Term Paper on "Lukoil Business in the USA"

Term Paper 5 pages (1797 words) Sources: 1+

[EXCERPT] . . . .

Lukoil resulted as a result of a decree from the Council of Ministers of the former Soviet State USSR on November 25, 1991. This decree was titled No.18. Lukoil was incorporated as a state-owned oil concern. The Russian term "LangepasUraiKogalymneft" was abbreviated to Lukoil. In 1992, with the opening and privatization of Russian markets becoming more commonplace, Lukoil became an open joint-stock company. Between 1992 and 2000, Lukoil got actively involved in many small ventures with local oil companies in the Eastern block countries (Kazakhstan, Azerbaijan, Romania & Ukraine) and soon ended up acquiring many of these interests. In addition, the company worked at building a fleet of oil tankers, thereby ensuring that it handled all aspects of the petroleum exploration, discovery, extraction, and transportation sectors. Presently, Lukoil accounts for 18% of Russian oil output. In 2000, through the acquisition of Getty Petroleum Marketing, Inc. The company officially entered the U.S. markets. In 2001, it acquired the Bitech Petroleum Corporation in Canada. In this manner, Lukoil was able to establish a significant presence in North America.

The petroleum industry, from its very early beginnings, was very secretive about its operations and procedures. The U.S. economy and the lifestyle of the American population have always been extensively influenced by petroleum products and its prices. It is also the world's highest consumer of petroleum-based products. Lukoil could benefit significantly from entering this market. Most of the oil and gas industry players include some of the world's biggest businesses and multinationals such as British Petroleum, Chevron and Exxon-Mobil. In order to attain market penetration, any company in the oil and gas industry has to be able to achieve economies to scale and standardized working operations.

LukoilAmericas has steadily been able to penetrate the market through acquisition of existing facilities of Getty Petroleum and ConocoPhillips. Lukoil Oil Company is one of the world's top five publicly traded oil companies in terms of proven oil reserves. It is traded on the London stock exchange and ConocoPhillips is traded on the New York Stock Exchange (NYSE) making it a significant player in the U.S. market. From a psychological standpoing, it was "the first acquisition of a publicly listed U.S. firm by a Russian corporation." (BBC, 2000) Although the company faced many issues from the devaluing of the rouble to criminal charges against Vagit Alekperov, the president of Lukoil, it has managed to continue its operations both in Russia and internationally.

Lukoil enjoys the advantage of sitting on an extremely large proven oil reserves in the world. The proven crude oil reserves in the world are estimated to be approximately 1,074,850 million barrels and the consumption is estimated to be approximately 76 million barrels per day. In 2000, the three largest consumers of petroleum products were the United States (19.7 million barrels per day), Japan (5.5 million barrels per day), and China (4.6 million barrels per day). This consumption pattern is only expected to increase. The total oil reserve estimates have always been debated. "Lukoil proven reserves at the beginning of 2005 were 15,972 mln barrels of crude oil and 24,598 bcf of natural gas, totaling 20,072 mln boe." (Lukoil, 2007)

The majority of the current reserves are located in politically unstable countries such as the Persian Gulf. Canada ranks second in its storage of oil reserves, followed by Russia. Canadian oil has however proved difficult to extract and transport due to more stringent environmental laws in the country. Lukoil, with its reserves mostly in Siberia, has the advantage of being politically and geographically very distant from the troubled regions. In addition, other Russia oil companies have been able to provide oil and gas products to countries such as China and India, both developing nations having enjoyed tremendous boost in economic development.

As a commodity of great strategic importance, petroleum has tremendous international bargaining leverage. The 1973 oil embargo corresponding with the Arab-Israeli war showed the U.S. how very much depended the economy of any region is on oil availability. The second incident occurred at the end of the 70's and corresponded with the revolution in Iran where the Shah was overthrown and the fundamentalist Khomenei took over the reins of the country; and the third was between 1990 and 1991 -- this coincided with the first Gulf War. It is easy to draw a parallel of these price increases to the recessions that occurred in the U.S. economy during these periods. The United States currently imports more petroleum than it produces domestically. This dependence on foreign oil has been a cause for concern for some time in this country.

As stated earlier, a majority of the reserves of Lukoil are located in Western Siberia. Hard winters, turbulent seas and sparse resources are some of the operational considerations that Lukoil's management and employees have to take into account. The infrastructure needed for oil and gas extraction, refining and transportation are complex and very expensive. Large capital investments are needed to help set up the infrastructure. The wear and tear on equipment is also greater under the harsh working conditions in Siberia. Extreme natural disasters such as seismic activity, ice fields and hurricanes are generally considered the most common cause of accidents and Siberia has many of these natural conditions conducive to disasters. Skilled labor and constant monitoring is required at all levels of operation. This requires a constant source of talent at different locations. Russia might not be able to procure all the necessary talent from within the country and could be forced into looking outwards for the necessary skill level.

To complicate operations, all crude oil used in the refining process is not the same. Every batch of crude oil differs. The price of crude oil is based on a "benchmark" of the quality class. Heavier crude produces higher quantities of residuum and are considered a lower grade for commercial distillation. Higher sulfur content is also not a desired element in the crude oil. Even the highest-grade crude oil has approximately 33% of residuum and it requires secondary downstream distillation processes to maximize generation of the lighter distillates. Currently, the U.S. has the approximately 25% of all the refining capabilities in the world. It also has the best technology to extract the maximum lighter products such as naphtha, liquid petroleum gases (LPG) and straight run gasoline which offer the highest monetary compensations. By investing in better technology, U.S. refineries have been able to produce different products from crude oil at a more competitive and efficient manner.

Most of the refining of the crude oil is undertaken in Russia with very little overseas production. The company records indicate that the production levels have been better than expected. Lukoil however, is increasing 2D and 3D seismic surveying to discover new resources and prepare drilling activities for these new sites. These efforts have lead to discoveries of five new fields in 2005 (four oil and one oil & gas condensate) as well as 11 new oil deposits at previously discovered fields. (Lukoil, 2007)

In the U.S., Lukoil is faced with many serious competitors. The U.S. exports more oil from Canada, Nigeria, Venezuela and Mexico. Friendly trading relationships with these countries ensure that the U.S. is never dependent on a single source of oil. The U.S. customer is also savvier and brand conscious, even with respect to petroleum products. Americans use almost 17 million barrels of oil (more than 700 million gallons) every day of the year. Environmental regulations and more stringent reporting and monitoring policies also are an essential part of operating within this industry in the U.S. There are also many established competitors in the U.S. that have better infrastructures and networking setups that are essential for the petroleum industry to flourish. In addition, the company is also paying ExxonMobil almost 25 million for the use of the Mobil brand name on gas pumps that Lukoil purchased but has not been able to convert completely to the Lukoil brand.

Lukoil is still establishing its presence in the U.S. And will also experience the growing pains that most international companies will experience when operating on U.S. soil. There are however, certain advantages that Lukoil enjoys as a result of the industry that it operates in. For instance, petroleum is a natural resource that is available in certain regions of the world and as such unless a region possesses these sources it cannot pose a threat to the company. Other than the Persian Gulf region, very few region in Eurasia and Asia have the capability of being major competitors to Lukoil.

Lukoil has made significant strides in consolidating its operations in the U.S. In 2005, the company decided to modernize the oil terminal that it uses in New Jersey as well as dreg the harbor at its terminal in Vysotsk. In the hope of using larger tankers to transport crude and refined petroleum products to the U.S., Lukoil might gain better significant profits in the U.S. (Mosnews, 2005) From a global competitor's point-of-view, BP and Gazprom Neft are possibly the… READ MORE

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