International Business : Arco Will Buy 7.99% Stake in Russian Oil Firm : Energy: $250-million investment in Lukoil will give L.A.-based company a share of vast Siberian reserves.

By CHRIS KRAUL

Aug. 31, 1995 12 AM PT

TIMES STAFF WRITER

In what is believed to be the largest U.S. investment in a Russian company, Atlantic Richfield Co. said Wednesday that it will spend $250 million for a 7.99% stake in Lukoil, Russia’s biggest oil firm.

Although U.S. oil companies have set up numerous joint ventures with Russian oil concerns, Arco’s outlay is the first major American equity investment in the oil industry of the former Soviet Union.

Analysts expect the deal to ensure that Los Angeles-based Arco participates in future ventures to exploit crude oil and natural gas reserves in Siberia, where Lukoil is dominant.

Lukoil may control as much as one-fifth of Russia’s proven reserves, which, according to the Oil & Gas Journal, exceed 50 billion barrels, more than the U.S. and European reserves combined.

Lukoil’s daily average production is 1.1 million barrels--nearly twice Arco’s 664,000 barrels.

Arco’s planned investment in Lukoil comes at a time when U.S. oil companies face depleting domestic reserves, forcing them to redouble overseas efforts. On Aug. 21, Arco launched a hostile takeover attempt for Aran Energy, an independent Irish-based oil and gas company with reserves in the North Sea, Ireland and elsewhere.

In January, Los Angeles-based Arco will help inaugurate a $2.5-billion natural gas project in China in which it holds a 30% stake. The project includes a 500-mile pipeline from Yacheng Island off mainland China to Hong Kong.

Arco has committed to invest up to $250 million in Lukoil’s convertible bond offering next month, which is expected to raise $350 million to finance Lukoil’s future oil exploration and to pay back taxes. In April, the bonds will be converted to equity of up to 9.2% of Lukoil.

The offering limits Arco’s purchase to bonds that, upon conversion to stock, do not exceed a 7.99% overall stake, an Arco spokesman said. The agreement was announced in Moscow by Lukoil.

“This deal signifies two things: that Arco has made a decision that it wants to be a major player in the former Soviet Union, and that it has clearly chosen the most powerful company to go into business with,” said Julia Nanay, a director at Petroleum Finance Co., a Washington consulting firm.

In confirming the planned investment, Arco said in a statement only that the investment is “consistent with Arco’s strategy to expand its operations internationally.”

It also said it is in preliminary discussions with Lukoil “concerning potential oil and gas joint ventures” and that it would have no further comment until the bond tender is completed in September.

Lukoil is one of three vertically integrated oil companies formed in Russia by decree of President Boris N. Yeltsin in 1992. The other two are Yukos and Surgutneftegaz.

Since then, another eight private Russian petroleum companies have been or are being formed, according to Russian Petroleum Investor, a monthly intelligence report published in Los Angeles.

Until 1992, Russia’s vast oil reserves were off-limits to foreign oil companies. But the economically pressed nation opened the gates to attract capital and by January, 1994, there were no fewer than 70 joint ventures involving foreign and Russian oil companies extracting or exploring for oil in the former Soviet Union.

Those partnerships helped Russia to quickly lift its exports to an average 170,000 barrels of petroleum a day in 1994, from zero in 1991, according to analyst Nanay.

“The Russian government just doesn’t have the capital to develop petroleum itself,” said an investment banker connected to the bond offering who asked not to be identified.

But Russia has been filled with pitfalls for foreign companies. American companies have complained of a lack of port and pipeline facilities, and of a bewildering set of tax laws that make planning and profitability difficult.

“It’s a constantly changing, even nightmarish tax regime in which you never know where you stand. You can be taxed to death,” said Todd Holden, client services director of Russian Petroleum Investor.

And Nanay cautioned that the whole question of which newly privatized Russian company owns rights to how much of Russia’s vast crude oil reserves is “kind of a mysterious business.”

Arco is the United States’ seventh-largest oil company when measured by its 1994 revenue of $17.2 billion, third-largest in proven reserves at 4 billion barrels and second-largest in average daily production, a company spokesman said.

But more than 71% of Arco’s production comes from its oil fields in Alaska, where reserves are slowly being depleted and exploration is restricted.

Like other oil companies, Arco has undergone downsizing in recent years. Its current worldwide payroll of 23,000 employees is 3,300 less than two years ago. Still, Arco is Southern California’s largest company on the basis of revenue and third-largest in California after Chevron and Hewlett-Packard.

San Francisco-based Chevron has a huge $20-billion, 40-year joint venture in the Tengiz field in Kazakhstan, a former Soviet republic on the Capsian Sea, to produce crude oil.

In Russia, Chevron is providing technology to modernize one of Russia’s largest refineries about 70 miles southeast of St. Petersburg.

Arco shares closed down 37.5 cents at $109.625 in New York Stock Exchange trading Wednesday.