Bloomberg: Gazprom May Get Stake in Ukraine Pipe Operator, Kommersant Says

Gazprom

By Maria Ermakova

Feb. 9 (Bloomberg) -- OAO Gazprom, Russia’s gas exporter, may gain a stake in the operator of Ukraine’s pipeline network, Kommersant reported.

President-elect Viktor Yanukovych wants to boost Russian gas shipments to Europe via Ukraine to increase state revenue and plans to offer Gazprom and a group of European energy companies 33.3 percent stakes in a new pipeline operator, the newspaper said, citing an unidentified official from Yanukovych’s Party of Regions.

Ukraine wants to increase the amount of Russian fuel it ships to Europe to 200 billion cubic meters a year from about 75 billion now, Moscow-based Kommersant said.

To contact the reporter on this story: Maria Ermakova in Moscow at mermakova@bloomberg.net

Alexey Miller, chairman of Gazprom’s Management Committee, had met President Rajapaksa Monday, the oil firm said in a statement.

"The parties discussed prospects for Russian-Sri Lankan cooperation in the oil and gas sector.

"In particular, they focused on Gazprom’s possible participation in the development of offshore hydrocarbon deposits in Sri Lanka."

Cairn India, a private oil firm, has already bought one oil exploration block off Mannar in Sri Lanka's north western coast through an open auction.

In December, it began three-dimensional seismic surveys to pinpoint sites for test drills later on in the Gulf of Mannar waters off Sri Lanka's north-west.

Cairn has incorporated a local firm to begin oil exploration.

Cairn India said the 3D seismic surveys by its local unit, Cairn Lanka, will be completed in three months after which the company will analyse the data.

FEBRUARY 9, 2010

WSJ: Gazprom Touts Growth Prospects

By GUY CHAZAN

Gazprom's managers, in the midst of a roadshow that takes them to Moscow, London and New York this month, are telling investors the company's share of the European natural-gas market will grow from roughly a quarter now to nearly a third by 2020.

Meanwhile, a Gazprom presentation shows sales to all export markets outside of the former Soviet Union will more than double—to between 320 and 345 billion cubic meters by 2030 from about 140 billion cubic meters this year. The company says it will export 161 billion cubic meters to Europe this year, up 15% from last year.

Gazprom's ambitious growth targets, however, stand in contrast to recent changes in the global natural-gas market. The company's exports slumped last year as the world-wide economic downturn slashed industrial demand for the fuel. Meanwhile, supply surged as liquefied-natural-gas projects came onstream and production of unconventional shale gas boomed in the U.S.

"I don't have very good news for Russia, I'm afraid," Fatih Birol, chief economist at the International Energy Agency, told an investment conference in Moscow last week. He said the supply glut would last until 2015.

The changes in the industry mark a big shift from the days when Russia sought to remake itself as an energy superpower and was accused by the U.S. and others of using its natural-gas exports as a geopolitical weapon to bully its neighbors.

Gazprom itself acknowledged how weak energy demand is changing its strategy when it announced a three-year delay to the start of its massive Shtokman field in the Arctic last Friday. Shtokman was supposed to produce its first gas in 2013 and begin shipments of liquefied natural gas, or LNG, to North America in 2014. In a statement, Gazprom said it had agreed with partners Statoil ASA, of Norway, and France's Total SA to postpone production from Shtokman until 2016. It already has put back the start date for another big gas field, Bovanenkovo on the Arctic Yamal peninsula, by a year until 2012.

Gazprom officials predict the supply glut will dissipate much more quickly than Mr. Birol of the IEA says. European demand will bounce back by 2012, they say—with climate-change policies being a key driver. Gas burns much more cleanly than coal and is widely seen as an important bridge to a low-carbon future. They also point to the decline in domestic European production of gas in places like the North Sea, which will boost demand for imports.

Meanwhile, Gazprom says its robust market share in Europe is underpinned by a large portfolio of long-term contracts. It says it has already contracted to deliver 3.1 trillion cubic meters of gas to Europe between this year and 2035 under take-or-pay contracts, according to the presentation given to investors, guaranteeing revenue of about $1 trillion.

The big game-changer for suppliers like Gazprom has been the shale-gas boom in the U.S. Deposits of natural gas trapped in shale-rock formations that were once considered too costly to exploit have become commercially viable thanks to innovative technologies such as horizontal drilling and new ways of fracturing rock. U.S. shale-gas output grew from less than a billion cubic feet a day in 1998 to about five billion cubic feet daily last year. In 2009, the U.S. overtook Russia as the world's largest natural-gas producer.

