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Sunday, July 29, 2007

Gazprom seeking Shtokman partners

27 July 2007 - Upstream OnLine - Russia's state-owned Gazprom is keen to bring more partners into its giant Shtokman gas project either as co-owners of the field operator or as contractors, Gazprom chairman Dmitry Medvedev said today. France's Total recently agreed to take a 25% stake in a special purpose entity that will develop the first phase of Shtokman, a vast field in the Barents Sea that has enough gas reserves to supply the world for a year. "I agree that co-participation in this project makes sense for Gazprom," Medvedev, who is also Russia's first deputy prime minister, told a news briefing, Reuters reported. "There could be two models for this - it could be where our partners join the project as fully fledged participants in the equity of the joint company, or as ... contractors, which in my view ... could create a little less stability in relations." Total's participation has raised some eyebrows as it was not granted an equity stake in Shtokman itself - terms that other contenders to join the $15 billion, 25-year project have balked at so far. The gas monopoly is prepared to let its stake in the field operator fall to a bare majority. ConocoPhillips, Norsk Hydro and Statoil are the main contenders to join, but not the only ones, Medvedev said. "Can someone else come in? They can. The circle of potential participants is quite small because ... they have to be big companies that are well known in that market," he said. "Therefore the choice will be made from the list of companies that you named, and not limited to the ones that you named," he said in response to a reporter's question. Medvedev, seen as a possible contender to succeed President Vladimir Putin in next year's presidential election, took aim at European critics of a proposed Nord Stream gas export pipeline that would run under the Baltic Sea to Germany. Environmentalists have criticised the project and Sweden has suggested that it raises security concerns. Medvedev mocked the project's opponents as "not serious". "Some objections are put forward that are laughable - political, military or linked to spying," he said. "That is really surprising because in the modern world ... it is laughable to say a gas pipeline is a weapon in a spy war." Russia, supplier of a quarter of Europe's natural gas needs, argues that it needs to diversify its export routes to reduce its dependence on unreliable transit countries. There have been run-ins with neighbouring Ukraine and Belarus in recent years, but Medvedev said Minsk's failure to pay a $500 million gas debt should not be overdramatised. "Negotiations are going on. I hope that in the near future this knot will be untied. But untying has to be based on economic principles and not on any others," he said. Belarussian Prime Minister Sergei Sidorsky is due in Moscow next week to try and settle the debt run up by Minsk since Gazprom doubled gas export prices this year. In other comments, Medvedev said no decision would be taken this year to raise gas production taxes, as sought by Finance Minister Alexei Kudrin. He also rebutted critics who suggest that Gazprom is splurging on acquisitions - such as taking control of Shell's Sakhalin-2 and TNK-BP's Kovykta gas projects - when it should be investing more in exploration and production. "The balance of how much to spend on development and how much to spend on acquisitions is always a commercial decision," he said. "I don't think that spending on acquisitions is excessive, or that spending on extraction and transport is insufficient. I think there is a good balance at the moment."

Gazprom Neft opens its wallet

25 July 2007 - Upstream OnLine - Russian gas giant Gazprom's oil arm, Gazprom Neft, will invest 64.4 billion roubles ($2.54 billion) this year in a bid to stem a decline in oil output, mostly via bidding for new licences, it said today. "Thus Gazprom Neft will break the tendency of declining production volumes in 2007 and will go on to gradual growth in output," the company said in a statement. Gazprom Neft, previously called Sibneft, has been fighting declining production since it was bought by Gazprom from billionaire Roman Abramovich in 2005. The company said it expects output to rise to 33 million tonnes (662,700 barrels per day) this year from 32.7 million tonnes (656,700 bpd) in 2006. It said it planned to increase production to 35 million tonnes (702,900 bpd) by 2010.

Saturday, July 28, 2007

LNG Politics

Gazprom © RIA NOVOSTI07–19–2007 –  Moscow News by Marina PystinikBy the time this paper hits the stands, Gazprom's announcement that it will partner with France's Total to develop the giant Shtokman gas field in the Barents Sea will be old news already, but I just cannot forego the opportunity to consider this situation. The giant Shtokman field has already been hailed as the new warehouse of gas for Europe. The question of its development had been mulled over for at least two years when the gas monopoly announced a short list of contenders, one or two of which would get the chance to work hand-in-hand with Gazprom. Besides Total, the list features Norway's Hydro and Statoil and U.S. giants ConocoPhillips and Chevron. Last October Gazprom finally scrapped the original plan to offer foreign partners shares in license ownership and output, announcing that it would have a go at Shtokman alone. Later the giant reconsidered and renewed negotiations. The new conditions, however, called for granting foreign companies a stake in the service and infrastructure company that will develop the field, while Gazprom would retain full ownership of the field's reserves. Later Gazprom softened its position further, saying that the partners may be allowed to book a share of reserves as their own. Throughout the process of negotiations Total remained an outsider. It was believed that Gazprom would pick either a Norwegian or a U.S. company - or both. Total has nothing to bring to the deal except cash. Moreover, its recent experience in Iran, where it is building an LNG plant that is running into huge cost overruns, shows that it is not the best choice for a liquefied gas project situated just a few miles from the icy shore. But last Thursday Gazprom made a surprise announcement that Total would get a 25-percent stake in an operating company that will finance, build and own infrastructure in the $20 billion project. The gas monopoly also said that when the first phase of the field's production is complete, Total will return the stake in Sevmorneftegaz, the development company, to Gazprom. It doesn't take a genius to understand that Gazprom's decision is political. Now that relations with the U.S. Administration have soured, the selection of an American company was highly unlikely. Russia-Norway ties are strained over the territorial dispute and fishing rights in the Barents Sea. Russia's relations with Europe are becoming more and more troublesome. Unlike her predecessor Gerhard Schroeder, German Chancellor Angela Merkel is no friend of President Putin. The Russian-British relations are far from ideal and the Kaczynski twins in Poland use every opportunity to berate Russia. The new President of France Nicolas Sarkozy promised his European colleagues that he would be tougher on Russia than his predecessor. It is said that the fate of Shtokman was sealed by a single phone call by Putin to Sarkozy. The Russian president thus killed two birds with one stone - the cash-rich Total will help bankroll the expensive project development, while the French president will have to think twice before using anti-Russian rhetoric. Having a French partner for Shtokman suggests that its executives will gladly lobby for Gazprom's interests in Europe. But what seems like the best decision today may not prove the best several years down the road. Gazprom needs Arctic expertise and some serious cost-cutting techniques to keep the project's budget from going overboard. What it has today is a political partner with lots of cash and no experience in strenuous northern conditions. Let's hope that Norwegian companies will be invited on board this rocky coalition - that would give the Shtokman project a chance of ever coming on stream. Otherwise it may be a long time before Europe actually sees any of the promised gas. 

