Russ Oil-Gas

Kommersant by Elena Ivanova - Gas Industry 1991-2000 The Russian natural gas industry is largely represented by one company, Gazprom. It is the richest organization in the country and the largest gas company in the world. Gazprom alone accounts for 8% of Russia's GDP, and supplies about 20% of the world's gas needs. When writing about Gazprom many superlatives can be used: the largest gas reserves in the world, the biggest investment in new gas deposits, the world's longest pipeline network, the largest number of workers… Yet, its foremost significance lies elsewhere. Gazprom has been preserved as a single company, unlike the other Russian energy companies, and has no intention of splitting up. When President Vladimir Putin visited Urengoi, the gas capital of Russia, he promised the industry's workers that he would not hasten the company's restructuring. To confirm his pledge, he decorated Rem Vyakhirev, a man who did everything possible to avoid any reforms at Gazprom, with the order "For the Service to the Fatherland." At the company's internet site one can read: "Gazprom is the leading force in providing the balanced development of Russia in the 21st century." It is indeed.
HISTORY: 1991-2000 For the last 10 years, the gas industry has lived as if it were a state within the state. The government was too loyal to the gas monopolist, and even its privatization was conducted in the interests of the company's management. However, such benevolence did not come without a price: Gazprom regularly provided funds to patch up holes in the state budget and finance various political campaigns.

1991

A plan was elaborated to incorporate the gas infrastructure of Russia, the Ukraine and Belarus into one system. The state gas concern (GTK) Gazprom hoped to retain control over the most important parts of its vast property in the former USSR. Of the most significance was the Soviet gas transportation system. However, the plan failed, and Gazprom remained an exclusively Russian enterprise. Late in spring, Gazprom made an attempt to penetrate the European gas market to which it supplied about 100 billion cubic meters of gas yearly. In cooperation with a German chemical company BASF, Gazprom intended to buy 25.1% of Verbundnetz Gas thus lowering its own dependence on Ruhrgas, which dictated prices while negotiating export contracts with Gazprom. The idea of buying Verbundnetz Gas shares was eagerly backed by the Soviet government, and the chairman of the State foreign trade commission Stepan Sitaryan appealed to the economics minister of the Federal Republic of Germany Helmut Hausman to support the Russian company's bid. Yet, the German side turned down even the Russian company's application to participate in the tender. Shares in Verbundnetz Gas AG were bought by Ruhrgas. In September, Gazprom undertook a counter-offensive as it established two joint venture companies with another German firm Wintershall: WIEH (for selling gas) and Wingas (for transporting gas). These two companies still buy Russian gas at a cheaper rate than Ruhrgas. In November, Gazprom, together with its affiliated companies - Astrakhan'gazprom and Agropromkhim, established one of the first Russian joint-ventures with an American firm, Gaz-Agro-Freeport. The joint venture, which exported sulphur (Astrakhan'gazprom was the world's second biggest sulphur producer), received 1.8 million rubles investment from the Russian state: an extraordinary amount for the time. The American side was represented by two little-known companies Freeport and McMoran. Later on, a large sulphur deposit was found in the USA and the joint venture closed down.

1992

The government of Prime Minister Yegor Gaidar tried to open the gas industry to competition. In February, an idea was expressed for the first time of establishing independent gas producing companies that would supply gas to the centrally-controlled gas transportation system. The Minister of Oil and Energy Vladimir Lopukhin made an effort to realize the idea, which earned him an enemy in the person of Viktor Chernomyrdin, a fervent proponent of retaining Gazprom as one company. In April, the government allowed the concern Gazprom to keep 38% of its currency earnings abroad. But in May Yegor Gaidar ordered a review of Gazprom's foreign accounts. In late May, Gazprom demonstrated its power as a lobbyist. After the audit was finished, Vladimir Lopukhin was sacked, and was replaced with Viktor Chernomyrdin, who was also given a rank of vice-premier responsible for oil and energy complex. On 30 May, Viktor Chernomyrdin appointed Rem Vyakhirev, his first deputy and an old chum from their days in Orenburg, to head Gazprom. The very next day president Boris Yeltsin signed two decrees: #538 "On the united system of gas supplies" and #539 "On the exploitation of the new gas reserves on the Yamal peninsula, in the Barents sea and on the shelf of the Sakhalin island." According to these decrees, the whole gas market was to be fully controlled by Gazprom, which was also to supervise all property of the national gas industry. According to decree #539, Gazprom was to receive, without any tender, licenses to exploit the nation's most promising gas deposits. By 1995, Gazprom had licenses on 81 gas deposits, accounting for 68.5% of all gas reserves in the country. One day later, the government approved a package of decrees on the development of the oil and gas industry. Gazprom was given an exclusive right to supply gas on the state's foreign contracts. Gazprom could keep 45% of the earnings from these contracts, while the turnover on these operations was made tax exempt. In July, the government promised to borrow in the West $8.7 billion to provide for Gazprom's development. To pay the debt, the government recommended that the Central Bank allow Gazprom to open bank accounts abroad. In the autumn, the bank Imperial established by Gazprom bought up from the Central Bank a stake in the East-West United Bank, a former Soviet bank in Luxembourg through which payments were made for gas supplies to Europe, as well as for oil supplied by Rosneftegaz. Competitive advantages were not the only thing received by the empire created by Viktor Chernomyrdin. Gazprom was now to play an important political role covering with gas supplies the expenses of the Russian troops in the Baltic states. In November, the joint-stock company Rosshelf was created (with a 20% stake belonging to Gazprom) to exploit the largest shelf deposits - the Prirazlomnoye oil deposit in the Pechora sea and the Shtokman gas deposit, the world's third largest, in the Barents sea (estimated to contain 3 trillion cubic meters of gas). These deposits were expected to bring the state an annual income of $7 billion. Both projects are still frozen. In November, Boris Yeltsin signed decree #1333 "On transformation of the gas concern Gazprom into RAO Gazprom". The abbreviation RAO (stands for "Russian share-holder company") was given only to three companies - The United Energy Systems, Norilsk Nickel and Gazprom. According to the decree, gas producing and transporting companies were to become affiliated companies of Gazprom, which was to have 100%-control over them. Service companies were given the status of affiliate share-holder companies in which Gazprom was given stakes of 51% and more. The process of turning Gazprom into a share-holder company was controlled by Viktor Chernomyrdin and conducted in the interests of the company's management. Initially, the distribution of shares was the following: until 1999, 40% was to belong to the state of which 35% could be used by Gazprom to vote, 28.7% was to be sold for privatization vouchers, 15% was to be sold to the Gazprom personnel, 10% reserved for the later sale on foreign stock exchanges, 5.2% for sale to the population of the Yamal-Nenets autonomous region (YaNAO), and 1.1% was to be given to the company Rosgazifikatsiya. On 14 December, Viktor Chernomyrdin became prime minister.

