Financial Times
By DAVID BUCHAN and ANDREW JACK


Russia's two largest oil companies - Lukoil and Yukos - are vying to extend their downstream reach into the newly liberalised markets of central and southern Europe.

Both companies said, in separate interviews, that these were natural areas for expansion because of low transport costs.

Last week Yukos dropped out of the bidding for the Greek state's 23 per cent stake in Hellenic Petroleum, leaving Lukoil to make a joint bid with the Latsis group of Greece. Leonid Fedoun, Lukoil's vice-president said he was "very happy" at Yukos's move, and said a stake in Hellenic would give Lukoil "a strategic presence" in the Balkan market "which has huge growth potential after the end of the Yugoslav war".

But the companies could go head-to-head elsewhere, suggested Mikhail Khodorkovsky, the head of Yukos, who said he was interested in acquisitions in Poland and Germany, stretching down to Italy, Turkey and Bulgaria.

Mr Khodorkovsky said he would begin by purchasing stakes in refineries, because they were profitable and offered the prospect of long-term contracts. His strategy was to sell 70 per cent or more oil on contracts of at least five years.

He said he was puzzled why several refineries in the region had suddenly come on to the market, and speculated that one reason was pressure by financial analysts on oil companies to sell because refineries' return on capital was relatively low. He made clear he intended to exploit the situation.

Lukoil already has refineries in Ukraine, Romania and Bulgaria. But Mr Fedoun said Lukoil was negotiating both for a partnership with UK-based Rotch Energy, which has a preliminary agreement to buy the Gdansk refinery in Poland and is believed to be also talking to Yukos, and for some form of co-operation with Lithuania's Mazeikiu Nafta, operated by Williams of the US.
Mr Fedoun said tough US environmental rules had deterred Lukoil from buying a refinery in the US to supply the Getty chain of petrol stations it acquired a couple of years ago. Instead, it would use Getty's tank farms to store its Russian crude, which it would get a third party to refine.

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