Mixing oil, gas and politics
The Russian government is tightening its grip on the country’s
lucrative oil and gas industry. After wresting a key Yukos subsidiary from its former
owners, it has struck a deal to take control of Gazprom, Russia’s gas monopoly. Sibneft,
another big independent oil producer, could be next in line for renationalisation. Should
the wider, energy-hungry world worry?
IT WAS, in some respects, a step forward. On Thursday June 16th,
Gazprom, Russia’s gas monopoly, agreed to sell a 10.7% stake in itself to the
country’s government for $7.2 billion. The price is below that suggested by banks
charged with valuing the deal, but at least it was an open and honest transaction. This is
uncharacteristic in Russia’s notoriously murky energy sector. Given the ugly
dismemberment of Yukos, no one would have been surprised to see Russia’s government
employ questionable methods to wrest control of the country’s other oil and gas giants
from the lucky investors who got them on the cheap in the privatisations of the early
1990s.
The government’s deal with Gazprom will take its stake in the company
above 50%, which will allow it to open the shares to western investors. At present
Gazprom’s shares are “ring-fenced”: they cannot be traded on the Russian stockmarket
by westerners but only held as American Depository Receipts, which are more costly than
ordinary shares. By reasserting control, the government hopes to give Russia’s
stockmarket a boost. But it is also aiming to create a national energy giant in the style
of Saudi Arabia’s gargantuan Aramco.
When the government gets round to paying for its increased holding in
Gazprom and drops the ring-fence, foreign investors may find that the stock is not to
their taste. The gas giant has been likened more to a state ministry than a
profit-motivated corporation. Hermitage Capital, a Russian investment fund with a stake in
Gazprom, publishes a yearly audit noting the firm’s shortcomings. Hermitage says that
Gazprom has at least stopped the wholesale stripping of assets that it used to allow
through the sale of gas reserves to joint-venture partners at knock-down prices. But it
points to wasteful tax-payment schemes, seeming nonchalance about unpaid bills,
disproportionately high wage costs and suspiciously costly pipeline projects. No wonder
Gazprom’s market value in relation to its reserves is tiny compared with the likes of
ExxonMobil or Shell.
Some foreign investors will steer clear as a result. Others will
instead conclude that a company that holds 20% of the world’s gas reserves, produces 16%
of world output and has 25% of the European market is in a strong position despite its
many foibles. But Gazprom’s growth prospects are questionable. Its gas output in 2004
was no higher than in 1999.
The deal with Gazprom this week is not the government’s first attempt
to take control of the company in a bid to create a state-owned energy colossus. The
original plan was to merge Gazprom with Rosneft, a second-tier oil firm. But last December
Rosneft, supported by some but not all factions in the Kremlin, got its hands on
Yuganskneftegaz (known as Yugansk), the main oil-production arm of Yukos, after a curious,
$9.4 billion auction. This sale had been forced on Yukos after it was brought to its knees
by demands for back taxes.
Once Yugansk was under its wing, Rosneft insisted that the combined
group was too big to be absorbed by Gazprom. Furthermore, Russia’s government started to
fear the threat of legal challenges against Gazprom if it merged with the victor of a
controversial auction. The Gazprom-Rosneft merger soon fell apart. Rosneft’s managers
seem happy to plough their own furrow: with Yugansk’s assets, Rosneft has become a
powerful competitor to Lukoil, the country’s leading oil producer since the demise of
Yukos.
Rumours abound that Gazprom and Rosneft are vying to bring another
independent producer under state control: Sibneft, Russia’ fifth-largest oil firm.
Sibneft’s majority shareholder is Roman Abramovich, an oligarch who spends most of his
time these days in London. But Yukos still owns a 34.5% stake in Sibneft as a result of an
aborted merger in 2003. With Yukos’s assets still frozen as a result of the tax claims
against it, this stake could be up for grabs. The winner would have a useful lever to
prise Mr Abramovich’s controlling interest in Sibneft from his hands.
If another independent oil producer fell into state hands, this would
leave little for foreign oil companies that are still keen to lay their hands on some of
Russia’s vast energy reserves. Lukoil is partly owned by America’s ConocoPhillips and
may welcome more investment; TNK-BP, a joint-venture equally divided between Russian
investors and British oil giant BP, and jostling with Rosneft as the country’s
number-two oil firm, provides another toe-hold for outside investors; Surgutneftegaz,
Russia’s fourth-largest producer, is management-owned and has so far proved impervious
to foreign advances. As for Rosneft and Gazprom themselves, they have had discussions
regarding assistance with investment in their expansion plans, but only with state oil
companies from India and China.
What price national champions?
Foreigners’ frustration at not being able to grab a bigger slice of
the industry is understandable. Russian oil production has increased rapidly in recent
years to keep up with the burgeoning demand of energy-hungry economies around the world.
Between 1999 and 2004, Russian oil companies boosted output by around 50%. Oil exports are
now nearly on a par with those of Saudi Arabia, OPEC’s main producer (Russia is not a
member of the cartel). Not only has this provided a healthy stream of income for
Russia’s government, which takes a big chunk of oil revenues in taxes, but it has made
its oil a vital foreign-policy tool.
However, as the state has exercised more control over the energy
sector, oil production has stalled. From a level of 9.28m barrels per day (bpd) in January
this year, it has edged up to just 9.33m bpd in May. This 50,000-bpd increase compares
poorly with 2004, when output rose by 150,000 bpd between January and May. The blame for
this lies, partly at least, with the turmoil created at Yukos. Some analysts think that if
production suffers any more, the government may have to rethink its drive to nationalise
large chunks of the industry, especially since the oil-output slowdown is contributing to
a broader economic one—last week the economy minister, German Gref, cut his 2005 growth
forecast for the second time in a month, to 5.5%, well below the 7.1% growth seen in 2004.
Those state-owned national champions appear to be coming at quite a price.
“The Economist”, June 20, 2005
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