April 27, 2006

Ukraine businessmen are mystery gas firm’s owners

Moscow (Reuters) – Two influential Ukrainian businessmen are the previously undisclosed owners of a one-half stake in RosUkrEnergo, a mysterious company that controls Ukraine’s gas imports, Austria’s Raiffeisen Zentralbank said on Wednesday.

The bank confirmed a report by the Izvestia daily that Dmitry Firtash — who in the past played a role in importing gas from Turkmenistan to Ukraine and owns a Kiev basketball club — and banker Ivan Fursin were the beneficial owners of the stake.

Raiffeisen had previously said that it held the stake as trustee but had not revealed the identify of the real owners.

RosUkrEnergo bounced into the public eye when it was named as the middleman in a deal to resolve a gas pricing dispute between Russia and Ukraine which interrupted supplies to Europe over the New Year.

Russian state gas monopoly Gazprom owns 50 percent of Swiss-registered RosUkrEnergo, while Austria’s Raiffeisen Investment AG controls the other half on behalf of the beneficial owners.

Firtash, who according to media reports spends most of his time in Hungary, could not immediately be reached for comment. Fursin also could not be contacted.

Diplomatic and financial sources told Reuters last week that the U.S. Justice Department had opened a probe into RosUkrEnergo with which Raiffeisen had cooperated.

January deal

Izvestia, which is owned by Gazprom, published extracts from an audit report by PricewaterhouseCoopers that named the two men as the beneficial owners of Centragas Holding AG, through which Raiffeisen Investment controls half of RosUkrEnergo.

“The ultimate beneficial owners of Centragas Holding AG are Messrs. D. Firtash (90 percent) and I. Fursin (10 percent),” the audit document stated.

The Moscow office of PwC, which acts as Gazprom’s global auditor, declined to comment. PwC said its Moscow office was not responsible for the RosUkrEnergo account, which its Swiss team took over late last year.

President Viktor Yushchenko’s press service said he had previously asked security bodies to get information about RosUkrEnergo.

“The president’s press service wishes to point out that the president has previously asked security bodies to obtain all information on the founders and shareholders of RosUkrEnergo.

“Yushchenko has repeatedly said that there are no Ukrainian state bodies or officials among the owners or shareholders.”

RosUkrEnergo’s sales in 2005 were around $3.5 billion and it made profits of $500 million from the sale of around 40 billion cubic meters of gas, Raiffeisen has said.

The disclosures come as concern mounts that Ukraine — the transit route for 80 percent of Russia’s gas exports to Europe — is tolerating opaque gas deals, even after the “Orange Revolution” of 2004, that jeopardize regional energy security.

Ukraine‘s state energy company Naftogaz has struggled to pay for gas imports since the January gas deal, under which import prices nearly doubled to $95 per 1,000 cubic meters.

Naftogaz has been unable to pass on the gas price hike to consumers and, according to local media reports, ran up losses of at least $500 million in the first quarter of 2006.

Gas barrier

Following elections last month, Ukraine’s erstwhile Orange Revolution allies are struggling to pull together a coalition, but gas could yet pose a barrier to forming a government.

Yushchenko’s ex-Prime Minister Yulia Tymoshenko — who lost her job last September after calling RosUkrEnergo a “criminal canker” — wants her old job back but also wants to tear up January’s gas import deal.

Firtash also figures prominently in a recent report by Global Witness, a nongovernmental organization which campaigns against corruption involving natural resources, on the structures through which Turkmen gas has been sold to Ukraine.

Zeev Gordon, an Israeli lawyer, said Firtash had instructed him in late 2002 to set up a Hungarian company called Eural Trans Gas, which controlled Ukraine’s gas dealings with Turkmenistan before RosUkrEnergo took over.

Gordon told Reuters he acted as a trustee shareholder in Eural Trans Gas before the shares were sold in 2003 but has had no dealings with Firtash since.

Gordon also confirmed that Firtash is acquainted with Ukrainian-born Russian businessman Semion Mogilevich, whom he represents, but repeated earlier denials by Mogilevich of any involvement in RosUkrEnergo or Eural Trans Gas.

“I spoke to him (Mogilevich) today, and he said: ‘It is not mine and I am not connected to it’,” Gordon said.

Mogilevich, who is wanted by the U.S. Federal Bureau of Investigation for suspected racketeering, fraud and money laundering, was also investigated by Tymoshenko’s administration, before she lost her job, to determine whether he was behind the Ukrainian side of RosUkrEnergo. (Additional reporting by Boris Groendahl in Vienna)

Global Market Brief: What the Gazprom-ENI Deal Does — and Does Not — Mean

November 16, 2006 19 19  GMT

Italian energy major ENI announced a bilateral deal with Russian state energy giant Gazprom on Nov. 14 that will grant Gazprom the right to supply 3 billion cubic meters (bcm) of natural gas a year directly to Italian customers by 2010 — the firm’s first-ever unrestricted access to downstream European customers. This could be a seminal event, with Gazprom on the verge of attaining downstream assets and finally breaking out of the former Soviet Union. Then again …

The Gazprom Cage

Gazprom’s problems dictate its strategies. Though Gazprom is the world’s largest natural gas producer and exporter by a massive margin, it is chronically cash-shy. The Kremlin forces Gazprom to supply natural gas to the domestic market — primarily for electricity generation — at sharply subsidized rates. As a result, all of Gazprom’s profits come from its exports.

At first glance, it seems that this should be more than enough cash. After all, in 2005 Gazprom exported 150 bcm to Europe at a rate of about $230 per 1,000 cubic meters, netting approximately $35 billion in revenues. But there are three issues that must be taken into account. First, Gazprom is the Russian state’s largest taxpayer, paying $15 billion in taxes in 2005 — roughly 20 percent of the government’s total intake. Second, nearly all of Gazprom’s infrastructure and producing assets are more than 30 years old. In fact, only one significant field has been brought online since the end of the Cold War. Third, Gazprom is attempting to branch out into myriad fields, including power generation, nuclear energy and oil. In addition to the expense of attaining assets in such fields, building competence in them is an expensive process.

