ConocoPhillips is Exclusive Strategic Partner for Lukoil

Updated October 4, 2005.

ConocoPhillips level of shareholding in Lukoil as of September 30, 2005 is 14.8%

ConocoPhillips ("COP") was the successful bidder amongst three at an auction held in Moscow on September 29, 2004. COP paid $30.76 per share for 64.3 million shares of Lukoil, totalling $1.988 billion. Shortly after the auction results were confirmed, COP announced its intention to bring its stake up to an even 10% of Lukoil's shares by the end of 2004, and launched a tender offer for an additional 20,417,597 shares at a price of $30.76 per share, or $123.04 per American Depositary Receipt to reach the 10% mark. The shareholder agreement between COP and Lukoil limits COP to a 20% maximum stake in Lukoil and confers upon COP the status of exclusive strategic partner for Lukoil.

As of September 30, 2005, COP's stake in Lukoil stood at 14.8%. Indications are that COP will continue to increase its stake in Lukoil eventually reaching the maximum level of 20%. COP is accumulating shares on the open (London) market.

At the same time as the shareholder agreement, Lukoil and ConocoPhillips also agreed to create a joint venture company, called Rusco, to pursue various oil and gas development projects together. COP invested $370 million to obtain a 30% stake in the joint venture company, Lukoil retains 70%. The joint venture will focus on developing projects in the Timan-Pechora area of Russia. (see Joint Development Prospects below, also scroll to bottom to see map)

The auction of Lukoil shares occured because the Russian government decided during the summer or 2004 to sell its remaining shares of Lukoil. The government owned 64.639 million shares of Lukoil, or 7.59% of the outstanding shares of the company. The government had set a floor price on the sale of shares at $1.928 billion, but the actual reserve price at the auction on September 29 was to be the previous day's closing price, or $1.928 billion, whichever was greater.

Lukoil holds the world's second highest reserves of oil, second only to ExxonMobil. Lukoil also has potential to enter the natural gas business, including the possibilities to export LNG, in a significant way. The Yamal reserves of Lukoil offer considerable potential for LNG exports.

COP will get at least one seat on the Lukoil board of directors, and will have increasing proportional representation when it increases its stake in Lukoil. The Russian government had signalled that it would not like to see COP obtain a blocking stake (25% plus one share) in Lukoil. However, the shareholder agreement stipulates that Lukoil will take steps to amend its corporate charter to require unanimous decisions by the board on certain, key decisions. This change in the charter would make COP's stake an effective blocking share in the company without going to the usual 25% plus one share level. It should be noted that the "key decisions" defined in the shareholders' agreement are not as broad as those usually embraced by a legal blocking stake.

Joint Development Prospects: The two companies have said that they will cooperate in a number of areas of development, most notably two: the large reserve position that Lukoil holds in the Timan-Pechora area in Russia and Lukoil's West Qurna-2 PSA claim in Iraq. By virtue of a new shareholders' agreement between Lukoil and COP, COP will receive a 30% interest in the joint venture noted above to develop and exploit the Timan-Pechora assets and a 17.5% interest in the West Qurna production sharing agreement. The presentation made jointly by COP and Lukoil on September 29 suggests that COP will pay $382 million to Lukoil for the interests in these projects. COP will also pay its share (30%) of the operating costs going forward of the Timan-Pechora joint venture as well as contributing 30% of the working capital for this joint venture. The specifics regarding West Qurna were not described beyond the transferral to COP by Lukoil of a 17.5% interest in the PSA.

Although not mentioned in the press releases or presentations to date, the position of strategic partner with Lukoil appears to give COP a new foot in the door for new projects in Saudi Arabia. There was also no mention of what might become of Lukoil's service stations in the US. However, the point was made in the presentation that Murmansk is one third the distance from the US East Coast that Middle Eastern ports are, and that COP has a US East Coast refinery. This would seem to breathe new life into plans for a major oil export initiative from a Berents Sea port as well as reinforce prospects for the Lukoil export terminal on the Gulf of Finland.

Of parallel interest regarding foreign oil company interests in Russia, Total SA recently acquired a blocking stake (25% plus one share) in Novatek, an independent Russian gas producer. This is subject to approval by the anti-monopoly office, which has since been blocking the move.

Given the high oil prices and Russia's enormous reserves of oil and gas, it is no surprise to us that foreign oil companies are renewing their push to enter into the Russian oil and gas business. Parallel events regarding the development of the Shtokmanovskoe gas reserves (3.3 trillion cubic meters gas in place), controlled by Gazprom, are also being tracked by Pan EurAsian.

Map

General Map of Western Russia showing Timan-Pechora location

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October 4, 2005