LUKOIL AND TURKEY

As Europe frets over the political implications of Gazprom’s increasing presence in the EU market, another Russian energy company has quietly made an inroad into hydrocarbon-starved Turkey.

On July LUKoil’s president Vagit Alekperov announced in Istanbul that his firm had agreed to purchase Turkey’s Akpet, a petrol and petroleum products distributor whose assets include 693 gas stations servicing about 5 percent of the Turkish market. Alekperov declined to give an exact figure, as financial data on the transaction was “confidential,” but said that the sum was “slightly more than” $500 million. Expanding on the theme, Alekperov added that the “acquisition of large retail assets in Turkey expands LUKoil’s international retail network by 18 percent. It is one of the key elements of the company’s downstream strategy in the Black Sea and Mediterranean markets, aimed at supplying our products to end users with high added value” (Interfax, July 29). Oil for LUKoil’s new Turkish stations will come from its Neftokhim Burgas refinery in Bulgaria and it’s ISAB refinery in Sicily (LUKoil press release, July 31).

The purchase gives LUKoil a presence in a dynamic market. Although last year Turkey’s economic growth slowed to 5 percent, ironically because of the surging cost of energy imports, many analysts nevertheless expect it to resume its upward trajectory. Akpet is Turkey’s sixth largest company in terms of market size and the country’s second biggest company in terms of the number of stations (Anadolu Ajansi, July 28).

The assets LUKoil is acquiring extend far beyond the gas stations, as Akpet’s combined storage depots have a total capacity of 300,000 cubic meters, making it Turkey’s third largest oil storage company among the country’s 43 companies with distribution licenses. LUKoil will acquire Akpet’s oil terminals scattered across the country from western to northeastern Turkey in Izmit, Aliaga, Kirikkale, Hatay, Batman, Mersin and Hopa. Six of the terminals are on the coast, and an added benefit is that three of them, Aliaga, Kirikkale and Batman, are connected by pipelines to Turkiye Petrol Rafinerileri A.S. (TUPRAS) refineries (www.tupras.com.tr/).

Under the terms of the deal LUKoil also acquires Akpet’s three jet-fuel distribution centers and a lubricants production and packaging plant in Izmir with an annual capacity of 12,000 tons. Clearly with an eye to the future, LUKoil is also acquiring Akpet’s five liquefied natural gas (LNG) depots with a total storage capacity of 765,000 cubic meters. A LUKoil subsidiary, LUKoil Eurasia Petrol, A.S., will manage Akpet.

When journalists queried Akpet chairman Ismail Aytemiz as to whether the LUKoil purchase meant that Akpet might now move into upstream oil production, he replied no, as the association with LUKoil removed such a need, adding “We are a distribution company and will remain one, but with much greater resources by being connected to a world-class producer like LUKoil” (Vatan, July 28).

LUKoil is now the world’s second largest oil company after ExxonMobil, with an annual turnover last year of about $90 billion. LUKoil’s website proudly proclaims that it is “The only private Russian oil company whose share capital is dominated by minority stakeholders” (www.lukoil.com). That said, LUKoil President Vagit Alekperov, an Azeri born in Baku and ranked by Forbes as the 48th richest person worldwide worth $12.6 billion, now owns 20.4 percent of the company, Alekperov, along with LUKoil’s Vice President Leonid Fedun, Russia’s 21st wealthiest man worth $7 billion, and LUKoil foreign operations manager Nikolai Tsvetkov, worth about $8 billion, collectively control about 30 percent of LUKoil shares, while ConocoPhillips owns about 20 percent, with the remainder owned by smaller investors (“Corporate Bonds – LUKoil,” www.cbonds.info). LUKoil now accounts for 1.3 percent of world oil reserves, about 2.1 percent of world production, and 18 percent of Russia’s production and refining.

While LUKoil is at pains to stress that it is independent of the state, Alekperov is hardly shy about his background in the Soviet oil sector, stating in a 2006 interview, “In the Soviet Union I was the head of all oil production,” With regard to cooperation with state-owned firms, he added, “Is there a possibility of an alliance between the state-owned company and the private company? Yes, it is quite possible. We do have a joint venture with Rosneft, we do have a joint venture with Gazprom, and they are going fine” (www.forbes.com).

Alekperov’s comments about his previous career as a Soviet technocrat may provide the clearest clue about why his company has not suffered the fate of YUKOS, whose 2006 breakup by Putin’s government cast a pall over foreign investors, a pattern that the Western investment community sees mirrored in the continuing legal woes of the British Petroleum-TNK joint venture. Unlike the brash post-Soviet Mikhail Khodorkovsky, Alekperov’s background as a former Soviet apparatchik is doubtless more palatable to the Kremlin, which may well regard LUKoil as a tame capitalist company that it can live with, inasmuch as it reassures the nervous foreign investment community.

LUKoil seems to be an integral component of a more refined Kremlin strategy to refashion the Russian private energy sector, as part of Putin continuing efforts to establish Russia as a global economic force by attracting Western capital and expertise while retaining veiled control over the country’s natural resources.

If this is indeed the true intention of the Kremlin and LUKoil, the litmus test will come soon, as Alekperov is not about to risk his own personal fortune to acquire Akpet. LUKoil is seeking to raise $750 million as part of a syndicated five-year loan to finance its acquisition of Akpet (Euroweek, August 1). Investor’s may well flock to LUKoil’s search for funds, as last year LUKoil had the second largest volume of trade among foreign companies traded on the London Stock Exchange.

For Ankara, however, the sale merits careful consideration. Turkey already receives 65 percent of its natural gas exports from Russia, and as recently as last winter Gazprom cut supplies, forcing Ankara to dip into its stored reserves (EDM, January 23). In the event of rising tension between Moscow and Ankara, whether political or something as simple as a pricing dispute, LUKoil’s new acquisitions, if they became political pawns, could affect everything from heating to “trains, planes and automobiles.” All Ankara can do at the moment is wonder whether the allure of the free market will trump the siren song emanating from the Kremlin. As Russia’s new president was formerly chairman of Gazprom’s board of directors, it seems likely that the Kremlin will follow Alekperov’s acquisition with more than passing interest.