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. Last Updated: 07/27/2016

LUKoil to Streamline Trading

Russia's largest oil producer LUKoil is reshuffling its refining and trading operations as part of a new strategy to bring down costs and boost effectiveness, company sources and traders said.

The move will help LUKoil, long criticized for slow growth and archaic management, to catch its market peers in Russia and regain the confidence of investors by getting rid of a plethora of costly intermediaries, analysts said.

Traders said the plan could present a threat to trading houses, particularly the Geneva-based Taurus, which has for years enjoyed near exclusive access to seaborne barrels from one of the world's largest private oil companies.

"We are planning to merge our refining and sales operations in Russia and overseas. ... Much will change in our exports. We will have one export coordinator by the end of 2002," a high-level LUKoil source said.

"All I can say is that the restructuring announced in April is under way, including in our trading operations," LUKoil vice president Leonid Fedun said.

LUKoil announced in April an ambitious restructuring plan with the aim of doubling oil and gas output, reducing production costs, boosting exports and improving management.

Athough Russia's largest oil producer, with 1.6 million barrels per day, LUKoil output is growing at a mere 2 percent to 3 percent, compared with the double digit figures of its rivals.

LUKoil exports around 800,000 bpd of oil and refined products to lucrative Western markets, or around 20 percent of the total exports from Russia, the world's No. 2 oil exporter.

But unlike many Russian majors, which ship their barrels through one channel, LUKoil exports are split between a complex web of associated companies and intermediaries.

"Centralizing operations under one roof clearly brings more transparency," said Steven Dashevsky from Aton brokerage. "It will help not only investors but LUKoil's managers as well to better understand how their barrels are sold."

The LUKoil source said the firm was gradually uniting its exports in its Geneva-based trading department, known as LUKoil SA Geneva for the crude oil side, under the name Litasco. Refined oil products are already traded under this entity. By the end of 2002, Litasco is set to market all LUKoil barrels, the source said.

To date, LUKoil Geneva has mostly marketed only smaller LUKoil cargoes out of the Black Sea and about half of the company's volumes out of the Baltic Sea.

Geneva-based Taurus, which does not belong to LUKoil, typically received the Russian producer's larger cargoes of 1 million barrels from the Black Sea, usually about five every month, plus one or two cargoes from the Baltic Sea.

LUKoil has denied any special relationship with Taurus, but traders have questioned why LUKoil committed huge volumes to an independent firm instead of selling its crude directly to Western majors and refiners.

The source in LUKoil said Taurus was very useful in the mid-1990s, when it offered credits along with French bank BNP Paribas using oil as collateral. But now the scheme had outlived its usefulness, he said.

"The scheme was first hurt by Russia's financial crisis, when Western banks did not want to lend at all, and second when oil prices skyrocketed in 2000 and Russian firms decided not to borrow money at all," the source said.

Traders, however, also linked changes to LUKoil's management reshuffle when one of the company's founders, Ralif Safin, who monitored exports, resigned to become a member of the Federation Council.

The source in LUKoil confirmed that Dmitry Tarasov, a LUKoil Geneva senior trader, would soon be appointed LUKoil's first vice president responsible for refining and trading operations.

Another trader said changes in exports may be linked to LUKoil's decision to list shares in the United States.

"It would not surprise me if U.S. officials started questioning why the independent Taurus was getting so much crude," the trader said.