ARCO firms commitment with Russian oil company

With its huge fields in decline in Prudhoe Bay, Alaska, ARCO has been looking for new prospects overseas. Among the primary prospects for ARCO and other Western oil companies are Russia and some of the former Soviet republics like Kazakstan and Azerbaijan.

ARCO's approach has been different. Rather than form a consortium of Western companies to battle the Byzantine bureaucracies of the region, ARCO has teamed up with Lukoil, Russia's largest oil company.

That alliance was firmed up last week, with ARCO extending its commitment and providing more money for joint projects. ARCO and Lukoil Holding announced last week that ARCO would spend $5 billion over 18 years. That is $2 billion more, over a longer period, than the investment that ARCO and Lukoil had agreed to earlier this year. ARCO will have a 54 percent stake and Lukoil 46 percent in the joint venture, called Lukarco. In the race to bring oil from Russia to market, the venture is not wasting time. "Work is already under way to identify specific investments to start the operating phase of our work," said Mike R. Bowlin, the chairman and chief executive of ARCO, which is based in Los Angeles. The company, which has a huge refining and marketing business, cannot afford to wait too long. It is under pressure to replace reserves and production because crude oil output is expected to fall about 6 percent a year. from its Alaskan fields. The company's daily production of crude oil has fallen to 850,000 barrels a day from about 950,000 three years ago. In recent decades the fortunes of the Atlantic Richfield Company have been closely tied to the oil flowing from Prudhoe Bay, which it discovered in partnership with Exxon in 1968. With the building of the Alaskan pipeline in the 1970s the company thrived, feeding its growing refinery operations and gasoline stations on the West Coast. But in the last several years production from those fields has declined at a faster rate than expected, and ARCO's efforts to find new fields there have been only modestly successful. Arco, which has traditionally been mostly a domestic producer, has cast its net wide pursuing overseas ventures in Algeria and Indonesia as well as in Russia, and recently announced a major deal to develop oil in Venezuela. "We want to grow and the best prospects for growth are international," said Jay Cheatham, the president of ARCO international oil and gas. While significant production in Russia is probably eight to 10 years away, there is great potential, he added, saying, "This is one place you have to be." Having Lukoil as a partner, Cheatham said, will make it much simpler to put together projects to develop the vast oil and gas reserves in Russia and the Caspian Sea region. "They know the Russian bureaucracy much better than us," he explained. Some of the other ventures by Western oil companies have often hit snags in seeking favorable terms in production agreements. They have also found it difficult to negotiate through a new structure emerging to oversee the Russian oil industry, in which many companies are in the process of learning to operate as private companies. Paul Ting, an oil analyst for Salomon Brothers, said that since ARCO was hard pressed to find large new reserves "it makes sense to get a 350-pound blocker in front of you." He said Lukoil carried clout among the agencies that oversee the Russian oil industry and could open up joint ventures faster than if ARCO joined with other Western companies in a consortium. "Lukoil does have muscle," he added. For Lukoil, ARCO brings a strong cash flow to finance projects and technical skill. Vagit Alekperov, the president of Lukoil, said last week that the agreement "testifies to the growing confidence of Western investors in Russia's political stability and economic development."

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