Energy

Gazprom Is Power Hungry

By Michael Freedman

November 29, 2006

Measured by reserves, Russian energy giant Gazprom is by far the largest publicly traded energy company in the world, and with a $258 billion market cap, it is also one of the largest companies in the world, on par with behemoths like Microsoft and BP.

The state-controlled company has helped Russia resurrect its historic role as a global power. Yet, along the way, it has also faced allegations of corruption, inefficiency and a tendency to bully competitors and customers alike.

On Monday, the Organization for Economic Cooperation and Development released a critical report on the Russian economy, noting a marked trend toward state involvement and intervention in key sectors of the economy. “Of particular concern,” the report said, “is the state-owned gas monopolist OAO Gazprom’s seemingly insatiable appetite for asset acquisitions, often at the expense of a focus on its core business.”

As the report was being released, Alexander Medvedev, a deputy chairman of Gazprom’s management committee and head of Gazexport, was in New York. Forbes.com sat down to talk with him at the Four Seasons Hotel.

Forbes.com: In April, you publicly predicted that Gazprom would become the first $1 trillion company. Its market cap is now about a quarter of that. Do you stand by that prediction?

Medvedev: I still stand by that. In ten years, it will be.

Given your current size, do you anticipate any major acquisitions?

We have different options, including organic growth, which we are pursuing. Obviously, we don’t want to lose opportunities when it has economic sense. We have been successful in Germany with our joint venture with Wintershall, and in other countries. With respect to marketing opportunities, we’re considering in the U.S. what kind of acquisitions can be made and what kind of joint ventures can be made. We have different options in this respect.

Five companies bid for access to the giant Shtokman gas field in the Barents Sea. But ultimately, Gazprom decided to develop the field alone. How was that decision made?

There was a full openness. There were no politics behind it. It’s a pure economic decision. The explanation is very simple. Due to the obvious undervaluation of the Russian resources, compared to any country in the world, including Libya and Burma, plus undervaluation of the developed reserves, we have found it is not the right time to provide access to our upstream. It also reflects our dissatisfaction with the quality and quantity of asserts assets offered to us. Shtokman is maybe a risky project, but you can’t find any other project in the world with 3.3 trillion cubic meters of proven reserves. There is no exploration risk in the field, and I believe it is not the last word on the reserves. Maybe there is substantially more.

Your decision to go it alone there seemed to take everyone by surprise.

We had been in constant contact with the top management of the different bidders, and we had warned them that we were in the evaluation stage of their downstream reserves. Also, at the same time, a lot of changes happened in the forecast for future crude prices.

So why did Statoil, for instance, express surprise?

The market is changing. It’s inevitable. Also, you should not take everything for granted what everyone is telling you. I can imagine the level of disappointment, that they were so close. But due to the change in the market, we have reconsidered. To us, the discount rate for Russia is substantially higher than the discount rate for Libya or African reserves. It’s not fair.

At the same time the announcement was made, it appeared to many that Russian energy companies were attempting to push aside Western companies doing business in Russia, particularly in Sakhalin.

I believe these allegations are not fair. In Sakhalin, we have been in negotiation with Shell. We signed an agreement with them. The next day, we saw a doubling of the capital costs and operational costs. Second, we saw that 50% of the ecological requirements had not been fulfilled, and some of them were very serious.

Some might say that Russia has not historically been at the forefront of maintaining environmental standards. Is it using those standards only when it suits the country?

No, it’s not true. I can tell you Gazprom is facing very strict ecological requirements everywhere. That’s why we are keeping thousands of people, many thousands, who are fully responsible for ecological monitoring. For me, it was a big surprise when I saw the level of ecological noncompliance in Sakhalin. It’s a big question mark now what will be the cost. And for us, until this question is resolved, we can’t be exposed. We are awaiting the outcome of a discussion between Sakhalin Energy and the Russian state. It’s not a question of the doubling of costs; the project then is probably still good enough. But if it will be another additional investment, just to compensate for the ecological disaster that has been created, then it is a different question.

