Lukoil, Cuba, and Venezuela

As adroitly analyzed in Stratfor (subscription required), Russian oil firm LUKoil’s plans to purchase a refinery in Cuba are on hold because of the difficulty of investing in crude production in Venezuela.  As the article notes:

“…Russian oil firm LUKoil’s plans to expand into Cuba have been put on hold. LUKoil wanted to buy a refinery in Cuba, supply it with crude oil produced in Venezuela and wait for the U.S. embargo on trade with Cuba eventually to end. This would give LUKoil the chance to squeeze into the highly competitive U.S. market.

However, this long-term project faces a major roadblock. Venezuelan President Hugo Chavez’s burdensome and investment-unfriendly tax laws make investing in Venezuelan crude production extremely difficult for foreign companies. The U.S. firms have all left Venezuela, but even the companies that came in to fill that void — such as LUKoil — are not finding investment conditions favorable. This means that LUKoil’s plan to ship crude from Venezuela to Cuba for refinement is not going to be feasible under current conditions — not even at $130-per-barrel cost of oil. LUKoil founder and CEO Vagit Alekperov said June 26 that the firm “cannot afford to take the risk of viewing these [Venezuelan] projects as a source of supply of the Cuban refinery. And to buy a refinery without having crude supply logistics does not make sense.”

In other words, Venezuela’s current investment environment is leaving LUKoil with no way to control both the upstream and the downstream assets for petroleum product exports to the United States. Thus, Chavez might have just made a new enemy: Alekperov.

LUKoil, Russia’s most efficient privately owned energy company, has been on a serious campaign of global expansion for quite some time. It moved into the Northeastern U.S. gasoline-station market by acquiring Getty Petroleum in November 2000 and then bought Mobil-branded gasoline stations from ConocoPhillips in January 2004. In total, Lukoil has more than 2,000 U.S.-based gasoline stations, mostly in the Northeast. The idea behind the global expansion is to make a completely separate international arm of LUKoil that would be beyond the Kremlin’s reach. This is Alekperov’s way to insure that he could maintain a major presence in the global energy trade if Moscow nationalized his business in Russia.

A major part of Alekperov’s global strategy consists of expansion into the U.S. market. Considering that LUKoil already has a well-developed gasoline-station network in the Northeastern U.S., it also makes sense to acquire refining capacity nearby. Cuba is a great partner for LUKoil because of its location directly in the shipping path for potential crude production in Venezuela. LUKoil can also get into Cuba’s refining sector before others, because it has the advantage of Russo-Cuban political connections. The deal to buy a refinery possibly follows from reforms under Raul Castro’s leadership that have made Cuba more investor-friendly. Cuba has allowed partnerships with foreign companies as well as private acquisitions of some industrial enterprises. More specifically, one of Cuba’s economic goals is to become a refining hub.

But without Venezuelan crude production, LUKoil is left with few upstream options for crude in the Western Hemisphere. LUKoil could get oil from the spot market or even from Mexico, which is near enough to Cuba to make it work logistically, but in order to compete in the world’s richest and most competitive energy market — the United States — LUKoil needs to find other ways to lower costs, and it needs to be in charge of both upstream and downstream deals in order to make a long-term commitment to the Western Hemisphere. Aside from the Venezuelan crude, there simply are no other real alternatives.

There may still be a sliver of hope for LUKoil: Chavez could always change his mind, particularly ahead of his summit with Russian President Dmitri Medvedev in late July. On the agenda for that summit, announced on June 26 , is a proposed agreement on mutual protection of investments, which could signal that LUKoil has managed to lobby both Caracas and Moscow enough to get a break on the taxes it needs to pay.  Chavez is also feeling a lot of domestic economic pressure that could make him rethink his policy toward foreign investors.

That said, if the investment situation does not improve, Chavez will have to deal with Alekperov as an enemy. A powerful Russian oligarch who has managed to steer a private energy company from Russia into a position of considerable global success despite the predations of Gazprom and Rosneft, Alekperov has many reasons to hope that Chavez is ousted. And Chavez should keep in mind that Russian oligarchs usually do not sit around hoping that things happen — they usually make sure things happen.”

This entry was posted on Friday, June 27th, 2008 at 10:04 am and is filed under Cuba, Lukoil, Russia, Venezuela.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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