Financial Times: Gazprom looks to the world stage: “Separately, Gazprom is trying to muscle its way into the Sakhalin-2 project where Shell holds a 55 per cent interest.” (ShellNews.net)

By Arkady Ostrovsky

Posted 22 September 2004

By merging natural gas monopoly Gazprom and Rosneft, the last Russian state-owned oil company, the Moscow government has created the country's most powerful energy group - giving the Kremlin a powerful lever in dealing with a core economic sector.

On top of its oil interests, Gazprom also holds about 10 per cent of Unified Energy Systems, the electricity monopoly. If UES's current restructuring goes through, Gazprom will be able to swap its shares for control over one or more large generation companies.

With oil, gas and electricity under one roof, Gazprom would become one of the most important economic resources in the hands of the government.

Mikhail Fradkov, the prime minister, last week said the government had "ambitious" plans for Gazprom to buy more oil and gas assets once it fell under state control via the merger with Rosneft.

Likewise, Gazprom is looking to transform itself from a domestic gas giant into a global energy player, according to the company's spokesman. "Gazprom is viewed as a large national company which produces gas in Western Siberia and sells it to Europe.

"But we want to develop an integrated global energy group with worldwide presence," says Sergei Kuprianov, the spokesman for the company.

While oil will always remain a small part of Gazprom's overall production, the merger - to be completed by the end of the year - may have several far-reaching consequences both for the Russian domestic energy market and for foreign investors.

First, it will help to remove restrictions on foreign ownership of Gazprom's stock.

The government, with its direct stake of 38 per cent in Gazprom, has until now banned foreigners from buying the company's domestic shares, fearing a loss of control.

"Until now the government controlled the company without having a controlling stake," says Mr Kuprianov.

The merger with Rosneft, which is 100 per cent owned by the state, will give the government a direct voting control of 51 per cent of the combined companies' shares and pave the way for the long-awaited liberalisation of the remaining 49 per cent of Gazprom's shares.

This is welcome news for foreign portfolio investors who either had to pay a high premium for the company's

American Depositary Receipts (ADRs) or find a "grey market" scheme for buying domestic stock.

Getting rid of the ring-fence will entice Gazprom towards a full listing on both Russian and international stock exchanges, making the company more accountable to shareholders, Mr Kuprianov argues.

"We will certainly consider listing on the major exchanges once the merger is completed. This will allow the market to objectively assess the work of the management."

Second, a merger will focus Gazprom's interest in oil production and allow it to apply its borrowing power to developing Rosneft's projects.

Rosneft has been expanding aggressively by gaining new assets - in Western Siberia, for example - but it lacks sufficient financial resources and infrastructure for their development.

"We may not see a miracle in terms of efficiency improvement in Gazprom, but we could see a higher return on capital from the combined company, than we would have seen from its two parts," says Steven Dashevsky, an oil and gas analyst at Aton, a Moscow brokerage.

Third, the merger could help Gazprom to broaden its geography beyond Western Siberia - something the company is keen to do. Rosneft is one of the partners in several Sakhalin projects in the far east of the country where Gazprom had no presence. Separately, Gazprom is trying to muscle its way into the Sakhalin-2 project where Shell holds a 55 per cent interest.

This is of particular importance to Gazprom because it would provide much needed access to the Asia market. Shell, on the other hand, is interested in Gazprom's deep Zapolyarnoe fields in Western Siberia - which make up 20 per cent of all Gazprom production.

Mutual interest could lead to an asset swap between the two companies.

A merged Gazprom/ Rosneft would also provide a convenient receptacle for assets in Yukos, the oil company which has been pushed to the brink of bankruptcy by the government.

Alexei Miller, the chief executive of Gazprom, has adamantly denied any interest in Yukos's assets. But then again, the decision to merge Gazprom with Rosneft was taken by the Kremlin not by Gazprom.

And if the Kremlin decides to merge Yukos with Gazprom, Mr Miller may find that it is an offer he cannot refuse.