Conoco Phillips Buys a Stake in Russian Oil Giant Lukoil
In late 2004, Conoco Phillips (“Conoco”) announced the
purchase of 7.6% of Lukoil’s stock for $2.36 billion during a government
auction of Lukoil’s stock. The deal gives Conoco access to Russia’s huge, but
largely undeveloped, oil and natural gas reserves. Conoco intends to boost its
investment to 10% by year end and to 20% within 2–3 years. To ensure that
Conoco’s interests are protected, even though it has only a minority position,
Conoco will have one seat on Lukoil’s board and Lukoil changed its corporate
charter to require unanimous board approval for the most important decisions
such as payment of dividends and major new investments. Conoco will gain one
additional seat once its ownership share climbs to 20%. Because Lukoil was
granted certain oil rights in Iraq under Saddam Hussein, the deal gives Conoco
a potential toehold in Iraq’s oil fields. Lukoil is betting that its chances of
gaining access to the Iraqi oil fields will be enhanced with an American firm
as a partner. Conoco has also agreed to pay $370 million to Lukoil for a 30%
stake in a joint venture to develop reserves in northern Russia. The two firms
will split operational responsibilities equally. Conoco’s stock fell more than
1% immediately following the announcement.
Case Study Discussion Questions
1. Describe the operational and managerial challenges
facing the two partners.
2. Do you believe that Conoco gained an effective say in
Lukoil’s operations following its investment? Explain your answer.
3. Why do you believe Conoco’s stock fell immediately
following the announcement?