LUKoil to occupy up to 15% of the Turkish market of petroleum products

The Russian Oil and Gas Report (Russia)

June 26, 2006 Monday

Gasoline stations of LUKoil may appear soon on the Turkish coast. The company plans to establish a retail chain in this country, to buy a transshipment terminal and possibly to build a refinery. If these plans come true, LUKoil will be able to occupy up to 15% of the Turkish market of petroleum products.

LUKoil is the largest oil company in Russia. In 2005, it produced 90.1 million tons of oil and refined 47.4 million tons of oil. It owns eight refineries with an aggregate capacity of 58.5 million tons of oil a year including three refineries abroad: Ukrainian refinery in Odessa (3.6 million tons a year), Romanian Petrotel (2.4 million tons) and Bulgarian Neftochim Bourgas (10.7 million tons). In 2005, revenue of LUKoil according to US GAAP amounted to $56.2 billion and net profit amounted to $6.4 billion. Top managers of the company control 20.6% of its shares, American ConocoPhillips has 17.1%, Russian private individuals have 3.9% and the remaining shares are traded at exchanges.

Until the end of 2006, LUKoil plans to make a decision on acquisition of one of the oil transshipment terminals in Turkey on the coast of the Black Sea and construction of a new refinery in this country. Argus Media reported this with reference to a representative of LUKoil Eurasia Petrol based in Turkey. The source did not name the terminal. According to the source, LUKoil is also considering a possibility to rent a gasoline stations chain in Turkey. The representative of LUKoil Eurasia Petrol added, « The matter is about rent of gasoline stations for 10-15 years with possible prolongation. »

According to Argus, Turkey consumes slightly less than 20 million tons of light petroleum products a year, diesel fuel accounting for up to 70% of this quantity. Acquisition of a terminal will enable LUKoil to control up to 15% of the Turkish market of light petroleum products.

A source in LUKoil’s headquarters confirms that Turkey like other countries of the Black Sea basin belong to the zone of strategic interests of the company. The source adds, « We already have serious assets in the region and we are going to build them up. » According to him, the company is currently studying the Turkish market and it has already been decided that gasoline stations of LUKoil will appear in Turkey. The source explains that there are no agreements on purchase of certain assets yet.

Analyst Denis Borisov, of investment financial company Solid, remarks, « Broadening the refining segment LUKoil follows the global trend. All leading Western companies sell more finished products than they produce raw materials. » For example, oil production of ConocoPhillips amounts to 1.6 million barrels per day, oil refining amounts to 2.3 million barrels per day and the volumes of sale amount to about 3 million barrels per day. According to the expert, this policy results in a lower profitability than profitability of the companies oriented at production (like Surgutneftegaz) but their revenue is much bigger, whereas the revenue has decisive influence on capitalization growth. Such companies are also less dependent on oil price fluctuations. Borisov also says that Turkish market is beneficial for LUKoil from the standpoint of logistics. If the company acquires retail infrastructure in this country it will be able to process more oil at its refineries in Odessa and Bourgas and to deliver petroleum products from there to Turkey by sea. The expert concludes, « Thus LUKoil will partially solve the problem of busting Turkish straits for itself. »

The previous attempts of Russian oil companies to conquer the Turkish market cannot be called successful. Back in 1993, YUKOS established a joint venture with a local partner in Turkey that agreed with the government on purchase of 53 gasoline stations from state-run Petrol Ofisl and obtained a permit for construction of 100 new stations. YUKOS even started oil supplies for this project but failed to accomplish it because privatization was suspended in the country. In 2004, Tatneft in consortium with the Turkish corporation Zorlu won the tender for purchase of a 66% stake in Tupras, which accounted for 85% of oil refining in the country. The Turkish oil workers’ labor union acted against the deal and after numerous legal actions, the government annulled results of the tender. A year ago, Shell and its Turkish partner won the new auction. They paid three times as much as was offered by their predecessors.

Source: Vedomosti, June 23, 2006