It seems there is a wide gap between your view of Gazprom and the conventional wisdom. What do you do to close that gap?

We appreciate we could do a better job in this respect, meeting with the media and the investment community. We are making progress on that. My presence here is part of that. What I don’t like is just to be in a defensive position. We should have a regular communication channel.

What message would you prefer to be giving?

I believe that as natural resources have become more expensive, there are a limited amount of companies in a position to provide a long-term, secure supply of energy resources. If I’m speaking about gas, it’s Russia, it’s Qatar and it’s Iran. I leave it for you to evaluate the risks. I believe that Russia’s historic performance confirms that Russia and Gazprom is the best option.

What will you do for the remainder of your trip in the United States?

We have a business program and a hockey program. We are meeting with people at Harvard Business School, and then I will visit some people in the energy and trade departments in Washington, D.C. We also have a tradition of using hockey as a marketing tool. We will play teams put forward by Canada and the Boston Bruins.

Oil and gas

Gazprom and Rosneft shelve rivalry, form partnership

Agreement unites giants of oil and gas, raises worries for foreign companies

By Dario Thuburn

Agence France-Presse, with a file from Bloomberg News

Moscow — Russian state-controlled energy giants OAO Gazprom and OAO Rosneft signed a massive partnership deal yesterday that aligns two bitter rivals and could squeeze foreign companies out of the Russian energy market.

The heads of the two companies “signed an agreement on strategic co-operation” for joint work in oil, gas and electricity production, as well as combined bids on energy contracts, the statement said.

Gazprom, one of the largest energy companies in the world, has a monopoly over Russia’s vast natural gas extraction and transport network. Rosneft is Russia’s second-largest oil producer.

The two companies, both of which are controlled by powerful Kremlin officials, have risen in influence in recent years because of high global energy prices.

Gazprom and Rosneft have engaged in fierce competition for energy projects, seen as reflecting a battle for power between Kremlin factions, and a proposal to merge the two was scrapped last year.

“Two state companies working together on some . . . major energy projects, rather than competing with each other, makes a great deal more sense,” said Chris Weafer, senior analyst at Moscow-based Alfa Bank.

“But it also means that it is unlikely there will be a significant participation by an international energy company in these projects . . . There’ll be less influence of international energy companies,” he added.

The main aim of the partnership agreement announced yesterday was to avoid “confrontation” between Gazprom and Rosneft, said Andrei Gromadin, an oil and gas analyst at MDM Bank of Moscow.

The state wanted “that the two giants not compete any more both on the external and internal market,” and the agreement could encourage “joint foreign purchases” by lowering operational risks, Mr. Gromadin said.

The statement said the deal, signed by Gazprom chief executive officer Alexei Miller and Rosneft CEO Sergei Bogdanchikov, would remain place until 2015, after which it could be renewed in five-year periods.

The chairman of the board at Gazprom is Russian Deputy Prime Minister Dmitry Medvedev and the chairman of Rosneft is Igor Sechin, deputy head of the presidential administration.

The deal also foresees co-operation between the two firms in gas production in far eastern Russia — a region seen as vital to Russia’s ambitions to become a major energy exporter to booming Asian economies.

Under the agreement, Rosneft has also agreed to sell gas to Gazprom from its fields in western Siberia and the two companies added that they will make joint bids for contracts on a 50-50 basis.

The purchase of gas in western Siberia could enable Gazprom to ensure steady export supplies to Europe, amid fears that aging infrastructure and slow development of new supplies could hamper production levels, analysts said.

The deal follows an announcement earlier this month that Gazprom and Lukoil, Russia’s biggest oil producer, would form a joint venture to acquire new assets in Russia and abroad.

Gazprom and Rosneft have turned down partnerships with foreign companies on some Russian projects this year. Gazprom said it will develop the $20-billion (U.S.) Arctic Shtokman gas field without giving a stake to companies such as Chevron Corp., Norsk Hydro ASA or Total SA, saying they had failed to offer adequate assets in return. Rosneft pushed Total out of its $3-billion Vankor project.