1993

In January, Yury Shafranik became the head of the Ministry of Oil and Energy. On his initiative, the price of gas rose 3.6 fold from 1 February. In February, Gazprom for the first time cut off gas supplies to Ukraine citing payment arrears. The termination lasted just 14 hours. Ukraine's gas debt amounted by then to 138 billion rubles, but Kiev answered the demands from Moscow with a threat to terminate Russia's gas supplies to Western Europe since the pipeline went through its territory. In March, Gazprom started to realize its most ambitious project, regarding the gas deposits in the Yamal peninsula. Its most important part is to build a transit gas pipeline Yamal-Western Europe (the cost of the two first sections going through the CIS countries was estimated at $30 billion). On 22 March, Rem Vyakhirev and Oleg Davydov, the first deputy minister of foreign trade, signed an agreement in Warsaw on a transit gas pipeline to western Europe through Poland, bypassing Ukraine. In July, Gazprom made a second attempt to establish itself on the German market. A Russian government delegation headed by Viktor Chernomyrdin arrived in Bonn to negotiate the terms of Russian exports to Europe and bringing German investment to Russia. Gazprom signed a contract with the German company Wintershall regarding the building in Germany of two gas pipelines and a gas depot. These two projects were expected to bring a profit of DM1.7 billion. In November, Boris Yeltsin signed a decree establishing a special stabilization fund for Gazprom. The company was allowed to put into this fund up to one-third of the income it derived from the value added to the state price on gas for the consumers, the investment being earmarked for the development of the gas supply infrastructure. The decree granted Gazprom an unprecedented privilege: the money directed to the fund was exempt from taxation.

1994

In March, Gazprom once again stopped gas supplies to the Ukraine whose debt to Gazprom had exceeded by then 1 billion rubles. To solve the debt problem, Gazprom demanded that Ukrainian pipelines and some enterprises become the property of Russia. However, on 10 March, the sides agreed that Gazprom would continue to supply the Ukraine with gas. The Ukrainian side promised to present a timetable of debt payment within a month. Russia never received it, but for political reasons gas supplies to Ukraine continued. The same month, the State Committee on Property approved two instructions by Anatoly Chubais regarding the timing and conditions of selling Gazprom shares at voucher auctions. Auctions were to be closed for outsiders and the right to buy Gazprom shares would be given only to individuals with permanent residence in the region where an auction was held. Anatoly Chubais, who always succeeded in making the sale of shares for privatization vouchers an open event, was helpless in the case of Gazprom. The auctions were organized by the company itself. As a result, large independent investors were denied a chance to participate in the privatization of Gazprom, while the company's top managers controlled the number of participants in the auction, and, by implication, the distribution of shares. Later, "gas generals" were able to consolidate the major stakes in affiliated companies. In April, there appeared at the Russian gas market a new player - the company Itera. Registered in 1992 in Florida, Itera imported food into Turkmenistan. Turkmensitan was unable to pay for the supplies with money, and offered Itera a license to export 4 billion cubic meters of gas. Itera got a governmental letter of guarantee thanks to a close relationship between the corporation's president, the former sportsman- cyclist Igor Makarov and the deputy prime-minister of Turkmenistan Valery Otchertsov. (In 1996, Otchertsov left his post to become the president of a company which was part of the group). With the letter of guarantee in hand, Igor Makarov convinced Vyacheslav Sheremet, the first deputy chairman of Gazprom, to allow Itera to supply Turkmenian gas to Ukraine. Since then, Gazprom and Itera have been working together on various markets, with Gazprom even transferring to the company the rights on several gas deposits. Currently, the relationship between the two companies is the focus of auditors' attention. In July, Gazprom established in Finland a joint-stock company Gasum to supply gas. In August, Gazprom signed a contract with the German engineering companies Linde and Salzgitter-Gruppe, as well as with the chemical concern BASF, on the construction in Novy Urengoi of a gas-chemical complex to produce polythene and ethylene for future export. BASF was to provide Gazprom with technology and technical support for the complex. But the joint project was never completed: BASF lost over DM 1 billion and froze the project in 1999. In early August, Gazprom appointed the London investment bank Kleinwort Benson to be its adviser in the sale of 9% of its shares to western investors.
On 12 August, after the voucher auction had taken place, Gazprom shares appeared for the first time on the secondary market.
On 23 August, Rem Vyakhirev celebrated his 60th birthday. Gossip circulated about his impending retirement, but Rem Ivanovich said it was too early to think about his pension.
On 30 August, financial company The Russian Brokerage House ?. ?. & Co. was the first to quote the shares of Gazprom. They were first bought at 14,000 rubles. From the beginning, Gazprom shares were quoted only for buying, as brokers did not want to sell them on the open market.
In October, in Warsaw the negotiations were restarted between Europol Gaz and Gazprom regarding the construction of the Polish section of the Yamal-West Europe pipeline. However, the main question concerning financing the project was not resolved. Poland dragged out the talks, as it did not want to jeopardize its relationship with Ukraine.
In December, the voucher fund Narodny attempted to buy up Gazprom shares in Ufa, the capital of Bashkortostan, en masse. Those who won rights on Gazprom shares at voucher auctions were sent letters at their home addresses with an offer to sell these rights to the fund. The State Property Committee in the Republic of Bashkortostan declared that a leak of information regarding share-holders' home address had occurred in Moscow. The president of the fund Narodny Mikhail Roi insisted that he acted only as intermediary on the orders of a Moscow company that supplied him with information. At that time there was still no law on securities, and existing instructions were ambivalent on the issue of the share-holder register's confidentiality, so the Narodny fund escaped prosecution. Moreover, its example was followed by other investment funds. It has not been established who was behind these activities.

1995

In January, Gazprom announced that its register of shareholders was in operation. From 1 February, Gazprombank, the Gazprom authorized depository, was to start issuing documents confirming the owners' right on shares. At that moment, the market of Gazprom securities was estimated at $70 million.
In February, Gazprom bought a 10% stake in the international consortium Interconnector, which united 8 large oil and gas companies in Western Europe and the USA. Interconnector was to build a pipeline on the bottom of the Northern Sea connecting Britain with continental Europe. The pipeline with an annual capacity of 20 billion cubic meters was expected to start functioning on 1 October 1998. The cost of the project was about L440 million.
In February, the prime ministers of Russia and Poland finally signed a protocol regarding the construction of the Polish sector of the pipeline Yamal-West Europe via Belarus. The pipeline, when complete, would take about 50% of Russian gas planned for export to Western Europe through Belarus and not Ukraine.
In early March, Viktor Chernomyrdin raised excises on Gazprom- produced gas from 15 to 25% as the state budget needed additional revenue. That was the first sign of a chill in his relationship with Rem Vyakhirev.
In April, Gazprom experienced a new setback on the East German market. In Berlin, the last large deal was signed in the framework of the privatization of the former GDR industrial complex. The Federal commission on privatization of GDR industries (BVS) announced the transfer of 80% of shares of the East German chemical complex Olefinchemie-Verbund to the American Dow Chemical Company.
On 31 May, in the Moscow Youth Palace the first share-holder meeting of the company took place. It did not go without a scandal. A shareholder from the city of Tyumen demanded to vote separately on the clause in the statute which granted Gazprom the first refusal right to buy shares from share-holders. However, the suggestion was voted down.
In July 1995, Gazprom transferred its currency accounts from Vneshtorgbank to the banks Imperial and Gazprombank. At the same time, a fight developed for the bank Imperial between Gazprom and LUKOIL. In the end, Rem Vyakhirev let Vagit Alekperov of LUKOIL head the bank's board of directors.
In July, Gazprom and the European Bank for Reconstruction and Development (EBRD) signed in Helsinki a protocol on cooperation up to 2000, according to which the bank was to invest in Gazprom's projects about $700 million.
In September, Anatoly Chubais, the first deputy minister and a proponent of a strict budget policy lobbied for the liquidation of the Gazprom stabilization fund, and threatened to start an investigation into its activities.

