
said.
A crucial
element in Lukoil's attempt to go fully vertical is to have refining
capacity outside of Russia, says Alekperov. In the U.S., "the
margin of refinement is so lucrative, and so profitable,"
he says, "it is worthwhile. ... When the whole chain of production
is at home, so to speak, it is more interesting from an economic
standpoint." Rather than build facilities here, he would
instead sign joint-venture deals, which he is in a hurry to do.
"We are getting ready to cement a large project, a venture
with the government of Venezuela for development of a field in
Venezuela."
Likely candidates
in the U.S., however, remain sparse, especially since Alekperov
himself thinks they're too pricey. Still, having the ability to
get U.S. margins for his low-margin crude makes economic sense,
say some observers.
Even if oil
prices remained constant, the company should see substantial revenue
growth as it plans to double its output of oil and gas from the
present equivalent of 2 million barrels a day in the next decade.
Some of that increase will be in the form of natural gas output,
which will jump from 6% of the company's total production to 33%,
mostly by drilling in the vast gas fields it owns in the north
of Russia. Lukoil will continue to sell gas directly to Gazprom,
which it says is a reliable and stable customer--and has an export
monopoly on all Russian gas.
Still, at
the company's earnings presentation on Wednesday, details were
thin on how, exactly, the company would be able to wring out such
impressive growth. "Considering that 80% of the company's
business is in oil, it was disappointing that it didn't give more
information about that," says Alex Brooks, an energy analyst
in London with UBS.
Nevertheless,
Lukoil remains vastly profitable. Its latest earnings report,
released Tuesday, showed a 65% growth in second-quarter profits,
to $2.32 billion, from $1.41 billion a year earlier.
Despite its
optimism and great ambition, Lukoil is still vulnerable to the
whims of the Russian government. It is entirely in private hands
(ConocoPhilips bought the government’s last stake and now
has 18%). Yet the company’s ten-year plan appears to be
part of a broader Kremlin strategy to remake the Russian private
sector along with other giants like Rosneft and Gazprom (which
both have government equity holdings). President Vladimir Putin
seems to be attempting to make Russia a world economic force--using
Western capital and expertise while retaining close control over
its resources.
Putin seems
to envision an economy in which enormous state-owned companies
and investor-owned firms can coexist peacefully. So far, at least,
it seems to be working.
Many investors,
however, remain skeptical that in the face of greater government
intrusion, Lukoil can retain its long-trumpeted independence as
a totally investor-owned corporation. The specter of the Russian
seizure of the other large independent oil company, Yukos, still
hangs over the industry. Indeed, recently, Moscow bureaucrats
floated ominous suggestions that all of Lukoil's licenses would
be examined for tax and natural resources violations. "It's
a huge risk for them," says Mikhail Korchemkin, owner of
East European Gas Analysis.
Alekperov
suggests that these are just bureaucrats gone wild. "It is
really unfortunate that some of the bureaucrats are bringing these
day to day activities to the public eye, so to speak," he
says thinly. "It does have a negative effect."
Yukos was
effectively bankrupted by multibillion-dollar back tax claims
from the Kremlin. But senior Lukoil executives pointed out that
their company not only pays all taxes, but throws in an extra
2% to 3% "just for good measure."
Indeed, Alekperov
seems to believe that his own background will continue to protect
the company he has led since its inception 15 years ago. The Lukoil
chief headed all oil production under the Soviet Union when Communists
were in the Kremlin--the job was "not something you would
get on a silver platter," he said.
"The
foundation we created all these years," he concludes, "and
the level of political comfort that I assure to the Russian government,
the way they see me, makes me confident that what happened to
Yukos is not going to happen to us."
So
far, Alekperov has understood the rules and played by them. Hopefully
that will be good enough for the Kremlin.