Russia last year called off a merger of Gazprom with Rosneft that had been endorsed by Russian President Vladimir Putin, after Rosneft bought a unit of OAO Yukos Oil Co. that the government auctioned off as payment for tax claims. Rosneft’s Mr. Bogdanchikov had opposed the merger.

Both Rosneft and Gazprom, which have a combined market value of $359-billion, are looking at buying bankrupt Yukos’s remaining assets. Rosneft, which now sends some of its crude to Yukos’s refineries, has $24.5-billion in loan commitments it can tap to buy those assets. They may compete for the half of BP’s venture, TNK-BP, that is held by the Russian partners, Russian newswire Interfax has said.

The Associated Press

November 27, 2006

Gazprom plans to boost Europe prices

Moscow - Russian natural-gas monopoly OAO Gazprom plans to raise the price of gas it sells to Europe next year by almost 15 percent, a Russian newspaper reported Monday.

Vedomosti, citing a draft 2007 budget for the state-controlled gas company, said Gazprom forecasts gas prices of around $293 per 1,000 cubic meters for shipment to Europe next year. That’s up from roughly $257 in 2006.

Gazprom forecast that the higher prices should yield total revenue of $98.5 billion, with export revenues accounting for nearly half that, or $46 billion, Vedomosti reported. The company plans to export some 157.8 billion cubic meters to European countries in 2007.

Gazprom officials could not immediately be reached to comment on the report.

The rise in prices is likely to stoke worries in European capitals, where governments are watching Moscow’s sway over European energy supplies with growing concern.

Russia currently provides 30 percent of EU energy imports, including 44 percent of gas imports.

EU leaders have pressed Russia to sign the Energy Charter, an international treaty that would respect fair trade in energy and offer foreign investors fair access to Russian oil and gas deposits and export pipelines.

However, at a summit with EU leaders in Helsinki, Finland, last week, Russian President Vladimir Putin restated his opposition to giving foreign companies easy access to his country’s energy sources or breaking up oil and gas state monopolies.

Energy

November 18, 2006, 12:20AM

Kremlin puts the squeeze on BP’s hopes

It’s the latest foreign producer to be pressured

By Henry Meyer

Associated Press

Moscow — BP, which entered the Russian energy market three years ago with the blessing of President Vladimir Putin, has become the latest foreign producer to feel the icy power of the Kremlin as the state increases its control of oil resources.

The company’s joint venture TNK-BP, Russia’s third-biggest oil and gas producer, has been hit with back-tax bills and threatened with license annulments. Last week, prosecutors opened a criminal investigation against a TNK-BP executive.

Its difficulties mirror those seen by Royal Dutch Shell, Exxon Mobil and Total in their Russian projects.

Awash in oil money after years of high prices, a confident Russia is moving to ensure that the state has a major role in all key energy projects — even if that means using scare tactics against Western investors, analysts say.

“This is all part of a general policy of increasing state control over the oil and gas sector. Of course it’s worrying and it means a change in the investment climate,” said Valery Nesterov, an analyst from Moscow-based brokerage Troika Dialog.

Barrels of reserves

Back in 2003, BP’s rivals looked on enviously as it acquired billions of barrels of reserves by forming a partnership with Russian oil firm TNK, giving it access to huge, untapped oil fields in the world’s second-largest crude exporter after Saudi Arabia.

At an energy conference in London held in the gilded splendor of an early 19th century mansion, Putin stood side by side with British Prime Minister Tony Blair and hailed the multibillion-dollar deal as a sign of investor confidence in Russia.

But the BP-managed company, which expended huge efforts imposing Western standards of corporate governance in the often unruly Russian business world, now faces the prospect that TNK shareholders will be pressured to sell to the state, analysts and people close to the situation say.

“It’s a continuation of the Yukos affair,” Nesterov added, referring to the Kremlin-driven campaign that began shortly after the BP deal and led to the nationalization of most of Russia’s former top oil company and the jailing of its founder.

