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|  | SEPTEMBER 30, 2004
By Jason Bush Conoco and Lukoil: Everyone Wins The U.S. oil giant gets a good price, Russia's No. 1 oil company acquires a savvy partner, and Putin polishes Russia's image The price was fair. Investors aren't threatening to sue. The media isn't in an uproar. Foreign governments haven't cried foul. Clearly, this was no ordinary day for Russia. The Sept. 29 sale of a 7.59% stake in Lukoil, Russia's largest oil company, to U.S. oil major ConocoPhilips (COP ) is indeed a first in many ways. Conoco paid $1.98 billion for the stake, making it both the largest single privatization in Russian history and the largest-ever investment by a U.S. company in Russia. It's a sign that, despite Russia's notorious political and legal risks, the world's biggest energy players are eager to get a piece of Russia's abundant oil reserves. Conoco outbid two other potential investors, rumored to represent David Guggenheim, the U.S. financier and art patron, and a company controlled by Lukoil management. But Conoco was always the clear favorite, its interest in Lukoil rumored for months. GREAT DEAL. What's more, the bid clearly had strong backing from President Vladimir Putin. Concoco CEO James Mulva flew to Russia to meet both Putin and Lukoil CEO Vagit Alekperov in July. "They won't have any reason to have any second thoughts about their decision," Putin said in early September, referring to the possibility that a large U.S. oil company -- obviously Conoco -- would invest in Lukoil. Most analysts are with Putin on that. "I think it's going to be very good for both companies," says Ron Smith, oil and gas analyst at Renaissance Capital, an investment bank in Moscow. "Conoco will get access to reserves -- and oil companies are very desperate to get reserves." Lukoil has proven reserves of 16 billion barrels. Add in probable oil reserves, and the total tops 30 billion barrels. That means Conoco is paying just $1.63 per proven barrel of oil, which is between a third and a quarter typical replacement costs in the West. And for Lukoil, the partnership will bring much-needed Western management and knowhow. In addition to the equity investment, Conoco and Lukoil have announced a global partnership. That could come in handy in Iraq, for instance. Lukoil has an existing agreement with the Iraqi government to develop the country's West Qurna field, and Conoco has the links with the U.S. government to help ensure these rights now get recognized. WELCOME REASSURANCE. Analysts say the Russian government got a pretty good deal, too -- far better than in previous privatizations. Although Conoco paid just above the $1.9 billion starting price, it was very close to where Lukoil's stock was trading. Even better, however, is the boost the deal gives Russia's image in the investment community. In recent months, many foreign investors have been appalled at Moscow's treatment of Yukos, Russia's No. 2 oil company, which was hit with huge and controversial tax claims ($7 billion and rising). The crackdown is generally seen as punishment for Yukos' majority owner and former CEO, Mikhail Khodorkovsky, for getting too involved in politics. But the move against Yukos, which may soon be dismantled and partially renationalized, has raised much more general questions about Russia's legal stability and the security of private property. By welcoming Conoco's investment, Putin hopes to show that the crackdown on Yukos wasn't part of a wider campaign to freeze out foreign investment. Yet it also demonstrates that business in Russia can still be very unpredictable. A wink and a nod from the President is nice reassurance. But one day, even the occupant of the Kremlin will change.  Bush is a correspondent for BusinessWeek in Moscow Edited by Patricia O'Connell Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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