Considering these factors, maintaining control of Russia’s natural gas exports is critical for Gazprom. Because it is a cash-poor state firm, Gazprom has never developed or applied the technologies that are in broad use in the oil and natural industries of the developed world today. It (correctly) fears that if foreign firms were allowed produce and export Russian natural gas themselves, Gazprom would quickly find itself competed out of business. Therefore, it uses its ample influence in the Kremlin — CEO Alexei Miller and Chairman Dmitry Medvedev are both very close to President Vladimir Putin — to prevent such a disaster. Foreign firms that enter Russia can only do so if they agree to partner with Gazprom, give it majority control of all projects, pay Gazprom’s way, share any technology used or developed with Gazprom and commit themselves to supplying their share of any production to the nonprofitable subsidized market.

These terms might sound onerous or even self-destructive — Gazprom is, after all, driving away much-needed investment — but remember Gazprom’s cage: If the firm’s export monopoly ends, it fears it will soon be swept into history’s dustbin. Gazprom is not trying to attract investment — it is trying to survive. It should come as no surprise that since Medvedev and Miller took Gazprom’s reins, not a single foreign venture has begun operations, and many that preceded Medvedev and Miller’s ascendance — the Sakhalin projects come to mind — regularly face Gazprom-inspired problems.

Tool of the State

Medvedev is not simply Gazprom’s chairman; he is also Putin’s deputy prime minister and most likely successor. And Gazprom is not merely a large company or Russia’s chief taxpayer; it is also a powerful arm of state policy. So Gazprom’s strategies are not limited to keeping foreigners out, but extend to using energy and state power to further Gazprom’s — and thus, the Kremlin’s — power.

In particular, Gazprom is trying to use its massive natural gas exports to worm into what it knows best: the transport, distribution and retail of natural gas. Gazprom’s logic is simple: Why supply natural gas to European distributors and let them make profits supplying it to European customers when Gazprom could control the whole supply chain itself and make money at every step?

Annual exports of 200 bcm of natural gas — and full access to Kremlin decision-makers — give Gazprom a wealth of tools from which to launch such expansion efforts.

Yet, despite these advantages, Gazprom’s success in attaining foreign acquisitions has been remarkably limited. As one might suspect, foreign authorities and private companies alike are hostile to the idea of any single power, particularly a Russian government player, attaining too much control over their light switches.

Gazprom’s efforts in energy-poor states have been the most successful, with the firm now in charge of the bulk of energy supply and distribution in Armenia, Kyrgyzstan and Tajikistan, and a somewhat hostile takeover in progress in Belarus. But as one might guess from that list, states that have other options have been successful in fending off Russia’s advances.

Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan all possess their own natural gas industries and have been able to block Gazprom (although the company has made some recent progress in Uzbekistan; President Islam Karimov’s government wanted to find a new foreign sponsor, and Moscow quite happily accepted the offer). Georgia and Ukraine — because of their status as transit states for former Soviet Union energy — have similarly been able to prevent Gazprom from gobbling up many assets. Ukraine has an added advantage in that local oligarchs dominate the very sectors to which Gazprom wants access, and they are not above using less-than-polite means to keep things the way they are.

In Europe, Gazprom’s fortunes have been even worse; the company has been blocked at every turn by official and unofficial state and private actions that have prevented any but the smallest of deals. Only in Germany has there been any success, and that success has been limited. There, an asset swap with E.On has provided Gazprom with a 50 percent stake in a nascent marketing firm in exchange for a 24.5 percent stake in a Russian natural gas field (Yuzhno-Russkoye) that has not been brought on line. As one might guess, Gazprom’s willingness to bring that field on line in a way that will profit E.On will determine just how much market influence E.On will allow that marketing firm to muster. So far, progress has been negligible.

A similar logic will soon come into play with ENI, and that is what will determine the success of Gazprom’s latest effort to penetrate the European market. Under the extraordinarily vague terms of the Gazprom-ENI deal, Gazprom will get the right to sell natural gas. In exchange, Gazprom has committed no assets to ENI, pledging instead to work with the company to acquire energy assets in Russia and abroad. Since Gazprom holds a monopoly on the Russian natural gas sector, any such acquisitions would need to be greenfield investments, for which all of the “rules” Gazprom normally enforces would still apply. Think of the new deal as ENI making a good-faith gesture to Gazprom to see if the Russians will turn over a new leaf and grant the Italians access to upstream natural gas resources in a way that actually matters.

And do not bet too much on it.

Russia/Belarus: Belarusian President Aleksandr Lukashenko valued the national natural gas pipeline operator Beltransgaz at $10 billion to $12 billion on Nov. 13. That figure was based on sale of the Czech infrastructure, which sold for $5.5 billion. Belarus is in price negotiations with Russia’s Gazprom for natural gas supplies for 2007 and beyond; Gazprom’s offer is $200 per 1,000 cubic meters, up from the $46.68 Belarus currently pays. Russia has been raising natural gas prices for its former Soviet neighbors, and tensions between Lukashenko and Russian President Vladimir Putin contributed to the steep price hike. Belarus is willing to sell a 50 percent stake in Beltransgaz to Russia in return for lower prices from Gazprom, but the two sides have not been able to agree on the valuation of the operator. The Dutch bank ABN AMRO, hired by the Belarusian government, is scheduled to announce the results of its independent valuation Nov. 20.

Kazakhstan/China: Kazakh energy company KazMunaiGaz and China National Petroleum Corp. plan to start building a gas pipeline to China with a capacity of 30 billion cubic meters of natural gas in 2008. The route will roughly parallel the recently completed oil pipeline connecting the two states. Gazprom hopes to launch a similar project from the Altai region but that project still lacks financing and a feasibility study.

Russia: Sunset for Shtokman?

