Alekperov, Vagit Y. 1950–

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Vagit Y. Alekperov
1950–

Founder and chief executive officer, Lukoil

Nationality: Azerbaijani-Russian.

Born: September 1, 1950, in Baku, Azerbaijan.

Education: Azerbaijan Oil and Gas Institute, PhD, 1974.

Family: Married; children: one.

Career: Kaspmorneft, 1972–1974, drill operator; West Siberian oil production, 1974–1979, team leader, deputy chief, deputy director general; Kogalymneftegaz and Basneft, 1979–1982, director general; Kogalymneftegaz Oil, 1982–1990, director general; Soviet Union, 1990–1991, deputy minister of oil and gas, acting minister of fuel and energy; Lukoil, 1991–, president.

Awards: Order of People's Friendship, Order of Honor, medal for developing the oil and gas complex in western Siberia, Order of Glory, Global Corporate Leadership Award.

Address: OAO Lukoil, 11 Sretenski Boulevard, 101000 Moscow, Russia; http://www.lukoil.com.

■ Vagit Y. Alekperov created Lukoil in 1991, when he was the deputy minister of oil, as one of the first attempts by the Russian government to privatize state enterprises. Eventually acquiring a controlling stake in Lukoil, Alekperov deployed capitalist management techniques, socialist industrial practices, strong-arm tactics, and political connections to make Lukoil on of the world's leading oil companies. With 21.45 billion barrels of proven and probable reserves in oil patches across Russia as well as 25 other countries, Lukoil ranked second in the world to ExxonMobil, which had 22 billion barrels of proven reserves. Lukoil, a publicly traded company on the NYSE, remained a tightly held company in 2003; its principal shareholders were Atlantic Richfield Company (6 percent), the Russian government (8 percent), Alekperov (10 percent), and Lukoil managers (20 percent). In addition to oil reserves, Lukoil owned eight refineries and 4,700 gas stations worldwide, with 2,000 in the United States. In 2002 Alekperov ranked

327th on a list of world's richest people, with assets totaling $1.3 billion.

THE BOY FROM BAKU

Raised in Baku on the Caspian Sea, an area "seeped through with oil," Alekperov was destined to become an oilman (Forbes, January 22, 1996). Baku oil made several famous fortunes, including that of the Nobel brothers and the founder of Shell Oil. However, Alekperov, the youngest of five children from an Azerbaijani-Cossack family and the son of an oilman, was the first native to realize wealth from oil. His mother, who struggled as a single parent, raised him to be "a doer, not a talker" (New York Times, May 19, 2002). At 18, Alekperov went to work in the oil fields while pursuing an advanced degree.

Alekperov completed his studies at the Azerbaijan Oil and Gas Institute with a dissertation titled "Vertically Integrated Oil Companies in Russia: Methodology of Forming and Realization." In that work he explored the technical complexities that a Russian oil company faced in integrating oil production—that is, controlling all aspects of exploration, extraction, refining, marketing, and distribution. From his research, Alekperov formulated a theory about integrated Russian oil production and showed that integrated companies, whether in the United States or Russia, were the most efficient means of developing oil. He posited that if Russian oil was to compete on the global market, its companies had to resemble companies like British Petroleum and Shell. While completing his doctoral degree, Alekperov established his reputation as a sound oilman with an aura of invincibility. While at work in the Caspian Sea, he survived a wellhead explosion on a drilling platform that killed two other workers.

OIL IN THE SOVIET UNION

The Soviet Union organized oil deposits into 33 associations, determined in their size and breadth by the deposits under their control. Taken as distinct private companies, 16 of these associations would have ranked among the world's 30 largest oil companies in 1991. Having proven his knowledge of oil geology and his ability to work hard, Alekperov took charge of Kogalym, an oil production town in the association of Kogalymneftegaz, in 1983. Though atop one of the world's best reserves, Kogalym had poor output figures before Alekperov arrived.

Alekperov combined two managerial techniques, blending a capitalist-style attention to production margins with a socialist-style attention to workers. One of his first acts at Kogalym was to build homes and a retail outlet for his workers; later he added a hospital and small airport. Though such materialist concerns won him a reprimand and a criminal investigation from Moscow, the boost in worker morale assisted Alekperov in restructuring work practices. His approach included a genuine solidarity with his workers. On one occasion, men nervous about repairing a pipeline were put at ease when Alekperov lay next to it and told them to get to work. In short, Alekperov had begun to create an integrated oil company, and he was not afraid to get dirty. As a result of his management, annual production at Kogalym increased from 2 million barrels to 240 million barrels of crude by 1990. Amidst the general decline of Soviet production, Alekperov's performance brought him to the attention of Mikhail Gorbechev, who was then attempting to recreate the Soviet Union.