Billionaire Mikhail Khodor- kovsky had been negotiating to sell Yukos to a U.S. oil giant — reportedly one of the reasons authorities moved against him to prevent a strategic asset from falling into foreign hands. In the end, Yukos’ main production arm was taken over by state oil company Rosneft.

Analysts say the Kremlin now is applying pressure on the Russian shareholders who control half of TNK-BP to sell their stake to either state-run gas monopoly Gazprom or to Rosneft.

The two billionaires who own most of TNK, Pyotr Aven and Viktor Vekselberg, denied this week that they were in talks to sell their shareholdings or were under government pressure to do so.

But a person familiar with the situation told the Associated Press that the Russian shareholders in TNK “are sitting and waiting to be told who to sell to.” He spoke on condition of anonymity because of concern about official reprisals.

Under the terms of the TNK-BP deal, signed in June 2003, the Russian partners agreed not to sell their stake for four years in order to provide BP with a stable business environment — a restriction that ends next spring.

But the head of BP said Friday that the company would like to retain at least a 50 percent share of its joint venture.

“We wouldn’t like to reduce our shareholding,” CEO Lord John Browne told Reuters News Service after a speech at Columbia University.

Shell, Exxon Mobil and Total, which all signed deals in the 1990s that Russian officials now criticize as humiliatingly unfair, also have been under greater scrutiny of late.

In September, regulators froze a key environmental permit at the $20 billion Shell-led oil and natural gas project on Sakhalin island, and they have threatened to halt all work on it because of alleged ecological violations.

Full control

Russian regulators have warned that a license for an Arctic oil field being developed by France’s Total could be at risk because of violations, and Exxon Mobil has faced an environmental audit of its oil and gas project in Sakhalin.

The so-called Production Sharing Agreements, or PSAs, signed when state coffers were empty and investment was desperately needed, gave full control of energy projects to foreigners and allowed them to recoup all their costs before paying any royalties.

Shell angered the Russian government last year when it announced that costs had doubled to more than $20 billion. This shot down a proposed deal for Gazprom to enter the project, and the government is now reportedly demanding renegotiation of the PSA and better terms for Gazprom.

The strong-arm tactics have alarmed foreign investors.

William Browder, chief executive of Hermitage Capital, the largest investment fund in Russia, said BP and other large oil companies simply couldn’t afford to stay out of Russia with dwindling reserves available to them elsewhere in the world.

“If I was sitting in the boardroom of Shell, BP and Exxon Mobil and thinking about Russia, I’d be scared,” he said. “But at the moment, Russia doesn’t seem to suffer any real consequences for playing hardball. In a world where there’s no oil, foreign companies are lining up to work regardless of how the Russians treat them.”

Russian Gas Monopoly Eyes European Electricity Grids

November 28, 2006

Russia’s state-owned natural gas exporter Gazprom Tuesday said it was turning its sights toward acquisition of European electricity companies and grid networks. Nikolai Ilyakhin, general director of subsidiary Gazpromenergo, said in remarks run by the Russian monopoly’s official in-house magazine that his company was already in talks with utilities in Greece, Moldova and Bulgaria.

Ilyakhin did not say how close the company was to signing deals with the utilities, or how much it expected to pay for the stakes it is eyeing.

The acquisition of both electricity generation and grid network assets in Europe, he said, would guarantee the foreign utilities’ supplies of Gazprom fuel.

Much of Europe now burns natural gas to create electricity, and reserves of the fuel are essential for predictable power generation.

The monopoly’s announcement comes amid moves by the Russian state to consolidate and renationalize a variety of industries, including the oil and gas sectors, which have alarmed many in the West.

The Organization for Cooperation and Development (OECD) noted in a report released Monday that the trend has been marked by acquisitions “by the state itself or state-controlled companies, particularly … Gazprom.”

The OECD’s economic survey of Russia railed against the gas giant’s “seemingly insatiable appetite” for noncore assets.

The government, the international economic group wrote, has a “poor track record” in managing companies and a tendency toward “inefficiency and slow growth.”

