WEEKEND READ: The Sicilian job

Lukoil, Russia’s largest privately owned oil producer, has acquired a refinery in Sicily that will help insure it against a Kremlin takeover.

Stratfor.com
Lukoil, Russia’s second-largest oil producer and largest privately owned energy conglomerate, has acquired a 320,000 barrels-per-day (bpd) refinery in Priolo, a town in eastern Sicily near Syracuse. Furthermore, Lukoil and Italy’s largest independent refiner, ERG Group, have made an agreement to set up a joint refining venture. The venture will create a new entity of which ERG will own 51 percent and Lukoil will own 49 per cent – and ERG will have the option of selling Lukoil parts of its stake over a five-year period.

The Priolo refinery will allow Lukoil to integrate its oil supply chain directly into Western Europe. The refinery is already capable of processing the Urals-blend crude that Lukoil produces in Russia and will therefore need no updating to plug it straight into Lukoil’s network. The refinery acquisition is part of Lukoil’s $25 billion plan to invest in downstream assets by 2017 and particularly expand them in West Europe. The acquisition and the agreement with ERG also coincide with the start of operations at Lukoil’s Varandey terminal on the Barents Sea, which will allow the Russian firm to expand direct crude shipments to North America. These deals are part of Lukoil’s ambitious global strategy, which includes a serious expansion of its downstream business as well as an expansion of its foreign assets and subsidiaries.

Lukoil’s plan to expand globally is spurred both by business motives – a desire to diversify from upstream to downstream production – and by the desire to insure its viability as a private enterprise in Russia. At the moment, Lukoil is the most successful private energy company in Russia, primarily because its CEO and founder Vagit Alekperov has managed to keep the Kremlin satisfied on a number of fronts. He is known to meet with Russian Prime Minister and former President Vladimir Putin on an almost monthly basis to make sure that his business ventures receive the Kremlin’s blessing. Putin has allowed Lukoil to continue its operations both because Alekperov has never indicated any desire to enter politics and because it is a useful balancing tool between Gazprom and Rosneft, the twin state behemoths of the Russian energy industry. Ultimately, Lukoil is also an extremely profitable venture and one of the few segments of the Russian energy industry that is increasing efficiency and production and is bringing new projects online.

Lukoil’s international reach is helped through its close collaboration with the US firm ConocoPhillips, which bought 7.6 per cent of shares in Lukoil in 2004 and which was critical in bringing technological know-how to Lukoil’s Arctic ventures in Siberia. Lukoil’s global projects extend to gas station networks on three continents, oil production in Central Asia, Egypt and Iraq (through its cooperation with ConocoPhillips) and further oil exploration efforts in Central Asia, the Middle East, South America, East Asia and Africa.

As part of its downstream expansion, Lukoil owns three European refineries apart from the Priolo refinery. It has two refineries directly on the Black Sea – one in the Bulgarian city of Burgas (215,000 bpd) and the second in Odessa in Ukraine (nearly 72,000 bpd) – as well as one inland in Romania in the city of Ploesti (50,000 bpd). Lukoil also owns LITASCO, a marketing and trading company that helps Lukoil place its petroleum products on the international market and ship them to their destinations. Lukoil controls a shipping fleet of around 40 crude oil and other petroleum product tankers through its LITASCO subsidiary.

Lukoil’s successes both domestically and internationally would make it an attractive acquisition for either Rosneft or Gazprom. To date, this has not happened. Alekperov has expanded internationally and has developed an integrated global energy company as an insurance against such a Kremlin takeover, the idea being that if a hostile takeover were to occur, Alekperov would be able to split the global Lukoil from the company’s Russian arm and still remain a major player in the international energy industry.

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