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Thursday, December 29, 2005

Is Gazprom driven by politics or profit?

[Criticism of Schroeder aside it looks like a very smart move by Germany to have a former Chancellor so well placed. That might guarantee Germany’s energy future if there are disruptions, war or political conflict. Germany then could play the role of power broker in seeing how supplies are distributed throughout the rest of Europe. I’d watch for increasingly close ties between Britain and Germany. – MCR]

The Kremlin controls the company with a quarter of global gas reserves. The question is what it uses that power for, writes Conal Walsh

Sunday December 18, 2005Observer Link Here

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

It has been a busy week for the world's largest gas company. As well as getting into an argument with the Ukrainian government, Gazprom unveiled a high-profile new recruit: Gerhard Schroder. The former German Chancellor joins the board of North European Gas Pipeline, Gazprom's new consortium.

His appointment aroused condemnation in the German press, who objected to their recently deposed leader taking a highly paid job for a firm whose $5 billion pipeline project he personally championed while in office. But what the move says about Schroder's conduct is probably less important than what it says about Gazprom's growing status.

Owning more than a quarter of global gas reserves, this Kremlin-controlled behemoth is set to become western Europe's leading energy supplier within the next 10 years. Schroder and other appointees will help it to present a friendly and reassuring face to its western partners. But is Gazprom really a liberalising company we can do business with, or a dangerously large and powerful arm of the Russian government?

Even before it began making hirelings of Europe's best-known statesmen, nobody doubted its geo-political importance. Led by chief executive Alexei Miller, Gazprom saw its market capitalisation race past $100bn this year, a figure that could grow significantly once its shares become more accessible. An idea of the company's sheer size can be gauged from the fact that its most high-profile deal of recent months - the $13.1bn purchase of Roman Abramovich's oil firm Sibneft - added only 5 per cent to its asset base.

That, incidentally, was just one of a flurry of recent acquisitions and consolidations in Russia's energy sector. Gazprom is reported to have its eye on Slavneft, another oil firm, and is leading what seems to be a state-sponsored drive to bring the country's energy assets back into government ownership. To that apparent end, President Vladimir Putin has also imposed restrictions on foreign ownership of 'strategic' oil and gas fields, and, in effect, renationalised Yukos, the oil company formerly run by jailed tycoon Mikhail Khodorkovsky.

Controversial measures such as these raise the fear that Putin plans to make energy supplies a blunt instrument of Kremlin foreign policy. His government has always had de facto control over Gazprom but this year it made sure by spending $7.5bn to build its stake up to 51 per cent.

But William Browder, chief executive of the Moscow equity fund Hermitage Capital Management, rejects the notion that Putin is 'reSovietising' Russia's most important company.

Browder, whose fund has a small stake in the gas giant, has long been a critic of Gazprom's management but insists that the company is actually liberalising. Officially, foreign ownership of Gazprom stock has been limited to 4.5 per cent until now, but the indications are that Putin will soon raise the threshold to 49 per cent.

'Historically, Gazprom was forced to subsidise neighbouring countries in exchange for those neighbours being supportive of Russia,' says Browder. 'It was an economics-for-politics swap. Now that Ukraine and Georgia no longer want such close ties with Russia, they are being asked to pay market prices ... That will mean greater profitability.'

Demand for Gazprom shares will surely be high, but whether the company is yet an entirely good investment is debatable. By the standards of the western oil majors, it is badly run. Last year staff costs went up by more than 30 per cent, while net revenues increased by only 24 per cent. Many analysts decry its wide portfolio of non-core operations, which include holdings in banking, media and electricity.

Its market capitalisation per barrel of reserves is one of the lowest in the global industry. It produces 550bn cubic metres of gas a year but is obliged to sell 400bn of these to Russian buyers at low, state-regulated prices, leaving scant funds to develop new fields. Prices will eventually rise as a condition of Russia's membership of the World Trade Organisation, but for now exports to Europe, worth $30bn a year, are Gazprom's only source of serious profits.

Commercial logic suggests it will want to build constructive partnerships with western customers, but how much its performance improves may depend on how often the Kremlin chooses to interfere in its decision-making.

'Gazprom is a political animal and a major source of Russian government influence abroad,' says Stephen O'Sullivan, an analyst at UFG, the Moscow-based investment bank. But O'Sullivan feels that the company is driven by a business agenda more than a political one.

'Gazprom has some very smart people running its export businesses. It is moving into liquefied natural gas [a form of gas transported by sea rather than pipeline] and looking at exports to China.

'It is gently withdrawing from the domestic market, allowing some of the smaller independent companies to take that business, and focusing on exports. That ought to promote liberalism.'

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