Saturday, July 21, 2007

Gazprombank to set up subsidiary in London

MOSCOW, July 19 (RIA Novosti) - Gazprombank has decided to open a financial company in London, the bank's press service said Thursday. "To implement this decision, we need to obtain permission from the Bank of Russia and regulating bodies in Britain," the press service said. "We expect the process to be completed within 6-12 months." One of Russia's top three banks and a subsidiary of Russian energy giant Gazprom [RTS: GAZP], Gazprombank expects its presence in London to secure more instruments on international financial markets. Ulrich Rolf Gerza, an executive vice president in the bank, is expected to become the head of the company. Before coming to Gazprombank, Gerza was managing director of the structured products business of Dresdner Kleinwort. Founded in 1990, Gazprombank, which has about 2 million retail clients and over 36,000 corporate clients, is one of the top five banks in Central and Eastern Europe, with assets totaling 1.088 trillion rubles ($43 billion) and equity capital of 88.3 billion rubles ($3.5 billion) as of April this year.

Serbia gas plans 'hinge on Gazprom'

20 July 2007 - Upstream OnLine - Serbia's plans on expanding its gas infrastructure depend on whether Russian gas giant Gazprom includes it in its South Stream gas pipeline project, an Energy Ministry source said today. "All our plans are on hold until Gazprom decides the South Stream pipeline route," the source told Reuters. "All we can do is keep our fingers crossed and wait." Late last month Gazprom and Italian giant Eni announced plans to build the pipeline to take 30 billion cubic metres of Russian gas per year under the Black Sea to Europe. "If they choose Serbia, then we will not waste effort on a smaller local pipeline," the source told the news agency, speaking after Energy Minister Aleksandar Popovic ended a visit to Moscow where he discussed co-operation with Gazprom. Serbia initially planned an 80 kilometre gas pipeline between Nis in the south and Dimitrovgrad, on the border with Bulgaria. But late last year, its gas monopoly Srbijagas and Gazprom signed a memorandum to look into building an $800 million gas pipeline stretching from Bulgaria via Serbia and Croatia to Italy, that would in part run along the Nis-Dimotrovgrad route. Serbia had hoped the segment through its territory, with a capacity of 20 Bcm per annum, would ultimately be linked to the Blue Stream pipeline from Russia to Turkey under the Black Sea. If joining South Stream fails, Serbia will offer Gazprom to explore other business alternatives, including the construction of underground gas reservoirs, the source said. Serbia has started pumping gas into its sole, 800 million cubic metre, gas storage unit at Banatski Dvor, 40 kilometres away from the border with Romania, but plans to explore other sites for more reservoirs, the source added. "There are at least a couple more sites for storage units, at Mokrin, close to Banatski Dvor, and in central Serbia," the source said. Like most European countries, Serbia faced gas shortages a year ago due to a spat between Gazprom and Ukraine over transport fees. Storage units should reduce Serbia's reliance on gas flows, which come from Russia, via Ukraine and Hungary. Serbia consumes around 10 million cubic metres of gas per day during the winter. The government hopes to clinch €3 billion ($4.14 billion) worth of investments in the energy sector over the next three years, giving Serbia a key role in the transit of electricity, natural gas and crude oil in the region.

Gazprom Neft tenders Sakhalin invite

17 July 2007 - Upstream OnLine - Gazprom Neft, the oil arm of Russia's gas monopoly Gazprom, has asked Norway's Statoil to join a project off the island of Sakhalin, according to reports. "It was a very early discussion, which was part of our broader memorandum of understanding," a source close to Gazprom Neft told Reuters. The invitation concerns the Lopukhovsky Block, a prospect off Sakhalin bought by Gazprom Neft from BP's Russian venture TNK-BP. Gazprom Neft has been slow in developing the prospect and Russia's resources ministry had threatened to cancel its licence, although Russian media reported today the licence had been extended for another three years. Statoil is also hoping to partner Gazprom on the giant Shtokman gas field. However, France’s Total last week overtook Statoil and other Shtokman contenders to become Gazprom's first development partner for the field.

