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. Last Updated: 07/27/2016

Oil Majors Reach Westward

Clinging to the oil industry mantra that the bigger a firm is the better, Yukos and LUKoil grabbed headlines this week with moves to expand their presence in Europe.

The country's two leading oil majors share a desire to establish a global reach, but analysts said Yukos and LUKoil have fundamentally different business strategies.

LUKoil bid this week for a 70 percent stake in Serbian retail distributor Beopetrol, while Yukos is cultivating plans to build a pipeline spur to link its Slovakian arm, Transpetrol, with the Schwechat refinery in Austria.

Yukos' project to build the pipeline link and sell crude to the Vienna-based refinery "is very positive news," Valery Nesterov at Troika Dialog said.

The view from Eastern Europe of Russian corporate titans, however, is a bit less rosy.

LUKoil is not a welcome guest in Eastern Europe, where governments are not keen to see Russian expansion into their home markets.

Nesterov was skeptical of LUKoil's chances of winning the tender in Serbia, saying Hungary's MOL was a favorite for both political and logistical reasons.

MOL controls a Slovakian refinery and a blocking stake in Croatian oil company INA. In Eastern and Central Europe, MOL is battling for dominant position with Austria's OMV, which owns the Schwechat refinery, and Poland's PKN Orlen.

LUKoil bid for a stake in Greece's Hellenic Petroleum and Polish Refineria Gdanska last year, but in both cases government officials failed to close the deal. LUKoil's press office said Tuesday that the company was still eyeing the two countries as prospective markets.

LUKoil has snapped up refineries in Ukraine, Romania and Bulgaria and established sales branches in each of the three countries as well as Poland and the Czech Republic.

"LUKoil is going down the whole value chain [from upstream to downstream]," said Paul Collison, oil and gas analyst with Brunswick UBS.

The upstream part of the business involves pulling the oil up from the ground; the downstream business involves refining and retail.

"Yukos is much more in the business of selling crude," Collison said.

Yukos spokesman Hugo Eriksson disagreed, saying the company was doing much more than exporting crude.

"Everything that goes beyond pumping crude is downstream business," Eriksson said. "We are expanding downstream."

Strategy-wise, Yukos' project to sell crude to Austria is likely to pay off in the near future, analysts said, while LUKoil's plans to accumulate refinery assets will take time to reap profits.

"Selling crude will be extremely profitable in the short term," Collison said. In trying to buy refineries, "LUKoil is tying up much more capital [than Yukos]."

The pipeline to Schwechat is estimated to cost between $30 million and $60 million. Yukos' single largest investment project is a $1.7 billion pipeline to carry its crude to China, the world's fastest-growing oil market.

So far, LUKoil's profit margins look weak against those of its archrival Yukos. Last year Yukos posted $2.7 billion in profit versus LUKoil's $1.8 billion even though LUKoil reported sales of $15.4 billion, more than a third higher than Yukos' $11.4 billion.

The two oil majors, along with Sibneft and TNK, clinched a groundbreaking deal in December last year to build a pipeline to the northern seaport of Murmansk, from which they would be well positioned to export to the energy-hungry U.S. market.

This is the first time the country's oil majors have agreed to cooperate on a major investment project, though it is common practice in the West for oil firms to share commercial risks.