1996

In early June, Gazprom became the owner of the oldest bank in Hungary as it bought 50% of Altalanos Ertecforgalmi Bank (AEB).
In June, Gazprom became a shareholder in the Russian television company NTV as it bought the large stake in this company owned by the group Most.
In August, Petr Rodionov, the general director of Lentransgaz, became the new minister of oil and energy.
In October, a new tax scandal affected the relationship between Gazprom and the government. The accounts of some companies affiliated with Gazprom were frozen for tax arrears. The frozen property of Urengoigazprom amounted to 76.3 billion rubles. According to Rem Vyakhirev, the government threatened to auction some Gazprom properties and assets if it did not pay its tax arrears. This happened at a time when Gazprom was about to offer stakes in the company to foreign investors.
In December, Gazprom established an affiliated trade company Mezhregiongaz. The company became the Gazprom bookkeeper as it conducted all deals with Russian gas consumers. All deals were going through Mezhregiongaz as it was buying gas from transport companies and selling it to consumers for cash.

1997

In February, an international scandal broke up concerning Gazprom shares. A company from the Caiman islands, Regent GAZ Investment Company (RGIC), sold its shares for $200 million to Western investors, declaring that they were guaranteed by Gazprom securities. By doing so, the company tried to avoid the strict division between the internal and external markets on which Gazprom shares were traded, making a profit on a fourfold difference in their ratings. Rem Vyakhirev demanded that the management of Regent GAZ liquidate the company immediately. A week later, Regent GAZ announced its self-liquidation having bought back shares from its shareholders.
In March, in Frankfurt-am-Main a loan agreement was signed between a group of Western banks headed by the German Dresdner Bank and RAO Gazprom on a syndicated credit for $2.5 billion to finance the project Yamal-West Europe.
In March, Boris Nemtsov, the governor of Nizhny Novgorod province, became the first deputy prime minister. At the same time, he headed the ministry of oil and energy, as the former minister Petr Rodionov, who was Viktor Chernomyrdin's man, was removed and later became the deputy chairman of Gazprom. Boris Nemtsov promised first of all to put Gazprom "in order," threatening to split it. But Gazprom was first to act - on 26 March, it announced its restructuring. However, that was not the restructuring wanted by Boris Nemtsov. All drilling enterprises within Gazprom were to be united in a specialized company Burgaz, while producing and transport companies were to delegate their selling functions to a limited responsibility company (OOO) Mezhregiongaz. Gazprom also promised to sell its properties unrelated to gas production, such as service companies, agricultural firms, sanatoria and holiday homes.
In April, a contract was signed about the sell of 32.5% of the state Latvian gas distribution company Latvijas Gaze. The stake was divided equally between Gazprom and a German consortium consisting of Ruhrgas and Preussen Elektra.
On 10 April, prime minister Viktor Chernomyrdin took a two-day holiday. Seizing the opportunity, Anatoly Chubais and Boris Nemtsov convinced the president to terminate the trust agreement with Rem Vyakhirev in accordance with which he managed a 35% stake of the state in Gazprom. According to Boris Nemtsov, the shares had been given to Gazprom without a tender and the state did not get anything from that. Boris Yeltsin signed a decree depriving Rem Vyakhirev of the right to manage the state stake in the company. But back from holiday, the prime minister blocked the decree. In May, Boris Nemtsov and Rem Vyakhirev negotiated a new version of the decree according to which the head of Gazprom retained the right to manage the state shares in Gazprom, but lost the right to vote with them on his own initiative.
In November, Gazprom, LUKOIL and Anglo-Dutch concern Shell signed a memorandum of understanding declaring their intention to participate together in the privatization of Rosneft. However, the privatization did not take place.

1998

In January, a new holding Gazprom-media was established as an umbrella organization for all mass media owned by Gazprom. It was headed by Viktor Ilyushin, the former first adviser to the Russian president.
In February, Gazprom bought a 25% stake in the Bank Olimpiysky. The bank became the seventh bank owned by the gas monopolist.
On 23 March, Viktor Chernomyrdin was sacked. He was succeeded as prime minister by Sergei Kirienko, while Sergei Generalov became the head of the ministry of oil and energy. Viktor Chernomyrdin was expected to become the new head of Gazprom. Rem Vyakhirev commented on the rumors in the following way: "Chernomyrdin is far too normal for that".
The former prime minister decided to run for a place in the Duma from the Yamalo-Nenets region. Rem Vyakhirev refused to fully finance the election campaign of Viktor Chernomyrdin and his party Our Home is Russia (NDR).
In June, the deputy head of the ministry of state property Aleksandr Braverman made a sensational statement that the state was going to sell part of its Gazprom shares.
In late July, Boris Yeltsin signed a decree on selling 5% of the state stake in Gazprom. It was expected to bring $1.6 billion to the state coffers. The auction took place in December and only 2.5% of the monopolist's shares were sold. They were bought by Ruhrgas for $660 million which went towards paying off Russia's foreign debt.

1999

In January, Rem Vyakhirev's son Yury Vyakhirev became the head of the Gazprom's most profitable affiliated company Gazeksport. In the same month, the gas monopolist sold to Itera a controlling stake in the Urengoi gas producing enterprise Rospan. At the same time, Itera got licenses to exploit two large gas deposits - New Urengoi and East-Urengoi. Itera also got control over the gas company Purgaz, which had the Gubkin deposit in the Yamal-Nenets autonomous region. Later, Gazprom organized an additional emission of shares in its affiliated company Zapsibgazprom, but did not buy up them thus lowering its stake in the company from 51 to 37%. The Southern-Russian gas deposit the license on which had belonged to Zapsibgazprom was later also transferred to Itera.
In May, Sergei Stepashin became prime minister. On 25 May, Viktor Kalyuzhny was appointed the Minister of Oil and Energy. He tried unsuccessfully to become a member of the monopolist's board of directors. Kalyuzhny always fought with Gazprom. It was his idea to unite Gazprom and RAO UES and create a ministry on the basis of both companies.
In the autumn, Gazprom parted with its shares in banks and commercial organizations, including a non-state pension fund Gazfond (29%), the managing company of the pension fund ZAO Lider (20%), OAO Russian National commercial bank (19.96%), Gazaks (50%) and OAO Avtogaz (5%). According to the Federal Commission on Securities (FKTsB), the Gazprom stake in the bank National Reserve Bank shrunk from 63.82 to 37.44%. However, it was during this period that Gazprom was actively buying up stakes (of 19.9%) in gas processing factories in the Khanty-Mansy and the Yamal-Nenets autonomous regions. Most of these factories were part of OAO Sibneftegazperepabotka, in which SIBUR owned 36.5%.v In December, the group Media-Most sold 12% of its shares to Gazprom. The aim of the deal was to allow the group to start paying off loans to the bank Credit Suisse First Boston.

