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The Wall Street Journal: Gazprom Goes on the Offensive

Wall Street Journal Russia Chart

Official Defends Supply Moves
As Russian Titan Tries to Polish Image
January 29, 2007; Page A12

DAVOS, Switzerland — Two things anger Alexander Medvedev, the man in charge of Russian energy giant OAO Gazprom’s exports. One is being told the company isn’t doing enough to develop its natural-gas reserves. The other: that he has been shutting off supplies to Russia’s neighbors and Europe at the Kremlin’s bidding.

This year, Gazprom will spend $20 billion on development — double last year’s tally — Mr. Medvedev said during an interview at the World Economic Forum. More development spending will come as the company secures new long-term contracts with countries such as China, requiring new pipelines and extra production.
“Before producing gas, we should sell the gas,” said Gazprom’s deputy chief executive, responding to criticism from private investors and the Paris-based International Energy Agency that the company isn’t investing enough to meet spiraling global demand. “We know how much to invest to meet the demand.”

As for the cutoffs of gas to Ukraine and Moldova last year and of oil to Belarus earlier this month, Mr. Medvedev said: “Wait a minute, there was no cutoff.” Speaking at the Sunstar Hotel, the traditional haunt of Russia’s business tycoons in Davos since the 1990s, he said these countries refused to agree to pay market prices after years of getting inexpensive gas from Russia. When their annual contracts expired, so did the gas.

“Show me a company in the West that will deliver gas without a contract,” Mr. Medvedev said. “We have nothing to hide.”

Still, Russia’s global reputation has taken a hit during the past year, even as its economy has boomed. In addition to the energy-supply disruptions, Western energy companies were squeezed out of Russian investments for alleged breach of environmental regulations and other reasons. Meantime, a prominent journalist was murdered and a former Russian spy was assassinated in central London using polonium, a radioactive material.

Mr. Medvedev was part of a big delegation of cash-rich Russian businesses and politicians in Davos anxious to stop the reputational rot.

Increasingly the public face of Gazprom, Mr. Medvedev said the company is planning to hire outside public-relations firms to help repair its image. Public-relations firms Hill & Knowlton and PBN Co. will split the business, according to a person familiar with the deal.

Mr. Medvedev has led Gazprom’s negotiations for new long-term supply contracts and downstream acquisitions in Europe. He has sometimes clashed with European Union officials over energy security.
At a dinner on the theme “Russia’s more muscular diplomacy,” Mr. Medvedev and other major Russian businessmen got up to say the West has misread the behavior of Russia’s energy companies over the past year, which he said was driven by commercial, and not political, factors. Not everyone was persuaded.

“It’s not how people speak, it’s how they act,” said Sen. John McCain (R., Ariz.), speaking to reporters in Davos. “We’ve seen what happened with Belarus, we’ve seen what happened with major oil companies forced to sell. I don’t think there is any doubt that President [Vladimir] Putin is using energy as a weapon.”

According to Mr. Medvedev, such criticisms reflect Western fears of a major new competitor — Gazprom is the world’s second-largest energy company by reserves after Exxon Mobil Corp. He dismissed EU fears that Russia is trying to build a gas cartel with Algeria, another important supplier of natural gas to the EU. Gazprom signed a recent deal with Algeria’s state-controlled gas company to develop fields on each other’s territory.

Mr. Medvedev also defended a recent decision to force Royal Dutch Shell PLC to sell control of the Sakhalin energy project to Gazprom, because of alleged environmental failures. Mr. Medvedev, who grew up in Sakhalin, said the environmental issues were real.

TNK-BP Holding, a joint venture that BP PLC paid more than $6 billion to buy into in 2003, looks set to face a similar fate at the Kovykta gas field later this year. The Siberian field isn’t producing as much gas as required in its license, mainly because intended pipelines to China haven’t materialized.

“They know what they need to do to keep the license,” said Mr. Medvedev. Viktor Vekselberg, a major partner in TNK-BP, said he expects the joint venture will reach a deal with Gazprom whereby the license is renewed but TNK-BP’s stake in the field is reduced.

Gazprom is scheduled to start delivering gas to China in 2011 but hasn’t started building the main pipeline required because it is taking a long time to agree to terms of a contract. “Lenin said you should sell high and buy cheap, and the Chinese still remember this,” joked Mr. Medvedev. He added that Gazprom isn’t in a hurry, though a deal has to be struck this year if Gazprom is to meet the 2011 schedule.

Gazprom does have a challenge to become more efficient, Mr. Medvedev said. The company’s market capitalization per barrel of oil-equivalent is one eighth that of Exxon Mobil. But the company looks set for some strong revenue boosts in the coming years.

Write to Marc Champion at [email protected]

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