Lukoil Builds a Global Brand

Lukoil is the largest oil company in Russia, with more than 10 trillion barrels in proven reserves. And like Russia itself, the firm is gaining in global influence. Besides its operations in the former Soviet Union, it has oil and gas exploration projects in Central America and the Middle East. It also has gas stations in the United States and Europe, and it has plans to capture a bigger piece of Western markets. Lukoil vice president Leonid Fedun spoke with NEWSWEEK's Patrick Falby about the challenges of building a global oil company. Excerpts:

NEWSWEEK: Lukoil has come a long way since it was started 15 years ago.
Leonid Fedun: Our mission is to be in the top three or four international companies, so we need to double our hydrocarbon production and substantially improve our financial performance. We are making progress.

What are the biggest challenges reaching that goal?
Every year it's a new challenge. The main ones from last year were extremely high refining [costs] in Europe and, especially, the U.S., which prevented us from buying the refineries we were planning to buy. We were just not ready to pay this crazy price. Now the market is getting back to normal so we can come back to normal business purchases. One more challenge is [that] the amount of available reserves worldwide is shrinking. Today just 10 percent of international reserves are accessible.

What about competition with the state-owned company Rosneft—is that another challenge?
It's just one of our competitors. Yes, it's a big state-owned company, and we're a big private company, so we will compete. We have a number of advantages—for example, we have already made a lot of investments into new fields and new projects, and they're just getting into that.

For the last few years, Russia has been nationalizing strategic assets. How has Lukoil managed to maintain its private status?
Well, first of all, you should always keep good relations with governments everywhere. Even in Uzbekistan, even here in the United States. That's very important. And the rest derives from that.

So how does one keep good relations with the Russian government?
No. 1, you need to be a good taxpayer. You need to be a good corporate citizen, showing that you're ready to do projects for Russia, work on some social projects. For example, I'm in the soccer business myself.

Lukoil pays high taxes—the Russian government takes nearly all profits from prices that exceed $27 per barrel of oil. Do you lobby the Russian government on this issue?
Do you know anyone who wouldn't like to pay lower taxes? We're paying the same taxes as Rosneft and Gazprom, so no problem here. These taxes also still let us show profits. When you've got profitability of more than 20 percent, it's not a good idea to ask for lower taxes. That's the first half of the truth. The other half is that production in Russia is stagnating. New projects require huge investments. In 2005 dollars, Russian needs about $3 trillion to maintain and [expand] production. So of course when other state-owned companies go for big projects, they'll be talking about tax incentives. These discussions have been going on for some time now, and they'll become especially relevant around 2009 or 2010. But we're willing to work even under the current tax conditions.

The Russian government is supporting your bid to be the first to develop an oil field in Iraq after the fall of Saddam Hussein. What will need to happen for Lukoil to develop that field?
The main problem in Iraq is they still don't have national petroleum legislation. We just need to understand who we need to talk to—who has the mandate. When this legislation is passed we'll have a clear picture of where we have to go. But the first thing we want to state is we have all the legal rights for this field—all the leading U.S. law firms confirm that all of our rights are legal. We have enough expertise and technology to make this field operational faster than the others because it was Soviet geologists who worked on this field in the past, and we have all the necessary data. We are also ready to work under any political circumstances. We're counting on support from the U.S. State Department, because ConocoPhillips is going for this field together with us.

Have you had any assurances from the State Department that you'll have their support?
The problem is that the U.S. doesn't have much influence in Iraq at this point.

How is your brand doing in the United States? A couple of years ago, Lukoil made a big push to market its brand here—has that strategy worked?
We have about 2,000 gas stations working, and we're happy to have a chance to supply good fuel [in the United States]. We're not hiding the fact that we had a plan to buy a refinery here in the U.S., but the situation was not favorable. We expect the U.S. economy to be revitalized once the dollar devaluation is over. We had this situation in Russia: once the dollar has been devaluated, the assets will be cheaper and we'll be able to start working and after that the U.S. economy will be on the rise.

How long do you expect you'll have to wait for this devaluation?
I personally think that over the next two years the dollar will go down substantially. It's not up to the U.S.—it's up to China, to Saudi Arabia. If, for example, OPEC decides to use a multicurrency basket, this will weaken the dollar. And today all crude supplies are making losses because supplies are linked to the dollar and the dollar's going down. Crude oil exporters, they also have some limitations if they want to buy something abroad. For example: Dubai. They tried to buy a port in the U.S. and they weren't allowed to do that. So why should you have the dollar if you can't use it?