2000

In January, at a meeting with the employees of Surgutgazprom, Rem Vyakhirev made an important announcement about an impending division of Gazprom. "We would divide into those who make money and those who help them", he said. By this it was understood that the money-makers were the gas producing and exporting companies, which were to remain in Gazprom, while all other companies (transport and service companies) were to be sold off. On the same day, the shares of the company dropped 8% in value Two weeks later, acting president Vladimir Putin stated that Gazprom "would not be divided."
In February, Gazprom published a program for managing its shares up to 2003. The main news was that Gazprom planned to sell another 6% to foreign investors and requested the government to allow its securities to be traded at more stock exchanges.
In April, the National Association of the Stock-Exchange Participants (NAUFOR) allowed Gazprom, which was not a professional trader, to become its member. Gazprom membership in the association did not mean the diversification of its activities. Its purpose was merely to ensure that Rem Vyakhirev could keep a license on managing the state stake in the company.
In early April, a new conflict broke up between Rem Vyakhirev and Viktor Chernomyrdin over a project for the production in Russia of big diameter tubes for Gazprom, which had previously been imported. The cost of the project was estimated at $1 billion a year. All the country's metal- works tried to get the lucrative contract. Viktor Chernomyrdin lobbied for the metallurgical combine in Nizhny Tagil, while Rem Vyakhirev supported the bid of the Oskolsky metallurgical combine, 60% of which was owned by Gazprom.
On 28 April, Gazprom refused to take the shares of TNT-Teleset', ZAO Publishing House Sem Dnei and Media-Most itself as a payment for the debts of the holding Media-Most. Gazprom stated that it wants not some disunited packages of shares, but the control over the whole of the holding. In case of a voluntary transfer of the controlling stake its owner Vladimir Gusinsky was to lose automatically the status of the holding's head. He accused Gazprom of acting on the orders from the Kremlin.
The war between Media-Most and Gazprom ended up with the heads of both companies losing their positions. The Kremlin was the only winner.
In May, a fight developed between Gazprom and the group Interros for shares of three enterprises from the city of Perm: AO Perm motors, AO Aviadvigatel and AO Permsky motorny zavod. Gazprom wanted to increase its share in them up to 25% while lowering Interros's share in Perm motors.
In June, Vladimir Potanin, the head of Interros, and Rem Vyakhirev signed an agreement on cooperation in the spheres of engine building and ferrous metallurgy. The Gazprom-owned Lebedinsky mining complex was the main raw material supplier to the Novolipetsk metallurgical combine.
On 15 June, in Berlin Rem Vyakhirev stated that his successor at the post of the company's head was named.
In the same month, at a share-holder meeting a new chairman of the company's board of directors was elected - Viktor Chernomyrdin was substituted with the deputy head of the presidential administration Dmitry Medvedev.
In September, the Lebedinsky mining combine and Oskolsky Electrical and Metallurgical Combine (OEMK) announced their intention to establish a holding Gazmetall by the end of the year. The holding's main owner was Gazprom, which controlled both companies through its affiliated company Gazprominvestholding.
In October, Rem Vyakhirev said that a European media-holding showed an interest in buying a stake in Media-Most. This company was The News Corporation. According to Vyakhirev, in the summer of the next year, Most should pay back Gazprom $272 million, and Gazprom management preferred to sell the holding as a whole and not in parts.
In November, Gazprom and Media-Most made a truce: the holding was to pay its debts with its own shares. In December, Gazprom-media nullified its law suit against Media-Most for a $248.5 million debt as the debtor started to transfer its shares.

PRESENT

The year 2001 was a watershed in the history of Gazprom. Never before had instability been felt to such a degree in the Moscow office of the company. Rem Vyakhirev and the management team which had ruled the company for 10 years were made to step down by the Kremlin. A new management team from St Petersburg headed by Aleksei Miller, formerly a not particularly significant deputy Minister of Energy, seemed out of place, reminding observers of a "provisional government."

An Unsuccessful Start

For Rem Vyakhirev, the year started badly. The last meeting in 2000 of the company's board of directors decided that all deals with the monopolist's property would have to be approved by the board, which meant that the chairman would lose his freedom of action. If that was not bad enough, German Gref, a member of the board, demanded that the relationship between Gazprom and Itera be audited. In a letter to Dmitry Medvedev, the deputy head of the presidential administration and at the same time the chairman of the Gazprom's board of directors, Gref directly accused Gazprom of transferring its assets to Itera. According to Gref, "the transfer was conducted through several channels and addresses rather than just by a direct transaction. Any analysis of the bilateral relationship on the basis of just one company's data would not uncover their ties through intermediaries." (On the relationship between Gazprom and Itera, see the History chapter.) The audit of this relationship was to be conducted by PricewaterhouseCoopers (PwC), which had been auditing Gazprom for many years, though it never did a parallel audit demanded by Gref. Its report was ready in five months, by the time of the shareholder meeting. Its only significance was the statement that Gazprom could claim back one of the affiliated companies given to Itera - ZAO Purgaz. However, the new management of Gazprom is still undecided whether it needs Purgaz. At the same time, Gazprom was also audited by the State Accounts Chamber. Its report was more unpleasant for the company's management as it stated that Itera was buying gas produced by Gazprom in the Yamal-Nenets autonomous region far too cheaply. In other words, low internal corporate prices were used by Gazprom to the benefit of a non-affiliated company. Rem Vyakhirev was outraged with the report but could do nothing.

Honorable Retirement

It is said that Vyakhirev knew that his time at Gazprom was coming to an end and that his contract, due to expire in May, would not be prolonged. However, when in an interview to the newspaper Kommersant he himself said that he "does not believe that he is irreplaceable" and that his place "was offered to various big bosses," many thought it was a cover-up attempt. Moreover, the Gazprom board of directors included the names of Rem Vyakhirev and his first deputy Vyacheslav Sheremet in a list of candidates to the new board of directors. Vyakhirev was backed by one of the top German officials who was said to have appealed to the Russian government not to change the management of Gazprom: Germany had developed a good relationship with the company, and the change of management could affect the realization of Russo-German contracts. Vyakhirev insisted he did not know anything about that, but was preparing for a fight.
On 24 April, at the meeting of the management, an amendment was proposed to the Statute, so that Rem Vyakhirev, as any other member of the management who was also member of the board of directors, could be sacked only provided all other members of the board, except for himself, agreed to it. That would in fact make him irreplaceable, as it would always be possible to find at least one supporter. The amendment was turned down by the state representatives in the board.
On 27 April, Rem Vyakhirev lost the right to manage the state stake in Gazprom: his license expired and the Federal Commission on Securities postponed the issue of its prolongation indefinitely.v In late May, on the eve of the meeting of Gazprom's board of directors, at which the issue of the company's leadership had to be resolved, Rem Vyakhirev was elected the head of a newly established Russian gas association. In fact, that meant an honorable retirement.

