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Globe and Mail: Putin’s power play

SHAWN MCCARTHY

MOSCOW — The gleaming, 300-metre tower that would rise to dominate the historic czarist city of St. Petersburg is a testament to the power and influence of its owner, Russia’s state-owned energy company OAO Gazprom.

There’s been opposition to the skyscraper development by local residents, and the United Nations Educational, Scientific and Cultural Organ (UNESCO) has threatened to withdraw the designation of “world heritage site” from the city if Gazprom proceeds — but Gazprom is undeterred. That’s because it has clout that goes far beyond its status as Russia’s largest corporation.

Since coming to power, President Vladimir Putin, himself a St. Petersburg native, has increased the state’s controlling ownership stake in Gazprom, and appointed one of his top ministers, First Deputy Prime Minister Dmitry Medvedev, as its chairman.

At the same time, Mr. Putin has made Gazprom the linchpin of his drive to re-assert state control over the strategic oil and natural gas sector, putting the full power of government behind its efforts to gain assets owned by both domestic and foreign energy companies.

So imposing is Gazprom’s presence in the Russian economy — it is by far the largest taxpayer and also owns media outlets, banks and power stations — that analysts speculate that Mr. Putin may simply switch jobs with Mr. Medvedev, a leading contender to replace the President when he retires next year as required by constitutionally mandated term limits.

The iconic new headquarters in St. Petersburg would be a fitting corporate palace for the strongman president – dwarfing those of the former monarchs.

In a news conference last month, Mr. Putin gave his tacit support for its construction, although Gazprom itself insists that no final decisions have been taken.

Despite its ties to the Kremlin, the world’s largest natural gas producer insists it is essentially a commercial enterprise eager to pump up revenues by adding new production to replace declining old gas fields and by taking ownership stakes in foreign marketing and distribution assets closer to consumers.

Presidential spokesman Dimitry Peskov argues that the Kremlin maintains a controlling stake in Gazprom for reasons of “strategic security” but that the company is mandated to act in the commercial interests of its owners, including public shareholders who hold 49.08 per cent of the company.

“It is acting as an independent corporation, in the interest of its shareholders, including foreign investors, pursuing the goal of enlarging its revenues,” Mr. Peskov said in an interview. But the company’s reputation in the West has been battered over the past few years and critics argue it is Mr. Putin’s political aims, rather than shareholders’ interests, that drive its strategy.

Gazprom has been accused of not investing sufficiently in natural gas production to meet all its future commitments, of being used as a tool of the Kremlin in disputes with former Soviet states such as Ukraine and Belarus, and of using the naked power of the state to gain government control of promising projects.

Gazprom late last year bought a controlling interest in Royal Dutch Shell PLC’s Sakhalin 2 project after the Anglo-Dutch company was hounded into the deal by regulatory hassles. Gazprom had previously walked away from a deal on Sakhalin, after Shell announced a doubling of the project’s cost just weeks after concluding an asset-swap deal with the Russian company.

Now, Britain’s BP PLC is facing similar pressure over its Russian joint venture, TNK-BP and its eastern Siberia gas project, Kovykta. BP chairman, John Browne, was in Moscow last week, meeting with officials over the deal that could lead to Gazprom replacing the current Russian partners in the project.

Fyodor Lukyanov, editor-in-chief at the journal Russia in Global Affairs, said there is little to distinguish between the commercial interests of the biggest government-controlled companies, nicknamed Kremlin Inc., and those of the state itself.

“Is Gazprom a global company that is trying to extend its interests … or is Gazprom an instrument for Russian rebirth as international superpower? The answer is both,” Mr. Lukyanov said.

European nations are particularly dependent on Gazprom, which has a monopoly on Russian gas exports. The International Energy Agency, an association of energy-consuming nations, complains that the company is under-investing in major projects, and focusing too much on the acquisition of oil-rich companies and foreign upstream and downstream assets.

But while Europe remains its largest gas customer, Gazprom expects to diversify its markets through a planned pipeline to China and liquefied natural gas shipments to Japan and North America.

In an interview at the company’s current Moscow headquarters, company vice-president Sergei Kuprianov said Gazprom is pursuing a strategy that will allow it to maintain its status as the world’s leading natural gas supplier, while diversifying into other areas of the energy business.

In the short- to medium-term, Gazprom forecasts only modest increases in its output of natural gas. Last year, it produced 550 billion cubic metres of gas, and that is expected to edge up to only 560 billion cubic metres by 2010.

Some analysts forecast major shortages of natural gas in coming years, especially during cold spells. Domestic deliveries would be hit hardest, but analyst Vladimir Milov at the Moscow-based Institute for Energy Policy said the shortages could prevent Gazprom from supplying anything beyond its minimum contractual obligations to European customers.

Valery Nesterov, an analyst at Troika Dialog investment firm, said Gazprom has significantly increased its capital expenditures and is likely to achieve better results in term of offsetting production declines in the coming years.

He added, however, that Gazprom has an array of competing priorities, and it is not clear it can proceed simultaneously on all fronts — building pipelines, making overseas acquisitions, expanding liquefied-natural-gas operations and developing technically challenging production facilities.

“Gazprom’s problem is not to overstrain its funds, not to get involved simultaneously in too many super-giant projects,” Mr. Nesterov said. “In my view, the company needs to take decisions about what options to prefer.”

Gazprom’s Mr. Kuprianov dismissed talk of gas shortages. The introduction of market pricing in former Soviet states such as Ukraine, Belarus, Georgia and Modavia is likely to restrain demand there, and the Putin government has approved gradual increases in the heavily subsidized domestic gas prices to encourage greater efficiency.

As for foreign customers, Gazprom has the wherewithal to meet all contractual supplies, he said.

“We have entered a series of long-term contracts according to which we supply specific amounts of gas on a specific schedule. So we understand how much gas we have to produce and when,” he said.

Despite skepticism among analysts, Gazprom insists it has the capacity to expand its production of liquefied natural gas, and expects a decision soon on the planned LNG facility near St. Petersburg, for which it is negotiating a potential partnership with Calgary-based Petro-Canada, as well as with Algeria’s national oil company.

Gazprom vice-president Ilya Kochevrin said there are “no real obstacles” to a Gazprom-Petrocan deal. In a telephone interview from London, Petrocan spokesman Tom Carney said that the company could not comment on the continuing negotiations.

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