Gazprom CEO Alexei Miller this spring said the company planned to make electricity generation a core business and the monopoly is planning to take a controlling stake in Russia’s second-largest electricity generator, Mosenergo, with a 2.1 billion-dollar (1.6 billion euros) purchase in March.

Gazprom has been tapped to supply capital as Russia tries to pump 80 billion US dollars over the next five years into its ageing Soviet-era electricity infrastructure.

Miller visited Spain this autumn to discuss joint ventures in electricity with Madrid-based utility Endesa.

The Russian company has also announced ambitious plans recently to turn itself, the world’s third-largest energy firm, into one of the world’s top six firms of any stripe in the next few years.

Foreign acquisitions figure heavily in that strategy. The gas monopoly and Russian state-controlled oil producer Lukoil said earlier this month they were forming a joint venture to buy foreign oil assets.

While Ilyakhin said Gazpromenergo had yet to finalize its blueprints for foreign acquisitions, he added that the Russian firm had already received “many offers” from foreign utilities hoping to count Gazprom among their owners and secure steady fuel supplies.

November 24, 2006

Bankers to Back Up Energy Companies of Europe in Russia

RAO UES of Russia and Finland’s Fortum sealed yesterday a Memorandum of Intentions to implement Kyoto Protocol in Russia. The document that was concluded within the framework of Round Table of Russia’s Industrialists provides for constructing 40 new generating facilities. At the same time, Fortum will continue buying out the stocks of existing energy companies of Russia. EBRD is ready to back up the consortium. Investors, however, are on the guard about Gazprom’s growing interest in the industry.

RAO UES CEO Anatoly Chubais and Fortum President Mikael Lilius sealed in Helsinki yesterday the Memorandum of Intentions to implement Kyoto Protocol in Russia. The protocol provides for reduction in hydrocarbon emission by 35 million tons, which will be achieved through 40 projects of constructing new generating facilities.

Chiefs of the companies said the protocol will continue cooperation in power engineering of Russia, where Fortum is a strategic investor intending to strengthen positions.

Fortum that owns a block stake in TGC-1 and a percent in WGC-5 will continue buying the stocks of generating companies, Marina Balabanova from Fortum said, specifying it is interested in 25 percent in WGC-5 that RAO UES will put up for sale in spring. Official bidder for the stake is Gazprom.

EBRD could become Fortum’s partner in Russia. Two days ago, the bank transferred $35 million for a percent in WGC-5, said Vadim Dormidontov, a senior banker at EBRD. Similar to Fortum, the bank acquired the stocks via IPO. EBRD has no intention to resell the stocks, Dormidontov specified. “It is the first experience of EBRD when it buys energy assets for itself. We intend to participate in IPOs of energy companies in future,” the banker said, adding EBRD “is actively negotiating” with Fortum, Italian Enel and German E.ON about joint buyout of generating assets in Russia.

But the stocks will be of interest provided the energy assets are being passed to private investors, Dormidontov pointed out. “Otherwise, we won’t invest in it.”

Indeed, European investors see Gazprom rather than private investors in power engineering of Russia. Gazprom holds 10.5 percent in RAO UES, more than 30 percent in Mosenergo (the stake will exceed 52 percent in the following months), around a percent in WGC-5, some shares in WGC-1, WGC-2, WGC-4 and WGC-6.

“A new monopoly is maturing on energy market of Russia,” said one of the Round Table participants.

OECD slams Gazprom and Kremlin

November 27, 2006

The Organisation for Economic Cooperation and Development on Monday raised concern about the “seemingly insatiable appetite” of Gazprom, Russia’s state-run energy giant.

In a harsh report on the Russian economy, the OECD also said the Kremlin’s expansion into key economic areas was a “disturbing trend” that “bodes ill” for the country’s economic growth.

Instead of concentrating on market reforms, the government had been increasingly focused on tightening the state’s grip on critical sectors such as energy, aviation, media and finance.

“The expansion of state ownership in important sectors will probably contribute to more rent-seeking, less efficiency and slower growth,” the OECD says.

