LUKoil to buy Kazakh oil producer Nelson Resources

Sep 30, 2005 02:00 AM

LUKoil, Russia's biggest oil company, will pay as much as $ 2 bn to buy Nelson Resources, seeking to increase output in Kazakhstan as rising domestic taxes discourage investment.
A takeover of the Bermuda-based company would be the largest-ever foreign acquisition by a Russian company. LUKoil is offering C$ 2.57 ($ 2.19) a share, 13 % less than Nelson's closing share price in Toronto. Nelson shares had their biggest drop in six months in London. The offer was accepted by shareholders owning 65 % of Nelson, LUKoil said.

LUKoil wants to buy foreign assets as President Vladimir Putin's tighter control of the industry discourages investment, dropping Russian oil output growth to its slowest since 1999. Kazakhstan, second to Russia among former Soviet states, plans to triple crude output in a decade to 3 mm bpd.
“What you have going on across the world is a scarcity of oil assets,'' said William Browder, who manages about $ 2 bn at Hermitage Capital Management in Moscow. LUKoil wants “to grabsome of the assets that probably would be grabbed by the Chinese if the LUKoil guys didn't step in first.''

After this transaction, $ 120 bn of oil and gas takeovers have been announced this year, almost double the $ 61 bn in the first three quarters of last year. China National Petroleum Corp., China's biggest oil producer, in August agreed to pay $ 4.18 bn to buy PetroKazakhstan, outbidding India's Oil & Natural Gas Corp.
Browder estimates LUKoil is paying $ 7.41 for each barrel of proven and probable reserves, compared with the $ 10.70 a barrel the Chinese oil company paid for PetroKazakhstan.

Oil producers are expanding into Kazakhstan after growing demand for the fuel in neighbouring China helped push the price of crude oil to a record $ 70.85 a barrel on Aug. 30 in New York.
Chevron, which is doubling its workforce in Kazakhstan to 4,000 employees, said in June that it will invest an extra $ 3 bn there to help boost the country's crude production nearly fivefold by 2025. The company is already spending $ 4.8 bn to double oil production by 2007 and will raise investment by 63 % by 2010. Kazakhstan held 3.3 % of the world's oil reserves at the end of 2004, according to data compiled by BP.

LUKoil is in talks with CNPC to buy the Chinese company's half of their oil venture in Kazakhstan, Turgai Petroleum, LUKoil Deputy Chief Executive Leonid Fedoun said. LUKoil may pay $ 700 mm, according to Fedoun. PetroKazakhstan was LUKoil’s partner in Turgai.
“Kazakhstan is one of the world's most important countries in terms of future oil production and is a target for any oil producer,'' said Jean-Louis Tauvy, who manages more than $ 200 mm in Russian assets at Atria Advisors in Moscow. “LUKoil’s strategy has always been to diversify away from Siberia and having production in Kazakhstan makes perfect sense.''

A group of Kazakh banks owns more than 50 % of Nelson Resources and 43 % of the company is traded, Ann-Marie Wilkinson, an investor relations representative for the company, said.
Nelson's Chairman and Chief Executive Officer Nick Zana, worked in China for several years for Chevron, before becoming the head of TengizChevrOil, a Chevron-led group that is the biggest foreign oil and gas producer in Kazakhstan. He joined Nelson in January 2002.

Nelson Resources produced 30,000 bpd of oil in the second quarter, earning net income of $ 24.2 mm. The company has proved and probable crude oil reserves of 270 mm barrels.
LUKoil has a pre-emptive right to buy CNPC's stake in Turgai, Fedoun said. LUKoil in return could pump all of Turgai's output to China through a pipeline from Kazakhstan to the Chinese border that is due to be completed by the end of this year, Fedoun said.

LUKoil Chief Executive Vagit Alekperov met with Lithuanian Prime Minister Algirdas Brazauskas on Sept. 27 to discuss buying that country's largest oil refinery and transport complex Mazheikiu Nafta.
LUKoil stopped talks to buy into Dragon Oil, a Dublin-registered company that produces oil in Turkmenistan, after failing to agree on the price, Fedoun said.

Source: Bloomberg
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