Exxon Of The Steppes?

Business Week

March 13, 1994



The mustard-colored building in Moscow hardly seems like the corporate headquarters of a powerful new giant in the global oil industry. Paint is peeling on the corridor walls. Executives scramble up and down the stairs rather than wait for the single, tiny elevator.

But Lukoil, which is moving to fancier central Moscow digs, is stirring up controversy. Just as the U.S. majors have served as extensions of American power, Lukoil and some of its sister Russian energy companies have started to flex their muscles as a leading edge of the Kremlin’s more aggressive foreign policy. They are staking out some of the world’s most promising oil fields, especially in the former Soviet republics.

Lukoil, for example, is pushing its way into a major oil project offshore in the Caspian Sea–a prize that could be worth $100 billion over the next 40 years. The Azerbaijan government and a consortium of Western energy companies, including Amoco, McDermott, Pennzoil, and British Petroleum, are close to signing a deal that could produce up to 800,000 barrels a day. That would make the Azeri project one of the biggest in years.

QUALITY CONTROL. Until recently, the Russians did not have a role in the deal. But they appear to have pressured the Azerbaijan government of Geidar Aliyev to give them a slice. Many observers believe the coup d’ tat that brought Aliyev to power last spring had Kremlin support. At any rate, the new setup is working to Lukoil’s advantage. “We expect to get at least a 10% share of the Caspian project,” says Lukoil Vice-President Leonid A. Fedun.

Executives in the Amoco-led consortium seem to grudgingly accept Lukoil’s involvement as necessary to prevent Russian troublemaking. But they are skeptical of the quality and capacity of the pipeline network that Lukoil is offering as its contribution to the project. “I could see a fixed-up line through Russia as a good strategic option and a carrot for the Russians,” says a Western oil executive. “But I don’t see it as the No.1 solution here.”


Lukoil’s maneuvers are part of a fierce battle under way to control the pipelines to get oil out of the Caspian and other areas of the former Soviet Union. In nearby Kazakhstan, for example, Chevron Corp. is struggling to find ways to export oil from its huge Tenghiz oil field. When the project is running full bore 10 years from now, analysts expect Tenghiz to be producing 1 million barrels a day at the same time the Azeri field is pumping its 800,000. However, says one Western energy executive, the main existing pipeline in the area, which runs to the Russian oil port of Novorossisk on the Black Sea, can handle only 500,000 barrels a day, leaving a 1.3 million shortfall. Western companies are scrambling to plan new pipelines, and Russia, Turkey, and Iran are all fighting to get them so as to reap lucrative transit fees. Turkey is even threatening to block the straits through the Bosporus if it is cut out of the pipeline deal. Meanwhile, Lukoil is looking beyond the Azeri project. Sources in Western Europe say it is trying to move into a huge natural gas project at the Karachaganak field in northwestern Kazakhstan. Russia’s diplomats appear to be working hard to clear the way for their new big energy companies. One example is their effort to redefine the Caspian Sea so as to open some of its best reserves up for grabs.

PRIVATIZATION EFFORT. At home, Lukoil is one of three new “vertically integrated” Russian companies that pump, refine, and market oil. It is set to begin a massive privatization campaign in March, when a 7% stake in the company will be sold. Foreigners will eventually be allowed to purchase up to 15% of the Lukoil holding company. The state will retain a 45% share for three years.

Lukoil is working to upgrade some of Russia’s declining oil wells. But in the process, it became embroiled in a lawsuit filed by Frankenburg Inc., a Texas affiliate of a Liechtenstein company that was repairing wells for a west Siberian concern that now belongs to Lukoil. In court papers filed in Houston in late January, Frankenburg claimed Lukoil used improper means to squeeze it out of the Russian market to upgrade oil wells. Frankenburg claims that the Russians fell $5 million behind on payments for its work. It is asking more than $500 million in damages for losses, fraud, and loss of business opportunities in Russia.

Lukoil’s Fedun denies the charges. In late 1992, he says, Lukoil officials paid Frankenburg what it was owed and had not heard from the company until the lawsuit was filed. He adds that it is the first time the fledgling oil company has been sued–not an uncommon occurrence for an oil giant in the West. But it is all part of the learning curve as some potentially powerful new players make their debut in the oil market.

Peter Galuszka in Moscow, with Juliette Rossant in Baku, Azerbaijan, and John Rossant in Rome

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