It was particularly concerned by Gazprom’s “seemingly insatiable appetite for asset acquisition, often at the expense of a focus on its core business”. The report follows a chorus of international and domestic criticism of Gazprom’s business strategy.

Instead of investing in gas production, Gazprom has been expanding its interests in recent years in other sectors such as oil, electricity, power generation machinery and media. Last week’s announcement of the purchase of Komsomolskaya Pravda – Russia’s largest circulation newspaper - is the latest foray into media. It also owns an airline, a bank, three television channels, several newspapers, radio stations, cinemas and hotels.

At the same time Gazprom’s monopoly over transportation infrastructure has constrained the development of independent gas producers. “Unfortunately, the only significant recent change in this sphere was the adoption of a law enshrining in statute Gazprom’s existing monopoly on exports,” the report said.

The OECD’s criticism comes at a time of growing concern about Russia’s ability to sustain and increase its gas production.

But the report says Gazprom was only a vehicle for increasing state interests in the economy. According to one recent estimate, the state-owned share of Russia’s equity market capitalisation rose from 20 per cent in mid-2003 to 30 per cent early this year.

The change has been particularly visible in the oil sector where the state share of the total production increased from 16 per cent in 2000 to almost 40 per cent.

However, the Russian state has also been extending its reach to non-energy sectors of the economy, including aviation and automotive. Rosoboronexport, an arms trading agency chaired by a friend and former KGB colleague of president Vladimir Putin, has recently amassed a majority stake in VSMPO-Avisma, the largest titanium maker, and controls Avtovaz, the country’s largest car plant.

The OECD traces the beginning of the trend to the expropriation of Yukos’ assets in favour of Rosneft, the state-controlled oil company. It argues that the Yukos affair exemplified the trend towards state ownership.

Gazprom plans to compete with Gaz de France

Published: November 24, 2006

By James Kanter

International Herald Tribune

In a bold bid to sell natural gas directly to consumers in Western Europe, the Russian energy giant Gazprom said Friday that it would compete with one of its own clients, Gaz de France, for customers.

Gazprom, a state-controlled Russian monopoly, already sells about a quarter of the natural gas used by Europe to established distributors, including companies like Gaz de France.

But now that the European Union is opening up to competition, Gazprom appears determined to bypass companies like Gaz de France when it can, aiming to improve its profitability, and establish an even firmer foothold in the region.

Alexander Medvedev, the deputy chairman and gas export chief for Gazprom, told a gathering of journalists that Gazprom wanted to be involved in all aspects of the supply chain for gas in Europe.

He also said that Gazprom could buy assets in major energy companies in France in the future, to help its business.

“I don’t see any contradiction,” Medvedev said, referring to the new competition with Gaz de France, which also is a client.

“We want to get closer to our clients, whether that client is Gaz de France or client in industry,” he said.

Medvedev said Gazprom and Gaz de France were scheduled to meet Friday, and that the companies were very close to signing a new agreement on long-term gas supplies.

Medvedev also said the new unit, Gazprom Marketing & Trading, which is based in Paris, already had won several clients.

He declined to identify those clients, or say how many there were.

But Medvedev said he would be satisfied if Gazprom had a total of about 1,000 clients in France within the next five years.

Gaz de France had no immediate comment.

Some analysts are dubious about Gazprom’s new focus on delivering gas all the way to the doorstep of its users.

“The question is whether Gazprom has developed the skill set to be an effective marketing company,” said Carlos Lapuerta, an oil and gas expert at the Brattle Group in London.

“If liberalization in Europe is working, then Gazprom may be doing something better left to others,” Lapuerta warned.

Tensions are running high between the EU and Russia over the role of Gazprom.

The EU accused Gazprom of heavy- handed tactics in cutting supplies to Ukraine last winter.

The EU also wants Russia to open up its own energy sector to competition, so that European companies can invest in and improve Russian infrastructure, and thereby ensure greater security of supplies.