Russian officials have tended to downplay the unconventional-gas revolution and warn of dangers in exploiting the resource. Alexander Medvedev, Gazprom's deputy chief executive, told an industry conference in October that the potential pollution of water reservoirs caused by shale-gas production could be a problem.

But the surge in American output has affected Gazprom by increasing competition between suppliers in Europe. LNG cargoes that were originally destined for the U.S. have been diverted to European markets, driving down spot prices below the oil-linked price of gas in Gazprom's long-term supply contracts. Some customers responded last year by buying the minimum amount of gas allowed under their contracts with Gazprom and buying more LNG instead.

"The world through the Gazprom lens looks rather different" now, BP PLC Chief Executive Tony Hayward told reporters in Moscow last month.

Write to Guy Chazan at guy.chazan@wsj.com

The Georgian Times: Gazprom’s Miserable Performance Under Putin – Shattered Ambitions of a Russian Energy Superpower

http://www.geotimes.ge/index.php?m=home&newsid=20331

Gazprom’s future is in serious jeopardy. Production falls every month, exports are decreasing and, as a result, the payment of dividends to shareholders – chiefly the Russian State – took a nosedive in 2009. Deputy Prime Minister Viktor Zubkov announced on December 25 that only 5 percent of the company’s profits would be distributed to shareholders, while during the commodity and energy boom of previous years the portion of Gazprom’s profits paid out to stockholders usually reached 17.5 percent.

The Russian press has recently sounded the alarm signal in emphasising that Gazprom is losing its market share in Europe in the context of the world economic crisis. However, the company’s management remains optimistic and downplays such prognostics by claiming that what happened in Europe 2008 and 2009 is not the consequence of structural factors but rather a temporary economic slowdown that in no way endangers the stability of the company and the country. Well, one has to look again.

While the world economy was steadily growing Gazprom could pursue its commercial activities without paying much attention to structural problems. After all, Gazprom was the main instrument used by The Kremlin for making Russia great again. After Vladimir Putin was sworn in as President of the Russian Federation on May 7, 2000, Gazprom’s development strategy was unambiguous: get rid of domestic competition – the trial of former Yukos chief Mikhail Khodorkovsky on fraud and tax evasion charges was indicative of that strategy - beef up Gazprom’s dominance in the post-Soviet space and finally extend Gazprom’s products and influence into new regions, chiefly in the direction of Europe and East Asia (China). The construction of the Blue Stream pipeline, which runs from the Izobilnoy gas plant in southern Russia (Novorosisk) across the Black Sea bed to the Turkish port of Samsun at a record depth of 2,150 metres below the sea, was a reflection of this ambitious strategy.

By the summer of 2008, just months before the eruption of the financial crisis, the estimated worth of Gazprom was $350 billion, making it the third most valuable enterprise in the world, jus behind Exxon Mobil and PetroChina. However, at the end of 2009, being in no condition to weather the financial crisis, its estimated worth had dropped to $120 billion and it had fallen to 40th place on the list of the most capitalised companies in the world.

This fall from grace is the result of a combination of factors: the fall of energy demand worldwide and the fall of energy prices. The sharp economic recession in Europe forced Gazprom to reduce its exports to that market by around 55% in 2009, as compared to 2008. This led to production cutbacks. Russia’s annual output plunged 17% in 2009 to 462 billion cubic metres. To this we must add the price of gas, which began to drop sharply in the fourth quarter of 2008. The Russian newspaper Vedomosti reported in March 2008 that Gazprom sold gas to Europe in 2008 at an average price of $409/tcm. In 2009 the average price stood at $250/tcm, down from a projected $280/tcm – given that the price of gas follows that of oil with a six to nine month lag, it is clear that the drop could go even lower. Accordingly, it is estimated that revenues dropped from $73 billion in 2008 to around $40 billion in 2009. Gazprom anticipates a continued decline of its revenues in 2010.

Gazprom’s future is compounded by another tough problem: it has seriously neglected investment in gas extraction. In 2009 it produced at about the same level as in 1999. Although Russia has proven gas deposits that will last for 80 years, traditional fields, such as Urengoi and Yamburg, are being depleted at a fast pace, and new fields, such as Yamal, require heavy investment in infrastructure. Clearly, the new management team that was co-opted by Putin has failed to preserve the interests of the company and, by implication in Putin’s regime, those of the Russian State.