The Revolutionary Changes Continue

On 30 May, at a meeting of the board of directors, the contract of Rem Vyakhirev was not extended. The choice of a new boss for Gazprom was a complete surprise to everybody. Among possible candidates observers named German Gref, Viktor Khristenko, and even Sergei Bogdanchikov. Yet, it was Aleksei Miller who became the new Gazprom's head, a little- known former deputy Minister of Energy. President Vladimir Putin made his choice based on the principle of personal loyalty. A meeting of the Gazprom shareholders had to take place in a month, and the state started a fight for the places in the board. First, the company Stroitransgaz, Gazprom's main building contractor, was attacked. The FKTsB announced that the investigation regarding the transfer of Gazprom's assets to Itera would be continued, demanding that the company provide all the necessary documents concerning the transfer of its shares to ZAO Stroitransgaz. According to the FKTsB, these deals "significantly affected the interests of shareholders and investors." At the center of the conflict was a 1994 transfer of Gazprom's shares (4.83%) to Stroitransgaz for which the latter paid $2.5 million, while their market price was about $70 million. The move was rightly understood: on the eve of the board of directors' meeting, Arngold Bekker, the head of Stroitransgaz, who had for many years been a member of Gazprom's board, withdrew his candidacy to the new board. The state succeeded in enlarging its representation in the board - out of 11 places in the newly elected board of directors 6 were taken by state representatives. As Rem Vyakhirev, who was elected the chairman of the board, sadly commented, "now I can only observe." At his very first meeting with Gazprom personnel, Aleksei Miller promised that there would be no personnel changes, but did not hold his word. In a few months, a cadre revolution took place. On 3 September, at a morning meeting, the chairman of Gazprom's management Aleksei Miller announced the changes. All key financial posts were given to a "St Petersburg team." As a result, those managers from the old team who had controlled the company's finances lost their exclusive positions. At the first glance, the revolution was a velvet one: Aleksei Miller decided to double all the key positions in Gazprom. This seemed to be a sign that the company's new head did not yet feel confident in his new post. For better or worse, there were now two first deputies of the chairman: Vyacheslav Sheremet from the old team and Petr Rodionov from the new one. In fact, Rodionov also came from Vyakhirev's team, but he broke up with Itera, SIBUR and Strotransgaz at the right time, and established a friendly relationship with the new management. Petr Rodionov and Aleksei Miller had some common acquaintances in St Petersburg: in 1997: Rodionov headed Lentransgaz, one of Gazprom's building enterprises there. After Rem Vyakhirev was sacked, Vyacheslav Sheremet lost his right to sign documents and Rodionov hoped to gain it. However, later on, this right was delegated to another representative of the "St Petersburg team," Vitaly Saveliev, who was appointed to the post of Sergei Dubinin who had resigned. The former chairman of the bank MENATEP St Petersburg, Vitaly Saveliev became the deputy chairman of Gazprom for finance. One of the representatives of the former management who established a good relationship with Aleksei Miller was Yury Komarov. Now he was to control not just Gazprom exports, but also its activities in the CIS and the Baltic states. Komarov was given functions which had earlier belonged to the deputy chairman of GazpromM Aleksandr Pushkin, a man close to Itera. He even headed the board of directors of Sibneftegaz, Itera's affiliated company. Formally Pushkin was not sacked either, but in reality he became powerless. Aleksei Miller appointed Mikhail Akselrod to head the department of investment and construction. In the past, Akselrod headed the investment and construction department at Lenenergo, and later, the company Petersburgskie electroseti. Mikhail Akselrod was given the functions of Yury Goryainov, a member of the company's management who was said to have lobbied in Gazprom for the interests of Stroitransgaz. The place of Gazprom's superintendent Nikolai Guslisty was given to a former employee of the Federal Guarding Service (FSO) Sergei Lukash. Instead of Viktor Tarasov, a Vyakhirev man, Yury L'vov , a deputy minister of finance and also a St. Petersburg man, was made the chairman of Gazprombank. The new head of the information policy department Aleksandr Dybal, who later was appointed the chairman of the board of Gazprom-media, had formerly been the commercial director of the St Petersburg radio station Baltika, and later a secretary of the St Petersburg center of strategic development Sever-Zapad. Many think that new appointments are not provisional. Moreover, management changes could also be expected at Gazprom's affiliated companies - Nadymgazprom, Urengoigazprom and Astrakhan'gazprom. The first in this list is Rim Suleimanov, the head of Urengoigazprom, the largest gas producing company. Urengoigazprom exploits the gigantic Urengoi gas deposit producing annually 260 billion cubic meters of gas (a half of all gas produced by Gazprom), over 5,3 million tons of gas condensate and about 825,000 tons of oil. In hardly better positions found themselves the head of Nadymgaz Viktor Kononov and the president of Yamburggazdobycha Aleksandr Ananenkov. The head of Astrakhan'gazprom Viktor Shchugorev was the only "gas general" who was fully trusted by Vyakhirev and Sheremet. Shchugorev was several times elected a member of Gazprom's board. According to him, Vyakhirev invited him many times to move to Moscow, but he refused. At 65, Viktor Shchugorev is older than the other "gas generals." "I told Aleksei Miller that my contract of January 2000 was signed for three years, to which he replied 'Work on, there have been no complaints against you so far!', says Shchugorev. - Indeed, why to change the management of Gazprom's affiliated companies? We work under the Big Gazprom's full control and are fully accounted to it."

TRENDS

The change of the Gazprom head does not mean that the government is ready to reform the gas industry. Its goal was to establish control over the company's finances.

Reform is No Longer on the Agenda

In an interview with Kommersant, the new chairman of Gazprom Aleksei Miller said that the company's division into transportation and production is not on the agenda. That does not mean that Gazprom will remind unchanged. Preparations are under way for restructuring and liquidating two sales companies - Gazexport and Mezhregiongaz. "These companies were created under different socio-economic conditions," says Miller. The unwillingness of Gazprom to reform is evident from proposals sent to the Ministry of Economic Development, whose head German Gref was, together with the company, to work out a plan of the gas industry's restructuring. Gazprom proposed to conduct its reform in three stages. In the first stage, a special gas transportation company (STK) is to be created within Gazprom. At the same time, Gazprom is to create an exchange for trading gas to which 5-15% of its gas production would go, as well as gas produced by independent companies and imported gas. At the second stage, the prices on gas for all consumers, except the population and organizations financed by the state budget, would be determined by the market, while STK would become self-financed. At the third stage, the state would regulate the price on gas only for the population, while the Russian gas market would be opened to foreign importers. The first compromise on the gas reform was reached at the meeting between German Gref and Aleksei Miller in August 2001. Then the sides agreed that the gas transportation company would at the beginning be 100% owned by Gazprom. The minister and the Gazprom head disagreed about who would be accountable for the material resources of the gas transportation company. The Ministry of Economic Development proposed to transfer the property to STK. Gazprom wanted to keep the "pipe" for itself and rent it out to STK. Thus, in case the transportation company would in the future become a joint-stock enterprise, or a state property, the pipelines would still be controlled by Gazprom. German Gref had no choice but to agree. "We were ordered to find a compromise with Gazprom," one of the ministry's officials acknowledged in a private conversation with Kommersant. "In this case it would not make sense to change radically the property structure of Gazprom." The government and the presidential administration are not interested in restructuring Gazprom. It is not self-evident, the argument goes, that after sales and production would be privatized, the gas industry would immediately become open to competition and attract investment, while the income of the state budget might drop significantly. Besides, Gazprom has multibillion credits that it has difficulties paying back. If the restructuring were to start now, the reaction of Western creditors would be difficult to predict. However, the main reason lies elsewhere. At the moment, the main goal of the government is to make more manageable a company that had for long time existed as if on its own and whose internal life was not controlled by the state. This problem cannot be resolved by changes in management alone. Before conducting major changes in the monopoly, the state would increase its own stake in Gazprom. The first steps towards that goal have already been made.