Lukoil's
Alekperov: A New Global Giant
rfa.org
| Vladimir
Putin (left), Russia's presidet and Vagit Alekperov
Q
and A
By
David A. Andelman and Heidi Brown
Fifteen
years ago Vagit Alekperov, now 55 and with a net worth of $11
billion, No. 37 on the Forbes' billionaires list, was a deputy
minister of fuel and energy in the U.S.S.R., overseeing the old
Soviet Union's oil and gas resources. That's when he first met
Russia's President Vladimir Putin.
Now
Alekperov is the president and one of the biggest shareholders
in Lukoil, the largest privately-owned oil company in Russia,
with aspirations of becoming the newest fully integrated, privately
owned oil company in the world. (See: " Lukoil: The Next
Oil Superpower?") Lukoil has significant interests outside
of Russia, including refineries in Eastern Europe and the former
Getty gas station chain in the U.S., which it has rebranded with
its own name. Lukoil closed the biggest deal in its history in
the fall of 2005 when it bought Nelson Resources in Kazakhstan
for $2 billion. Next stop? Venezuela.
Video:
Lukoil
Explores Expansion
Recently, he sat down with Forbes.com to discuss the future of
Lukoil and the global energy picture.
Forbes.com:
You began before the current system under the Soviet Union?
Alekperov:
I am also one of those persons who were transformed, who grew
out of the Soviet system and transformed myself into the new Russia.
I am probably the only one left.
Forbes
:
How
has the company transformed itself since its creation?
Alekperov:
I can tell you that the company has had three stages of development.
The first one starting with the start of the company in 1991,
the company is going to be 15 in November, next month--when the
three state-owned companies signed a document declaring their
wish to work together. Then the second stage when Lukoil was formed
as a company and when the process of privatization started. And
that lasted roughly until 2004, when ConocoPhilips (nyse: COP
- news - people ) purchased the last block of state-owned shares
from the state and we became a private company. Then the third
stage in our development began, and as part of this new stage
we presented our plan of strategic development, and we spoke about
the transformation of Lukoil as a company into a transnational
company. I mean one of the largest players in the energy market
among private companies. Everything in the company has changed
over these 15 years. We think differently, we work differently
and the perception of our company has changed as well.
Forbes
:
What
are your aspirations and do you have the resources to achieve
them?
Alekperov:
I would say that the quintessence of the strategy is to guarantee
a stable supply to our consumers of the sources of energy--stable
delivery of our products to the markets and predictability of
our operations and responsibility--responsibility being the key
word. The reserves are in the area of 38 billion barrels, and
we are not going to sit on those reserves, but we are going to
make them available to the international community, to the world
at large.
So
we are making the reserves available to the world market and the
rate of growth, around 6% in terms of production--hopefully this
will be a restraining factor in the growth of prices. Our investors
can be assured that we will deliver these reserves to the market
at the most competitive pricing, at the most cost effective pricing,
and we will guarantee a good return on the investments. As for
the U.S. market, you will have noticed that our presence is mostly
concentrated in the Northeast. This is the region which is the
closest in terms of the delivery point of oil from Russia to the
U.S. Instead of going all over the place, we decided to stay focused
on the northeastern part of the U.S. Our plan is to deliver oil
to the U.S. that will come from Timan Pichura.
Forbes
:
Do
you deliver to U.S. refiners?
Alekperov:
Today we do not deliver any crude to the U.S. Today with our partners
at Conoco we are developing a new field at Timan Pichura. And
we are also building a terminal for large tankers for delivery
and transportation of oil. The launch date for the project is
2008. At this point there is not a single terminal in Russia that
would have enough capacity to load large tankers. Because of the
constraints of the Black and Baltic Sea straits, only smaller
tankers can pass through those, and therefore there is no large
capacity terminal.
Forbes
:You
are building a VLCC terminal?
Alekperov:
In Murmansk, which is ice-free, where large tankers will be loaded.
As for oil refinery products, with the help of the Overseas Private
Investment Corporation (OPIC), we have built a terminal in St.
Petersburg which is in operation already. Its capacity is 7 million
barrels per month. And it is from that terminal that we transport
refined products including gasoline to New York markets, to the
terminal we are leasing here in the New York area.
