ConocoPhillips acquires stake in Russia's Lukoil

MOSCOW -- U.S. oil giant ConocoPhillips Inc. agreed to pay nearly $2 billion Wednesday for the Russian government's remaining 7.6 percent stake in Lukoil, the world's No. 2 oil company -- a deal expected to clear the way for joint ventures in Siberia and Iraq, while allaying broader concerns about the Kremlin's commitment to foreign investment.

The transaction, Russia's biggest privatization to date, also lays the groundwork for ConocoPhillips to eventually own 20 percent of Lukoil.

Speaking with reporters, ConocoPhillips president James Mulva said the deal would benefit Russian and U.S. interests, while bringing both countries closer.

He brushed aside questions about the politically charged government investigation of Russia's biggest oil producer Yukos and its jailed billionaire owner Mikhail Khodorkovsky. Critics allege the Yukos investigation, which has pushed the company toward bankruptcy, is retribution for Khodorkovsky's political ambitions, and question the government's commitment to free enterprise. The Russian government has denied wrongdoing, saying it is only acting to prevent tax abuses.

Mulva said ConocoPhillips has a "good corporate citizen" for a partner in Lukoil and inevitably faces economic and political risks in all countries that it works.

Lukoil president Vagit Alekperov called the sale, which completely takes the Russian government out of the company, a "landmark both for Lukoil and the country as a whole."

ConocoPhillips' acquisition is the biggest foreign investment in Russia since BP's $7 billion merger with Russian company TNK, sealed before the Yukos clampdown began last year.

It follows Russia's recently announced, multibillion-dollar energy projects with South Korea as well as French company Total's reported $1 billion acquisition of a blocking stake in gas producer Novatek.

"From a psychological point of view, it is important. . . . It demonstrates how interested foreign investors are in buying assets in Russia," Maxim Shein, an analyst at Broker Credit Services, was cited by the Interfax news agency as saying.

After an auction that lasted slightly more than one minute Wednesday morning, ConocoPhillips -- acting through a vehicle company -- snapped up the stake for $1.988 billion, just a fraction above the $1.928 billion starting price. In addition to gaining representation on Lukoil's board, the acquisition will allow the Houston-based company to book a proportion of Lukoil's revenues and massive reserves of 20.1 billion barrels. In terms of reserves, Lukoil is the second-biggest oil company in the world, behind only ExxonMobil Corp.

Other applicants at the Lukoil auction included Russia's Promsvyazbank and Promregion Holding, who represented unidentified clients.

ConocoPhillips' victory had been expected since July, when President Vladimir Putin gave his tacit approval to its bid at a meeting with the heads of both companies.

The $1.988 billion price tag made the sale the single biggest cash- earner in the history of Russian privatization, exceeding the $1.88 billion sale of a 25 percent stake in the Svyazinvest telecom group in 1997. It was also higher than the $775 million raised from a placement of 5.6 percent of Lukoil shares on the London Stock Exchange.

ConocoPhillips is expected to pay for the Lukoil transaction sometime in the next 10 days.

ConocoPhillips said it plans bring its stake in Lukoil to 10 percent by the end of the year with share purchases made on the open market, and aims to raise it to 20 percent in coming years.

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