The Consolidation of Shares

Gazprom is unique among state-controlled companies as the state has in fact neither the controlling stake, nor a "golden share" in it. Thanks to Viktor Chernomyrdin, the privatization of Gazprom in 1994 was done fully in the interests of its management: 15% of shares were distributed among its employees, and 28.7% were to be auctioned. However, the head of the State Property Committee Anatoly Chubais did not succeed in his efforts to make the auctions open. According to Viktor Chernomyrdin, the reason for that was that "Gazprom was the only stable company among the chaos." Gazprom shares were sold in the regions at closed auctions organized by its affiliated companies. Thus, the management retained control over the distribution of shares and later accumulated major packages of shares in the companies it controlled. "When Gazprom's shares were auctioned in the region, nobody wanted them. It was July 1994, and everybody was running after the MMM shares," says the head of Astrakhan'gazprom Viktor Shchugorev. "My wife and I then bought 2 million shares. But it was a trifle in comparison with 259 billion shares sold." In addition, the "gas generals" later bought another 5.6% shares, which originally were meant for the population of the Yamal-Nenets autonomous region. In this situation, the state could hardly control the financial currents within the company. Now, the situation can change. In August, at a meeting with shareholders, Aleksandr Semenyaka, a member of the management and the head of the securities department of Gazprom, made an interesting statement: the state would not have a "golden share" in Gazprom. That means that in order to control the company, the state might want to enlarge its stake to 51%. Recently, a working group at the president headed by the deputy chairman of the Gazprom's board of directors Dmitry Medvedev finished a report on the liberalization of the market of Gazprom shares. At the moment, this market is divided for internal and foreign investors. Foreign investors, who cannot buy Gazprom shares on the internal market, have a quota of 20%, which is filled to 11.5%. The working group was to decide how to attract new investors to the market. The only proposal made in the report was to increase the number of exchanges at which Gazprom's shares may be traded. "The recommendations disappointed investors. The report might have been intended to discourage investors from buying Gazprom shares so the state would get an advantage as it intends to acquire a controlling stake in the company," says Dmitry Avdeev, an analyst of UFG. Not surprisingly, a proposal by the RFFI to sell Gazprom's shares to foreign investors not through a stock-exchange, but through a state organization which would be paid for its services by the company's shares, was supported by the government, as it also helps the state to increase its stake in the company. The state has been using all possibilities to get a larger stake in Gazprom. Yury L'vov, the deputy finance minister, who is close to Aleksei Miller, was appointed to head Gazprombank. All treasury shares of the company were transferred to this bank except for 4.8% which belong to Gazprom Finance BV and which could be transformed into ADR. According to Dmitry Avdeev, the state won't stop at 51% and will strive to accumulate 75%, which would give the state the right to change the company's Statute and negotiate major deals on its own initiative. The main resource for that is 14% shares owned by individual investors (recently, Gazprom started to trade its shares in 200 offices in 45 regions), as well as the packages of shares controlled by the former management and affiliated companies formerly under its control, such as Stroitransgaz, which holds 6% of Gazprom shares. The head of this company Arngold Bekker has already declared that at a shareholder meeting next year, at the election of the company's new board of directors, he would vote for Aleksei Miller.

Gazprom "Draws the Line"

Not only Stroitransgaz is worried about the future. Itera, which was close to the former Gazprom management, experiences serious problems, too. For one, it could lose the gas deposits given to it by Gazprom. Its main gas producing company Purgaz (15 billion cubic meters of gas annually) might again be transferred under the control of Gazprom. The new management of the monopolist decided to use its right to buy back 32% shares in Purgaz thus lowering the Itera's stake from 81 to 49%. Itera was already made to give to TNK its stake in another company received from Gazprom - Rospan from Novy Urengoi. Currently, Itera is looking for allies among oil companies. In the summer, it signed an agreement with the oil company YUKOS to "jointly exploit a number of promising gas deposits in Siberia." In doubt are also Itera's export schemes, such as selling gas to the CIS countries, first of all to Ukraine. This business earned Itera billions of dollars. It was based on contracts that Gazprom signed with Itera on transporting Turkmen gas to other CIS countries through Gazprom's pipelines. As payment for transit, Itera received 42% of gas transported from Turkmenistan to Ukraine, which the company then sold to Ukrainian companies for $70-80 per thousand cubic meters. Now, the functions of Aleksandr Pushkin, the deputy chairman of Gazprom on relations with the CIS, have been transferred to Yury Komarov, who has never been on good terms with Itera. There is little hope that next year, Gazprom will prolong its contract with Itera.

RBC, 21.11.2007, Moscow 10:55:36. Gazprom's President Alexei Miller and Managing Director of Germany's natural gas and energy services provider Verbundnetz Gas Klaus-Ewald Holst discussed the strengthening of cooperation between the two companies during a meeting in Moscow, the press office of the Russian energy holding reported today. The chiefs of the two companies also talked on various projects for natural gas supplies, underground gas storage, and the use of gas mains.

November 20, 2007 - Reuters by Emma Graham-Harrison - BEIJING — Chinese oil company CNPC and Gazprom have agreed a gas pricing deal that should unlock a major pipeline plan, but it may come at a higher cost than Beijing wanted, the Xinhua news agency cited a Russian executive as saying Saturday. Alexander Medvedev, Gazprom’s deputy chairman, said the two sides had reached consensus on the pricing mechanism for fuel piped from Russia to China after months of wrangling that had held up the start of work. However he added that negotiations “would not be influenced by China’s low natural gas import prices,” Xinhua said, without giving further details. Beijing holds state-set gas prices below international market levels, while Gazprom had demanded the gas export price for China should be at least comparable with supplies to Europe, after taking transportation costs into account. Russian media have reported that China was refusing to pay more than $100 per 1,000 cubic meters, similar to current Russian domestic prices and far below the European price of around $250 per 1,000 cubic meters. Gazprom, which has a monopoly on export of the fuel, was waiting for a deal to be reached to start construction. But eventually, under a deal signed last year, two pipelines either side of Mongolia could deliver up to 80 billion cubic meters of gas per year — almost double the amount the company sells to Germany, its top customer in Europe. Moscow has agreed in principle to begin pumping gas to China through the west link in 2011 and by the east link in 2016, the country’s top energy official said this summer. The first pipeline would be fed with output from western Siberian fields, Gazprom said last year. Gas for a second pipeline could come from Sakhalin and maybe the Kovykta field in East Siberia. China has hedged against the slow-going Russian deal and upped pressure on Moscow by pushing for imports from Turkmenistan and Myanmar. CNPC, parent of listed PetroChina, has agreed to import an annual 30 billion cubic meters of gas, or 60 percent of the country’s total consumption last year, from Turkmenistan with the first gas flow targeted for as early as 2009. Turkmen media reported in August that construction had begun on a 7,000-kilometer pipeline to take the fuel to China by 2009, bypassing its traditional export market of Russia. In China, the gas will be fed through a pipeline linking the sparsely populated west with booming coastal regions, which can more easily afford to replace dirty-burning coal. Beijing wants to more than triple the use of the cleaner fuel, which now provides barely 3 percent of China’s energy, to 200 bcm per year by 2020. Its domestic output is growing by around 20 percent per year, but cannot meet demand and import deals have been hampered by price controls as international markets soared.