October 10, 2006 19 05  GMT

Summary

Gazprom CEO Alexei Miller said Oct. 9 that Russia’s natural gas monopoly will not invite international companies to participate in the Shtokman natural gas project in the Barents Sea. Gazprom, however, lacks the technical expertise and financing needed to execute Shtokman — hence the project is doomed. The decision is another example of the Kremlin attempting to use Russian energy resources to further Moscow’s political aims.

Analysis

Gazprom CEO Alexei Miller said Oct. 9 that Russia’s natural gas monopoly will not invite international companies to participate in the Shtokman natural gas project in the Barents Sea. Miller told Russian television that Gazprom decided against offering 49 percent of Shtokman to any of five shortlisted international energy firms because the firms failed to offer suitable assets in exchange.

Gazprom lacks the technical expertise and financing needed to execute Shtokman, dooming the project. The decision is another example of the Kremlin attempting to use Russian energy resources to further Moscow’s political aims.

Prospective partners for the $20 billion project were U.S. giants Chevron Corp. and ConocoPhillips, France’s Total and Norwegian firms Norsk Hydro and Statoil.

Traditionally, Gazprom has asked its international partners to provide project financing and technical knowledge while it remains the majority stakeholder. This formula, however, has been less than successful, since Gazprom has yet to see a single natural gas project implemented along those lines. And Gazprom’s terms on Shtokman were extremely demanding to the point of being unrealistic.

Gazprom sought stakes in existing profitable downstream projects in the United States and Europe in addition to its international partners’ proprietary technology, all while retaining a majority stake in Shtokman. Furthermore, the foreign firms received no guarantee that they could export Shtokman’s natural gas. This meant the firms could be stuck providing expensive natural gas to the Russian market at below-cost prices after having enabled Gazprom to better compete on the firms’ home turf. The firms continued to negotiate, expecting Gazprom to compromise on a more reasonable deal. But their expectations proved false.

Such bullying from Gazprom is hardly new. The Shtokman announcement comes on the heels of pressure on Royal Dutch/Shell over its stake in the Sakhalin-2 project, and amid signs that Gazprom wants to buy out the Anglo-Russian TNK-BP venture. Russia has a firm policy of using oil and natural gas as a political tool against energy-importing states with which it has — or might — come into conflict, such as the tussle over Ukrainian imports of Russian natural gas.

But there is more at work here than Gazprom’s corporate goals. The Russian state — the primary shareholder in Gazprom — regularly uses energy as a tool of foreign policy. As a major natural gas provider to EU states, Russia enjoys significant energy levers against European policies, and is becoming less and less shy about playing the energy card to further its interests in any arena, be it expanding NATO, muting international criticism of its human rights record, joining the European Aeronautic Defense and Space Co. or bolstering pro-Russian elements in Central Asia and the Caucasus.

But as Shtokman has now demonstrated, this strategy has limits. Using existing supply relationships as leverage works well. Dangling the possibility of new relationships — such as those Shtokman could create — does not exactly tantalize foreign firms.

Using a state industry as a policy tool has negative effects, as the energy nationalizations of the Arab world have clearly shown. The marriage of insufficient indigenous technology and hostility toward fair partnerships with outsiders inevitably results in second-rate production techniques, and with them a decline in long-term production. But this prospect does not seem to worry the Kremlin too much at the moment.

Europe: Resisting Assimilation

April 20, 2006 20 20  GMT

Summary

Russian state energy firm Gazprom has bluntly informed European states that if they do not allow it to directly own distribution and retail natural gas infrastructure and thus penetrate deeply into their economies, they will face retaliation that could include a diversion of Gazprom’s attention — and natural gas — to other markets. It is not a threat that Gazprom can deliver on, either now or in the future, but it marks a critical evolution both in internal Russian politics and European-Russian relations.

Analysis

Gazprom met with ambassadors from all 25 EU states in Moscow on April 20 to discuss natural gas supplies. From the European point of view the meeting diverted heavily from expectations and heralds a dramatic change in intra-Russian, not to mention Russian-European, relations.

The European ambassadors went into the meeting under the impression that they were going to use their collective weight to pressure Gazprom into behaving more responsibly (in their minds) as an energy provider. They saw Gazprom’s decision to slash natural gas exports to Ukraine, an action that actually resulted in cutoffs not to delinquent Ukrainians but to paid-up Europeans, as the height of irresponsibility. Additional cutoffs to Europe due to a spell of excessively cold Russian winter weather (which is saying something) reeked, in Europe’s opinion, of poor planning and management on the part of Gazprom. The ambassadors were ready to give the company a stern talking-to. And they figured that they would have a receptive audience in Gazprom CEO Alexei Miller. Unlike many Russians who feel that energy is a political lever or even weapon, Miller traditionally is concerned about things such as customer relations and profitability.

The ambassadors could not have been more surprised with how the meeting progressed — or how Miller had changed. The calm, sophisticated but firm lecture that they expected to give was instead delivered to them. Miller flatly informed the Europeans that they should stop interfering with Gazprom’s efforts to acquire downstream assets within the European Union.

Gazprom already controls all meaningful natural gas production facilities, transport pipelines and distribution infrastructure within Russia. It now wants to branch out and extend its corporate empire to cover transport and distribution infrastructure wherever it can. Gazprom wants to evolve from simply a raw material producer to a vertically integrated continent-spanning energy monopoly. And, as Miller informed the Europeans, should they not become more receptive to Gazprom’s desires, then his firm just might take its business — and its natural gas — elsewhere.

The Europeans have been less than forthcoming in this process. Most European countries — particularly in Western Europe — jealously control their energy networks and are allergically hostile even to fellow European countries whose firms desire to expand their domain. But even states with relatively liberalized energy networks are hostile to the idea of Russian domination; there are simply too many political strings attached where the Kremlin is involved. And that is even without the added complication of a trust-style domination of one company controlling everything from the wellhead to the stove — something that free-market-minded EU states oppose in its own right.

