Russian oil firms go on buying spree in Europe, eye US market

MOSCOW – A profits boom fueled by high oil prices has whetted the appetite of Russia’s oil majors to buy up refineries and filling stations abroad in a bid to become world players. Cash-rich and aggressive, companies such as Lukoil and Yukos are looking beyond their vast domestic heartland and muscling in on Western competitors in a hunt for lucrative assets around the globe. «Russian firms are now big enough and managed in an efficient way. Foreign acquisitions are an automatic next step,» said Jonathan Stern from the Royal Institute of International Affairs in London. The Russian oil majors, enjoying soaring exports, are expected to stick to the acquisition trail even if oil prices weaken and fat profit margins start to erode, analysts said. «If you want to call yourself a world-class oil company, then you need properties outside your own country. The obvious place to buy properties is in Europe and this logic will continue even when oil prices begin to fall,» he added. After years of struggling in post-Soviet obscurity in the 1990s, foreign acquisitions now come as naturally to the Russian oil companies as double-digit output growth figures, Western-style management and international accounting standards. Russia’s largest oil firm, Lukoil, caused a sensation two years ago when it bought more than 1,000 Getty Petroleum filling stations in the United States. Second-biggest crude producer Yukos followed suit this year, acquiring a pipeline network in Slovakia and buying a refinery in Lithuania from US energy group Williams. The Russians are expected to strike next in eastern and southern Europe, where they are on the lookout for refining businesses. Lukoil says it wants to buy refineries in Poland and Greece to add to its two foreign plants in Bulgaria and Romania. If they go further afield and try to buy more refining and retail business in the European Union and the United States, even the strongest Russian companies can expect tough competition from well-entrenched local players. Lucrative Caspian With oil production soaring at home, one thing the Russians do not need urgently is to acquire any big oil fields outside their home turf. Richer Western firms are prepared to pay hefty premiums for valuable production assets. In the mid- and late 1990s, when Russia was gripped by political instability and domestic investment slumped, Russian oil firms acquired some upstream assets – stakes in oil fields – in South America and the Middle East. A revival after a decadelong slump in oil production has shown there is plenty of profitable exploration and production business to be done at home. «In terms of upstream there is not much motivation to go outside Russia, where possibilities of huge oil finds are still very high,» said Valery Nesterov from Troika Dialog. BP’s statistical review estimates Russian oil reserves at 50 billion barrels, but US Geological Survey puts them only second to Saudi Arabia, the world’s biggest oil producer, at 130 billion barrels. Most Russian oil firms say they have enough reserves to maintain their current output for at least 30 years. Few Western firms have enough to cover more than 10 years of production. «Western majors are much more hungry for new reserves and Russians simply cannot afford to face this tough competition,» said Sergei Glaser from Alfa Securities in London. Iraq is an exception because Russian firms have privileged access to the government of President Saddam Hussein but are reluctant to flout UN sanctions and invest in oil exploration there for fear of provoking Washington’s anger, said Glaser. «The focus will remain on huge Caspian Sea reserves,» said Troika’s Nesterov, adding that smaller projects in Kuwait, Peru, Colombia or Libya are exotic sidelines. Ivan Mazalov at Commerzbank agreed that the only foreign partnerships in upstream ventures that could be useful to Russian firms would be in the Caspian, where the Russians need to learn more about offshore oil business. The search for new know-how is also fueling the international expansion in refining and distribution. This gives Russian companies invaluable information about consumption trends, said Glaser. «But I can see further acquisitions only in eastern Europe and the Balkans, where refineries were built together with the Soviet Union and are still supplied by Russians,» said Nesterov. «The best acquisition targets are in southeastern Europe. There is not so much competition with Western majors; properties are quite cheap because the risks are big,» agrees Stern. Russian oil majors apparently do not want to limit expansion to eastern Europe, with Lukoil saying it could buy a refinery in the United States to supply its retail chain. Industry sources also said Yukos might acquire refining and retail assets in Germany and the United States. Analysts say this idea would make little sense for the Russian companies, which lack the experience to compete in those markets at a time when refining margins are stagnating at their lowest levels in a decade. «Investing in the United States can become effective only if Russian firms manage to build a reliable chain of crude deliveries. Currently it looks doubtful,» said Glaser. Stern said there might be a hidden motive behind Russian aspirations to operate in the United States. «Most firms in Europe have small US subsidiaries. It is not where they make all their money, but a foothold in the United States can be useful if they want to raise money and become accepted members of the international oil community.»

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