Gazprom plans to buy 50% in Caspian field from Swedish company

On a Side
Gazprom eyes Lagansky stake
16 July 2007 - Upstream OnLine - Russian gas giant Gazprom may take a stake of 50% plus one share in the Lagansky licence, in the Russian sector of the Caspian Sea, after signing a call option agreement with Swedish explorer Lundin Petroleum. Under the deal, Gazprom has the right to take the stake, Lundin said in a statement. Separately, Lundin said it had signed an agreement with its minority partner in the licence to take a further 30% stake in Lagansky. This would leave Lundin with an indirect 50% minus one share interest in the licence in the event Gazprom exercises its option.
MOSCOW, July 16 (RIA Novosti) - Russian energy giant Gazprom [RTS: GAZP] said Monday it had signed a deal with Sweden's Lundin Petroleum AB to acquire a call option for 50% plus one share in a Caspian oil and gas field. The cost of the planned deal, under which Gazprom will buy the shares in the Lundin-owned company that holds the deposit's license, has not been disclosed. The Lagansky block is located in the Russian sector of the Caspian Sea and has estimated reserves of more than 800 million barrels of oil equivalent. Sweden's Lundin Petroleum AB is an oil and gas exploration and production company with operations in Europe, Africa and Asia. The company is involved in five oil and gas projects in Russia. As of January 1, the company had existing proven and probable reserves of 176.4 million barrels of oil equivalent.

Shtokman field development first phase estimated at $15 bln

MOSCOW, July 13 (RIA Novosti) - The cost of the first project phase to develop the vast Shtokman natural gas deposit off Russia's Arctic coast has been estimated at $15 billion, a Gazprom [RTS: GAZP] top manager said Friday. "In preliminary estimates, the first phase of the project will cost $15 billion," the deputy chairman of the energy giant's management committee, Alexander Medvedev, said. Gazprom and French oil major Total signed an agreement Friday on cooperation in developing the Shtokman field in the Barents Sea, which holds an estimated 3.7 trillion cubic meters of natural gas and 31 million metric tons of gas condensate. Gazprom CEO Alexei Miller said earlier that the first stage of the project aims to produce 23.7 billion cubic meters of natural gas annually by 2013, and to start production and delivery of liquefied natural gas in 2014. He said a new operating company - a special purpose vehicle (SPV) - would be set up to organize project funding, design, and construction. Gazprom will hold 75% in the SPV, while Total will receive the remaining 25%. Gazprom could reduce its stake in the future, offering other foreign partners an aggregate interest of 24%, ensuring that Gazprom retains at least 51%. Gazprom's deputy head, Alexander Ananenkov, said Friday that the new company would be formed in the very near future, but that the project would go ahead even before it is up and running. Gazprom is set to retain full ownership of the license-holding company, therefore controlling the entire output. The deposit is the only source of natural gas for the ambitious Nord Stream gas pipeline that will run under the Baltic Sea from Russia to Germany. The decision to involve a foreign company comes in spite of the Russian energy giant's announcement last October that it would develop the Shtokman deposit on its own. The company had previously short-listed U.S. majors Chevron and ConocoPhillips, Norway's Statoil and Norsk Hydro and Total to develop the field.

Total signs on Shtokman dotted line

13 July 2007 - Upstream OnLine - Russian gas giant Gazprom and Total have signed a 25-year deal to develop phase one of the giant Shtokman gas field, with the French giant saying it expects a decision on investment in the project in 2009. "A final investment decision should be signed in 2009," said a spokeswoman at Total, adding that feasibility studies will begin as soon as this month.. After the signing ceremony, held in Moscow, Total boss Christophe de Margerie said the French giant would be able to book reserves from Shtokman. "It's a technicality, but yes, we will be able to book reserves," Reuters quoted de Margerie as saying. Gazprom said yesterday that Total had agreed in principle to take a 25% stake in Sevmorneftegaz, the operating company that will develop Shtokman and own its infrastructure. Upon completion of phase 1, Total will transfer its share to Gazprom. Total said last night the deal commits it only to a study phase, but not to any investments. But Gazprom will retain the licence for the field, and be sole owner of the gas produced. The agreement provides for the possibility for other foreign partners to join the project, taking up to a 24% stake at the expense of the Gazprom’s share. This morning Gazprom's acting chief executive, Alexander Ananenkov, said other potential partners needed to better their offers to land a stake in the development. Norways's Statoil and Norsk Hydro, and US supermajor ConocoPhillips have been in talks to join the project. "The further development of Shtokman - I mean phases 2, 3 and 4 - Gazprom will develop on its own," he added. Work will start as early as this month on the field, which lies above the Arctic Circle, in the Barents Sea, in order to meet a deadline to start production in 2013 and thus avoid a slump in Russian gas output, the companies said in a joint statement.

Gazprom chooses Total for Shtokman first phase

MOSCOW, July 12 (RIA Novosti) - Gazprom [RTS: GAZP] has chosen French oil major Total SA as a partner in the first stage of developing the vast Shtokman natural gas field in the Barents Sea, the chief executive said. "Gazprom has decided on a foreign partner for the first stage of Shtokman's development - it is French company Total," Alexei Miller said. The agreement will be signed in Moscow on Friday. Miller said the first stage of the project off Russia's arctic coast aims to produce 23.7 billion cubic meters of natural gas annually by 2013, and to start production and delivery of liquefied natural gas in 2014. He said a new operating company will be set up to organize project funding, design, and construction, in which Gazprom will hold a 75% stake, and Total the remaining 25%. Gazprom could reduce its share in the future, offering other foreign partners an aggregate stake of 24%, ensuring that Gazprom retains at least 51%. Miller said Gazprom would retain full ownership of the license-holding company, therefore controlling the entire output. Total has not yet confirmed the deal announced by Miller; a company spokesman said negotiations are ongoing. The Shtokman field holds an estimated 3.2 trillion cubic meters of natural gas and 31 million metric tons of gas condensate in the Barents Sea, where Gazprom plans to build a liquefied natural gas plant. Some $12-14 billion will be invested in the project's first phase, and production will begin in 2011. The deposit is the only source of natural gas for the ambitious Nord Stream gas pipeline that will link Russia to Germany along the Baltic seabed. The decision to involve a foreign company comes in spite of the Russian energy giant's announcement last October that it would develop the Shtokman deposit on its own. The company had previously short-listed U.S. majors Chevron and ConocoPhillips, Norway's Statoil and Norsk Hydro and Total to develop the field. Gazprom previously said it would only attract partners with expertise in liquefying natural gas and development in "severe weather conditions" as contractors. U.S. oil major Chevron gave up its plans to join the Shtokman gas project in April.

