Equity 13 September 2007, 10:48am

Lukoil rumours around Hungary's MOL - Financial Times

Portfolio

Lukoil, Russia's second-largest oil company, is rumoured to enter into a partnership with its Hungarian sector peer MOL, the Financial Times has reported. While Leonid Fedun, Luloil's Vice-President for strategy, has confirmed his company's interest in MOL, he warned that raging nationalism in Central and Eastern Europe could force Lukoil to spend the USD 9 billion earmarked for downstream acquisitions elsewhere in Europe.

Lukoil, 20% owned by US-based ConocoPhillips, has set aside USD 9 billion for buying downstream assets in Europe, including refineries, distribution and retailing, believing that the market has become more favourable for deals, Fedun told the FT.

Fedun said the situation for acquisitions was not very good up until recently, with stock markets going up and the price of oil being high. “Now the stock markets are much healthier," he added though.

The ambitions of Lukoil, which operates some 2,000 petrol stations in Europe, reflect its strategy of using its upstream strength in oil production in Russia to build its position in EU markets, the FT said.

Fedun said that if Lukoil could refine the oil it sold in Europe, it would make "at least USD 1 bn more [a year]". Fedun was speaking as Lukoil's net income dropped 4.8% yr/yr to USD 3.82 bn in H1 this year. He added that Russia now had more export options for its oil, meaning that it could negotiate better terms with European customers.

"These refineries are not going to get windfall profits any more, meaning that they will be more willing to talk," the FT cited him as saying. "It is no longer a buyer's market [for crude oil], it is a seller's market."

Fedun mentioned Hungary's MOL and Poland's PKN Orlen as companies whose refining margins had been squeezed.

According to the FT, Lukoil has been rumoured as a potential partner for MOL. The Hungarian fuels group is currently building up defenses against overtures from Austrian OMV that quietly upped its stake in MOL to 18.9%.

While Fedun said they were naturally interested in MOL, Lukoil was seeing nationalism in Central and Eastern Europe; “and this nationalism is getting stronger and stronger in other European countries as well."

Lukoil may be more able to pick up assets such as refineries that are being sold by international oil companies. The European refining market is changing because of the decline in production from the North Sea, and companies such as BP, Royal Dutch Shell and ExxonMobil have been selling refineries in EU countries.