Arco-Lukoil Boost Russian Oil Ventures

With an eye toward the decline of its Alaskan oil reserves, Atlantic Richfield Co. said Thursday that it expanded its venture with Russian oil giant Lukoil by committing $5 billion to jointly develop projects in the former Soviet Union.

The 18-year agreement, which replaces an earlier $3-billion, 10-year plan announced in March, may be years from producing any results. The foreign oil companies that have made deals in the former Soviet Union have been frustrated by red tape, graft and the lack of adequate oil pipelines and transportation, executives say.

An Arco spokesman said the project closest to fruition is a proposed $1.5-billion, 900-mile pipeline that would connect the Tenghiz oil field in Kazakhstan to a port on the Black Sea. The Arco-Lukoil venture is seeking permission from various former Soviet republics to build it.

But analysts believe Arco’s chief interest in Lukoil is its presence in Siberia, where the Russian company controls about one-fourth of the conservatively estimated 50 billion barrels of reserves. That’s more than in Europe and the United States combined, according to the New York-based Petroleum Intelligence Weekly newsletter.

Of Lukoil’s 1 million barrels-per- day average production, 80% comes from Siberian oil fields, said Arco, which declined to comment on specific prospects in Siberia. Lukoil is the biggest player in Siberia and Russia’s largest oil company.

“Certainly, Arco’s deal is an example of taking the long view, and the potential in Russia is huge. The former Soviet Union is the new prize in terms of oil supplies. In Lukoil, Arco has by far the strongest Russian oil company as its partner,” said Daniel Yergin, oil historian and president of Cambridge Energy Research Associates.

Siberia could someday supply Arco’s West Coast-based refining and marketing network now fed mainly by North Slope oil fields in Alaska--which are declining at the rate of 6% per year. Alaska accounts for 63% of Arco’s worldwide production this year.

“Siberia is why Arco is doing the deal, and replacing Alaska with Siberia is one of the options,” said Petroleum Intelligence Weekly Publisher Ed Morse.

Lukoil basically has no cash and needs Arco as a partner to bankroll and provide technology for its future development, said Jennifer Weinstein, a research analyst with NatWest Securities in Baltimore. In fact, Arco is expected to provide nearly 100% of financing in return for a 46% ownership interest in whatever projects the joint venture builds, she said.

In addition to the joint venture, Arco owns an 8% equity stake in the Russian company by virtue of its purchase last year of $340 million in convertible bonds.

Other U.S. oil companies have tended to avoid equity investments in Russia, fearful that the Russian legal system and red tape offers little protection for their money. And hopes for a boom in foreign investment in Russia this summer, after President Boris N. Yeltsin was reelected July 3, have faded with Yeltsin’s health.

Oil companies, accustomed to operating in a climate of instability, are less affected than others by short-term political worries. But, while big energy projects are being planned in Russia by Exxon Corp, the Royal Dutch/Shell Group, Texaco Inc. and Amoco Corp., they have lingered in the early development stages without making big investments.