Total delight at Shtokman win

12 July 2007 - Upstream OnLine - Russian gas monopoly Gazprom has picked French giant Total to become its partner in the giant Shtokman development, but said more partners may be invited to take part in the $20 billion project. The announcement marked the culmination of years of talks between Gazprom, Total and other hopefuls ConocoPhillips, Chevron, Statoil and Norsk Hydro. Gazprom and Total are expected to sign an accord in Moscow tomorrow. Total declined immediate comment on the news, which followed a telephone conversation between the Russian and French presidents Vladimir Putin and Nicolas Sarkozy. Statoil also declined comment. "We have ongoing dialogue with Gazprom. I can't really comment beyond that for now," Statoil spokesman Ola Morten Aanestad told Reuters. Gazprom boss Alexei Miller said in a statement Total would control 25% of a company that will own the infrastructure of the field, located in the Barents Sea. Other partners could later be granted 24%, while Gazprom would keep 51%, Miller said. The company would design the first phase of the project, finance it and build facilities, but would not own the licence for Shtokman as well as gas produced from it, which will be controlled by another full subsidiary of Gazprom. Meanwhile, an industry source told Reuters that Shtokman's first development phase will cost between $15 billion and $18 billion, meaning Total will have to commit between $3.75 billion and $4.5 billion to the project. "It's a bit of a different project to the one discussed in the past. The first phase will cost $15 billion to $18 billion and will produce 25 billion cubic metres (per year) at plateau," the source told Reuters. "Some 5% of this volume would be supplied to the Russian local market with the rest split equally between shipments to Europe and liquefied natural gas shipments to the US." "This is great news for Gazprom, as it has found a partner who agreed to share financial risks," Standard & Poors analyst Elena Anankina told Reuters. "But it is not clear what guarantees are there for Total to make the project interesting." Sergei Glazer from Vostok Nafta, a fund with $3.4 billion worth of Gazprom stock, said there was a clear reason for Total, which has often been viewed as an outsider, to join Shtokman. "One should not forget they have been sucessfully working with Gazprom in Iran for ages. Shtokman will secure them a foothold in the Russian Arctic. They will be the first foreign (company) in this hugely attractive area," he told Reuters. The US Geological Survey estimates 25% of the world's remaining hydrocarbon reserves lie above the Arctic circle. Last year Gazprom surprised the industry with an announcement that it had scrapped a year-long bidding process and would instead develop Shtokman on its own, a move many analysts linked to the cooling relations with Washington. It also said it had dropped a plan to liquefy gas for shipments to the US and was now looking to export at least half the gas by a new pipeline to Europe. However, talks continued with a view to having one or more foreign companies serving as an operating partner, although some companies including Chevron said they were not interested in being a mere contractor. Shtokman is one of the world's largest gas fields with reserves of over 3.7 trillion cubic metres. The first phase envisages production of 23.7 billion cubic metres per year and its export by a pipeline in 2013, while liquefied natural gas production will start in 2014.

Saturday, July 07, 2007

Moncrief's Siberian Claim Fails

July 6, 2007 - The Associated Press - FRANKFURT - A German court on Thursday rejected a lawsuit by Moncrief Oil International that sought to void a joint venture between BASF and Gazprom to develop a Siberian gas field. Forth Worth, Texas-based Moncrief, a privately held U.S. gas company, sued BASF, contending that a deal between Gazprom and BASF's Wintershall unit should not have been permitted because the U.S. company had already signed a deal with Gazprom in the late 1990s. The U.S. company claimed that BASF had induced Gazprom to breach its contractual obligations to Moncrief, leaving it out in the cold and devoid of any chance to explore, exploit and profit from the natural gas field. Moncrief signed deals with Gazprom in the late 1990s for a 40 percent stake of the Yuzhno-Russkoye gas field. The value of the stake is estimated at around $8.5 billion. But in April 2006, Gazprom and BASF struck an asset-swap deal that raised Gazprom's stake in BASF marketing subsidiaries in exchange for increasing the German company's share in the giant Siberian gas field. BASF had maintained that Moncrief's claims were without merit. Gazprom was not named in the suit. Gazprom owns a pipe network in Germany through its Wingas partnership with BASF's Wintershall division. Manfred Nax, a judge at the Frankenthal district court, said Moncrief failed to "convince us that [BASF] actively persuaded Gazprom to breach its contract. And whether or not there was a binding contract between Gazprom and [Moncrief] that was breached by the contract with [BASF] is not up to this court to decide." The court added that BASF had not been provided with any documents proving beyond a shadow of a doubt that Moncrief and Gazprom had a contract to begin with. Moncrief did provide copies of the original contracts, but was unable to secure forms from Russia proving that the signature by a Gazprom executive was valid. In a statement, Moncrief said it would review the decision before deciding its next step. Moncrief can appeal the decision to a regional court.

