LUKOIL - From a State-owned Company to a Privatized Global Player

TABLE OF CONTENT

1  INTRODUCTION  3

2  THE HISTORY OF LUKOIL  5

2.1  LUKOIL Introduction to the Company  5

2.2  Milestones in the Past  5

2.3  The Privatization Process  7

2.3.1  Introduction to the Privatization Process  7

2.3.2  Stages of the Privatization Process in Russia  7

2.3.3  The Privatization of LUKOIL  9

3  LUKOIL TODAY  12

3.1  Doing Business Internationally  12

3.2  Among Global Players A Competitive Analysis  13

3.3  Corporate Social Responsibility at LUKOIL  15

4  FUTURE PERSPECTIVES  18

5  CONCLUSION  21

  REFERENCES  23

2  NA  

1 INTRODUCTION

Since the collapse of the USSR many changes in all social areas of Russia have taken place and are still in process. Besides important developments in culture, politics and society, the economic system pla ys an important role. By the end of the cold war, after 30 years, the system of planned economy turned out to be a not effective one – it lost the race against the capitalism.

Before the influences of the free market economy swashed to Russia, all companies where basically state-owned by the Russian government. At that stage, the involvement of foreign investors was unthinkable as it would have meant a loss of control by the politicians.

In the early 1990s, the Russian government decided to adapt its economic system more to the western standards and started to liberalize the Russian market with all its companies which were controlled by the government before. The deregulation process brought very big changes with it, especially for the economy- leading big companies. Companies were established which are nowadays well-known on capital markets all around the world and which are playing important roles as global players on several markets.

In our report we are presenting one of those newly formed, internationa l operating companies. LUKOIL is the largest Russian oil and gas company by proven reserves and the second largest worldwide. It was build by the consolidation of three formerly state-owned Russian companies and stands today for the innovative and radical changes in the Russian business environment. Our goal is to present the main changes since the collapse of the communism and to explain why LUKOIL can be seen as figurehead of all changes that took place in Russia.

To introduce the company, we are taking a look at the young past of the company. Basic information on the company’s business activities is given and the milestones in the history are presented. Afterwards, we are going to take a look at the vital privatization process, first in general in Russia and than with exclusive look on LUKOIL. Therefore, we are not only concentrating on the process as it, but also point out how the government decreases its influence to company over the years and how the shareholder structure developed. At this

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point, there were many interesting findings concerning the company as well as the whole Russian economy.

After the introduction the company is being analysed with regard to the actual situation today. What is LUKOIL doing, how is its positioning on the Russian and especially on the global market in its operating sector, the oil and gas sector. Additionally, we chose one interesting subject in relation to Russia and economic habits: the corporate social responsibility is playing an important role at LUKOIL and is another reason for us, why the company is a representative of the changes of the Russian economy to annex the topics which are important for western investors.

Before we make a general conclusion on the developments at LUKOIL, we are going to take a look at the future of LUKOIL. We will access a SWOT-analysis to point out the situation on the Russian oil and gas market and give an outlook on the prospects of LUKOIL in its internal and external development in the next couple of years.

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2 THE HISTORY OF LUKOIL

2.1 LUKOIL – Introduction to the Company

LUKOIL is the 2 nd largest private oil Company worldwide by proven reserves, the leading oil company in Russia and the 6th largest oil company worldwide by production of hydrocarbons. LUKOIL also produces and explores gas and petroleum products and is the only Russian oil company with significant hydrocarbon reserves (in Timano-Pechora and the Northern Caspian).

(Lukoil 2005a)

West Siberia and Perm Oblast are LUKOIL’s most important regions and main sources of company’s production (West Siberia stores about 54% of company reserves), in Azerbaijan, Kazakhstan, Egypt, North Africa and Columbia exploration and production projects are made. LUKOIL owns around 1.5% of global oil reserves and 2.1% of global oil production and dominates the Russian energy sector, with 19% of total Russian oil production and 19% of total Russian oil refining.

(Lukoil 2005a)

LUKOIL owns important oil refining capacities in Russia (four large refineries), in Ukraine, Bulgaria, and Romania, have a sales network in 17 countries of the world, including Russia, the CIS (Azerbaijan, Belarus, Georgia, M oldova, Ukraine), Europe (Bulgaria, Hungary, Cyprus, Latvia, Lithuania, Poland, Serbia, Romania, Czech Republic, Estonia) and the USA. The retail network includes 1,456 own and leased outlets as well as 276 franchised outlets. (Lukoil 2005a)

2.2 Milestones in the Past

After the resolution of the UDSSR in 1991 the company "LangepasUraiKogalymneft" was built and started to become private in 1993 under the new name “ OAO LUKOIL”. The president of the old and new and still today’s head of the company is Vagit Alekperov.

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In 1995 nine oil-producing, distribution and service companies of Western Siberia, Urals and the Volga region started to manage the company and the American Atlantic Richfield Company (ARCO) became a major shareholder and a strategic partner of LUKOIL. (Lukoil 2005b)

Three years later LUKOIL acquired the Petrotel refinery in Romania, four years later the Odessa refinery in the Ukraine, and five years later the American company "Getty Petroleum marketing, Inc." that owns about 1,300 gas filling stations in the north-eastern USA. (Lukoil 2005b)

In 2001 the company acquired OAO "Arkhangelskgeoldobycha ”, which has over 20 licenses to develop oil and gas fields in the Arkhangelsk Oblast and Yamal Nenets Autonomous Okrug. One year later LUKOIL Overseas Holding Ltd., a 100% subsidiary of LUKOIL, became a sole contractor and investor of the concession agreement on oil exploration and production. In the same year LUKOIL signed with GAZPROM for a strategic partnership for the period of 2002-2005 which includes developing mutually beneficial cooperation in the area of oil and gas exploration, production, transporting and processing, as well- marketing of oil and gas products, chemicals and petrochemicals.

(Lukoil 2005b)

LUKOIL becomes the first Russian company in 2002 that obtained a full secondary listing on the London Stock Exchange by including its securities to the UKLA Official List and shows highest liquidity in their group according to official data of the London Stock Exchange in 2003. LUKOIL sold their 10% interest in the Azeri-Chirag-Gyuneshli project to INPEX Southwest Caspian Sea Ltd for US$ 1.354 billion, started the production of Jet A-1 fuel and won the tender for the right to acquire the 79.5% interest in "Beopetrol" of Serbia. The company is controlling about 20% of the Serbian retail fuel market.

(Lukoil 2005b)

In September 2004 the 3 rd biggest U.S. oil combine ConocoPhillips bought 7.6% of LUKOIL’s government shares for about US$ 2bn, which was sold in a bidding method; an additional agreement ensured ConocoPhillips the access to extensive oil reserves. (Lukoil 2005b; Adblue 2005).

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