By Simon Pirani
Gazprom’s monopoly of gas production is under heavy artillery fire from the Russian oil companies. And inside the fortress, new ceo Aleksei Miller has pushed aside the management old guard and is preparing to implement a restructuring plan that is likely to break the monolith up into several producers and a transport company.
Miller’s reshuffle of senior managers has put reform-minded supporters of Russian president Vladimir Putin into most key positions at Gazprom, and seriously weakened the allies of Rem Vyakhirev, whom Miller replaced as ceo in May this year.
On 3 September Pyotr Rodionov effectively became Miller’s second in command. He was appointed chief financial officer and first deputy chairman in place of Vyacheslav Sheremet, Vyakhirev’s right-hand man.
The move, which observers hoped would help staunch financial abuses, was backed by two other crucial financial appointments: Mikhail Akselrod was appointed head of investments in place of Yuri Goryainov, who sanctioned the award of $1.5 million worth of work to Stroitransgaz, the contractor owned by Gazprom managers’ friends and relatives; and the replacement of Viktor Tarasov as chief executive of Gazprombank by Yuri Lvov was confirmed.
Miller also put his own people in charge of export flows. Yuri Komarov takes responsibility for exports to Europe and the CIS away from Vyakhirev ally Aleksandr Pushkin, who was criticised for surrendering markets to Itera. Komarov is expected to rein in Gazeksport, the export agency headed by Vyakhirev’s son Yuri that until now has formally executed all export contracts.
On 11 September, Sergei Dubinin, deputy chairman (finance) of Gazprom’s management committee, left the company and was replaced by Vitalii Savelev.
Rodionov (former head of Lentransgaz who has been at Gazprom for two years), Akselrod (former ceo of the St Petersburg power grid), Lvov (former head of the St Petersburg bank) and Savelev (former ceo of Menatep-St Petersburg bank) all worked closely with Putin and Miller when they ran the St Petersburg city foreign economic affairs department in the mid 1990s.
The new management team are likely to be more amenable than their predecessors to proposals on restructuring being prepared by the economic development ministry, headed by the strongly reformist minister German Gref, and due to be presented to president Putin by the year end.
Most observers believe it will result eventually – i.e. over the next three to five years – in the break-up of Gazprom into a single state-owned transport company and about six privately-owned producers. Prime minister Mikhail Kasyanov has already said that the production and pipeline businesses will be split, and, indicatively, Tyumen Oil Compnay (TNK) chairman Simon Kukes said in an interview with Vremya Novostei newspaper on 2 August: “I hope that Gazprom becomes a transport company like [state-controlled oil pipeline monopoly] Transneft, and that others do the production. I believe that would result in a rapid improvement in efficiency.”
An analysts’ report issued in August by Brunswick UBS Warburg stated that restructuring is being made “increasingly likely” because (i) separating trunk pipelines from production is essential in order to liberalise the domestic market and unleash oil companies’ large gas resources; (ii) Gazprom has proved “unwieldy”, and (iii) compared to the oil companies, Gazprom “suffers from the lack of strong shareholders with clear interests in building the company”.
Prospects for restructuring
The economic development ministry’s gas sector working group reportedly believes restructuring should start by setting up a gas transport company as a 100% Gazprom subsidiary and demerging Gazprom’s production subsidiaries as joint-stock companies with a high level of independence and the right to trade gas independently. Secondly the government would swap its shares in production companies’ for investors’ shares in the transport company, turning the latter into a state-owned monopoly.
From there on, producers would have equal pipeline access with volume allocations set in auctions. A major issue that will have to be resolved politically is export pipeline access for other producers – primarily Itera, Gazprom’s self-created competitor, and the Russian oil companies, who produce associate gas now and are aggressively acquiring natural gas assets (see below).
UBS Warburg’s report highlights several unresolved questions with crucial financial consequences. First, would Gazprom’s effective monopoly over export pipelines, a vital source of revenue from higher-paying western European customers, be continued by successor producers, or would such rights be redistributed in the way that Russian oil companies are demanding? Second, what is the future of the cartel system by which Gazprom maintains high prices for exports to Europe? (So far sources close to the ministry suggest exports will be allowed but only through a special operator that will charge an unspecified commission.) A third, separate issue is how Gazprom’s debt, much of which is collateralised by export contracts, would be reallocated.
Gazprom could be split up, UBS Warburg’s analysts speculate, into (i) a transportation company owning and operating 149,000km of pipeline; (ii) refineries and processing folded into Sibur, the petrochemicals company of which Gazprom owns 51%; (iii) six production companies (with 2000 production in billions of cubic metres and as a % of Gazprom’s total production in brackets), i.e. Urengoygazprom (193.3bcms, 36.9%), Yamburggazprom (168.0bcms, 32.1%), Nadymgazprom (73.6bcms, 14.1%), Noyabrskgazprom (49bcms, 9.4%), Orenburggazprom (24.1bcms, 4.6%) and Astrakhangazprom plus other small producers (15.1bcms, 2.9%).