U.S. appeals court rejects Moncrief Oil's claim against Gazprom

MOSCOW, June 27 (RIA Novosti) - A United States appeals court rejected a claim filed against Gazprom by U.S. oil company Moncrief Oil International, the Russian energy giant said Wednesday. The U.S. Fifth District Court of Appeals ruled that it had no jurisdiction over the Russian natural gas monopoly. American billionaire Richard Moncrief, president of Moncrief Oil International, filed the lawsuit in a Texas court against Gazprom, demanding that it either return the right to develop the Yuzhno-Russkoye natural gas field in Russia or pay several billion dollars as compensation for lost profits. On March 21, 2006, a Texan court granted Gazprom's petition to throw out a claim filed by Moncrief Oil. The Yuzhno-Russkoye gas field, with estimated recoverable reserves of 700 billion cubic meters, is to be the main source of natural gas supplies along the Nord Stream pipeline, set to run under the Baltic Sea from Russia to Germany. In the late 1990s Moncrief signed an agreement with Vladimir Nikiforov, then director general of regional energy producer Zapsibgazprom, to set up a joint venture to develop the Yuzhno-Russkoye deposit in the northern Yamalo-Nenets Autonomous Area. Moncrief pledged to invest about $1 billion in the project. In 1999, a different company, Severneftegazprom, was established to develop Yuzhno-Russkoye. But in 2001 it emerged that Severneftegazprom was controlled by structures that had close ties to Russian gas trader Itera, while Zapsibgazprom was already controlled by the ill-fated Yukos. These companies said that they did not have any dealings with Moncrief over the gas field. By the end of 2002, Gazprom had regained 85% of Zapsibgazprom and control over the license to develop Yuzhno-Russkoye. However, it was not until July 2004 that the company management learned of Moncrief's interest in the deposit.

Tuesday, July 03, 2007

Nabucco slice still on Gazprom's agenda

29 June 2007 - Upstream OnLine - Russian gas monopoly Gazprom might still take a stake in the planned Nabucco pipeline that will bring Caspian and Iranian gas to Europe, company boss Alexei Miller said today. Gazprom unveiled a deal last weekend to build a new natural gas pipeline with Italy's Eni under the Black Sea, dubbed South Stream, seen as a possible rival to Nabucco. "If Nabucco has a sound economic basis, has a confirmed demand for gas and the equivalent reserve base, no one can interfere with it," Miller told Moscow-based business daily Kommersant in an interview. "And Gazprom could in the future join the list of participants in Nabucco, even more so as we are in constant contact with its founders," he said. Although Gazprom said South Stream was not aimed as a rival to any other planned lines, its announcement prompted fears in Turkey that South Stream could eclipse Nabucco and threaten Turkey's goal of becoming a major regional energy transit point.

Nord Stream Requires New Influx

// Gasunie has to expand the assets it will exchange with Gazprom
July 2, 2007 - Kommersant by Natalia Grib, Oleg Gavrish -
Gazprom shareholders have approved a number of agreements on the construction of the Nord Stream natural gas pipeline. The agreement with the last foreign participant in the project, the Dutch Gasunie, is still under discussion, however. Gazprom is not yet satisfied with the share in the Balgzand Bacton Line pipeline that is being offered for entry into Nord Stream. The Russian monopoly wants new assets in exchange – underground gas reservoirs and other pipelines. Analysts suggest that Gasunie may agree to that, and then expand its partnership with Gazprom. On Friday, OAO Gazprom shareholders approved the final agreement between the monopoly, the German E.On Ruhrgas and Wintershall, Nord Stream AG and the Dutch Gasunie for the implementation of the Nord Stream project. Related agreements on compensation for tax payments and taxation in Sweden were also approved. Stanislav Tsygankov, head of the Gazprom department of foreign economic activity, stated that the company plans to sign a number of tax agreements as part of the Nord Stream project, including with Sweden. “One option being considered is the construction of a platform in Sweden. In that case, we will have to pay taxes in that country and an agreement with Sweden will be essential,” he said. The agreement defines the obligations of the parties in the project. In particular, they must contribute €1.5 billion in capital each. If the consortium requires more than €7.377 billion in the construction period, additional contributions will be made will be made to the Nord Stream capital up to 30 percent of the total sum of investment and proportionally to the share of each participant. The participants are guaranteed the repayment of any loans or credits made to Nord Stream AG. They should also guarantee reserve financing, including loans to Nord Stream AG of €3.8 billion. In spite of this, it cannot be said that the structure of the consortium has been finalized. Gazprom deputy supervisory board chairman Alexander Medvedev explained that Gasunie's inclusion in the project will be considered only on July 12. Another Gazprom executive told Kommersant that Gazprom is “discussion the receipt” of a variety of Gasunie assets. N.V. Nederlandse Gasunie specializes in the storage and transport of natural gas. Its pipelines extend 12,000 km. and its underground gas reservoirs have a capacity of 1.1 billion cu. m. It transported 95 billion cu. m. of gas in 2006 and its income exceeded $1.25 billion. The memorandum signed between Gazprom and Gasunie suggests mutual participation in Nord Stream and BBL. The latter is a gas pipeline with a capacity of up to 20 billion cu. m. per year that connects Great Britain and The Netherlands. Gasunie owns 60 percent in it. Under preliminary agreements, Gazprom is to receive about 9 percent in the BBL Co. However, according to a Kommersant source, “while investing in BBL and receiving a fixed income, Gazprom will not receive any preference in transport and the income will be insignificant on the whole.” Therefore, the source continued, the monopoly is discussing a new list of assets for exchange with Gasunie, that is, other transport and storage assets. It was not possible to receive a comment on this information from Gasunie on Friday. The company's press service in The Netherlands and its office in Moscow did not answer their telephones. Alfa Bank expert Konstantin Batunin thinks that the new exchange option can be profitable for Gasunie. “Gazprom is planning to expand most in the retail segment of the market, so it so it may be a matter of providing it with reservoirs and Gasunie shares in distribution pipelines in The Netherlands in exchange for a share in Nord Stream,” Batunin said. BrokerCreditService analyst Maxim Shein noted that, once it has a share in Nord Stream, Gasunie will try to buy resources in Russia to increase the capitalization of the company. Therefore, Shein said, if E.On does not agree to pay about $1 billion to Gazprom for its share in the Yuzhno-Russkoe deposit by the end of the summer, Gasunie will try to take its place.