Gazprom does not much care for such details, and feels by dint of its size (it is the world’s largest natural gas firm), its importance (it supplies more than 40 percent of EU natural gas imports) and its political connections (it is majority government-owned) that the Europeans had better recognize reality for what it is and let Gazprom in.

Such a message is a major departure not only from the old Gazprom, but also from Kremlin policy.

Russian nationalists have long argued that not exploiting Gazprom’s market share would buy them political leverage in the countries to Russia’s west. Thus Gazprom sold natural gas to Western and Central Europe, and former Soviet republics such as Ukraine and Moldova, relatively cheaply. The logic did not hold. Most Europeans — particularly Central Europeans who until recently were Soviet satellites — distrust Russia regardless of what Gazprom charges for its energy exports. This fact finally hit home in Russia in just the past two years as a new sort of realism sunk in, and as a consequence European prices doubled and Ukrainian prices tripled. What must be particularly frightening to the Europeans is that Miller’s pragmatism and rationality now appear to be married to the Russian nationalists’ hostility. They now face high prices and political strings and demands for surrendering critical assets all in one package, from one of the few Russians whom they thought saw things their way.

Moving forward, there are two critical things the Europeans will be worrying about.

First, the driving force behind Russian energy firms is rapidly evolving. Russian press reports aside, no one has ever seriously believed that Russian energy politics were not … well, political in some way. But there is a difference between a company with state links mixing national interests in with its corporate outlook, and a state firm making state policy with corporate tools. Until recently Gazprom was a state-run but not state majority-owned natural gas firm. Now it is a state-owned natural gas and oil firm looking to consolidate control over oil and natural gas at home while establishing a global empire. Big difference.

Second, Gazprom is not the only petroleum piranha in the European goldfish pond. Two other state-owned firms — Rosneft and Transneft — are in the mix as well. Rosneft in 2005 took over most of Yukos, formerly Russia’s largest private oil firm, while Transneft controls the bulk of Russia’s oil transport network. Both undeniably and proudly look out for Russia’s national interest, and just like Gazprom, are aggressively expanding their control over Russia’s oil resources while casting their gaze abroad. Europe’s problem is not limited to Gazprom and natural gas specifically, but to Russia and energy in general. Bear in mind that Russia’s dominant electricity firm, Unified Energy Systems, is not only also majority state-owned and also a national monopoly, but it is also a chief exporter of power to Europe and also seeking to expand its own empire.

There is, however, one quite bright spot to keep in mind if you are a European. Although Miller warned that Gazprom would shift its efforts to supplying North America and East Asia should the Europeans not prove more cooperative, it will do no such thing.

First, and most obviously, it is an issue of infrastructure. Multithousand-mile-long pipeline networks built at the cost of hundreds of billions of dollars over the course of 50 years to tie together an empire and a continent cannot simply be picked up and relocated. It would take another 50 years and hundreds of billions to construct alternatives. Russian natural gas is not going anywhere but Europe any time soon. Gazprom — in fact, all Russian state energy firms — are technologically obsolete, and because of stiff government tax policies, capital shy. As the dozens of largely fallow pipeline projects they have postulated show, even when these firms come up with a plan to diversify, shift or even entangle customers, they generally lack the means to implement them. What is in danger from Europe’s point of view is not the volume that Russia currently ships westward, but the strategic direction of any future, additional exports.

Second, geographic and geopolitical constraints make North America and East Asia daunting alternative markets. North America is (obviously) on the wrong side of the planet, ruling pipeline connections out completely. Gazprom’s only experience with liquefied natural gas (LNG) — the only other way to ship the stuff — it got from effectively blackmailing Royal Dutch/Shell at its Sakhalin-2 venture, and that facility will not even be up and running for another year at least. And even if Russia could ship LNG in vast volumes, does anyone really think that Washington would be more welcoming to Russian state ownership of U.S. infrastructure than Paris is to Russian state ownership of French infrastructure?

Shipping to East Asia has other complications. On one hand, Russia currently has no natural gas or oil energy infrastructure linking itself to Japan, China or the Korean Peninsula. In fact, Siberian infrastructure of any kind is thin, consisting of but two rail lines and one road — and one of those rail lines and that road only became operational within the past five years.

On the other hand, the Russians are quietly terrified of China. Russia took roughly 1 million square miles of territory away from China in the 1800s, something that Beijing certainly has not forgotten; in fact, aside from Taiwan, the most significant piece of China’s once far-flung empire still outside of Beijing’s control is inside Russia. China has unofficially been encouraging Chinese migration north into Siberia even as Siberian Russians have been moving back to European Russia. Constructing the massive natural gas infrastructure that would be necessary to link China to Russia also would involve parallel road-and-rail connections that, in essence, could be used as an invasion corridor. Put more simply, there are excellent reasons why Russian-Chinese energy cooperation is enthusiastic and robust — on paper.

Which puts Europe in the awkward position of knowing that Gazprom et al is aggressive, unsatisfied and likely to remain so — a combination that countries on Russia’s periphery know from experience rarely ends well. The only solution — and it is a lousy one — is to find some way to cut natural gas consumption or find new sources to the tune of 140 billion cubic meters per year.

As the spokesman for Energy Commissioner Andris Piebalgs, the unlucky European who has the job of taking point on addressing the energy dependency issue, said April 20 of Miller’s threat, “That statement gives grounds to our concerns on the growing foreign dependency of European energy supply and … our need to diversify both the origin of our supplies and our supply routes.”

Duh.

Gazprom, CNPC far from agreeing on price for Russian gas supplies

The Associated Press

Published: November 16, 2006

Moscow: Russia’s OAO Gazprom gas monopoly and the China National Petroleum Corp. still have not come close to agreement on a price for Russian gas supplies, the Interfax news agency reported Thursday.

“There is a very large difference between the price on the European market and the price being offered by China, so it will take a long time to draw these together,” Interfax quoted Sergei Chelpanov, the deputy executive of Gazprom Export, as saying.

Gazprom spooked Europe — which depends on Russia for half its gas imports — by saying it could favor Asian markets for its gas in the future if the company is not allowed to expand in Europe.

