Arco to Boost Its Stake in Russia’s Lukoil

Prodded overseas by its declining oil reserves in Alaska, Atlantic Richfield Co. announced Monday that it plans to boost its investment in Russia’s largest oil company and spend up to $3 billion over the next 10 years to look for petroleum in the former Soviet Union.

Arco said it plans to up its stake in Lukoil by buying an unspecified number of convertible bonds in Lukoil this month. In September, Arco bought a 6.3% interest in Lukoil through its purchase of $250 million in convertible bonds, the first purely equity investment by a U.S. oil company in a Russian oil firm.

Previous deals between U.S. and Russian oil companies mainly took the form of joint ventures entitling the U.S. investor to some portion of oil produced in Russia. Arco says its approach is designed to ensure a long-term strategic relationship with Lukoil.

Los Angeles-based Arco also said it has signed a “cooperation agreement” that is a prelude to a formal joint venture to explore for oil and gas. Arco said it may contribute up to $3 billion in capital to the joint venture over the next decade. It would own 46% of the venture but contribute most of the capital.

Analysts expect the joint venture to direct much of its exploratory efforts to Siberia, where vast oil reserves are controlled by Lukoil. One recent survey pegged overall Siberian reserves at 50 billion barrels, more than Europe and the U.S. combined.

U.S. investments in Russian oil have yet to produce any gushers--in oil, revenues or profits--and an Arco spokesman said the company expects no “short-term payoff.” The country still presents massive transport problems, and the nation’s political uncertainty has scared away many potential investors in the much-needed infrastructure. Industry experts complain that reliable information pertaining to reserves and government policy is hard to obtain.

“U.S. oil companies have been for the large part unsuccessful in Russia. No company has been able to commit substantial resources there because of the uncertain political climate,” said analyst Ed Morse of Petroleum Intelligence Weekly in New York.

But with production from its primary Alaskan fields declining at a 6% annual rate, Arco needs to replace its depleted reserves and has made no secret of its desire to boost its international exploration and production-sharing arrangements.

Although its 1995 net income of $1.4 billion was its highest since 1990, its revenue-- which reached $17.3 billion last year--has trended down since 1993. Total Alaskan oil production has fallen from 2 million barrels a day in 1988 to the current 1.5 million a day. Arco produces about 27% of all Alaskan oil.

In addition to its Russian venture, Arco in January helped inaugurate China’s largest offshore natural gas field, which ships energy to Hong Kong via a 480-mile suboceanic pipeline. Arco owns one-third of the $2.5-billion project.

The company also has substantial holdings in Indonesia and earlier this year announced it would invest $1.3 billion in an oil-recovery project in Algeria.

For its part, Lukoil needs what every other Russian oil company lacks: capital and technology. Arco is an attractive partner because of its experience in developing oil on Alaska’s North Slope, where conditions are similar to Siberia.