THE BUSINESS: Gazprom tightens its grip: Western firms are wooing Russia s energy powerhouse: Turning the screw: Gazprom will soon be five times the size of the world's biggest private oil company, Exxon Mobil, and be able to dominate its competitors: “If it were a country, it would rank number three in terms of reserves after Saudi Arabia and Iran.”: “In October, Gazprom chairman Alexey Miller seemed to be on everybody's appointment lists, holding London meetings with BP's chief executive Lord Browne, Royal Dutch/Shell chief executive Jeroen van der Veer and Exxon Mobil president Rex Tillerson - all in one day.”: “RoyalDutch/Shell, Exxon Mobil and BP are all on the point of giving the Russian giant entry to their two respective projects on Sakhalin Island, even though theoretically they are under less pressure than BP at Kovykta.” (ShellNews.net) 7 Nov 04
By Richard Orange
THE international oil industry's leading lights have been falling over themselves to pay homage to state-dominated Russian gas giant Gazprom.
In October, Gazprom chairman Alexey Miller seemed to be on everybody's appointment lists, holding London meetings with BP's chief executive Lord Browne, Royal Dutch/Shell chief executive Jeroen van der Veer and Exxon Mobil president Rex Tillerson - all in one day.
The reason for this popularity is that Gazprom, long used to a monopoly in natural gas, is increasingly becoming the gatekeeper to Russia's energy sector. It already does this through its monopoly on transmission. Gaining access to the country's huge oil and gas reserves is one of the key strategic goals of everyone in the industry; without transmission this is a pointless activity.
Gazprom's grip is tightening. It is increasingly becoming a proxy for the government in the energy industry. Any newcomer will want to make sure the government is on its side; companies do this through Gazprom. The government plans to take a majority stake in Gazprom in exchange for giving Gazprom two state oil companies. When you consider what happens to companies who get on the wrong side of it, this rush to make alliances makes sense. Itera, a private Russian gas firm with dose ties to Gazprom's previous management, spent some $280m (£151m, €218m) developing the huge Beregovoye field, only for Gazprom to refuse to connect it to its network. Ivan Mazalov, a fund manager at Prosperity Capital in Moscow, says: "It's becoming a road block to any independent activity in the gas sector. It's continuing to grow, like moss. It will get worse when it branches out into oil."
Gazprom is muscling its way into all of the big gas projects run by the international oil majors. Miller and Browne discussed ways of breaking the impasse between BP's Russian joint venture TNK-BP and Gazprom on the massive Kovykta gas field in eastern Siberia, in which BP has 63%.
Analysts argue that Gazprom, which has no stake in the field, might demand majority control before allowing the project to go ahead, citing its monopoly on gas export pipelines. In exchange, BP may get a share in other Gazprom fields. But with Gazprom holding most of the cards, BP's position is difficult.
RoyalDutch/Shell, Exxon Mobil and BP are all on the point of giving the Russian giant entry to their two respective projects on Sakhalin Island, even though theoretically they are under less pressure than BP at Kovykta. Sakhalin's location on Russia's east coast means they don't have to use Gazprom to get to the gas to market.Some of the potential friction surrounding Gazprom's entry into Sakhalin will be soothed by its absorption of Rosneft, which already has stakes in Exxon and BP's schemes.
Companies looking for a break in the Russian oil sector are also keen on forging ties. ChevronTexaco and Norwegian oil firm Statoil signed co-operation agreements in September, and German utility Eon signed a gas and power co-operation agreement in July. Shell has had a similar deal.
International oil companies often dwarf the economies of the countries in which they operate. With Gazprom this relationship is reversed. It alone provides more than a quarter of Europe's gas supplies. After the Russian government's announcement in September that it would fold Rosneft and Zarabuzhneft into Gazprom in exchange for a majority government stake, it will have oil and gas reserves of 117bn barrels. This makes Gazprom more than five times the size of the world's largest private oil company Exxon Mobil. If it were a country, it would rank number three in terms of reserves after Saudi Arabia and Iran.
When the merger with Rosneft is complete, the gas giant will own an oil company of the scale of Roman Abramovich's Sibneft. Should the new entity, Gazpromneft, buy up Yukos' main producing subsidiary Yuganskneftegas, it will rival Lukoil as Russia's largest oil firm. Gazprom is also moving into power generation, buying up 25% of Mosenergo, the largest subsidiary of the national electricity company, over the past few months.
Even in the wild privatisations of the early 1990s Gazprom was seen as too important for the government to offload its stake completely; it kept a near 40% stake. Nevertheless, Gazprom spent the 1990s operating semi-independently, chief executive Rem Vyakhirev and chairman Viktor Chernomyrdin stripped out billion of dollars worth of assets.
When Vladimir Putin took the presidency in 2000, he rapidly seized control, bringing in Miller, a former colleague at the St Petersburg mayor's office, as chairman. The government's move towards a majority stake completes Gazprom's progress back towards being what is essentially a national oil and gas company. On the face of it, this shouldn't trouble international firms. Dealing with national oil companies is a core part of oil diplomacy. But most national oil companies amount to little more than the state's stake in projects led by international oil companies; their interests are closely aligned.
Gazprom is beginning to look worryingly like national oil companies in the Middle East such as Saudi Aramco or NIOC in Iran, companies that insist on near complete control over developments in their regions, with political concerns as important as profitability. The scope for increased profits at the company through better management is immense. But potential investors should bear in mind that Gazprom is likely to be managed for the benefit of the Russian authorities - not them.