Gazprom is planning two export pipelines to China, bypassing Mongolia. Analysts say that the higher transportation costs caused by the large distances involved will mean lower profit margins for Gazprom than those it sees on sales to Europe.

Chelpanov said a Gazprom delegation would travel to China next week for more talks.

Also Thursday, the president of Russia’s No. 1 oil producer OAO Lukoil, Vagit Alekperov, said his company had agreed to create a joint enterprise with Gazprom’s oil arm to develop resources in Russia and abroad, Interfax reported.

His announcement came a day after the surprise dismissal of Alexander Ryazanov, who was responsible for the development of Gazprom’s expansion into the oil sector. Ryazanov had also headed Gazprom Neft, formerly known as Sibneft, which was acquired from tycoon Roman Abramovich’s Millhouse Capital in 2005 for more than US$13 billion.

Ryazanov was the highest-ranking official to leave Gazprom since Alexei Miller replaced long-standing chief executive Rem Vyakhirev in 2001, and some Russian media on Thursday tied the sacking to Russian parliamentary and presidential elections in 2007 and 2008.

Gazprom, which has financed many of Russia’s prestigious national projects such as facilities for its bid for the 2012 Winter Olympics, is seen as a cash cow for the Kremlin and parties that support it.

“The consolidation of Gazprom’s personnel and financial resources before the pre-election struggles in the president’s circle became impossible to put off,” the liberal Vremya Novostei newspaper commented, noting that Ryazanov was not considered part of Miller’s team or that of Deputy Prime Minister Dmitry Medvedev, a possible successor to Putin who also serves as Gazprom’s chairman of the board.

Before his dismissal, Ryazanov had managed to fight off attempts to take over control of the financial flows of his department and maintain his autonomy, Vremya Novostei said.

Italy’s Eni reaches gas supply pact with Gazprom

By Adrian Michaels in Milan and Arkady Ostrovsky in Moscow

November 16, 2006

Eni, the Italian energy company, and Russia’s Gazprom on Tuesday finally signed a wide-ranging strategy pact to replace a gas distribution deal that collapsed last year.

The deal, which confirms Eni as Gazprom’s single largest customer, comes amid intensified concern about Gazprom’s ability to produce enough gas for domestic and export markets.

A leaked report by Russia’s Ministry of Trade and Economic Development predicts the country will not have enough gas from next year to satisfy domestic demand and to cover all its export contracts to Europe. European Union officials say this explains why some European countries have been trying to negotiate bilateral deals directly with Gazprom.

Under the terms of the deal signed on Tuesday, Gazprom will gain direct access to the Italian gas market. It will be able to sell up to 3bn cu m of gas in Italy a year from 2010, equivalent to about 3 per cent of the market and worth about €600m-€750m ($770m-$963m) a year.

The deal helps Eni respond to pressure from its home regulators to reduce its market share in Italy.

In return, Eni will gain access to a number of upstream oil and gas projects with Gazprom. The two companies said they would work together on a series of projects that would be finalised by the end of next year.

Gazprom has long been targeting access to the European retail markets. It already owns 50 per cent of Wingas, a German distribution company, and has tried to strike similar deals with other European countries.

However, EU officials have warned that bilateral deals with Gazprom undermine Brussels’ efforts to work out a common policy towards Russia and its gas supplies. The EU has been pushing Russia to ratify an energy charter treaty that would provide access to Russia’s reserves and remove Gazprom’s monopoly of the export pipeline to Europe.

“The agreement signed today is a major step towards the security of energy supply to our country,” said Paolo Scaroni, Eni chief executive.

Italian electricity production is more dependent on gas than other countries that have nuclear power or more coal. Last winter’s cold snap in Russia led to fears over gas supplies to Italy and prompted emergency government meetings.

The companies did not say which upstream projects were involved in the deal or where they were. However, people close to the negotiations said there were about seven or eight ventures, of which two were in Russia and some others in Africa. They involved both oil and gas.

Gazprom’s Nord Stream pipeline submits environmental data

November 14, 2006

London (MarketWatch) — OAO Gazprom (GSPBEX.RS)-controlled Nord Stream AG submitted environmental data to countries affected by its planned pipeline connecting Russia and Germany under the Baltic Sea, the company said in a statement Tuesday.

The submission of the document is the first step in an environmental impact assessment, or EIA, that will determine whether the 1200 kilometer pipeline can proceed as planned.

The pipe, which will connect Vyborg in Russia with Greifswald in Germany, passes through the territorial waters of Denmark, Finland, Germany, Russia and Sweden. All five countries will be involved in the EIA, which is scheduled to finish in July 2007.

The assessment will look at the impact of construction, operation, maintenance and decommissioning of the pipeline on the environment. In particular, it will focus on the impact on wildlife and fisheries, air and water quality, seabed sediments and shipping.

One of the more unusual concerns of the EIA is the estimated 300,000 metric tons of chemical and conventional weapons dumped in the Baltic from the end of World War II up to the 1970s.

The route of the pipeline will have to be carefully surveyed using sonar and high-resolution scanners to locate and identify munitions. Munitions will either be removed, or the pipeline diverted, depending on the risk involved.

The pipeline, which should become operational in 2010, will have the capacity to bring around 27.5 billion cubic meters of Russian gas each year into Germany. A second phase of the pipeline, currently without a scheduled completion date, could increase this capacity to 55 bcm.

The pipeline may eventually be fed by the massive undeveloped Shtokman gas field in Russia’s Barents Sea. The field holds 3.8 trillion cubic meters, although a pipeline to the field is only likely to be completed in 2014-2016, Gazprom said last month.

Nord Stream is a joint venture of Gazprom, which holds a 51% stake, and BASF AG (BF) and E.ON AG (EON), which hold 24.5% each. The company is headed by former German chancellor Gerhard Schroeder.