ROME, November 12 (RIA Novosti) - Gazprom forecasts that the average European natural gas price will be $300 per 1,000 cubic meters in 2008, a company executive said on Monday. "The average European price forecast for 2008 is $300," said Alexander Medvedev, deputy chairman of the Russian gas giant's management committee. Gazprom management earlier said that the average level for 2007 would be $263-265 per 1,000 cubic meters. The company's planned exports are expected to reach 147 billion cubic meters this year. The state-run company is seeking to raise to European levels the prices it charges former Soviet republics for natural gas supplies. Medvedev said that the price of $160 per 1,000 cubic meters earlier discussed with Ukraine would be approved if the country signed a deal of gradual transition to the average European price by 2011. "We cannot sell [gas] to our neighbors at lower prices than we do to others," he said. Last week, Medvedev told the state English-language TV channel Russia Today that a preliminary agreement had been reached with Kiev at talks on Russian 2008 natural gas supplies. Asked whether Gazprom was satisfied with a price of $160 per 1,000 cubic meters, he replied: "the most important thing is that this price suits Ukraine". He said a gas deal would be signed well before the end of this year. "Not December 31. Much earlier," he said. Gazprom set an official price for Russian natural gas supplies to Ukraine at $230 per 1,000 cubic meters from the start of 2006. However, Ukraine paid an average of $95 per 1,000 cubic m for the mixture of Central Asian and Russian gas supplied at the border. After Turkmenistan hiked its gas price, the rate for Ukraine was raised to $130 per 1,000 cu m from January 1, 2007.

Nov. 13, 2007 - Kommersant - Gazprom plans to enter the European electricity market with the construction of two plants in Germany. German electric company E.On will be Gazprom's partner in the plants. The Luxembourgian Soteg will be Gazprom's partner in one of the plants as well. E.On (along with BASF and the Dutch Gasunie) is Gazprom's partner in the Nord Stream project, which will bring 27.5 billion cu. m. of Russian gas to Germany by 2010 by second, with a second pipeline of equal capacity opening up in 2012. E.On head Wulf Bernotat told Kommersant at the end of last month that the construction of electric plants was being considered as part of a deal to allow E.On into the Yuzhno-Russkoe natural gas deposit, with reserves of 700 million cu. m. of gas. Experts estimate that each electric plant will cost about $1 billion. Bernotat said that Gazprom and E.On were in negotiations over the construction of electric plants in Great Britain and Italy as well. Gazprom deputy chairman Alexander Medvedev told Frankfurter allgemeine Zeitung that Gazprom subsidiary Gazprom Germania was considering sites in Brandenburg and on the Baltic Sea for the plants, which will run on gas from Russia.

November 9, 2007 – Kommersant – Britain’s Timan Oil & Gas (TOG) has sealed a memorandum with Zapsibgazprom, where Gazprom owns 79.69 percent. According to analysts, TOG attracted Zapsibgazprom to the projects as a guarantee against potential difficulties that the foreign companies apprehend for Russia’s activities. Britain’s Timan Oil & Gas Plc. (TOG) announced yesterday it sealed a cooperation memorandum with Gazprom’s Zapsibgazprom October 22. The memorandum is of no binding nature yet and provides for Zapsibgazprom’s participation in development and exploration of TOG’s reserves of crude oil and gas (estimated at 438.7 million tons under the C3 category). The result could be investments of up to $500 million, TOG said. The memorandum commits Zapsibgazprom to no investment obligations, explained TOG General Director Alexander Kapalin. The partners “are to elaborate the program for raising $500 million to cover CAPEX for putting all facilities into operation.” The memorandum spells out an option for Zapsibgazprom’s participation in development of Nizhnechutinskoe field (Timano-Pechora) that provides for drilling and infrastructure construction for 2,600 wells (the matter at stake is the shallow wells worth no more than $40,000 each); drilling four prospect wells at Khudoelskoe field and two wells at TOG’s two fields in the Caspian Sea. Zapsibgazprom may also enter into the capital of TOG or of its subsidiary, the memorandum says. People in TOG specified that Zapsibgazprom is mostly the technical partner for them, as it has required facilities and qualification to explore the reserves. Indeed, no matter what the form is, Gazprom’s presence in the project has helped quite a few foreign companies strengthen the standing in Russia.