Over the period 2001-07, Gazprom’s investments in developing gas extraction were just over $27 billion. Just for the sake of comparison, during the same period France’s Elf Total invested the same amount of money in each year. Due to Gazprom’s dire situation its investment programme may be cut by about 30% in 2010. Meanwhile, $44.6 billion was spent on acquisitions in Russia proper but also in different regions of the world. Two-thirds of these acquisitions were outside the energy sector. Apart from owning colossal natural gas reserves and the largest pipeline network in the world (150,000 km), Gazprom is playing a strategic role in Russia's banking, insurance, mass media, agriculture and construction sectors. As a result of these investments in non-energy sectors, between 2003 and 2009 the company’s operating costs rose from $4.9 to $14.8 per barrel of oil equivalent (boe). During Putin’s Presidency, Gazprom also accumulated a colossal debt. In 2000, its debt amounted to $13.5 billion. By the end Putin's term the behemoth company owed about $62 billion, the equivalent of two-thirds of its income.

It seems that improving gas extraction is not an important objective for Gazprom. To continue to honour its supply contracts in Europe it was imperative for Gazprom to get hold of as many new promising fields as possible. Since the beginning of 2007, Gazprom’s strategy has thus been to gain control of gas assets and to invest in gas deposits that for a time were owned by foreign investors. In Russia, it repurchased for $9.4 billion in December 2004 Yuganskneftegaz, the main production unit of Yukos, which was sold in a rigged auction to an obscure company registered in a grocery shop in a provincial town near Pskov. Rosneft, a subsidiary of Gazprom, then bought Yuganskneftegas. Gazprom also drove Shell and BP out of the Sakhaline-2 and Kovykta deposits in Eastern Siberia and the Far East. It also signed agreements with Turkmenistan, Kazakhstan and Kyrgyzstan to increase their gas exports to Russia. In March 2008 Gazprom agreed to pay “European” prices for gas imported from these Central Asian countries for the next 25 years. With the fall of gas price in Europe, Gazprom now has to pay much higher prices to its suppliers than the price it charges to its consumers, resulting in a loss of $3.5 billion for 2009.

In Uzbekistan the Russian Zarubezneftegaz – another subsidiary of Gazprom – and Uzbekneftegaz National Holding Company signed a production sharing agreement in April 2004 to continue developing the Uzbek Shakhpakhty gas deposit on the Ustyurt Plateau. The exploitation of the deposit brings yearly 13 billion cubic metres (Bcm) of gas delivery to Russia. However Uzbekistan is so far dissatisfied with Gazprom's implementation of the project. Not only is the project slowly implemented, but the Uzbeks complain that Gazprom promised to invest $300 million in it but has so far invested only a small fraction of that amount. A fifteen million dollar investment for the modernisation of the existing infrastructure is also stalling.

Gazprom’s bulimia is also developing in the electricity sector. In Russia, the group upped to 42.72% its participation in Mosenergo – the main electricity producer for the Moscow area – and acquired controlling stakes in wholesale power generators OGK-2 and OGK-6, as well as a number of power assets in three territorial generating firms that were spun off from the former power monopoly REA UES, now known simply as the Unified Energy System (UES). Gazprom was allowed to swap its stakes in some regional power generators for 55% of OGK-2 existing shares and 52% of OGK-6, with the latter planning to invest 49.1 billion roubles ($1.8 billion) by the end of 2010.

Despite these moves in the last 4 or 5 years the world's number one gas exporter has a tough year ahead. Two general causes may explain this miserable performance in the last ten years. First, under Putin Gazprom became a political instrument in the pursuit of The Kremlin’s ambition to reestablish its dominance at home and on the post-Soviet territory. At times domestic and foreign policy purposes were and still are at variance with the company’s – and the country's – best interest. Second, in the ‘reconquista’ of Russia’s greatness Gazprom was subjected to Byzantine schemes to dilute value and strip assets. A thread of murky intermediaries involved in transacting and distributing gas imports from Central Asian states via southern Russia and Ukraine and on to Europe causes Gazprom to lose control over an enormous amount of assets. According to some estimates, under Putin’s watch Gazprom’s assets were reduced by $60 billion through intermediaries, overvalued acquisitions and transfer pricing schemes.

Many indicators point to a situation where the Kremlin’s short-term energy policy will soon collide with long-term energy commitments in Europe and elsewhere. Russia as an energy superpower is not on the cards anymore.

Richard Rousseau, Ph.D. is Lecturer in International Relations at the University of Georgia

Renaissance Capital, Russia

Devil's advocate. The investment community is divided on Gazprom- probably more so than it is on any other Russian oil and gas stock. Our positive view on Gazprom in 2H09 proved premature (although up 11%, it has underperformed the Russian equity market 18% over the past six months), but we continue to think the structural forces are in place for the stock to deliver strong performance over the next six months. In this report, we look at the nine questions investors most frequently ask us about Gazprom, and set out our position on each.