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Stephen Gates has been senior vice president and general counsel at ConocoPhillips Inc. of Houston for only 18 months, and he has spent much of his time on the job working on an energy deal that completes the largest privatization in Russian history. On Sept. 29, ConocoPhillips and Lukoil, a Russian oil company, announced an agreement calling for ConocoPhillips to pay nearly $2 billion to buy a 7.59 percent equity interest in Lukoil from the Russian government. ConocoPhillips won the stake at an auction held in Moscow at which the Russian government sold off its final stake in Lukoil. “It’s been very big, challenging, interesting and I think it’s an important transaction for the company, a great opportunity to get involved [in Lukoil],” says Gates, who worked in-house at Amoco, and later British Petroleum, for 23 years but came to ConocoPhillips in May 2003 from Mayer, Brown, Rowe & Maw in Chicago. “It was complex, multipart, and each aspect required us to become conversant with the applicable Russian law,” Gates says. In addition to the equity interest, the deal calls for ConocoPhillips to pay Lukoil $374 million for a 30 percent interest in a joint venture to develop some oilfields in Timan-Pechora, which is an area north of European Russia and west of Siberia. Also, Lukoil will give ConocoPhillips a 17.5 percent interest in a production-sharing agreement in an oilfield in Iraq, for a purchase price equal to 25 percent of Lukoil’s sunk costs in the project and a funding obligation going forward. (That part of the deal is conditioned on approval from the Iraqi government that Lukoil’s contract is still valid.) According to the deal, ConocoPhillips, which had done business in the past with Lukoil, has the right to increase its stake in Lukoil to 20 percent, and initially will have one member on Lukoil’s board. “It’s a very big deal, not in terms of the initial dollar amount of the investment, but it is possibly an indication of a trend. … You start to see now corporate-level investment in the Russian energy industry, as opposed to asset investment,” says Rick Burdick, a partner in Akin Gump Strauss Hauer & Feld who represents Lukoil. “It’s obviously a groundbreaking transaction, and one with a lot of moving parts,” he says. TWO CULTURES A decade ago, in 1994, Lukoil hired Akin Gump to help it go public. In September 1995, in what Akin Gump lawyers characterized as the first major public offering in Russia since the Bolshevik Revolution, the firm helped Lukoil sell $322 million in bonds. The bonds converted into Lukoil stock in April 1996. [See "From Russia With Rubles," Texas Lawyer, March 11, 1996, page 1.] The firm, which has continued to do work for Lukoil over the years, represented it in the deal with ConocoPhillips. Two years ago, Burdick says, Lukoil executives asked the firm to help it find a U.S. energy company that might be interested in entering into a strategic partnership. “We were the ones who called ConocoPhillips through a personal relationship one of our lawyers has with Jim Mulva,” Burdick says. Partner James Langdon Jr., of Washington, D.C., says he “played a small role” in getting Mulva, chairman and chief executive officer of ConocoPhillips, together with Vagit Alexperov, the chairman of Lukoil. Langdon says he’s known both men for years. Langdon says the deal with ConocoPhillips makes sense for Lukoil because the company is “westward moving.” “They [Lukoil executives] don’t see themselves as forever just a Russian oil company, so an important issue for them is how do they align themselves and move into the rest of the world,” Langdon says. Burdick says the deal took 18 months to work through because both companies had to do due diligence and get to know each other. Also, they had to be sure that the Russian government would be a willing participant by selling off its stake in Lukoil. And, he says, ConocoPhillips wanted to get a sufficient stake in Lukoil to be able to treat it as equity for accounting purposes. Although talks stretched over 18 months, Burdick says they were able to keep the discussions under wrap for 14 or 15 months by avoiding Houston and Moscow negotiating sessions, Burdick says. It wasn’t until the Russian government announced the privatization auction in July that speculation began about the deal in the works. That required some coordination to find places where Mulva and Alexperov, two busy CEOs, could meet. “We would find places where their paths would cross, or could cross,” Burdick says. “We met in Zurich one time. We met in Washington, D.C., a fair amount because Washington is out of the way at least as far as the energy business and the investment banking community goes,” he says. “We met several times in New York and a lot toward the end in London.” Gates confirms the meetings were held in various locations, although he notes that he and ConocoPhillips’ team went to Moscow for the auction and to sign the agreement with Lukoil. Langdon says when the talks began, Lukoil was looking for a strategic partner, but not necessarily one that would buy an equity interest. “The idea was to find an American company to discuss the possibility of a strategic alliance, and when the parties put on the table the things they were interested in, the possibility of ConocoPhillips owning a strategic interest in Lukoil stock [came up],” Langdon says. In announcing the deal, ConocoPhillips said the investment meshes with its strategy of increasing reserves and production. Gates says in-house lawyers Wayne Byers and James W. Skelton Jr., both senior counsel, worked on the deal with him. He says he used lawyers from London-based Freshfields Bruckhaus Deringer, which has a Moscow office, for its Russian law expertise and for help with due diligence and with law that governs the joint venture. He says lawyers from Wachtell, Lipton, Rosen & Katz in New York worked on the design of the deal and corporate governance issues. Andrew Brownstein, a partner in Wachtell, Lipton in New York, declines comment on the deal. William Lawes, a partner in Freshfields in London, did not return a telephone call seeking comment before presstime. But Akin Gump had a huge team on the deal. In addition to Burdick and Langdon, Akin Gump partners Natalia Baratiants and Richard Wilkie and counsel Alexander Danilov, all of Moscow, worked on equity aspects of the deal. Partner Jack Langlois of Houston, and senior counsel Jonathan Socolow and associate Alexander Urlyapov, both of Moscow, worked on the Russian upstream part of the deal, and counsel Mark Stoleson of Moscow, and Bill Alexander and Edward Poitevent, both senior counsel in Houston, handled the Iraq upstream aspect. Others include New York partner Charles Biggio and counsel Abid Qureshi, who worked on U.S. anti-competitive issues, senior counsel Robert Aulsebrook of London on English law matters, and Brussels partner Jacques Bourgeois and associate Ana Perez Ocon on European Union anti-competition matters. Burdick says Ivan Masliaev, the general counsel of Lukoil, had only a small role in the negotiations, but he says that is typical for Russian companies in transactions such as the one with ConocoPhillips. He says in-house lawyers in Russia are more administratively focused. Langdon says the deal was difficult because of the two cultures. He says, “You’ve got language barriers at the top … culturally, they [the two companies] come from very different worlds, so when you try to put together a transaction like this, there are lots of bridges to cross.”

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