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The Independent: Jeremy Warner's Outlook: Gazprom takes a tilt at Centrica, but is it safe to be embraced like this by the Russian bear?

Shell: not enough profit, too little investment; Eurotunnel: more misleading claims
Published: 03 February 2006
Just a giant ramp, or is Gazprom serious about bidding for Centrica? Whatever the answer, Centrica's chief executive, Sir Roy Gardner, will be pressing the Takeover Panel for an urgent clarification after remarks yesterday from a senior Gazprom official to the effect that a bid is indeed being considered. If he hasn't already done so, Sir Roy will also be beating a trail to No 10 Downing Street to establish whether it is remotely acceptable for the state-controlled Russian gas monopoly to acquire such a key part of the British gas supply market.
From Norsk Hydro to Shell, Gaz de France and BG Group, every man and his dog is rumoured to be interested in bidding for Centrica, yet Gazprom has long been the most outspoken in expressing an interest. The world's largest gas producer is on record as saying it would like to have at least 20 per cent of the British gas market by 2015, with acquisitions the most obvious way of achieving this goal. Indeed, it is a little puzzling that yesterday's remarks from Alexander Shkuta, Gazprom's deputy general director, should have had such an electrifying effect on the share price, since the company has admitted its interest before.
Even so, I guess there's something of a difference between possibly being interested in bidding, and yesterday's admission that it is actively considering, analysing and reviewing such a move. Mr Shkuta insisted last night that something had been lost in translation, and that in fact his remarks were directed at the UK market as a whole, not Centrica in particular, yet it is hard to see who else he could mean.
Assuming Gazprom is serious, is there any reason for obstructing its advances? As things stand, Russia supplies only about 2 per cent of the UK market's gas needs, but this is expected to rise strongly over the years ahead as North Sea sources of supply decline. To make Britain so beholden to such a potentially hostile and politically unstable source of energy supply is in itself worrying enough, and is one of the main reasons for the Government's belated energy review.
Yet to allow what is in effect an arm of the Russian government to acquire a company which still accounts for 60 per cent of Britain's gas supply market might seem almost wantonly neglectful. As things stand, Centrica derives its gas from a variety of different sources and contracts. In order to protect itself from high levels of volatility in the gas price, it has also been acquiring its own sources of supply, both in the North Sea and the west coast of Africa. The underlying strategy is to seek security of supply in diversity.
With Gazprom as owner, Centrica would presumably quite quickly become only a conduit for Russian supply. In the short term, this might have some positive impact on the price. Gazprom lays claim to about 60 per cent of Russia's gas reserves and is responsible for about a fifth of the world's supply of gas. Despite its inefficencies it is also one of the cheapest sources of gas around.
Yet to see how potentially dangerous it might be for Britain so wholeheartedly to embrace the Russian bear, just look what happened to Ukraine, where for largely political reasons the Russian government overnight trippled the price. In a diplomatic crisis, what is there to stop Gazprom turning off the taps entirely? Britain has prospered by keeping its borders open to inward investment, but there are genuine issues of national security involved here.
Back in the 1980s, the Kuwait Investment Office was ordered to slash its stake in BP on the grounds that this was a sovereign state attempting to take control of a strategically important company. The same standard should be applied with Centrica. It took huge amounts of political capital to free Centrica, once part of British Gas, from the dead but at least largely benign hand of the British state. To stand idly by and watch it renationalised by the Russians really would be a pretty pass.
Shell: not enough profit, too little investment
First Exxon, now Shell, next week BP. We are in the midst of another round of record profits from the oil majors, which for those who still think of profit as a dirty word, means it's oil bashing time again. The UK government has already had two bites at the “windfall” profits of the oil majors, the last one in the pre-Budget report two months ago, but the TUC wants one-third, with the money to go to the pensions compensation scheme or some such other worthy cause.
It's a natural enough response, since a rising oil price feels to most of us like a tax, eating away at our disposable income. Why should the fruits of this tax go to the City? I don't want to act as an apologist for Big Oil, but scratch the surface of the $25bn of annual profits announced yesterday by Shell, and you can begin to see the answer.
The profits were at a record, but oil production was sharply lower and the reserve replacement ratio – the rate at which the company matches the oil it sells with new finds – is down to a miserable 60-70 per cent. The days of easy oil – accessible reserves capable of being developed at marginal cost – are over.
To satisfy the world's demand for fossil fuels, the oil majors must drill in ever more inaccessible and inhospitable places. The oil isn't yet running out, but it is becoming ever more expensive to extract. The political complications of the Middle East make the remaining sources of cheap supply look uncertain too.
Jeroen van der Veer, Shell's chief executive, reacts with almost visible anger to any suggestion that he and others in the industry are deliberately underinvesting so as to keep the oil price high. Not so many years ago, when the world was flush with spare capacity, Shell's annual capital spending would rarely top $10bn. For this year, it will be almost double that number.
Throughout the industry, oil companies are ramping up investment in exploration and development. The only constraints are the lack of available assets and the capacity of the oil majors and the industries that service them to cope. The service sector has had 15 years of famine and so far just two years of feast. It's going to take time to manage the necessary adjustment.
In his State of the Union address, President George Bush committed himself to reducing American dependence on oil. Good luck to him. The only surprise is that it has taken him so long to realise that from both a geopolitical and environmental perspective this is a desirable public policy aim.
Yet in the meantime the world's demand for the stuff just keeps growing, and with it the costs of extraction. It's small wonder that after the reserving fiasco of a few years back, Shell is being so mean with the share buy-backs. Shell needs all those profits and some if it is to keep the oil gushing.
Eurotunnel: more misleading claims
You say tomato, I say tomato… If you ever wondered why the Eurotunnel share price doesn't seem to connect with anything happening in the real world, then compare the statement the company issued yesterday with the one sent out by its creditor banks.
If Eurotunnel is to be believed then it has concluded a “memorandum of agreement” with the key creditor committee on the restructuring of its £6.3bn in debt. According to the creditor committee, on the other hand, the two sides “have agreed a memorandum of understanding that sets out a road map for a restructuring of Eurotunnel's capital structure”.
There are two important differences between the two statements. First, an “understanding” does not amount to an “agreement” and second, “capital” refers to both debt and equity. In fact, Eurotunnel and the banks are nowhere near an agreement, let alone one which would allow the company to write-off two-thirds of its debt without giving the banks anything back in return. And yet, the Eurotunnel share price rose 10 per cent in Paris and 15 per cent in London, making a company which is essentially bust worth more than £800m. Hey ho.

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