Forbes
:
Are
you going to develop or buy refinery capacity in the U.S.?
Alekperov:
Not building, because it is really difficult to build something
new in the U.S. We are looking for partnership arrangements with
refineries--partners that would either give us access to their
refinement capabilities.
Forbes
:
Would
this require equity investment in these companies?
Alekperov:
It would be an investment in the operators of these refineries.
The margin of refinement is so lucrative and so profitable, all
the downstream products are so expensive, it is worthwhile. We
have to resolve this issue because we are getting ready to cement
a large project, a venture with the government of Venezuela for
development of a field in Venezuela.
Forbes
:
Will
there be any political problem with that in the U.S. given that
the president there is not very well liked here right now?
Alekperov:
We are actually planning to deliver large volumes of crude from
Venezuela, and that is still significant despite the relationship
or the animosity between the two presidents.
Forbes
:
Are
you interested in buying a stake in Citgo or expanding your investment
in ConocoPhilips?
Alekperov:
Citgo is not being offered. We are not interested in Citgo.
Forbes
:
Can
we clarify, then, your presence in the U.S.?
Alekperov:
What we are doing is rebranding the gas stations of Mobil that
we bought from Conoco, and by Jan. 1 we are supposed to complete
this rebranding process. In the U.S. today we have about 2,000
gas stations. In terms of sales it is about 7 million tons per
year.
Forbes
:
And
you envision that growing to what in five years?
Alekperov:
Today the main objective is to assure the stability of supply
of those gas stations through our own refining capacity. And until
we resolve this issue we are not going to expand the network of
our stations.
Forbes
:
When
you talk about stability of supply, presumably these stations
have all been supplied until now. What are you concerned about?
Alekperov: I am not implying that there might
be instability of supply. What I am trying to say is that we are
interested in supplying our own crude produced either in Russia
or Venezuela, refined in our own capacity. When the whole chain
of production is at home so to speak it is so much more interesting
from an economic standpoint.
Forbes
:
If
you decide to partner with a refiner in the U.S., do you think
there will be any backlash, such as Dubai suffered with its efforts
to buy ports in America?
Alekperov:
We really didn't have any obstacles. On the other hand, the Russian
government and the president of the Russian federation welcomes
Conoco, a major western company in our country. This year the
Conoco share in our company is going to reach 20%. I really do
not anticipate any backlash, because our projects will not be
so extensive that they will pose any threat to the national energy
security of the U.S. This will not be anything major that would
affect America’s strategic interests.
Forbes
:
At
the beginning you said that you would not keep your reserves in
the ground. This is very different from what some OPEC nations
believe.
Alekperov:
It is really difficult to forecast the development of energy or
the oil market in general because the growing oil prices encourage
development of alternative energy sources and stimulate energy
efficient technologies also. So the oil price should be satisfactory
not only to the producer but also to the consumer, to assure stability
of industrial development of all prices.
Forbes
:
So
do you have a favorite price of oil?
Alekperov:
I don’t have a favorite price, I have a fair price. We believe
that a price of about $60 per barrel is fair, is satisfactory
to consumers and to us as producers. Why am I saying this? Because
that is what we've had in the past couple of years, and it has
stimulated industrial development and production in all countries.
Forbes
:
Are
you saying that you, Lukoil, and the Russian government, which
controls even vaster reserves than Lukoil, are prepared to adjust
production along with OPEC and other major sources to keep prices
stable within the $60 range?
Alekperov:
I am not going to speak on behalf of the Russian government. Today
the Russian oil industry is operating at full capacity. And our
president has always declared that our country is a stable supplier
to the energy markets in the world. We have really never adjusted
production depending on the price.
Forbes
:
You
did say that increasing production can keep prices at a manageable
level. But OPEC officials say Russia’s outcome is not enough
to affect world oil prices.
Alekperov:
It’s true. We are operating at full capacity. And the fields
that are being operated today are at a mature state. We are spending
significant money to maintain the level of production where it
is. And the potential fields we have are in quite remote areas
such as eastern Siberia that will require tremendous investment.