But Medvedev insisted that the European media were wrongly portraying Gazprom as a threat to Europe. Instead, he said, Gazprom and Russia were Europe’s best hope for secure energy supplies.

Thursday, November 23, 2006

Gazprom Gains Control Over Large Gas Field in Yamal Area

Reuters - Gazprom has gained control of a big gas field on the Yamal peninsula by buying it from its former owner after reaching an out-of-court settlement, newspapers reported Wednesday.

Vedomosti and Kommersant said the gas monopoly had gained control over the Yuzhno-Tambeyskoye field, citing unidentified Gazprom sources and the field’s former owner.

The newspapers said the field held 1.2 trillion cubic meters of gas reserves as opposed to previous reports of 1.2 trillion cubic feet.

The new volume would be enough to supply Europe for three years. Aton brokerage said the development was positive for Gazprom.

“South Tambey will add 6 percent to the Gazprom’s existing reserve base,” Aton Brokerage said.

“This also means that Gazprom is likely to be the only gas producer on the Yamal peninsula, and the almost 5 trillion cubic meters of still undistributed gas reserves would ultimately end up on Gazprom’s books.”

Gazprom had initially planned to buy 25 percent in the firm, which controlled the field, but Vedomosti said it had ultimately agreed to buy full control from the former owner, Nikolai Bogachyov, for undisclosed sum.

Spain’s Repsol said in February that it was considering setting up a joint venture with Anadarko Petroleum and Yuzhno-Tambeyskoye’s license owner for an integrated liquefied natural gas project on Yamal.

Officials at Gazprom were not immediately available for comment Wednesday and it remains to be seen whether the plan to operate the gas field together with foreign partners will survive after Gazprom acquires the field.

Yushchenko calls for gas company probe

By Roman Olearchyk in Kiev

November 17, 2006

Financial Times - Ukraine’s President, Viktor Yushchenko, has called for an investigation into a natural gas trading company he views as a tentacle of Russia’s Gazprom, describing its refusal to supply industrial consumers as a “threat to national security.”

While refraining from directly pointing the blame at the Kremlin, Mr Yushchenko on Friday expressed his concern and appealed to the country’s anti-monopoly committee to investigate the actions of Ukrgaz-Energo, a company considered loyal to Russia’s state-controlled Gazprom.

Mr Yushchenko said he was disturbed that Ukrgaz-Energo had refused to supply gas to 16 of the country’s largest industrial enterprises.

Moscow has significantly strengthened its grip over Ukraine’s gas sector since a controversial accord was inked in January between both countries ending days of supply shortages to Europe. Ukraine, whose pipelines pump a majority of Russia’s supplies to Europe, agreed to a price increase of nearly double what it had paid. This autumn, Ukraine agreed to an additional 40 per cent increase starting 2007 paying an import price of $130 per 1,000 cu m.

The January accord also gave Swiss-registered RosUkrEnergo, owned by Gazprom and Ukrainian businessmen, monopoly rights to supply Ukraine with Russian and Central Asian gas.

The accord gave Gazprom a claim to Ukraine’s domestic market through its indirect ownership in Ukrgaz-Energo. In signing the accord, Kiev agreed to yield Ukrgaz-Energo the right to supply industrial consumers, driving Kiev’s state energy giant, Naftogaz, into cash flow and solvency problems. Ukrgaz-Energo is a joint venture owned on by RosUkrEnergo and Naftogaz.

Volodymyr Saprykin, an energy analyst in Ukraine, said warnings that Gazprom would have significant influence in a joint venture co-owned with Naftogaz are proving true. One fear is that Ukrgaz-Energo is being used as an instrument to squeeze Ukrainian industrial giants “forcing them to fall under the ownership of Russian companies, possibly even Gazprom affiliates,” Mr Saprykin said.

Ukrgaz-Energohas defended its policy arguing factories at hand are controlled by Ukrainian businesses that control large amounts of gas stored underground. Freeing up the underground storage facilities ahead of the peak winter period could grant RosUkrEnergo a larger role in the lucrative business of filling peak winter demand in Europe.