Units of BP and Gazprom form Russian natural gas venture

Bloomberg News

Published: November 15, 2006

Moscow: The Russian unit of BP agreed Wednesday to form a joint venture with Gazprom, the world’s biggest natural gas producer, as it sought better government relations amid a crackdown on foreign energy companies.

TNK-BP and the Gazprom petrochemical unit Sibur Holding signed an agreement to refine so-called associated gas, which is extracted along with crude oil.

The agreement may help TNK-BP, whose Russian shareholders include the billionaires Viktor Vekselberg and Mikhail Fridman, smooth relations with Gazprom, the Russian state-controlled company that opposes TNK-BP’s single- handed development of the $18 billion Kovykta gas field in eastern Siberia.

“This is a good example of partnership between private and state companies,” German Khan, the executive director of TNK-BP said during the signing ceremony at the western Siberian city of Nizhnevartovsk. “We want to broaden our cooperation to other regions where our interests intersect.”

Alexander Dyukov, president of Sibur, said that Gazprom would have a 51 percent stake in the new company and TNK-BP 49 percent, though management control would be equal. Gazprom will contribute two refineries with a combined capacity to process 12 billion cubic meters, or 424 billion cubic feet, a year. TNK-BP will provide the natural gas.

The agreement will guarantee deliveries at stable prices for future growth, Dyukov said.

The two companies may together invest as much as $500 million in the project over the next five years, Khan said. Dyukov declined to put a value on the new venture.

Russia is using noncompliance with license agreements and environmental legislation to raise pressure on projects led by BP, of Britain; Royal Dutch Shell, based in The Hague; and Total, of France, as the Kremlin seeks to turn state-run companies like Gazprom and Rosneft into global champions.

Sibur is in talks on similar projects at TNK-BP’s Nyagan and Orenburg fields, Dyukov said. The company is also considering ventures with the Russian companies Lukoil, Gazprom Neft and state oil company Rosneft.

Oil companies in Russia often burn off the natural gas that they extract in oil production, a process that is both environmentally damaging and wasteful.

Russia is facing a gas crunch as it seeks to meet export contracts and the demands of a booming economy.

TNK-BP, which pumps two-thirds of its crude in the Nizhnevartovsk area, produced 6.6 billion cubic meters of associated gas there last year, a quarter of which was simply burned off into the atmosphere. By the end of 2008, the company wants to be using all of its associated gas.

Alexander Ananenkov, the Gazprom deputy chief executive, said Wednesday on Sakhalin Island that Gazprom and Rosneft were completing talks on a “strategic partnership.”

BP already has a close relationship with Rosneft, having spent $1 billion buying Rosneft shares in the company’s initial public offering in July.

TNK-BP is seeking an agreement with Gazprom to sell gas from Kovykta. Gazprom opposes TNK-BP’s plan to break its export monopoly by shipping the fuel directly to China or South Korea.

Threats to revoke the Kovykta license on environmental grounds are reminiscent of government warnings to Shell’s Sakhalin-2 project, in which Gazprom is also seeking a stake.

Gazprom fires top oil executive

By Arkady Ostrovsky in Moscow

November 16, 2006

Gazprom, Russia‘s state-controlled gas giant, on Wednesday dismissed one of its most senior executives, replacing him with an ex-KGB officer.

In the most dramatic shake-up at Gazprom in the past five years, Alexander Ryazanov, the head of its oil business and deputy chief executive, was dismissed without explanation.

At the same time, the company appointed Valery Golubev, the head of the investment division, to the post of deputy chief executive.

Mr Golubev served in the KGB from 1979 until the end of the Soviet Union when he joined Alexei Miller, the chief executive of Gazprom, and Mr Putin in St Petersburg’s city council.

Gazprom’s reshuffle heralds further strengthening of the economic power of the siloviki – the present and former members of Russia’s security services who have formed Mr Putin’s power base since he came to office in 2000.

Mr Golubev will become one of three deputy chief executives on the management board of Gazprom with a KGB background.

“This event is comparable with the appointment of Gazprom’s chief executive in 2001,” one analyst said.

In 2001 Mr Putin installed Mr Miller, another colleague from St Petersburg, to head Gazprom.

Over the past five years Russia’s largest company by market capitalisation has been turned into a Kremlin foreign policy arm and vehicle for establishing control over Russia’s energy sector.

Mr Ryazanov was in charge of Gazprom’s oil business which largely consisted of Sibneft oil company bought from the oligarch Roman Abramovich for $13bn (€10bn) last year.

According to one foreign investor familiar with Gazprom politics, Mr Ryazanov was never part of Gazprom’s inner circle. He had argued against the acquisition but, once it took place, tried to keep the oil business separate from Gazprom – a battle he also lost.

Oil and gas analysts said Mr Ryazanov, one of the few industry people at the top of Gazprom, was a “big loss”.

“It looks like a high-class specialist has been replaced with a person whose professional skills are not obvious,” said Steven Dashevsky, head of research at Aton, a Moscow-based brokerage.

Mr Golubev joined Gazprom in 2003 and was in charge of procurement and construction division of the company. According to Hermitage Capital, Russia’s shareholder rights activist, in the first nine month of 2004 the cost of materials at Gazprom rose 82 per cent.

Gazprom on Wednesday refused to comment any further on the reasons for the reshuffle, merely saying that Mr Ryazanov’s contract has expired.

Companies, People, Ideas

Cold Front

By Michael Freedman

November 13, 2006

Statoil plans to find oil and gas riches in the Arctic. It will face harsh weather and surly Russians.

From Edvin B. Ytredal’s window on an island in Hammerfest, Norway, the vast Barents Sea looks placid on a recent sunny morning. But soon the sun will set and not rise again for months. The temperature will drop to well below freezing, and steady gale-force winds will howl in for the winter. Ytredal’s understatement: “It is a challenging environmental area.”

