Russian Giant Lukoil Taps U.S. Market
For Lukoil, it’s not enough to be the largest oil company in a colossal country with vast crude reserves, to employ 120,000 people, to support towns across Russia and to dominate the national stock market.
Lukoil wants a piece of America too.
Buoyed by a year of soaring oil prices, Lukoil bought Getty Petroleum Marketing Inc. and its network of 1,300 U.S. gas stations for $71 million--the first Russian purchase of a publicly held American company.
The buyout, launched in November, was approved by Getty shareholders last week.
The deal could provide a welcome boost for Russia’s woeful business reputation, but some analysts wonder whether Lukoil, or any company that came of age in Russia’s chaotic, often corrupt 1990s, is ready to face Western markets.
Leonid Fedun, Lukoil’s vice president, answers that suggestion with a reliable old saw: “If you don’t jump in the water, you can never learn to swim.”
Fedun’s polished-wood-and-chrome office in Lukoil’s Moscow headquarters sits behind several security doors; his gold-tinted windows look down from one of the capital’s sleekest buildings onto the snow-heaped newspaper stands of Turgenev Square.
Few question whether Lukoil--with assets in 2000 of $14.5 billion, according to U.S. accounting standards--has the money needed to run Getty. But some ask why the Russian company isn’t routing the cash to the shabby, investment-hungry domestic market.
In Russia, many companies flout shareholder rights, keep questionable books and build empires through dubious privatization deals and top-level political ties--practices that would cripple most Western counterparts. Oil concerns are also known to shrug off oil spills, even when they’re huge in magnitude.
Critics say Lukoil is no exception, but some analysts say the company is reforming as it reaches outside Russia’s borders. Fedun insists Lukoil is cleaner financially and environmentally than its Russian counterparts.
Lukoil has a number of foreign deals in the works--deals in Iraq and the Persian Gulf and high-stakes Caspian Sea projects in Azerbaijan and Kazakhstan. But it considers the United States the crucial market, and it plans eventually to buy U.S. refineries. Foreign profits, Lukoil reasons, can buffer it should Russia’s economy take another plunge.
Fedun doesn’t deny that Lukoil is saddled with problems familiar to all Russian oil companies: disintegrating Soviet-era equipment, punitive taxes, hard-to-reach reserves and limited pipeline capacity.
The company has barely increased production in recent years, and its stunning jump in profits from $92 million in the first half of 1999 to $1.45 billion in the same period in 2000 stemmed almost entirely from high world energy prices.
Lukoil is also still smarting from its first, failed foray into the U.S. With champagne and balloons, it opened a gas station at a Virginia supermarket in 1997 that was supposed to be the first of 2,000 such outlets. But plans fell apart the next year when world oil prices plummeted.
“We weren’t ready, not legally or organizationally,” Fedun said. “The one useful lesson we learned is that you can’t build a business from scratch. You have to buy a ready-made business.”
Getty’s red, white and gold signs are familiar sights to motorists in 13 East Coast states. Based in Jericho, N.Y., it is also a regional wholesaler of gasoline, diesel fuel, fuel oil and other petroleum products. For the nine months ending Oct. 31, Getty posted a net loss of nearly $6 million on sales of about $903 million.
The company is a remnant of the sprawling financial empire built by oil billionaire and philanthropist J. Paul Getty, believed to be the world’s richest person when he died a quarter-century ago.
Lukoil’s $5-per-share bid for Getty didn’t sit well with U.S. competitors. In December, United Refining Co., based in Warren, Pa., submitted a $6-per-share counteroffer that Getty’s board rejected as unrealistic. United Refining later lost a court bid to block the Lukoil transaction.
Lukoil plans to call its U.S. stations “Getty-Lukoil” until its own name is more familiar to American consumers.
Analysts said the Getty purchase--though symbolically important for Russian corporate confidence--doesn’t portend a trend.
“Not a lot of Russian companies have experience working internationally,” said Steven Dashevsky, an oil analyst with the Aton brokerage in Moscow. And Lukoil likely will have little impact on the U.S. fuel market because Getty is a relatively small player and major changes are not planned, he said.
Fedun admits that it’s too early to compare Lukoil, which emerged in 1991 from the collapsing state-run Soviet oil sector, to the Shells and Chevrons of the world.
Though Lukoil has pragmatic managers like Fedun, who consult Western advisors and appear to recognize the international challenges, it still has Soviet-style directors with little grasp of what global markets demand.
For example, despite Lukoil’s 13.5 billion barrels of crude oil reserves, Russian service stations often run out of gas, take only cash and have few conveniences.
Lukoil’s production--1.5 million barrels a day in 2000--could be much higher if it weren’t burdened by aging drilling and refinery equipment. And the thousands of miles of petroleum pipelines that cross Russia are ancient and spill-prone, the result being despoiled rivers, forests and tundra and deep cuts into Lukoil’s potential revenue stream.
Environmental activists are protesting Lukoil’s expansion into Western markets.
“They bought expensive offices and cars for their ecological department, but they still don’t clean up spills and don’t do anything to prevent them,” said Oganes Targulian, who follows Russia’s oil industry for Greenpeace.
Fedun admitted spills are common because of poor pipelines, but he says Lukoil is cleaning up faster than other Russian oil companies.