"A Monster Has Appeared! What Else Could the Man on the Street Think?"

Miller// Alexei Miller on the Russian Monopoly's Expansion in the Gas, Oil, and Electrical Energy Markets
07-01-2007 Kommersant -
Gazprom CEO Alexei Miller did not attend the company's annual shareholders' meeting on June 29, 2007, although he voted with his shares on all of the issues on the agenda. Mr. Miller spoke last week with Kommersant about the company's recent performance and its future plans for the gas, oil, and electrical energy sectors.
What were the main results of 2006 for Gazprom?
Primarily the signing of a whole series of agreements concerning the extension of long-term export contracts, the sale of new volumes of gas in Europe, and the entry into the market of new end consumers. I'm referring to Italy, France, Austria, and [our] first deal with Denmark. So despite unceasing attacks on Gazprom from certain politicians and the press, European business is rationally choosing to seek to develop and strengthen cooperation with us. And that's understandable. The public at large found out about Gazprom's existence only a few years ago, in connection with the auction of Yuganskneftegaz, the conflict with Ukraine, and the shocking growth of capitalization. A monster has appeared! What else could the man on the street think? Meanwhile, our partners had 100% confidence in Gazprom. New contracts for the delivery of gas, new joint projects, and new routes for the transport of gas are the best answer to all of the skeptics in Europe and especially outside of it.
But the most serious changes apparently took place in the CIS, isn't that right?
In a sense, 2006 was for us an intermediate year in that region. As it happened, last year involved very tense negotiations with Ukraine and Belarus. For the last few years, the price of gas in Europe has grown several-fold, but almost nothing has changed in the CIS. Eventually, Gazprom was basically subsidizing the economies of the former Soviet republics at the expense of its own profits. The main difficulties in the negotiations arose because the transit countries linked the fulfillment of our export obligations to Russian gas being supplied [to them] at a discount. In the end, we were able to reach some fundamental agreements concerning the separation of the issues of the transit and supply of gas, as well as holding to the principle of equal yield on supplying gas for consumers in Europe and the CIS. The third important outcome of 2006 was the decision concerning the liberalization of the Russian gas market. It was already impossible to put the resolution of this problem off any longer. Cheap gas resulted in uncontrolled growth in demand. During the entire period of economic reform in our country, Gazprom's gas was the only fuel whose price was directly regulated in terms of historical importance rather than being defined by real supply and demand. The share of natural gas in the energy balance rose to more than 50%, and to 80% in some regions, and the use of coal, fuel oil, and other kinds of alternative fuel dropped significantly.
In other words, there isn't enough gas?
Gazprom has already surpassed the parameters of the government's energy strategy, a fundamental program document that was adopted only three years ago. Gas extraction in 2006 was 25 billion cubic meters higher than the plan for 2010. And the extraction volume for 2010, according to which the investment program was worked out, corresponds to the maximum level of extraction in 2020 according to the energy strategy. Keeping the price of gas artificially low has led to a growing imbalance between the expected growth in demand for that resource and the ability of gas companies, including independent companies, to supply the stated demand. With the levels of pricing that had taken hold in the domestic market, our investments in the extraction and transport of gas would never have broken even.
Has the trading of gas on the stock market helped balance out the situation?
The expansion of trading on the stock market, the use of mid-range contracts with a pricing formula for the basic supply volume for commercial consumers, and the gradual evening-out of yield from all of Gazprom's markets has allowed full-fledged market relations to be created in the Russian energy sector. That will stimulate the development of competition and expand business [opportunities] for independent gas producers. The objective inclusion in gas prices of the quality characteristics of gas in comparison with alternative types of fuel will ensure its sustainable use. In addition, without a transition to market prices for gas for industrial consumers, the temptation for our economy to remain in the role of an exporter of energy resources and energy-rich prepared raw materials will be too great; there will be no stimulus to invest in the manufacturing of high-tech products. So the government's decisions concerning the liberalization of the gas market are important not only for the fuel and energy sectors but also for the economy as a whole.
You mentioned the auctions of assets belonging to Yukos. Why did Gazprom not participate in them? In particular, the company's top managers earlier confirmed that [Gazprom] was interested in Tomskneft. You couldn't come to an agreement with Rosneft concerning the purchase of some Yukos assets?
We decided that the potential risks of participating in these auctions were too high for Gazprom. And with regard to any agreements, Gazprom is an open company, and if we really had reached any concrete agreements, we would have immediately and directly announced them. This is also true concerning the implementation of any points in a partnership agreement with Rosneft.
Nevertheless, Gazprom received its share of Yukos assets via an option with the Italian [oil companies] Eni and Enel concerning Arktikgaz, Urengoil, and Gazprom Neft. When and under what conditions will the company act on these agreements?
Like always – on time and under market conditions. This deal attracted extra attention, but it shouldn't be forgotten that the implementation [of these agreements] is only part of a large bundle of agreements with Eni. We are taking our cooperation with the Italian company to a qualitatively higher level. In the same way that Gazprom is already working with German partners, with Eni we are building up a joint business along the whole pricing chain – from the wells to work with consumers, including projects for the transport of gas. The agreement concerning the Yuzhny Potok gas pipeline shows that European countries share our concern about the risks involved in transit. As you may remember, it was their leaders who first suggested evaluating the advantages of the construction of a new southern corridor. Europe needs new volumes of gas and a more reliable supply. The Yuzhny Potok [project] answers these demands. And Eni has been searching for a long time for new joint projects to work on with Gazprom – they're trying to repeat the success of the Goluboi Potok [project].
Do you consider that project a success, even though so far it is still underutilized?