Hard to fathom that it is also the hottest battleground on the planet for vast untapped energy reserves. Here, at 70 degrees latitude, well inside the Arctic Circle, Ytredal runs the day-to-day operations of a vital project for Statoil ASA, the $66 billion (trailing 12 months sales) company, Norway’s largest. Geologists say at least 25% of the world’s undiscovered oil and gas reserves could lie underneath these icy waters–a claim that has spurred a race to the Arctic by oil companies like Eni, Total and ConocoPhillips, followed quickly by oil services firms and ship manufacturers.

For Statoil the stakes are enormous. The company now gets 83% of its production revenue from the Norwegian continental shelf, a region that many industry analysts say has already reached or passed its peak. By 2010 production along the shelf is expected to hit 5 million barrels per day of oil equivalent, then drop to 3.5 million barrels by 2015 and to 1 million barrels by 2030. Statoil executives know the company’s long-term success rides on exploring the frontier regions in the Barents Sea, and they’re counting on the project Ytredal manages, known as Snøhvit, to secure an Arctic foothold to establish the company as the preeminent player in the region. “Statoil has been a pioneer in the Barents Sea,” its chief, Helge Lund, said earlier this year, “and we want to play a central role in the further development of the far north.”

Yet exploiting the Arctic is a staggeringly risky proposition. Snøhvit has 6.8 trillion cubic feet of natural gas (the equivalent, in energy, to 1.2 billion barrels of oil) plus 113 million barrels of light oil, but it is situated 90 miles offshore and 1,000 feet underwater. Statoil must work alongside the fishing industry–an important sector of Norway’s economy–and face off against environmentalists, while managing the technical complexity of the project. Ytredal and his staff must also contend with gnarly winter storms and freezing seawater. In years past there have been avalanches from the hills surrounding the Hammerfest harbor.

Still more challenging is that the future depends upon Russia–a prickly partner with an unsteady grasp of Western property rights. Statoil has long banked on gaining access to a monster field called Shtokman, one of the most prized assets in the energy world, with 113 trillion cubic feet of reserves. Companies from the U.S. and France have also vied for access. The state-controlled Russian behemoth Gazprom was cagey about its plans. Then, after months of growling and temporizing, Gazprom’s enigmatic chief, Alexei Miller, stunned the energy world last month by announcing that the company would go it alone, without foreign equity partners. “Yes, it was disappointing,” says Henrik Carlsen, a senior vice president who oversees Statoil’s Barents strategy. “But that does not change the basic strategy.”

In heading to the High North, as Norwegians call it, Statoil executives will join the legions of explorers who have sought fortune and renown in this tough climate over the centuries. These hardy men suffered ice and isolation, while fighting off scurvy and mutinous crewmen, but they ushered in the modern era of Arctic exploration at the turn of the 20th century with the insight that the key to success there lay in working with the weather rather than fighting against it. They largely kept quiet about their territorial discoveries, at least in part to fend off competition for walrus from foreign vessels, and later because the Norwegians–always great seafarers and once brutal warriors–wanted to avoid disputes with other nations. Meantime, Norway’s Arctic north enjoyed a lively trade with Russia, exchanging fish for flour in Hammerfest, the Arctic city with the ice-free harbor, thanks to the Gulf Stream.

Trade ended with the October Revolution. By the Brezhnev era Russia and Norway had become embroiled in a still-simmering dispute over a piece of the Barents Sea that measures 540,000 square miles–roughly four times the size of modern Germany–and is believed to hold vast energy reserves. Territorial beefs elsewhere were resolved more amicably. In 1965 Norway and the U.K. drew a line down the geographic center of the North Sea. The same year, after decades of drilling dozens of dry wells, energy companies discovered large oil and gas deposits, setting off a race to tap a region that would later be hailed as “the biggest play of them all.” Phillips, bp and others drilled on both the Norwegian and British sides of the North Sea, but in the mid-1960s few Norwegians knew much about exploration and production. Finally, in 1972 the Oslo parliament set up Statoil (“state oil”) to exploit the first big discovery on Norway’s continental shelf.

Over the next three decades the state-owned company worked its way north along the shelf, gaining experience in harsh climates, while also expanding internationally. A 1990 alliance with bp gave it access to exploration licenses in such places as Angola and Azerbaijan. It later took stakes in the production of oil and gas in Algeria, China, the U.K. and Venezuela. In 2001 Statoil was partially privatized and listed on the Oslo and New York stock exchanges. The government, which now owns a 70.9% stake, doesn’t get deeply involved in operations. By law, rights to the gas and oil reserves in the Norwegian parts of the sea are owned by the state, which then puts up for bid licenses to explore and produce in certain areas. Statoil and competitors all bid equally for the concession.

The government couldn’t shield it from one of the biggest scandals in the history of Norwegian business. In 2002 news reports uncovered allegations of bribery–that Statoil had used an intermediary to pay $15.2 million to officials in Iran in order to get access to oilfields there. Statoil paid a $3 million fine to Norway, without admitting or denying guilt, and later agreed to shell out another $18 million to the U.S. The affair forced the resignations, in the fall of 2003, of three executives: the chairman, the chief executive and a vice president for exploration. In March 2004 the board appointed as chief executive Helge Lund, a then-41-year-old onetime McKinsey & Co. consultant who had most recently served as head of Aker Kvaerner, a Norwegian engineering and construction firm. That August he gave a presentation confirming that the future of the company lay in the High North.

Lund‘s tenure has been aided by high oil prices. Between 2003 and 2005 Statoil roughly doubled earnings to $4.8 billion; at the end of last year it had 4.3 billion barrels (equivalent) of proved oil and gas reserves. Recently, Statoil, along with Chevron and Devon Energy, announced a find in the Gulf of Mexico that appears to hold between 3 billion and 15 billion barrels (equivalent) of oil and gas reserves.