Alekperov became deputy oil minister in 1990, charged with improving the overall efficiency of Russian oil production. Understanding that oil, whether under Communism or not, had to be developed by integrated companies using modern technology, Alekperov sought foreign investment, specifically from British Petroleum. However, Western oil executives could not imagine a post-Communist Russia and declined, fearing political risk. Alekperov, however, learned some lessons from British Petroleum: "If the company is hit by a fall in crude oil prices, it can still make money on petrochemicals" and "buying and selling goes on between competing oil companies" (Forbes, January 22, 1996). Alekperov added these aspects of capitalism to his already sound understanding of integration.

Although Soviet hardliners revolted against Gorbachev, their failure only accelerated the demise of the Soviet Union. Nevertheless, Gorbechev was unable to prevent Boris Yeltsin from taking the lead and establishing the Russian Republic. Meanwhile, oil's importance to the government and Alekperov's excellent managerial ability ensured his continued role as oil minister. When Yeltsin expedited privatization of state industries in 1991, Alekperov created Lukoil. The first three letters came from the largest of Russia's associations, which Alekperov had selected to anchor his company: Langepasneftegaz, Uraineftegaz, and Kogalymneftegaz. Lukoil was the first and largest of 10 Russian oil companies created at this time. By 1993 Alekperov had stepped down from his ministerial post to take control of Lukoil, becoming incredibly wealthy in the process. Alekperov's Lukoil was not released into a free market world but a world of a partially functioning capitalist bureaucracy. In addition, he had to face the Russian mafia, or Mafiya ; the kidnapping of a Lukoil subordinate in 2002 by the Mafiya revealed their intransigence.

ROBBER BARON, CRONY, OLIGARCH

By the mid-1990s the Western media equated Russia's new men of wealth to the American robber barons of the late 19th century. Accordingly, robber baron was defined as a man who used his unique business acumen to consolidate manufacturing concerns or extract natural resources when nobody else could, all for the benefit of the economy as a whole. Using the robber-baron analogy to depict Russian businessmen obscured the deterioration resulting from the Soviet Union's demise and boosted support for global market deregulation.

However, the myth by analogy was grossly misleading. First, the historic imbalance of the late 19th century was not unique to the United States: Russia had the Swedish-born Nobel brothers to match Rockefeller in oil, and N. I. Putilov matched Andrew Carnegie in steel manufacturing. The instability of capitalist economies at the time of the historic robber barons nearly destroyed the entire system; government reform and a judicial crackdown eventually curtailed the monopolistic power acquired by the robber barons. Second, and worse, propagation of the robber baron myth allowed commentators to view Russia in the 1990s as 19-century Russia, thus ignoring the historical vestiges of a corrupt Communist bureaucracy demanding attention before a market economy would be viable. Refusing to see Russia in its post-Soviet context fostered ignorance of the true state of Russia, where incredibly high rates of alcoholism and suicide created a decline in population and a civic order verging on anarchy. Russia's new men of wealth took advantage of a power vacuum to look out for their own interests.

As Linda Randall wrote, the Russian robber baron more closely paralleled the 19th-century Russian manager, using Communist-style bureaucratic habits to operate in a global capitalist market without checks and balances. Russian administrative autocracy operated within a set of "interlocking relationships" involving managers, workers, government bureaucrats, and organized crime. Such managers had no reason to become risk-taking entrepreneurs looking out for shareholders. Rather, they worked to secure the well-being of their networks by refusing to lay off workers (who often included generations of families working at the same plant because they could not relocate), refusing to favor new policies, refusing to demand honest bureaucrats over "their" bureaucrats, and refusing to give up protection regimes. As a result, the private fiefdoms carved out of the Russian Federation's economy during Yeltsin's presidency were woefully inefficient, undervalued, and far from the standards of a market economy. As described by Randall, corporate moguls like Alekperov were a return to the past; they were 19th-century Russian managers joined with Soviet bureaucrats looking to capitalist markets to enrich their networks. Such figures looked nothing like the mythic robber barons, who ultimately had answered to market rules. A more apt comparison was the "junk bond king" of the scandal surrounding U.S. savings and loan associations in the early 1990s.

Alekperov capitalized on this misunderstanding as he constructed an image of himself for the West. The press promulgated the idea that Russia could transition to capitalism only by means laid out by the men who had violently wrested their private fiefdoms from the wreckage of the Soviet Union instead of demanding transparency and lawful market behavior. Subsequently, Western capital flowed where men like Alekperov wanted it to flow. Consolidations and operation improvement did occur during the 1990s, but in Russia a "hostile takeover" was more often accomplished with guns than with a stock purchase. Because Western investors allowed the so-called robber barons to set the terms of investment, common Russians were disillusioned. Their vouchers for stock in the new companies were made worthless in a market controlled by the powerful. Not surprisingly, Russians call privatization, prikhvatizatsiya, meaning "grabification." In short, the benign robber baron hid the actual theft of state resources Yeltsin had allowed to occur. Advertising himself as a safe, dependable source of oil, Alekperov never spurned a Western reporter and freely disseminated a "rags to riches" tale of his upbringing that mirrored Russia's struggle to become a rich capitalist nation.