Nov. 08, 2007 - Kommersant by Natalia Grib - Experts estimate that the German concern E.ON holds gas and electricity assets in Russia worth $25-26 billion. It plans to expand its presence in those sectors as well. The concern still does not have an agreement with Gazprom on an asset exchange for the Yuzhno-Russkoe deposit in the Yamal-Nenets Autonomous Area. E.On chairman of the board Wulf Bernotat, in his first interview with the Russian press in two years, talks about the companies main Russian projects.
What is your company's strategy in Russia? What are your goals and the deadlines you have set for them?
Out strategy is based on long-term partnership relations with Russian companies, especially Gazprom, planned for more than 30 years. About two years ago, we made a decision to enter the electricity sector, which has been successful. About 70 percent of the stock in OGK-4 (Wholesale Generating Co. 4) has been acquired. And I emphasize that it was not a spontaneous step arising from a sudden desire to enter the Russian electricity market. Rather, it was the logical conclusion of long-term relations that existed in the sphere of natural gas. We own 6.5 percent of the stock in Gazprom, our interests are represented on the board of directors of the Russian gas monopoly and we are the largest importer of Russian gas. If the value of our shareholders equity packages in Gazprom and OGK-4 were added up [the capitalization of 6.43 percent of Gazprom stock was $19 billion as of November 5], as well as the share we plan to acquire in the Yuzhno-Russkoe deposit, we are the largest foreign investor in Russia. Deadlines are meaningless, because we plan to invest logically and gradually as the business develops. The development of our relations can be seen in the fact that we own a quarter of Nord Stream AG, which is building the North European Gas Pipeline.
E.On's electricity business is developing most successfully. What are your long-term plans for OGK-4. What will you do with that asset?
We plan to increase our share in OGK-4 and will make the appropriate offers to the company's minority shareholders. The 23 percent of shares in OGK-4 that RAO UES of Russia owns will be distributed among the minority shareholders in connection with its dissolution in 2008. But the 70 percent that we already own allows us to manage the company successfully. Our task at the moment is to integrate that company smoothly into our concern. That is a matter of setting up a team of representatives of E.On and OGK-4 that will prepare for the annual account taking, since we want to include data from OGK-4 in the E.On annual report. Last week, we had the first meeting with the management and employees of OGK-4 and we acquainted them with our plans.
Do you intend to replace OGK-4 executives??
In the long term, we will have a team of managers in which Germans and Russians work together. We take that approach no only in Russia, but in all countries where we have assets, whether it is Great Britain, Scandinavia, Italy or Spain. We have always decided what positions local workers can be kept in and in what positions representatives of our concern would be especially strong in. But every time it was a mix.
Will you replace the general director and the deputy director for finance?
We have delegated a number of the top executives of our concern to speed up integration. A decision on replacing managers in key positions has to be made much later.
E.On had set its sights on Mosenergo as part of an exchange of electricity assets with Gazprom. Have you reconsidered or are you still counting on receiving a share in that company?
I will be happy to elucidate that situation, since a direct exchange of electricity assets involving Mosenergo was never in our plans. Four years ago, we discussed questions connected with our cooperation on the Russian electricity market with [Gazprom CEO] Alexey Miller. It was assumed that Gazprom would participate in it because of the positions it has here and we would bring our experience and know-how to it, which are useful to Gazprom when entering new market. Nothing came of it in the end, however, because Gazprom decided to act without us and we turned our attention to other objects, particularly OGK-4.
Are there other electricity assets in Russia that interest E.On? How soon do you intend to acquire or build them? Are you interested exclusively in gas generation, or are you interested in coal generation and hydro-generation as well?
At this stage, we are most interested in issues of integration of OGK-4, which has 5500 employees and facilities throughout the country. The distance between the farthest electric plants is 4000 km. Since there are electric plants in OGK-4 that run on gas, as well as coal, it fits E.On's development strategy well. Parallel to the process of integration, we plan to make investments to increase capacity, in order to meet the demand for electricity. There is no time to wait. Our total expenses for the purchase of OGK-4 were $5.7 billion, of which $1.8 billion will go to increase the authorized capital, which will be used to finance the projected new capacity. We think that OGK-4 is an excellent platform for the expansion of capacity.
As for other assets, we will turn our attention to them when the time is right. No final decision has been made yet and we will consider it by analyzing the conditions of specific objects. I cannot answer your question at the moment yes or no, and all the more so since we are competing with other companies and should not reveal our plans to them..
So we can expect you to buy another share in a territorial generating company at any time?
We will attentively analyze the appropriate objects before making a decision on their acquisition.
Nothing of the sort. We never blocked Gazprom's access to the German electricity market. We always conducted negotiations about it, including on the exchange of assets. The negotiations came down to a discussion of the Hungarian assets E.On acquired from MOL during privatization, also in the electricity sphere. Some time later, however, Gazprom decided to concentrate on gas-powered electricity plants in Western Europe. Therefore, now we are talking about a share gas plants E.On has in Europe, including in Germany, and about the joint construction of new plants.
Did Gazprom reject the Hungarian assets completely?
I can't talk about the details of the negotiations until we reach an agreement with Gazprom, but its interests shifted in the direction of gas-powered electric plants in the EU..
Is E.On prepared to provide Gazprom a share in its British electric plant? Would it be a blocking package or a controlling package?
Gazprom is interested in shares in the electric plant in Britain, but not in our E.On UK subsidiary. Now is not the time to discuss the details in the press, since they are still in the active stage.
The deadline for completing talks on the development of the Yuzhno-Russkoe deposit has been extended more than once and now a new deadline has been announced – the end of November. What has prevented you from reaching an agreement on Gazprom's conditions for two years?
Most of all, it has to be said that Gazprom itself, for a number of reasons, asked for the deadlines to be moved. And [Gazprom deputy chairman] Alexander Medvedev said that the was working on a number of projects at the same time and negotiating with BP and Shell and there was no chance to hold final negotiations on Yuzhno-Russkoe. Today we should divide the issues into two blocks. That is the package of assets, and here an agreement had more or less been reached, and the assessment of the share in Yuzhno-Russkoe. There is not yet an agreement on that block, but I can suggest how we will reach it.
The Russian press has stated that the cost of the assets in the deal between Gazprom and BASF, which has a share in Yuzhno-Russkoe that is analogical to yours, is $1.3 billion. Please comment on that sum.
I don't know how accurately the package was assessed, but they used a different formula for asset estimation. As far as I understand it, it was a matter of the companies' joint activities in Libya. There the logic is completely understandable. The price of gas rises along with the price of oil, and that influences the market assessment of assets and, in this case, the package has no primary importance. We have a formula for the exchange of assets that assumes a difference between the cost of the assets in one sector, gas, for instance, where prices rise or fall along with prices on world markets, and the cost of gas-powered electricity generation. That complicates assessment.
Last year, $800 million was mentioned in the press as the total value of the exchange b between Gazprom and E.On. Do I recall correctly that you provided a share in the electric plants in Great Britain or Italy for exchange with an additional cash payment?
Yes. From the very beginning, we proposed a large part of the payment in assets ad the rest in money. Nothing has changed in that issue.
When will the negotiations be completed and whose court is the ball in now?
The ball is now in the center of the field. There is no sense in naming a new date every two weeks. The negotiations will be completed the moment when the agreement is signed.
Talk, please, about how the Nord Stream project is going. What is the main source of disagreement between the participants in the project?
There is a shareholders board that decides principle issues connected with the company's activities. Managers decide technical issues. We are maintaining the planned schedule. There are no disputed points among the partners.
Has financing been found for Nord Stream? How much does it cost – €5 billion or $12 billion? How much is planned in the E.On budget for it?
I am completely unfamiliar with the figure of $12 billion. I operate on the sum of expenses of €5 billion for the two lines of the gas pipeline. If the need arises to raise expenses, the shareholders will consider it. We definitely envisaged a certain sum in our budget in case of unforeseen expenses.
Comment, please, on the EU initiative to liberalize the gas market that would divide the business into transport and sales to the final consumer.
We have repeatedly stated from the podium of the EU and to individual commissioners that we do not consider the division between production and transport companies the right move and that implementation of that initiative will not lead to increased competition or decreased energy prices. I know that BASF, Total and Gazprom will oppose those initiatives. But each of them is formulating its position separately.
What advantage does your concern have over other strategic investors in Russia on the gas and electricity market? Should we expect E.On projects in other spheres of business?
We will continue to concentrate our efforts on the production and sale of natural gas and electricity, and on renewable energy sources that will eventually also be usable to produce electric power. Our advantage in comparison with other strategic investors is that we are present on practically all the energy markets of Europe, from Russia to Turkey. That gives us an advantage in the growing tendency to establish a single European energy market. We support that idea and support not so much the elimination of borders in the EU energy market as the improvement of physical connections between individual parts of that single market. In my view, that is the strategic advantage of E.On.

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MOSCOW, November 6 (RIA Novosti) - Russian energy giant Gazprom signed a deal on Tuesday with Gasunie, giving the Dutch natural gas transportation company 9% in a pipeline being built under the Baltic Sea. "Gasunie will receive stakes from our German partners [BASF and E.ON], 4.5% from each of them," Gazprom CEO Alexei Miller said. The stake handover is in line with the original contract signed between Gazprom and the German firms on building the Nord Stream pipeline, he added. Experts said the deal with the Dutch company will help Russia resolve political difficulties plaguing the ambitious project, and clear the way for the state-controlled giant to pump gas directly to consumers in the European Union. Mikhail Korchemkin, head of U.S.-based consulting firm East European Gas Analysis, told Kommersant daily: "Gazprom needs to obtain authorizations quicker, and the Netherlands could help speed up the process." Poland and the ex-Soviet Baltic states, which have chilly relations with Moscow, have criticized the pipeline project, fearing they will be cut off from Russian gas supplies. The pipe will bypass their territories, linking Russia to Germany. Other Baltic nations have voiced concerns over the environmental threat posed by Nord Stream. Donald Tusk, set to become Poland's prime minister this week, warned on Tuesday that Russia and Germany could soon make radical changes to the project, but did not give details. Under Tuesday's deal, the Russian monopolist receives 9% in Gasunie-controlled pipeline operator BBL, which is building a pipeline to pump gas from the Netherlands to Britain. Russian media reports said earlier the Netherlands could offer Gazprom stakes in other gas infrastructure projects implemented by Dutch firms in the Netherlands, Belgium, Luxembourg and Germany in exchange for access to Nord Stream. Gazprom holds a 51% stake in operator Nord Stream AG, and BASF and E.ON held 24.5% each until Tuesday's deal. The 1,200-km (746-mile) pipeline with a capacity of 27.5 billion cu m of gas a year is planned to be commissioned in 2010.