Yet its big project in the north, Snøhvit, has run into snags. The company first discovered natural gas and oil there in 1981, but global demand was weak, and Statoil, like the rest of the industry, lacked the financial and technological know-how to transport gas over long distances. Two attempts at tapping the field failed. In 2001 Statoil faced further delays when greenies persuaded the Norwegian parliament to halt Barents Sea exploration until further study. After a heated debate and a series of environmental reports the government allowed the Snøhvit project to proceed a year later, but it only fully lifted the ban on exploration earlier this year, with some strict regulations. “It was quite a hard fight,” says Arvid Jensen, head of Petro Arctic, a trade association for energy developers in the region. “You have to drill for 10,000 years to get an accident in the Barents Sea. But the risk is not zero. It’s point zero, zero, zero something. But it’s not zero.”

Poor planning also took its toll. Statoil increased capacity at the gas liquefaction plant by 30% but failed to calculate all the necessary changes. The company had bought from a Hammerfest family a small island called Melkøya, built a 1.5-mile underwater tunnel to it from Hammerfest and intended to ship in prefabricated parts. But drawings and schedules were late, and by the time the parts arrived, executives found that they were poorly or improperly constructed and needed to be repaired. Delays set the project back by a year and put the $8.6 billion project 50% over budget.

Statoil also faced technical challenges. While most offshore projects extract oil and gas via above-water platforms, the company placated environmentalists and trimmed costs by placing its platforms on the seabed, running pipes back to Melkøya and operating the wells remotely. In so doing the company found it could cut capital expenses by half and labor by 90%. In addition Statoil expects the experience will help in future cold-climate operations, especially in avoiding icebergs. Still, frigid conditions are a constant challenge in pipes that take in water, gas and condensate. At certain temperatures the water and gas mesh together and create hydrates, or icy sludge, that can block the pipes. Antifreeze is needed.

Despite the obstacles Statoil is now convinced Snøhvit will be up and running by the end of 2007. At current natural gas prices that means an estimated $1.4 billion annual kick to the company’s top line. Hans M. Gjennestad, who runs the day-to-day strategy in the Barents Sea, argues that the lessons learned in Hammerfest will give Statoil credibility to take on other projects in the region. To go deeper into the Arctic, he says, the company is developing ways to work with or around the ice. Example: partnering with Aker Kvaerner to build ice-breaking vessels that can bring oil and liquefied natural gas through ice that is 6.5 feet thick. Gjennestad says the plan is to be able to go “anywhere in the Arctic by 2030.”

That is, if its big neighbor to the east cooperates. Russia enjoys (if you can call it that) the largest Arctic coastline of any country, the world’s largest natural gas reserves, with 1,680 trillion cubic feet, and 60 billion barrels of proved oil reserves. Yet foreign companies have had a tough time getting access to any of it. High energy prices have emboldened the Kremlin and encouraged it to revisit a number of projects with Western oil companies. In what has been widely viewed as an attempt to renegotiate or cancel existing exploration and production licenses and agreements, Russia is now accusing Royal Dutch Shell and BP of violating its environmental and regulatory standards.

Until very recently Gazprom, Russia’s biggest company, seemed eager to accept foreign help in its largest field, Shtokman, located 300 miles offshore in the Russian Barents Sea. Though Gazprom is one of the ten most valuable companies in the world, with a market capitalization of $264 billion, it lacks the technological expertise to tap the field on its own. Earlier this year it suggested as much by announcing a list of potential equity partners that included Chevron and ConocoPhillips, Total, Statoil and Norsk Hydro. Eager to take part, Statoil hoped its offshore experience at Snøhvit would score points with the Russians. Arild Moe, deputy director at the Fridtjof Nansen Institute, an energy and environmental think tank in Oslo, says in return for an equity stake in Shtokman, Statoil would have given up a piece of Snøhvit, which would have allowed Gazprom to begin selling gas to the U.S. while acquiring knowledge about offshore projects that would pay off in its own Arctic efforts. Later on, Moe says, Statoil might have given it access to Europe through prospective Arctic pipelines.

Shtokman has been a key piece of Statoil’s Arctic strategy. It has said that during even the first phase of development the Russian field could produce 3.5 times as much natural gas as Snøhvit, and, later on, nearly as much as all Norwegian fields were producing in 2005. The High North, Statoil has said, is “a natural meeting area for long-term cooperation.”

Maybe one day. Gazprom’s bombshell announcement provoked astonishment, confusion and anger. Was it a part of the negotiation–an attempt by Russia and its powerful state-controlled company to extract more? Or yet another example of resource nationalism–”petro-arrogance,” as some put it? “The Shtokman decision is a serious blow for both Statoil and Hydro,” observes Moe. “Both Statoil and Hydro are looking at other options in Russia, but clearly they will evaluate their strategies now.”

A flummoxed Statoil issued a six-sentence press release expressing surprise, as well as an abiding commitment to a long-term presence in Russia. Executives say they are looking at other gas and oil fields there; they are still hoping, perhaps naively, that Shtokman is not completely off the table. “When you deal with the Russians, you have to be very patient,” says Øystein Noreng, a professor of petroleum economics at BI Norwegian School of Management. “The worst thing you can do is push them, because then they will react.”

Jonas Gahr Støre, Norway’s foreign minister, has made collaboration with Russia a top priority over the last two years. At the request of Statoil and Norsk Hydro he has discussed the Shtokman field with his counterpart and the energy minister in Russia and planned to do so again at a meeting in western Siberia; another get-together is planned in Moscow. A day after the Shtokman announcement Støre delivered a planned speech in Brussels, amending it in light of the news. “I continue to believe that the Norwegian experience–technologically, industrially and managerially–could benefit Russia in its quest to develop its resources in the Barents Sea,” he said, sounding like a scorned suitor still in shock.

Meantime, back to plan B: exploring the Norwegian continental shelf and its own part of the Barents. There’s the other unpredictable beast to deal with–nature. At the plant in Snøhvit, builders installed breakwaters around Melkøya island to protect against a millennial 45-foot wave, as well as weatherproofing and insulation to withstand the 45mph winter gusts from the north and west. In January a hurricane with freezing temperatures and 100mph winds forced Statoil to evacuate 1,100 workers to the mainland. “That’s why it was so cold,” muses a Statoil executive. “Cold winds blow from Russia.”