PUTTING ON THE BAKU SQUEEZE

Alekperov delivered cheap oil to the West using the Baku Squeeze. As an oilman and, more importantly, a man of the government with friends in high places, Alekperov solved problems in Russian oil development by creating them. Alekperov used his Moscow connections to pressure local governments to bog down a foreign company in a hopeless mire of red tape. Then, just when the foreign company despaired, Alekperov promised to solve the problem if Lukoil received a share of the project. By 1996, wherever oil development had stopped in the former Soviet Union for political, technical, or financial reasons, Alekperov appeared, and oil magically flowed.

Gradually, nicknames like General and Don dropped away, and Alekperov was referred to as Alek the First (and often compared to a Turkish pasha). The nickname was an endearment but reflected the fact that Lukoil's success at moving oil occurred because Alekperov governed oil. Western oil companies admired Alekperov's ability to resolve issues and soon insisted on making deals only with Alekperov. Although control of cash flow was tantamount to control of a company in Russia, Alekperov made himself essential to the flow of a commodity in general, and Lukoil increased its holdings outside its core associations as payment for Alekperov's "help."

Alekperov also used sex and gift giving to augment his "position to demand participation in all oil and gas projects in the region," as he once told a Russian reporter (The Economist, July 16, 1994). Alekperov funded the development of Russian private jets to have a local source for expensive gifts. A jet worth $18 million given to the president of Kazakhstan ensured Lukoil's entry into that country's oil fields, a seat on Kazakhstan's Foreign Investments Council, and numerous marks of nobility. To polish his image, Alekperov made it company policy to hire only beautiful Russian women as Lukoil spokespersons and translators. The best-looking women were reserved for Alekperov's plane. The women became Lukoil's face, helping to smooth negotiations between Alekperov and oilmen from around the world.

MATURATION OF LUKOIL

At the end of the 1990s, Lukoil was in trouble. Vladimir Putin had become president of Russia and was determined to consolidate power. Lukoil was charged with tax fraud in fiscal year 1998–1999. To become better friends with Putin, Alekperov orchestrated the departure of one of Putin's strongest opponents, Boris Berezovsky. Using Lukoil's stake in NTV, the domestic television network that Berezovskyhad grown to a 50 percent audience share, Alekperov forced the network into bankruptcy and Berezovsky to flee to Britain.

In 2002 another Russian oil giant, Yukos, embarrassed Lukoil by surpassing it as the most valuable Russian company and the most preferred Russian stock. Lukoil shareholders and executives were furious and criticized Alekperov for the very qualities that had made Lukoil successful. One shareholder complained, "Lukoil was built on personal loyalties, not a corporate structure. You can sign a deal at the center, but you find you can't implement it" (New York Times, May 19, 2002). Ultimately, Alekperov defended himself in a form that had worked in the past—he cultivated reporters. He asked to be excused from blame for the immaturity of Russian capitalism. He then agreed to make Lukoil more "open" but stated, "In the Soviet school of management, nothing like that existed" (New York Times, May 19, 2002). Alekperov played up his image as a rustic pioneer who would ultimately succeed.

Aleperov's ability to make oil move in the former Soviet Union stuttered. By 2004 Lukoil withdrew from a number of fields it easily entered in the 1990s. Citing regional instability, cash shortages, and technical problems, Alekperov reduced work in Komi to focus on Parma. In the area of the Timan Pechora project, for which Alekperov won the admiration of Mitsui, Mitsubishi, McDermott International, Marathon, and Shell because of a Baku Squeeze, Lukoil had its exploration license revised.

LUKOIL AND RUSSIAN FOREIGN RELATIONS

A highlight in Alekperov's leadership of Lukoil came in September 2003. Two years after terrorists attacked the Pentagon and the twin towers of the World Trade Center, President Putin paid his respects in New York on his way to a meeting with President Bush. During this visit, Putin appeared at the grand opening of a Getty gas station in Manhattan, which for the occasion was renamed Lukoil. Putin appeared holding a Krispy Kreme doughnut and a cup of coffee as a visible sign of his support of Lukoil, the Russian government's investment in Lukoil, and Lukoil's claim to development rights in Iraq's West Qurna oil field. The public relations stunt by Russia's president showed Lukoil's importance to Russia's foreign policy. As Julia Nanay, a Russian oil expert, said, "The company's international expansion is focused on the Caspian and Iraq, and Putin is focused on those places" (New York Times, September 27, 2003).