First of all, its load is increasing according to a plan that was previously agreed upon. Secondly, we're not the only ones who think so. Ask the Turks what they would do without the Goluboi Potok after the explosions and interruptions in the supply of gas to pipelines that go to Turkey from third-party countries. This isn't the first year or the first time that we have supported the gas balance in Turkey for several months by increasing the gas delivered via the Goluboi Potok pipeline by almost one and a half times. That is particularly felt in Turkey in the winter.
Gas from the region around the Caspian Sea is being considered as one of the sources of resources for the alternative Nabucco project. Isn't the Yuzhny Potok [project] a political solution that puts an end to that project (Nabucco) that would be launched without Gazprom's participation?
Why do you consider these projects to be alternatives? If the Nabucco project is economically grounded and has reliable demand for gas and the corresponding resource base, nothing can interfere with it. And in the future, Gazprom might join the participants in Nabucco, especially since we are in constant contact with its initiators.
After Gazprom bought Kovykta, which is conveniently located with regard to China, it would be logical to export gas to China from there, and keep gas from Sakhalin in the domestic market. But then a conflict of interest arises with Rosneft and the Sakhalin-3 project. Where will gas from Sakhalin and Kovykta end up going? The direction of the flow of deliveries and the resource base is defined by a program for eastern Siberia and the Far East that was approved by the Russian government. Kovykta is not among the primary export projects. Extraction from that field began significantly later than on Sakhalin.
How are the partnership negotiations going for the Shtokman project? In August, when the Norwegian companies Statoil and Hydro join up, there will still be three foreign candidates for the project to develop the Shtokman gas condensate field. That accords with the number of partners that Gazprom originally wanted to attract to the project. Is it possible that you will accept all three of them and begin the project?
As you know, in October 2006 Gazprom decided that it will be the single owner of the license for Shtokman. Nevertheless, potential foreign partners have continued to speak with us regarding other means of cooperation. The negotiations concerning the first phase of the development of the field are close to completion, and I think that soon we will be able to announce that concrete agreements have been arrived at. We consider Shtokman to be a resource base for the export of Russian gas to Europe via the Severny Potok pipeline (the Northern European gas pipeline, Nord Stream), as well as for the construction of a plant to produce liquefied natural gas (LNG).
What in general is going on at the Shtokman field: how is work going, what is the volume of financing from Gazprom, what are the updated timeframes for the completion of the project?
A schedule has been worked out to synchronize the beginning of extraction, the supply of gas to the pipeline, and the production of LNG with Gazprom's long-term gas balance. The first gas will be extracted from Shtokman in 2013. In 2007, the volume of investment in the development of the field is 17.1 billion rubles. This project has a special significance not only for Russia but for the global gas market. The geographical location and the dimensions of this field are such that over the long term Shtokman will become one of the links in a system of global energy security. We are ready to cooperate with our foreign partners in all spheres of this project.
But the Nord Stream pipeline has met with active opposition from several European countries. The EU antimonopoly commission has warned that Gazprom will have to sell its share in the project if amendments to the Gas Directive within the framework of the liberalization of Europe's gas market are approved. Might Gazprom wait a little before beginning construction? And wouldn't it be better to build a second branch of the Yamal-Europe pipeline, which could be done for a third of the cost of a similar pipeline in the Baltic region?
[The plan for the pipeline] is neither legally or geographically unsound. The Severny Potok pipeline will go from the Russian coast along the bottom of the Baltic Sea, in neutral waters. I would also like to note that the gas that will be delivered via the Severny Potok pipeline has already been sold – consumers will be waiting for it in 2010, and we would advise the European Commission to carefully analyze the possible effects that a delay in the completion of the project will have on the future pricing situation in Europe. With regard to Poland, there is no demand in that country for additional supplies of gas from Russia, and that means that there is no need to build up new gas transport capacities in the direction of Poland. If the situation changes in the future, gas can be provided from the western direction, and such proposals have already been made.
What should Gazprom Neft eventually become – a company that has its own market capitalization and that possesses its own oil reserves, or a production division of the [Gazprom] monopoly that holds all of Gazprom's oil licenses? Will you take Gazprom Neft off the quota lists? How are you planning to increase Gapzrom Neft's extraction [volume] to 40-45 million tons?
The strategy for Gazprom Neft envisions a much more ambitious increase in extraction – up to 80 million tons by 2020. The same document describes the basic steps for achieving this goal. The combination of Gazprom's resource base of liquid hydrocarbons and Gazprom Neft's production capabilities will yield very good results. In order to combine the two, we will of course exercise [our] option with Eni and buy up the 20% stake in Gazprom Neft. Then we will decide the way that the shareholder equity and the resource base will be consolidated. Our future course will be guided by the increased interest that the packet of shares in Gazprom Neft attracted during the preparations for the auction. Most likely, the company will remain public and quoted on the stock market. In the distant future, we could consider the possibility of using a packet of shares that is not quite a blocking share as a basis for the creation of a new international alliance.
What plans does Gazprom have in the electrical energy sector? How will you structure the energy assets that you've acquired? What place will the partnership with SIBENCO have in that structure? What will it be called, who will lead it, and what assets and how much [financing] will Gazprom contribute? Will it be a public company? Are you entering into this partnership to finance the revival of electricity generation using only gas, or coal as well?
In the last few years, Gazprom has actively expanded its presence in electrical energy. Our strategic goal is to create an effective group of electricity-generating enterprises that will be one of the core divisions of Gazprom's activities. The amount of gas that is used for electrical energy is very large, and that allows us to ensure a good level of synergy with the gas business. Among our goals is increasing the profitability of capital, diversifying the risks of tariff regulation, and optimizing the fuel balance. As a large shareholder in UES Russia and Mosenergo, Gazprom intends to become one of the largest – though not a monopoly – players in Russia's reformed electrical energy market. Gazprom's involvement in coal-based electricity generation projects will allow the realization of plans for balancing the consumption of coal and gas and will also increase the effectiveness of the marketing of gas. For that, we intend to create a joint venture with the country's largest coal company, SIBENCO. The partnership will include electrical energy assets belonging to Gazprom and coal and electrical energy assets belonging to SIBENCO. Right now we are continuing to work on the deal, and we primarily need to figure out which electricity-generating assets we will get for our packet of shares in UES Russia.
