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Financial Times: Russian bargain that comes at a price

By Catherine Belton
Published: April 5 2007 03:00 | Last updated: April 5 2007 03:00

When an Eni-led consortium walked out of yesterday’s Yukos auction with a bundle of prime gas assets for a knockdown price of just $5.83bn, it came as little surprise to hear soon afterwards that Gazprom would take control.

The deal – in which Eni agreed to buy a 20 per cent stake in Gazpromneft and three gas producers – gives the Italian energy major for the first time direct access to Russia’s vast reserves.

But the deal also sees Eni essentially doing Gazprom’s bidding in a move strikingly reminiscent of the scandal-tainted forced sale of Yukos’s main production unit in 2004.

Then the Yuganskneftegaz production unit went to Baikal Finance Group, an obscure front company registered in a grocery store in Tver.

Eni will hand over 51 percent control of the assets to Gazprom. In the earlier deal Baikal Finance Group some weeks later sold the unit on to state-controlled Rosneft.

The arrangement, as President Vladimir Putin later put it, was aimed at avoiding legal risks.

“This seems to be the identical scheme that Rosneft used with Baikal Finance Group,” said Tim Osborne, managing director of GML, Yukos’s main shareholder, which is suing the Russian Federation in the Hague for expropriating its property.

Gazprom is believed to be wary of participating directly in the bankruptcy auctions because it fears the legal consequences. “But it offers them no protection,” Mr Osborne said.

The deal underlines the strengthening hand of the Kremlin and the lengths western oil majors now appear ready to go to in order to enter the Russian energy sector.

Despite GML’s protestations, the Eni deal, on top of the participation of BP’s Russia venture TNK-BP in last week’s sale of Yukos’ stake in Rosneft, could help the Kremlin win the legitimacy it sought in selling off the asset, analysts said.

“They would like to have the likes of Eni and BP participating because they want to show that despite the damage of Yukos and Gazprom’s takeover of Sakhalin-2, the reality is that the international oil companies are queuing up to enter the Russian energy sector,” said Chris Weafer, chief strategist at Alfa Bank.

“The rules of the game are set to favour state companies. But they want to show there is still a role forforeign companies.”

The Kremlin is now preparing the ground for the real sell-off, he said. This is the sale of Yukos’s two remaining production units, which together have capacity for a combined output of more than 500,000 barrels per day, and five major refineries.

The bankruptcy auctions for these assets is likely to be a strictly Russian affair, with Gazprom and Rosneft vying for these assets, analysts say.

But questions remain over whether Gazprom will directly participate, especially after its arrangement with Eni in this sale.

Rosneft has lined up $22bn in loans for participating in the Yukos auctions. Gazprom, meanwhile, has still been struggling to close its purchase of control in Royal Dutch Shell’s Sakhalin-2 venture for $7.4bn, and is also expanding into the coal and electricity sectors.

“It’s all going to go to the state,” said Valery Nesterov, oil and gas analyst at Troika Dialog. “The only enigma left is how Gazprom will participate.”

Gazprom has said it is interested in buying Yukos’s east Siberian assets including its Tomskneft production unit, which is up for auction on May 3.

Eni and Enel’s winning bid wins them a foothold in Russia following arduous talks with Gazprom, followed up by a phone conversation late on Tuesday between Mr Putin and Romano Prodi, Italy’s prime minister.

Relations between the two countries could draw even closer with a potential airline deal, as Russia’s Aeroflot is bidding to take over Italy’s Alitalia.

Copyright The Financial Times Limited 2007 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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