Iraqi debt to Russia totaled $7.6 billion, an amount Russia wanted to recover. Lukoil paid Iraq $2 billion in 1997 for exploration rights to the West Qurna oil field, thought to have 7 billion to 15 billion barrels. These interests fueled Russia's disagreement with U.S. policy toward Iraq from 1996 through 2004. During that time Lukoil was unable to explore West Qurna because of UN sanctions and U.S. policy (as an NYSE company and a recipient of U.S. development aid, Lukoil had to abide by all U.S. policies on Iraqi business operations). In 2002 Saddam Hussein canceled Lukoil's contract due to inaction. In 2003 Russia refused to participate in the occupation of Iraq, in part because the United States would not guarantee Russian interests, which included Lukoil's. In 2004 Alekperov met with Iraqi ministers to lay the groundwork for Lukoil's investment in Iraq and the education of Iraqis in Russian petroleum institutes.

Oil also permeated Russia's relations with China. Officially, the Chinese economy grew by 9.7 percent early in the 21st century (analysts put the actual rate several points higher), making it desperate for oil. Consequently, China aggressively pursued supplier relations with oil-rich countries. Lukoil helped construct pipelines and developed rail transportation of Russian oil south. Investment in trade with China plus an investment in South America pushed Lukoil ahead of Yukos once again (in terms of Russian company value) and firmly in the number-two spot of global oil companies (in terms of reserves). It helped that Putin had imprisoned the head of Yukos for tax fraud in 2003.

GLOBAL OIL

A ranking of the world's largest economies listed ExxonMobil 21st, just behind Sweden but ahead of Turkey. Lukoil was not on the list. Alekperov's boast to one day buy ExxonMobil, therefore, appeared unlikely. Lukoil had better reserves but failed to approach ExxonMobil's level of capitalization. Yet Alekperov continued working toward his goal, steadily improving the chronically undervalued company by modernizing its facilities, increasing its cash flow, and fostering integration by purchasing gas stations and petrochemical concerns.

Alekperov's plan depended largely on the oil reserves of Eastern Siberia, which were at an unknown level, and Lukoil's ability to diversify its reserves. Alekperov's deputy, Leonid Fedun, put the matter succinctly: "To become an international oil major, our overseas output should account for 25 percent of total production, with 30 percent of total reserves located outside Russia" (FSU Energy, April 23, 2004). Though shareholders and analysts grumbled loudly about Alekperov's inability to realize Lukoil's potential as a global oil supplier because of his management style, that style defended Lukoil's Iraq investments and secured Lukoil a role in China's energy markets.

Growing up in an "oil-stained environment," Alekperov became a consummate oilman regarding the development and delivery of oil as a legitimate means of world security (December 2000). Alekperov showed no concern for the environmental impact of oil or the repercussions of oil politics in terms of war or human disease. Much of Lukoil's ability to sell oil cheaply depended on keeping labor costs low but keeping workers happy through superficial housing improvements. He used political connections and the media's gullibility to make Lukoil the world's second-largest oil company. However, his inability to operate according to the rules of transparency expected in a true market economy nearly exposed Lukoil to expensive litigation several times as the company pursued global status and greater responsibility for oil security.

See also entry on OAO LUKOIL in International Directory of Company Histories.

sources for further information

Alekperov, Vagit, "The Oil Business: A Responsible Approach," Second Russian Energy Summit, December 2000, http://www.mmnk.org/journal/alekperov.htm.

"Alekperov Talks Big," FSU Energy, April 23, 2004.

Energy Intelligence Group, "Lukoil Halves Timan-Pechora Investments," NEFTE Compass 11, no. 15 (April 11, 2002), p. 4.

Gabel, Medard, and Henry Bruner, Global Inc.: An Atlas of the Multinational Corporation, New York: New Press, 2003.

"Iraq Pact: Lukoil Signs Pact with Iraq, West Qurna Waits," NEFTE Compass 13, no. 12 (March 16, 2004).

Klebnikov, Paul, "Russia's Robber Barons," Forbes, November 21, 1994, pp. 75-82.

——, "The Seven Sisters Have a Baby Brother," Forbes, January 22, 1996, pp. 70-78.

"Lukoil," Petroleum Economist, August 2000, p. 42.

"Lukoil: Vagit Rockefeller," The Economist, July 16, 1994, p. 57.

Neela Banerjee, "Russia Sends Message to U.S. About Iraqi Oil Contracts," New York Times, September 27, 2003.

Randall, Linda M., Reluctant Capitalists: Russia's Journal Through Market Transition, New York: Routledge, 2001.

Rubinfien, Elisabeth, "Russian Oil Man and Firm He Formed, Lukoil, Are Making Mark on Industry," Wall Street Journal, April 25, 1994.

"Russia: Iraqi Leaders Meet Lukoil's President," IPR Strategic Business Information Database, December 24, 2003.