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Lukoil/Repsol

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Published: December 8 2008 02:00 | Last updated: December 8 2008 02:00

Lukoil’s interest in Repsol has whipped up even more of a furore in Spain than Gazprom’s 2006 suggestion that it fancied buying Centrica did in the UK. The reaction in Madrid, where Spanish media reported on Friday that the Russian oil group was still seeking government approval to buy 20 per cent of Repsol, is overblown. Lukoil is privately owned; ConocoPhillips of the US owns 20 per cent. Unlike Gazprom, it is Kremlin-loyal, not Kremlin-controlled. The Russian leadership has, admittedly, pushed Russian companies to make acquisitions abroad to underscore Russia’s economic revival. But Lukoil’s Spanish ambitions probably derive in part from the same calculation that has underlain many companies’ foreign expansion since the Yukos affair: that owning high-profile assets internationally is insurance against Kremlin assault.

Yet, if Spain’s politicians are hardly enthused about a Lukoil-Repsol deal, the Russian group’s shareholders should be less so. True, a presence on Repsol’s board might help its aim of expanding European refining capacity, enabling it to send Russian crude to Spanish refineries. But, as UBS notes, a minority stake seems unlikely to assist another Lukoil goal – of expanding into Latin American production – since many of Repsol’s activities in that region are separate joint ventures. Raising its stake later could still prove politically difficult. And the prices being mooted are up to twice Repsol’s current share price – valuing the Spanish group at well above Lukoil’s own market capitalisation. It is hard to see how such a deal could create value for Lukoil shareholders.

Meanwhile, Urals blend crude finished last week at below $40 a barrel, a level at which Lukoil is likely to have to cut capital spending in Russia sharply next year. This is not the time to pursue trophy assets abroad (its Repsol pursuit is part of a spending spree ranging from an oil refinery in Sicily to filling stations across central Europe). Better to focus on improving management in Russia and ensuring it can fund development of its extensive reserves at home.

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