LUKoil to Build New Export Route

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Top oil producer LUKoil is building a new export route through western Siberia to free itself from dependency on state pipeline monopoly Transneft, the company announced this week.

The project, dubbed Northern Territories, calls for the construction of a land and sea pipeline system with an initial capacity of 7.5 million tons of oil a year or about 10 percent of LUKoils total production. A second phase of construction could see the pipelines capacity double.

The cost of the project has not been released, but LUKoils web site said it would create 2,000 jobs in the Nenets Autonomous District, where the main development will be.

LUKoils partners in the project are second-tier U.S. oil firm Conoco and domestic oil and diamond firm Arkhangelskgeoldobycha, or AGD.

The new export route is likely to significantly reduce LUKoils transportation expenses because LUKoil would no longer be forced to use Transnefts system.

"LUKoil and Conoco could ensure themselves against unpleasant surprises, in the event that Transnefts tariffs rise," said Gennady Krasovsky of the NIKoil brokerage.

Conoco, which explores and produces oil and gas internationally, first invested in Russia in July 1998 when the company bought a 15.7-percent stake in AGD.

The three companies originally considered five possible routes for the new pipeline and have narrowed the choices to two: through the Cape of Gorelk or through Varandei on the Barents Sea.

Valery Nesterov, an oil and gas analyst at Chase brokerage, said that Varandei was the most feasible route because it would allow LUKoil to make use of its ice-breaking tankers.

Construction of the pipeline would have been launched in the spring of 1999, but LUKoil was prevented from signing the agreement by then-Prime Minister Yevgeny Primakov, who was angered at the U.S.-led NATO bombing campaign against Serbia, Nesterov said.

The agreement was again postponed earlier this fall because LUKoil president Vagit Alekperov was preoccupied with completing the purchase of U.S. firm Getty Petroleum Marketing, Nesterov said.

LUKoil announced Nov. 2 that it had bought the East Coast-based retail chain for $71 million in cash the first time a U.S. public company has been acquired by a Russian corporation.

NIKoils Krasovsky said LUKoil might use the new route to supply gas to Gettys 1,300 retail stations.

LUKoil officials said this month that Getty will allow LUKoil to supply fuel to its stations. LUKoil, however, has just learned that its purchase of Getty may not be final: On Wednesday, Getty vice president and general counsel Samuel Jones said that Getty received a competing offer last week from United Refining.

United Refining, which owns refineries and a network of 303 filling stations in New York and Pennsylvania, is offering to buy Getty for $5.75 per share for a total of $80.5 million $9 million more than LUKoil has on the table.

"By matter of law, if the company receives a superior proposal, it must consider it," Jones said in a telephone interview.

Jones, however, said he fully intends to adhere to the terms of the agreement with LUKoil, which calls for Getty to pay LUKoil $5 million if it withdraws from the deal, Prime-Tass reported.

United Refining has to finalize its offer by Dec. 8 the deadline for Getty to back out of the deal.

LUKoil, for its part, may already have a plan for that contingency. If the merger with Getty fails, LUKoil might consider investing in Conocos 5,000-station U.S. retail network, which could then be supplied by the two companies new Northern Territories project.