The independent producers’ role
The direction taken by Russian gas market liberalisation in general, and Gazprom restructuring in particular, will depend to a large degree on the independent producers – who in 2000 produced 61bcms of gas, compared to Gazprom’s 523bcms. Of that 61bcms, 18bcms is produced by Itera, about 31bcms is associate gas produced by the major oil companies and about 12bcms comes from other producers, including Norilskgazprom (in the Norilsk industrial region in the far north) and Sakhaneftegaz (Yakutia) which have their own infrastructure separate from the national gas transmission system.
The oil companies are buying gas assets, courting Itera and, above all, building up political pressure on the Kremlin to get access to export pipelines. Raisa Khodchenko, spokeswoman for the third-largest oil producer, Surgutneftegaz, told Gas Matters: “Like all gas producers, Surgutneftegaz would certainly welcome access to export pipelines for independent producers. In market conditions there has to be genuine competition.”
In the long term, it is the export markets that count. Export prices are now about ten times higher than domestic prices. And although president Putin has made clear that he is ready to confront the politically-tricky issue of raising domestic tariffs – and a draft 20-year energy strategy, published in July by the energy, economic development and nuclear power ministries, envisages an increase in domestic tariffs from $11 per tcm to $27.5 in 2003 and $38.5 tcm in 2005 – they will only rise to western European levels in the long term. According to Surgutneftegaz, the current cost to oil companies of production and transport of gas in western Siberia is 350-500 rubles ($12.5-$18) per tcm.
A problem for the oil companies is that associate gas must be processed into dry gas before being marketed, and only Sibur, a 51% Gazprom subsidiary, has the plant to do this. The oil companies will not invest in plant of their own until there are clear rules on market access, including export pipeline access, says Steven Dashevsky, oil and gas analyst at Aton investment group. “The gas business is all about infrastructure costs, and no-one is going to put money into gas treatment plants unless they have guarantees about access to the end users.”
At present, the oil companies dispose of associate gas (i) by piping it to power stations over which they have control, mainly to meet their own power requirements; (ii) by delivering it to Sibur for processing and sale to the domestic market, which is rarely economically viable; and (iii) by flaring it (now about 25% of output).
Time is on the oil companies’ side. If and when Gazprom’s successor production companies appear alongside them in a liberalised gas market, UBS Warburg’s analysts reckon it will be a case of “lambs to the slaughter”. The post-Gazprom production companies will be unlikely to have either the management experience to compete effectively against the oil producers, nor the financial or political clout to resist takeover by them.
Itera group, the international gas trader whose good relations with Gazprom’s old management enabled it to expand rapidly across the CIS, has also become Russia’s second-largest gas producer. The company expects 2001 production from its fields in Yamal-Nenets region to total 25bcm (including 15bcm from the Gubinskoe deposit, which is worked by Purgaz, a subsidiary of which Itera owns 81%; 9bcm from the Vostochno-Tarkosalinskoe deposit and smaller quantities from Vostochno-Urengoeskoe and Nov-urengoe deposits); 2000 production totalled 18.6bcm, including 13bcm from Purgaz.
Itera spokesman Nikolai Semenenko said: “Our position on the gas sector reform is similar to that of the oil companies: we welcome the prospects of wider possibilities for independent producers on the gas market and of equal access to the pipeline system. We are also interested in being able to export gas not only to CIS customers but to Europe.”
Semenenko said development is concentrated at the Beregovoye field in the Yamal-Nenets region, which has reserves of 201.2bcm of gas, 14.3 million tonnes of gas condensate and 11.3 million tonnes of oil, and planned annual production of 9.63bcm of gas – and the licence to which is held by Sibneftegaz, one of the Gazprom production companies that has passed into Itera’s control in 1998-99. In the period to 2005, Itera plans to invest $17 million on exploration and development at Beregovoye, and $590 million on a pipeline connection to the main Gazprom-owned transmission network.
A question over Itera’s future gas production is raised by the inquiry into the Gazprom-Itera relationship ordered earlier this year by the Gazprom board. In June this year, the report on the links commissioned from PriceWaterhouseCoopers recommended that Gazprom consider buying back shares in Purgaz that it sold to Itera at bargain-basement prices.
Purgaz was established in 1998 by Noyabrskgazdobycha, a Gazprom production subsidiary, and Itera; at that time Itera took 49% of the shares in return for agreeing to develop Purgaz’s Gubinskoe deposits. In 1999 a further 32% stake in Purgaz was sold to Itera for just 32,000 rubles ($1092); under the agreement Gazprom could buy these back at face value by 1 January 2002. The problem is that Purgaz has borrowed heavily. Of the 6.5 billion rubles ($222 million) provided by Itera for investment, 4.2 billion rubles is loans and the rest promissory notes. Semenenko at Itera says: “Given Purgaz’s indebtedness, and the transport fee income Gazprom would lose if it took Purgaz back, the repurchase would not be economically expedient; it may be done for political reasons.” Most observers doubt it will happen.
