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The Sunday Times: Gazprom steps up its plans for the UK

The Russian giant aims to buy up power stations as well as gas distribution firms to become a one-stop energy shop for commercial users

Dominic O’Connell
July 8, 2007

ON his way to London last week, Alexander Medvedev, deputy chief executive of Gazprom, took a call from the Takeover Panel, the City watchdog that polices the buying and selling of quoted companies. Shares in a London-listed energy group had jumped 4%. Was he up to something?

Medvedev has become used to such calls. Gazprom, the world’s sixth-largest company, owner of 17% of the Earth’s gas reserves and provider of one-quarter of western Europe’s gas, has regularly been tipped as a buyer of big British companies. Last year the government was thrown into a spin by reports that Gazprom was about to make a move on Centrica, owner of British Gas.

It proved to be a false alarm, as did last week’s alert. But Gazprom is still keeping an eye on Britain – in an interview with The Sunday Times, Medvedev was careful not to rule out a big deal. “Prices today are at the top level, but at the right price and at the right time, we could consider something,” he said.

The Takeover Panel’s nervousness was understandable. Last month Medvedev said he planned to make an announcement about the company’s British plans during Wimbledon.

More excitable traders leapt to the conclusion that this meant a bid for Centrica. The truth was more prosaic. Gazprom was buying Natural Gas Shipping Services (NGSS), a small, Cheshire-based gas-distribution business that is the sister company of Pennine Natural Gas, which the Russians bought last year.

Pennine and NGSS are Gazprom’s vehicles for a push into the British retail market. Gazprom now accounts for 4% of that market, and Medvedev has set a target of 10% “within five to seven years”.

But his plans for Britain go beyond gas. He wants to become a one-stop energy shop for commercial users, selling electricity, heating and even carbon credits.

Supplying electricity also means generating it. “We are looking at acquiring generation assets [power stations]. It will allow us to mitigate different kinds of risk, and to deliver this complete service to our clients. We are in discussion with different potential partners,” he said.

Gazprom’s immense size has provoked nervousness, not only among City watchdogs, but also among politicians, who are uneasy at the close relationship between the company and the Russian government. Gazprom’s chairman, Dmitri Medvedev – no relation to Alexander – is Russia’s first deputy prime minister, and other government representatives sit on its board. The state holds a stake of just over 50%.

European politicians’ worries were exacerbated last year when the company cut off gas supplies to Ukraine after a row over prices. The move was seen as a warning shot by the Kremlin to the country not to stray too far from its connections with Moscow. Supplies to western Europe were disrupted, provoking unrest in Germany which relies on Russia for 40% of its gas.

In March the foreign affairs parliamentary select committee began an inquiry into Britain’s relationship with Russia, with energy security at the top of its agenda. Tony Blair warned that Russian government intervention in western oil and gas projects threatened international investment in the country.

Medvedev rejected allegations that his company is a tool of the Russian state. “It’s absurd,” he said. “The state has a majority stake but we are a listed group, with the remaining shares in the hands of private investors.

“All operational decisions are taken by the executive committee, and decisions are for the board of directors, where the state has a majority. There is quite hot discussion there – the ministry of energy does not always have the same view as the ministry of foreign affairs.” European gas users had nothing to fear from Gazprom, he said. “There is this myth that we are making all this investment in Europe so we can squeeze the customers there. That’s ridiculous. We are heavily dependent on Europe for our revenues.”

If the spat with Ukraine had European politicians worrying, international energy groups have been unnerved by recent manoeuvres involving western investments in Russian gasfields.

Shell and its Japanese partners sold a controlling stake to Gazprom in their Sakhalin II project after being accused of environmental breaches, while TNK-BP, BP’s Russian joint venture, sold its Kovykta gasfield to the Russian group after being accused of failing to meet licence obligations. Both moves sparked claims that Moscow wanted to bring strategic gas assets back under national control and used Gazprom as its agent.

Medvedev rejects allegations of expropriation, saying that in each case there had been negotiations over Gazprom’s involvement, and there were failings by the western groups.

Talks on Sakhalin II started seven years ago, he said, with a plan for Gazprom to become involved by swapping gasfield assets with Shell. When the development costs soared, and the environmental problems began to surface – Medvedev said they were genuine – talks switched to a straightforward cash deal.

“It was a mutual agreement, and we had two investment banks giving their opinion that it was a fair price.”

At Kovykta, there was disagreement over how gas from the field should be used. TNK-BP wanted it dedicated to export to China, but Gazprom did not want to set a precedent.

TNK-BP also failed to meet licence conditions to produce a certain volume of gas by 2006. “This is an objective measure,” said Medvedev. “It’s there in black and white.”

The Kovykta row could eventually bring a happier outcome for both sides. Gazprom and BP are now in talks over the formation of a joint venture that will encompass at least $3 billion (£1.5 billion) of assets. The price Gazprom will pay TNK-BP for the Kovykta field will be hammered out over the next 90 days. TNK-BP will then be offered a chance to buy back a stake in the field.

Medvedev said such cooperation was important to Gazprom, not only to bring in the latest technology to develop oil and gas fields in difficult environments, but to share the risk of multi-billion pound greenfield developments. Such is Gazprom’s size, however, that some might question whether it needs much help. The company’s current stock-market value is $251 billion. This is well behind Exxon Mobil’s $479 billion value, but Medvedev says Gazprom should become the world’s first $1,000 billion group.

It is not difficult to work out how Gazprom’s value could increase so substantially. Controls on gas prices in its domestic market will be eliminated by 2011, a measure that will by itself bring in another $32 billion in revenue. Then there is its continuing transformation from state enterprise to private company; Medvedev says new cost controls and management schemes are just beginning to bite, dropping overheads by 5% last year. On top of that, there are the company’s plans for diversification and investment outside Russia.

Analysts also point out its assets are undervalued against those of its western counterparts. “Gazprom still trades at a 50%-70% discount to peers,” said Citigroup. In 1989 Soviet president Mikhail Gorbachev created Gazprom from the Ministry of the Gas Industry of the Soviet Union.

After the break-up of the Soviet Union, president Boris Yeltsin privatised Gazprom in Russia, with the state retaining 50.2% of the shares.

RISE AND RISE OF GAZPROM

Gazprom has since grown into the biggest extractor of natural gas and the sixth-largest company in the world, as shown by the following statistics. 29,100 billion cubic metres: Gazprom’s natural gas reserves, the largest in the world 547.9 billion cubic metres: the company’s gas production in 2005 155,000 kilometres: Gazprom’s Russian system for gas transmission 32: the number of countries that import Gazprom’s natural gas £41.6 billion: Gazprom’s sales (2006) £11.9 billion: Gazprom’s profits (2006) 440,000: number of Gazprom’s employees (2006)

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2041422.ece

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2 Comments on “The Sunday Times: Gazprom steps up its plans for the UK”

  1. #1 electronics projects
    on Sep 11th, 2007 at 03:58

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  2. #2 electronics projects
    on Sep 11th, 2007 at 03:56

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