ConocoPhillips is announcing today that one of its affiliates was the successful bidder in an auction for 7.59 percent of LUKOIL's authorized and issued ordinary shares held by the Russian government for a price of $1.988 billion, or $30.76 per share. ConocoPhillips intends to initiate a tender offer outside the U.S. to non-U.S. LUKOIL shareholders for up to an additional 2.4 percent of LUKOIL's equity capital in the open market at a price of up to $30.76 per share upon receipt of U.S. Federal Trade Commission clearance for the equity investment in LUKOIL. ConocoPhillips will have proportional board membership including one initial director on the LUKOIL board. In addition, LUKOIL and ConocoPhillips have agreed that ConocoPhillips may increase its total ownership stake in LUKOIL up to an aggregate total ownership interest of 20 percent. These, and other governance issues described below, are the subject of a comprehensive Shareholder Agreement between LUKOIL and ConocoPhillips. ConocoPhillips is assuming it will report this investment in its financial statements using the equity method of accounting.
LUKOIL and ConocoPhillips have entered into a Shareholder Agreement that will govern ConocoPhillips' equity investment in LUKOIL. Under the Shareholder Agreement, LUKOIL will propose for shareholder approval amendments to its corporate charter that will require unanimous board consent for certain key decisions. The Shareholder Agreement limits ConocoPhillips' ownership in LUKOIL to 20 percent and also limits ConocoPhillips' ability to sell LUKOIL shares for a period of four years.
LUKOIL and ConocoPhillips plan to commence a comprehensive exchange of management in corporate and operating areas beginning in early 2005.
Upstream Partnership in Russia
LUKOIL and ConocoPhillips also are announcing the creation of a joint venture (JV) with respective interests of 70 percent and 30 percent that will allow ConocoPhillips to partner in the development of LUKOIL's reserves in the northern Timan-Pechora area (north of European Russia). Under the terms of the joint-venture agreement, ConocoPhillips will pay to LUKOIL an acquisition price consisting of more than $370 million for a 30 percent interest in the JV oil and gas resources, together with an additional payment for its 30 percent share of working capital and its 30% share of LUKOIL's capital investments in the JV fields from January 1, 2004. The precise amount of the acquisition price will be established at closing. The joint venture will be governed 50/50 by LUKOIL and ConocoPhillips, and is expected to be producing and marketing approximately 200,000 barrels per day (BPD) of oil by 2008.
Production from the joint-venture fields will be transported via pipeline to LUKOIL's existing terminal at Varandey Bay on the Barents Sea and then shipped via tanker to international markets. LUKOIL will expand the terminal to 240,000 BPD capacity by 2007 with ConocoPhillips participating in the design and financing of the terminal.
Partnership in Iraq
LUKOIL and ConocoPhillips will cooperate with the Iraqi government to confirm the validity of LUKOIL's rights under its production sharing agreement (PSA) relating to the West Qurna field in Iraq. Subject to confirmation of those rights, and subject to obtaining all required consents of governmental authorities and the parties to the contract, LUKOIL and ConocoPhillips expect to enter into further agreements regarding the assignment by LUKOIL to ConocoPhillips of a 17.5 percent interest in the PSA.
The transaction represents a strategic step for both companies, has the strong support of both the Russian and U.S. governments, and furthers bilateral energy development between the countries, including the potential supply of Russian crude oil and natural gas to U.S. markets.
For LUKOIL, the alliance is an affirmation of its status as Russia's leading international oil and gas company, and a global energy player. Additionally, LUKOIL will benefit from:
ConocoPhillips will gain further exposure to Russia's vast resource potential, where LUKOIL has leading positions in reserves and production. ConocoPhillips also will benefit from:
This transaction is compatible with ConocoPhillips' strategic and financial plans. It does not affect spending on any of ConocoPhillips' previously announced or planned capital projects.
LUKOIL's Board of Directors approved the key terms of the strategic alliance with ConocoPhillips as one of the strategic priorities of LUKOIL.
"This investment is consistent with our Exploration & Production strategy of increasing reserves and production growth in new legacy areas at attractive costs," said Jim Mulva, ConocoPhillips President and Chief Executive Officer. "ConocoPhillips has a long and rich history of successfully doing business in Russia and the Caspian region. LUKOIL has a well-deserved reputation as the leading international oil and gas company in Russia, and we are looking forward to contributing to and sharing in their future success."
"The new partnership with ConocoPhillips represents an exceptional opportunity to combine the talents and resources of two great companies for the mutual benefit of the shareholders of both enterprises. ConocoPhillips' investment in LUKOIL and LUKOIL's assets shows the confidence that ConocoPhillips' management places in the continuing growth of investment attractiveness of Russia and the Russian energy industry, and opens new opportunities for high-quality growth of LUKOIL," said Vagit Alekperov, LUKOIL President.
Credit Suisse First Boston (CSFB) and Citigroup Global Markets Inc. acted as financial advisors to ConocoPhillips on the transaction. CSFB is conducting ConocoPhillips' planned tender offer for LUKOIL shares. Compass Advisers, L.L.P. acted as financial advisor to LUKOIL on the transaction.
Akin Gump Strauss Hauer & Feld LLP acted as legal advisor to LUKOIL on the transaction, while ConocoPhillips was represented by Freshfields Bruckhaus Deringer and Wachtell, Lipton, Rosen and Katz.
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