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. Last Updated: 07/27/2016

Lukoil Descends on U.S. Markets

For Lukoil, it's not enough to be the largest oil company in a colossal country with vast crude reserves, to employ 120,000 people, to support towns across Russia and to dominate the national stock market.

Lukoil wants a piece of America, too.

Buoyed by a year of soaring oil prices, Lukoil bought Getty Petroleum Marketing Inc. and its network of 1,300 U.S. gas stations for $71 million - the first Russian purchase of a publicly held American company.

The buyout, launched in November, was approved by Getty shareholders last week.

The deal could provide a welcome boost for Russia's woeful business reputation, but some analysts wonder whether Lukoil, or any company that came of age in Russia's chaotic, often corrupt 1990s, is ready to face Western markets.

Leonid Fedun, Lukoil's vice president, answers that suggestion with a reliable old saw: "If you don't jump in the water, you can never learn to swim."

Fedun's polished-wood-and-chrome office in Lukoil's Moscow headquarters sits behind several security doors; his gold-tinted windows look down from one of the capital's sleekest buildings onto the snow-heaped newspaper stands of Turgenev Square.

Few question whether Lukoil - with assets in 2000 of $14.5 billion, according to U.S. accounting standards - has the money needed to run Getty. But some ask why the Russian company isn't routing the cash to the shabby, investment-hungry domestic market.

In Russia, many companies flout shareholder rights, keep questionable books and build empires through dubious privatization deals and top-level political ties - practices that would cripple most Western counterparts. Oil concerns are also known to shrug off oil spills, even when they're huge in magnitude.

Critics say Lukoil is no exception, but some analysts say the company is reforming as it reaches outside Russia's borders. Fedun insists Lukoil is cleaner financially and environmentally than its Russian counterparts.

Lukoil has a number of foreign deals in the works - in Iraq and the Persian Gulf, and high-stakes Caspian Sea projects in Azerbaijan and Kazakstan. But it considers the United States the crucial market, and it plans to eventually to buy U.S. refineries. Foreign profits, Lukoil reasons, can buffer it should Russia's economy take another plunge.

Fedun doesn't deny that Lukoil is saddled with problems familiar to all Russian oil companies: disintegrating Soviet-era equipment, punitive taxes, hard-to-reach reserves and limited pipeline capacity.

The company has barely increased production in recent years, and its stunning jump in profits from $92 million in the first half of 1999 to $1.45 billion in the same period in 2000 stemmed almost entirely from high world energy prices.

Lukoil is also still smarting from its first, failed foray into the U.S. With champagne and balloons, it opened a gas station at a Virginia supermarket in 1997 that was supposed to be the first of 2,000 such outlets. But plans fell apart the next year when world oil prices plummeted.

"We weren't ready, not legally or organizationally," Fedun said. "The one useful lesson we learned is that you can't build a business from scratch. You have to buy a ready-made business."

Getty's red, white and gold signs are familiar sights to motorists in 13 East Coast states. Based in Jericho, New York, it is also a regional wholesaler of gasoline, diesel fuel, fuel oil and other petroleum products. For the nine months ending Oct. 31, Getty posted a net loss of nearly $6 million on sales of about $903 million.

The company is a remnant of the sprawling financial empire built by oil billionaire and philanthropist J. Paul Getty, believed to be the world's richest person when he died a quarter-century ago.

Lukoil's $5-per-share bid for Getty didn't sit well with U.S. competitors. In December, United Refining Co., based in Warren, Pennsylvania, submitted a $6-per-share counteroffer that Getty's board rejected as unrealistic. United Refining later lost a court bid to block the Lukoil transaction.

Lukoil plans to call its U.S. stations "Getty-Lukoil" until its own name is more familiar to American consumers.

Analysts said the Getty purchase - while symbolically important for Russian corporate confidence - doesn't portend a trend.

"Not a lot of Russian companies have experience working internationally," said Steven Dashevsky, an oil analyst with the Aton brokerage in Moscow. And Lukoil likely will have little impact on the U.S. fuel market because Getty is a relatively small player and major changes are not planned, he said.

Fedun admits that it's too early to compare Lukoil, which emerged in 1991 from the collapsing state-run Soviet oil sector, to the Shells and Chevrons of the world.

Lukoil still has Soviet-style directors with little grasp of what global markets demand, but it also has more pragmatic managers like Fedun, who consult Western advisers and appear to recognize the international challenges.

For example, despite Lukoil's 13.5 billion barrels of crude oil reserves, Russian service stations often run out of gas, take only cash and have few of the conveniences taken for granted in the United States. Russians are accustomed to long gas lines and routinely carry extra canisters to stock up.

Lukoil's production - 1.5 million barrels a day in 2000 - could be much higher if it weren't burdened by aging drilling and refinery equipment. And the thousands of miles of petroleum pipelines that cross Russia are ancient and spill-prone, the result being despoiled rivers, forests and tundra and deep cuts into Lukoil's potential revenue stream.

Russian tax collectors accused Lukoil - whose diverse holdings include newspapers, television and a sugar business - of evasion last summer, one of several recent cases against huge Russian businesses that capitalized on their political influence in the 1990s.

The Lukoil charges were quietly dropped, but neither Fedun nor the Tax Ministry would say why. Some observers suggested that Lukoil's billionaire president Vagit Alekperov had won the favor of President Vladimir Putin, who has promised to distance the Kremlin from powerful tycoons. Alekperov, a former deputy oil minister, had close ties to former president Boris Yeltsin.

Fedun strongly denied any favoritism from the government, which owns 17 percent of Lukoil common stock but has announced plans to sell a third of it this year. BP Amoco Group said this week that it would sell its 7 percent stake in Lukoil, but that several BP-Lukoil ventures would continue in Russia and former Soviet republics.

Environmental activists are protesting Lukoil's expansion into Western markets.

"They bought expensive offices and cars for their ecological department, but they still don't clean up spills and don't do anything to prevent them," said Oganes Targulian, who follows Russia's oil industry for Greenpeace.

Fedun admitted spills are common because of poor pipelines, but he says Lukoil is cleaning up faster than other Russian oil companies.

Keeping up with spills is no simple task. The Russian Parliament's ecology committee reported that oil companies in Russia spill up to 5.8 billion gallons of oil a year. As a comparison to the high-end figure, the 11 million gallons of crude dumped into Alaska waters in the 1989 Exxon Valdez grounding would be less than a day's spillage.