ConocoPhillips Reaches Deal to Boost Stake in Russia’s Lukoil

ConocoPhillips won an auction to buy 7.59% of Russia’s Lukoil for $1.99 billion on Wednesday and said it reached an agreement to increase its total stake in the Russian company to 20%.

The deal gives the U.S. energy company a head start against other major U.S. oil producers in the quest to tap Russia’s vast oil reserves, analysts said.

ConocoPhillips “delivered a huge knockout” with this deal, said Oppenheimer & Co. analyst Fadel Gheit.

Gheit said a 20% stake in Lukoil would add “a couple of billion barrels” to ConocoPhillips’ oil reserves as well as potentially give it access to lucrative Lukoil-operated oil fields in Iraq.

The two companies also will form a joint venture -- 70%-owned by Lukoil and 30% by Conoco -- to develop Russia’s northern Timan-Pechora oil region. They expect the venture to produce 200,000 barrels of oil per day by 2008.

ConocoPhillips, formed in 2002 through a merger between Conoco Inc. and Phillips Petroleum Co., is the third-largest U.S. oil company. Lukoil has the world’s second-largest oil reserves after Exxon Mobil Corp.

U.S. companies recently have stepped up their exploration to maintain stable reserve levels, according to Robert W. Baird analyst George Gaspar.

This deal “gives ConocoPhillips a much broader playing field in one of the most opportunistic non-OPEC areas in the world,” he said.

Without the Lukoil stake, the company was in danger of hitting a wall in terms of production growth, according to Gene Gillespie, analyst at Howard, Weil Labouisse, Friedrichs.

Gillespie estimated the deal would double ConocoPhillips’ production growth to about 5% to 7% for the balance of the decade.

Western oil companies have, until recently, avoided major investments in Russia because of the risks of doing business in that country, exemplified by the $7-billion tax dispute between oil major Yukos and the Kremlin.

However, many analysts said ConocoPhillips’ deal with Lukoil could be read as a signal that the Russian government was willing to cooperate with Western companies. They noted that other U.S. majors probably would follow.

“This is a clear, deliberate move on the part of the Russian government to say, ‘We’ve not been the nicest boys in the past, but we do need to serve our people better and the Western influence is probably what we need,’ ” said John S. Herold analyst John Parry.

Shares of ConocoPhillips fell $1.64 to $81.57 on the New York Stock Exchange. Analysts said the widely expected deal already had been priced into the stock, which reached a more-than-20-year high on Tuesday.