LUKoil’s Iberian Ambitions

Via Stratfor (subscription required), an update on Lukoil’s dalliance’s with Repsol YPF. As we have discussed previously, LUKoil, Russia’s largest privately-owned oil firm, is considering forming a partnership with Spanish energy company Repsol YPF. As the article notes:

“…Spain’s Repsol YPF, a privately owned energy company with major assets in Latin America, and LUKoil, Russia’s largest privately owned oil company, have been discussing a potential partnership since the end of November. On Dec. 17, LUKoil President and CEO Vagit Alekperov said that his company has not made a “concrete bid” for Repsol, but it is still “examining all offers on the market.” Repsol is looking for investors willing to purchase the 20.1 percent of shares owned by the Spanish construction giant Sacyr Vallehermoso (hit hard by the collapse of the Spanish housing market and burdened by a debt of 19.2 billion euros, or US$24 billion) and possibly also the 9.1 percent stake held by the bank La Caixa.

Russian energy companies have shown very little interest in Spain, mainly due to its geography. At the extreme southwest of Europe, Spain does not connect Russia to any other key region or country on the Continent. With bodies of water to its north and south, Spain borders only Portugal and France (which relies on domestic nuclear power for almost 90 percent of its needs). Thus, Spanish energy companies would not advance Russian energy interests — namely, becoming strategically integrated in both production and distribution — in Europe. Nor is Spain currently a power player in Europe with which Moscow engages.

Map - Latin America - Repsol YPF Assets

However, Repsol is the most active energy company in Latin America, with exploration and production operations in all the major countries throughout Latin America. Repsol took over YPF (Yacimientos Petroleros Fiscales), previously owned by the Argentine government, in 1999. It thus greatly enhanced its presence in the region, which now includes activities from exploration and production down to distribution and commercialization.

Therefore, when Repsol’s Spanish shareholders buckled under the combined pressure of the Spanish housing collapse and the global financial crisis, the Kremlin saw a great opportunity. Initially, Gazprom — the Kremlin’s champion energy company — was tasked with the purchase. Russian Deputy Prime Minister Alexander Zhukov, during a visit to Madrid on Nov. 12, announced that the Russian gas behemoth was interested in 20 percent ownership, although rumors were that Gazprom was interested in more.

Faced with a firm opposition from the Spanish government — panicked that a Kremlin-owned entity, Gazprom, would buy into its strategic private energy company — Moscow shifted tactics and pushed LUKoil, its “gray” energy company (not directly government-owned, but still tied to the Kremlin enough to obey the Kremlin’s orders) into the foreground. While LUKoil is an independent and privately owned company, Alekperov understands that if his Russian assets are to remain under his control he must do the Kremlin’s bidding. From the Kremlin’s perspective, LUKoil is a less threatening energy company (without official government ties) for foreign governments to deal with, and thus it is well-suited to extend Russian energy influence around the world.

Map - LUKoil's international assets

With operations already in Venezuela and Colombia, a distribution network on the U.S. East Coast, and refineries in Bulgaria, Ukraine, Romania and most recently Italy, LUKoil has an international reach unrivaled by the Russian state-owned energy behemoths Gazprom and Transneft. LUKoil’s partnership with the U.S. giant ConocoPhillips also gives LUKoil legitimacy abroad. A sale of a substantial portion of Repsol YPF to the privately owned LUKoil would therefore be a much more palatable proposition for Spain.

However, for many in Spain, that LUKoil is privately owned does not make the fact that it is a Russian company any easier to swallow. Resistance to Russian ownership of such a key private Spanish energy enterprise still exists within the center-right opposition People’s Party, as the memories of the bitter Spanish Civil War and left-right split are still concrete. There is therefore a push to find a less controversial investor, such as perhaps the French firm Total, which until now has remained disinterested.

Furthermore, LUKoil is going to need some help from the Kremlin to make the purchase. With the global financial crisis, subsequent crisis in Russia and the sharp decrease in crude oil prices, the climate is not friendly to large investments. Foreign bank lending has completely dried up — not just for Russian energy companies, but overall. If the Kremlin wants to push LUKoil into Spain and Latin America, it may have to do so by using some of its own funds, which amount to more than $550 billion.

This probably explains Alekperov’s denial that LUKoil had made any “concrete bids” for Repsol. LUKoil would like to see the Kremlin loosen export duties and the mineral extraction tax for 2009 — a point that Alekperov made at the same time as his update on the status of the Repsol talks. Alekperov is essentially sending a message to Moscow that the Kremlin will need to step up if it expects LUKoil to be its battering ram abroad and thus extend its influence in Spain and Latin America through an already-established player in the region.”



This entry was posted on Thursday, December 18th, 2008 at 3:04 pm and is filed under Gazprom, Lukoil, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.