How will you manage your non-core assets? In particular, as far as we understand, you are planning to sell a controlling stake in Gazprombank this year. If that is the case, what will happen with SIBUR Holding? Will it be completely transferred to Gazfond, for example? What plans exist with regard to SIBUR – the sale of the stake to a strategic investor, an IPO, a reorganization that puts chemical companies in a narrower division?
It is commonly believed that we're buying up everything in sight. But in reality, our core divisions are gas, oil, and electrical energy. We are selling [our] non-core assets. The budget for this year alone stipulates the sale of more than a billion dollars worth of non-core assets. Gazprombank and SIBUR are non-core assets for Gazprom. Plans for SIBUR might include any or all of those different approaches: strategic investors, an IPO, reorganization.
Recently the Russian and international press, pundits, and even the US Congress have repeatedly talked about the possible creation of a so-called gas OPEC. Are you ready to get onboard that project? I wouldn't limit that question to just the gas sector. Modern business is rapidly globalizing and breaking out of the strictures of sectors and national markets. That is exactly why, two years ago, Gazprom decided to launch the creation of a global energy company. And it is no exaggeration to say that by now the process of transforming Gazprom from a "national champion" company into a leader in the global energy business is complete. In six years, the company's capitalization has increased 25-fold, and by the end of last year it was more than $270 billion. We're not only developing a unique resource base, enhancing production potential, and investing significant funds in modernizing the pipeline system – we're also opening new market outlets, diversifying energy transport routes, and developing new business models by actively getting involved in electrical energy and the oil business and developing an entire production chain for hydrocarbons. In addition, Gazprom is becoming a huge player in the LNG market. This implies an active expansion of business models and regions of activity, as well as an additional lowering of risk. The results of Gazprom's activities over the last several years clearly demonstrate its effectiveness as a global competitor – it is sufficient just to point out that we are already number two among the world's energy companies. And we're not resting on our laurels. It may be precisely because of Gazprom's rapid growth over the last few years that we feel the discrepancy between the "rules of the game" that exist in the energy sector and the current challenges of the international economy more sharply than our colleagues and partners in the market.
What exactly do you mean?
The global energy market is characterized, first of all, by increasingly stiff competition for resources, appreciation of resources, and the closed-off nature of several markets, and, second of all, by a noticeable increase in the risks facing different participants in the market. In particular, energy consumers constantly express fears regarding the reliability and volume of supplies and their projected cost. Transit countries, which play a large role in the system of global energy exchange, make no secret of their anxiety over retaining existing volumes and transit tariffs, which, in turn, is inextricably linked to the necessity of maintaining and modernizing energy transport systems. For their part, suppliers still cannot be certain that the market's growth tempo, the balance of supply and demand, and acceptable standards of profit can be maintained, which threatens the rate of return on investment and undermines the basis of how the electrical energy business is run. Gazprom, like all market leaders, constantly runs up against such problems. Though it is following a consistent course of liberalization of the Russian domestic market, in European markets Gazprom encounters various manifestations of discrimination. Instead of unfounded fears of Gazprom's inability to guarantee supplies according to long-term contracts, we expect acknowledgement from our international partners of the obvious fact that the company's proven reserves are sufficient both to unconditionally and in the long-term fulfill all [of our] signed and planned agreements and to back up a fully-fledged entrance into new markets. From our European colleagues, we expect support when it comes to the necessary modernization of the gas-transportation system in transit countries, and that support should take into account Gazprom's investment in the capital of the corresponding companies. In connection with this, I want to express hope that the joint venture between Gazprom and Beltransgaz will allow us to avoid situations like those that arose in the Ukrainian gas transit system last spring.
What possible measures to deal with the situation might be considered? Something like a gas OPEC after all, or something different?
The risks that arise systematically in the global energy market require the creation of a system of worldwide energy security, the construction of which is possible only once the transition from competition between national champions to cooperation between global leaders in the market is complete. The basis for the creation of such a system should be that each participant in the market takes simple and coherent measures to lower the fundamental risks [involved in the market], and the system should coincide with the interests of both global leaders and participants in national markets. The founding principles could be the development of a system of long-term commercial contracts, including contracts for transit; obligatory international audits of reserves; the adoption of regional and global strategies for increasing reserves; and coordination between energy balances from a middle- and long-term perspective and issues of the integrity of the system, including taking into account the evolution of the LNG market. And finally, the creation of a system of international cooperation on technological and ecological maintenance for global energy projects. Clearly, a possibility might be the creation of an international energy organization – along the lines of the UN Security Council, but in the energy sphere. Unlike the gas OPEC you mentioned above, such an organization should not regulate extraction quotas – although those, of course, are also very important – rather, it should deal with the coordination of strategic principles of cooperation in global energy markets. We've done enough competing – it's time to cooperate.

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