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. Last Updated: 07/27/2016

LUKoil, Tatneft Set for Partnership Pact

Amid growing consolidation in the oil industry, oil producer LUKoil and regional producer Tatneft are to sign a strategic partnership agreement, the leader of Tatarstan said Tuesday.

Tatar President Mintimer Shaimiyev said the two companies would not merge but would jointly develop large fields in Russia and overseas. Tatarstan's president did not rule out the idea that Tatneft could participate with LUKoil in a bid for Rosneft when it comes up for auction.

"Although we are talking only about a strategic partnership, cooperation with LUKoil will cover all areas, including dividing responsibilities while bearing in mind our mutual interests," Shaimiyev said.

The two companies strongly denied that a merger is under discussion.

"We are not talking about any kind of merger," LUKoil spokesman Dmitry Dolgov said.

"I can rule out the possibility that what will be created is a vertically integrated structure," Tatneft president Maxim Dyomin said.

Considered as a unit, Tatneft, Russia's number four producer, and LUKoil would easily be the largest Russian oil producer, pumping over 1.6 million barrels per day.

On Jan. 19 oil firms YUKOS and Sibneft announced a massive merger to form a new company, YUKSI, with potential output of about 1.3 million barrels per day.

Oil analysts Tuesday agreed that a full merger would not be prudent but noted several areas in which the two companies could cooperate.

Tatneft, controlled by the regional government of Tatarstan, could help LUKoil establish sales outlets in the promising Tatar region, where a heavy concentration of industry and a steadily growing economy bodes well for oil sales, said one Moscow analyst who asked not to be named.

"It's clear LUKoil wants to increase its presence in Tatarstan," the analyst said, noting that LUKoil is one of the few oil majors opening gas stations in the region.

LUKoil is also hoping Tatarstan will give its approval to a plan to build a pipeline from LUKoil's Perm refinery across Tatar territory to join the main Transnefteprodukt oil products pipeline that ships west to export outlets, noted Ken Kasriel, an analyst with Robert Fleming Securities in London.

In return, LUKoil could offer Tatneft access to Caspian Sea development projects and the chance to increase its reserves by acquiring some Rosneft assets, analysts said.

"Tatneft's fields are old, high-cost fields to operate," said one analyst. "They need to think about increasing their reserves."

Tatneft could also be concerned about maintaining its oil flow to the state-owned Norsi refinery in Nizhny Novgorod, said Stephen O'Sullivan, director of oil and gas research with MC Securities, London.

LUKoil, looking to boost its refining capacity, has confirmed its interest in acquiring the Norsi refinery in an upcoming privatization auction. Norsi is one of Russia's biggest refineries, with annual capacity of 18 million metric tons.

"If LUKoil gets the refinery it might mean Tatneft needs to look around for other customers," O'Sullivan said.

The two companies could be discussing a mutually beneficial deal concerning Norsi, he said.