Forbes
:
Where
do you see gas affecting strategy in the future? Do you see yourself
become more of a gas than an oil company?
Alekperov:
Gas consumption is growing everywhere. We have major gas reserves.
The production of natural gas in the company accounts for 6% of
the total hydrocarbon production in the company, and we are planning
to bring that figure to 33% by 2016. The natural gas projects
we are developing will be aimed at supplying natural gas to the
Russian Federation. By 2016, Gazprom will be feeding the appetites
of Western Europe.
Forbes
:
Your
very ambitious plan for 2016 calls from investments of $115 billion.
Alekperov:
The most optimistic scenario. Conservatively $72 billion, depending
on the price of oil.
Forbes
:
Where
do you anticipate finding this investment capital? Will you be
generating it internally or from the global capital markets?
Alekperov:
Last year we invested $8 billion. In the current year the investment
level will reach $9 billion, and the company’s borrowings
have remained pretty much at the same level.
Forbes
:
Many
Western investors got burned from the bankruptcy of Yukos. How
can you assure Western investors that Lukoil will remain strong,
independent and a capitalist company?
Alekperov:
In the Soviet Union I was the head of all oil production. And
you know in the Soviet Union, you didn't get that job unless you
were really worth it. It was not something you would get on a
silver platter. Think back to November 1991, what was happening
in Russia--and we are able to establish Lukoil. Everything was
falling apart. At that point we were able to form a company that
is now a central component of our economy. And all these 15 years
we haven’t had any major scandals, any negative developments.
We never defaulted on any of our obligations to any of our partners.
In 1998 we were the only company that declared that we would honor
all our obligations and our contracts. So the foundation we have
created all these years and the level of political comfort that
I assure the Russian government, the way they see me, makes me
confident that what happened to Yukos is not going to happen to
us.
Forbes
:
Now
the Russian government is looking at your licenses though.
Alekperov:
These are day-to-day operations. And it is really unfortunate
that some of the bureaucrats are bringing these day-to-day activities
to the public eye, so to speak. It does have a negative affect.
These are all routine audits and examinations, and now they are
publicized. It's becoming far too aggravated and politicized now.
Forbes
:
This
is the only country in the world with largely state-owned companies--Gazprom,
Rosneft--existing side by side with a wholly private company,
Lukoil. Is that a stable situation that can exist indefinitely?
Alekperov:
Gazprom, Rosneft have private investors. It is hard to compete
with the state. Is there a possibility of an alliance between
the state owned company and the private company? Yes, it is quite
possible. We do have a joint venture with Rosneft, we do have
joint venture with Gazprom and they are going fine. So these alliances
are quite conceivable and possible. And in the future I am sure
that such alliances will enable us to implement large-scale projects.
Forbes
:
Your
U.S. retail gas stations--are they profitable?
Alekperov:
Yes. Today the economic situation is a little tougher than it
was three years ago. The difference between the wholesale and
retail price is very little. The refinery is taking all the market.
That's why we want to have our own refinery links that we maintain.
Because all the independent operators are gradually being pushed
out. So in the future we are planning to have the entire chain--from
production through refining to retail.
Forbes
:
You
have a photograph of President Putin on your desk?
Alekperov:
With me. The two of us together.
Forbes
:
So
is it accurate to say you are friends?
Alekperov:
I met President Putin before he became president. I have a lot
of respect for him. But to say that we are friends would not be
accurate. He is the president.
Forbes
:
Tell
us what you are like. How would you describe yourself?
Alekperov:
I am a normal guy. I like to fish. I play tennis. And I go to
the Caspian Sea.
10.20.06,
6:00 AM ET
David
A. Andelman
is a veteran journalist and Executive Editor of Forbes.com. Heidi
Brown is a senior reporter for Forbes. Their views
are not necessarily those of PETROLEUMWORLD.
Editor's
Note: The preceding article was first published forbes.com, on
November 20, 2006. Forbes.com Inc. (www.forbes.com), is the home
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