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Friday, October 03, 2008

Gazprom and E.ON strike deal on Siberian gas field

//Entry into Yuzhno-Russkoye costs E.ON approx. $5.4 billion
10-02-2008 - RBC News - Russian President Dmitry Medvedev has blessed the first major deal since he took office in May. The transaction is also the first one involving a large foreign company since the beginning of the Georgian-Ossetian conflict in August. Following four-year negotiations, Russian gas giant Gazprom and German utility E.ON clinched a deal today, under which E.ON will receive an almost 25 percent stake in the Yuzhno-Russkoye field, in return giving up 2.93 percent of its 6.5 percent stake in Gazprom. The deal costs E.ON $5.4 billion, almost three times as much as another German company, BASF, paid for its entry into the project two years ago. The Yuzhno-Russkoye oil and gas field in the Yamal-Nenets Autonomous Region is one of the world’s largest gas reserves. It contains ABC1 gas reserves of 825.2 billion cubic meters, C2 reserves of 208.9 billion cubic meters of gas, and 5.7 million tonnes of oil. The project is expected to reach its design capacity of 25 billion cubic meters of gas in 2009. A license for Yuzhno-Russkoye is held by Severneftegazprom. Gazprom CEO Alexei Miller and E.ON CEO Wulf Bernotat have signed an agreement to jointly develop the Yuzhno-Russkoye field in St. Petersburg today in the presence of Russian President Dmitry Medvedev and German Chancellor Angela Merkel. According to the agreement, the German utility will receive a 25 percent minus one share in Severneftegazprom, in exchange giving up a 49 percent in Gerosgaz CJSC, which has a 2.93 percent stake in Gazprom. E.ON’s stake in the company will drop to 3.5 percent. The swap will take effect on January 1, 2009, and the deal will be closed in the second half of next year. The agreement follows four years of negotiations. During this period, another German company, BASF, joined the project, getting a 25 percent minus one share, and plus 10 percent of non-voting shares. The Gazprom-BASF agreement was signed in the spring of 2006. In return, Gazprom received a stake in Wingas Europe, a joint venture selling natural gas to the EU; and it also increased its stake in European gas trader Wingas GmbH to 50 percent minus one share. Gazprom had hoped to get energy assets from E.ON, too. In the summer of 2006, both companies signed a framework agreement under which Gazprom would get a 50 percent minus one share in E.ON’s Hungarian companies E.ON Fоldgaz Storage and E.ON Fоldgaz Trade, and a 25 percent plus one share in Hungaria. Many swap options were discussed later, the latest including stakes in German, Hungarian or British power plants. E.ON first offered to join Yuzhno-Russkoye back in 2004, but Gazprom declined the offer. In June 2004, E.ON renewed its bid, offering $7 billion for the stake, or about 2.07 percent of Gazprom’s stock. The global financial crisis has knocked the price down: Gazprom’s capitalization is currently estimated at $184.74 billion, which means that a 2.93 percent stake is worth some $5.4 billion, calculated Ivan Andriyevsky, Managing Partner at 2К Audit-Business Consultations. Yet, this is almost three times as much as BASF had paid ($2 billion): the stake in the gas field has risen in price thanks to growing energy prices. So, E.ON did not benefit from the dragged-out negotiations. On the contrary, Gazprom will benefit from the buyback, which will effectively put the government in control of over 50 percent of the gas monopoly, says Dmitry Lyutyagin, an analyst at Veles Capital. In addition, once Gazprom’s capitalization increases, the group can sell some of its shares to buy stakes in other projects, including international ones. The deal is also important from a political viewpoint as it is the first major transaction involving a large foreign company since the outbreak of the Georgian-Ossetian conflict, which strained Russia’s relations with the West. Mikhail Korchemkin, General Director of East European Gas Analysis, is more skeptical, saying the transaction is hardly an achievement for Gazprom, which has failed to get access to E.ON’s Hungarian assets mentioned in the 2006 framework agreement. For E.ON, the deal means access to Russia’s gas resources and bigger influence and bigger gas supplies in Germany, Lyutagin concluded.

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