Surgutneftegaz is the largest gas producer among Russia’s oil companies, with annual output of 11.2bcm both this year and last year. Spokeswoman Raisa Khodchenko said only 4% of the gas is flared, the lowest proportion of any oil company; of the remainder, 10% is used by the company itself, 70% is sold to Tyumenenergo, a power company in Tyumen region where Surgutneftegaz’s main operations are located, 12% to a gas production subsidiary of Sibur and 8% to other customers.
There is both gas and oil in almost all of Surgutneftegaz’s currently producing deposits, and it holds licences to a range of others with total gas reserves of 5000bcf. Khodchenko said the company could raise production to 22bcm per year, but that it will not undertake investment until there is action, not words, about reform of the gas sector. “The tariff can change as much as you like; that won’t alter anything. What is needed is a normally functioning gas market and agreed prices, such as exist everywhere else.” Surgutneftegaz ceo Vladimir Bogdanov has previously urged reform of transport tariffs, pointing out that up to 1994 the company had exported 1.5bcm per year, after which hiked-up tariffs made even export sales unviable.
Rosneft, the only remaining state-owned oil major, has by far the largest gas reserves of any oil company, 11,200 bcf. It produced 5.6bcm of associate gas in 2000. Like Lukoil and Yukos, it has signed a framework partnership agreement with Itera group that provides for both joint development of deposits and marketing. The company, the only Russian company with equity participation in the Sakhalin island projects, may be privatised in the medium term.
Rusia Petroleum, the east Siberian company with the licence to the giant Kovykta gas field, has far greater reserves, estimated at more than 50,000bcf. The company is 31% owned by BP Amoco, operator of the project; Interros, the business group headed by Vladimir Potanin that owned the now-bankrupt oil company Sidanko, holds a 25%+1 share; TNK, which owns about 17%, is trying to increase its share; and Gazprom holds a smaller share. BP believes the project will require roughly $4 billion of investment in the field and $6 billion for a 3,000km pipeline to Liaonging province of China. A feasability study covering production, transport and marketing, by Rusia and the Chinese energy company CNPC, is due to be completed next year; the South Korean gas company Kogas has joined it to establish whether it, too, could be supplied from the pipeline. Progress at the Russian ended will be aided by a share-swap agreement on 2 August that ended an extended tussle between TNK and Interros over east Siberian assets, including disputed Rusia holdings.
Lukoil, Russia’s largest oil group, which produced 5bcm of associated gas in 2000, has made no secret of its intention of opening up the gas market. chairman Vagit Alekperov said in June that “2001 must become the year that we change from being an oil company to being and oil and gas company. The need to work out a system for free access to gas pipelines is already clear”.
In mid-July Lukoil signed a deal with the administration of Yamal-Nenets autonomous okrug (region), the heartland of Russian gas production, providing for it to take control of Yamalneftegazdobycha, a production company with reserves of 176bcm of gas and 100 million tonnes of oil. Under the deal Lukoil acquired a 25%+1 share stake straight away and expects to raise this to 60% in the near future, according to a report in the business newspaper Vedomosti under the headline: “Lukoil bears down on Gazprom in the monopolist’s own territory”.
TNK, Russia’s fourth-largest oil producer, with 2.67bcm per year associate gas production, has – in addition to its participation in the Kovykta project – set its sights on gas production assets in Yamal-Nenets region belonging to Rospan International, an Itera subsidiary. Earlier this year several companies associated with TNK bought Rospan’s debt, and acquired at least 50% of the 2.9 billion ruble total. In early August TNK’s president, Semyon Kukes, stated: “We intend to buy Rospan. We spent serious money buying its debt.” On 10 August a Rospan creditors’ meeting announced that it was issuing 3 billion rubles’ worth of shares to clear the debt, but the decision is being challenged by Itera.
Control of Rospan, the Itera subsidiary that owns the licences for the Novo-Urengoeskoe and Vostochno Urengoyskoe deposits (with total reserves of 560bcm of gas and 96 million tonnes of gas condensate), was sold by Gazprom to Itera in 1998 for a nominal sum; shares are also held by small exploration companies.
Yukos, Russia’s second-largest oil producer, reports an output of 1.5bcm of associate gas. On 10 August, Yukos and Itera signed a partnership agreement for “co-operation in the production, transport and supply of natural gas”. Yukos president Yuri Beylin said the deal is part of “Yukos’s long-term strategy to transform itself into a high-value energy company” and reiterated the company’s readiness to invest in Siberian oil and gas fields. Also to be watched is Yukos’ relationship with Sakhaneftegaz of Yakutia; in April the two companies joined forces to bid for the licence for the Talakanskoe oil and gas deposit.
The competitors are ready. Now it’s up to the Kremlin to decide on the rules of the game.
A version of this article appeared in Gas Matters, September 2001
Posted 15.12.01; © 2001 Simon Pirani