Gas monopoly OAO Gazprom has agreed to sell a controlling stake to the Russian government, setting the stage for more liberalized trading of Gazprom shares, consultants said.
Tim Lambert, a vice-president with Wood Mackenzie Ltd., said the Russian government is involved in a series of complicated maneuvers involving Gazprom. He added that Russian President Vladimir Putin wants to increase Gazprom’s value.
“Events have been building up to this for several months, and this is a logical conclusion,” Lambert said.
Michael Lelyveld, senior advisor to PFC Energy, said Russia “desperately needs something to restore optimism to investment.” But he questioned the wisdom of what he called “empire creep,” saying, “In Gazprom, you have what is going to be a state-controlled entity that is getting bigger and bigger.”
The government, which already owns 39.4% of Gazprom, offered to pay $7.14 billion for an additional 10.7% stake. Gazprom’s board approved the price.
Putin has said he intends to end limits on foreign ownership of Gazprom’s shares sold in Moscow.
Lambert said, “The value of the shares will go up quite a lot [after trading is liberalized] because there are a lot of people who would like Gazprom shares who can’t currently buy them.” Most of Gazprom was privatized during the 1990s.
“It’s a neat way of getting exposure to the Russian economy,” Lambert said. “Anybody wanting a Russian component in their energy portfolio will have to have Gazprom.”
Strategy
Gazprom will find itself with two sets of strategy, Lambert said. The first is typical business activity, such as trying to get into LNG and expanding internationally by buying distribution companies in Europe.
“Those are things you expect a big gas company to do. It’s also doing a lot of other things, but it’s still heavily involved in Russia’s wider economy. The government’s stake is a recognition that the government still wants to control what Gazprom does,” Lambert said.
Lelyveld questioned whether Gazprom will compete fairly with international oil companies that have invested in Russia and been waiting patiently for years. “They may well be disadvantaged by this,” he said.
Foiled merger
Gazprom and OAO Rosneft had been expected to merge, but the Russian government canceled the merger last month (OGJ, May 23, 2005, p. 36).
The merger first was called into question late last year after Rosneft acquired Yuganskneftegas, the key subsidiary of struggling OAO Yukos. Baikal Finance Group bought Yuganskneftegas at a Dec. 19 government auction in Moscow. On Dec. 23, Rosneft agreed to buy Baikal (OGJ Online, Mar. 15, 2005).
Yukos’s former Chief Executive Mikhail Khodorkovsky, incarcerated since his arrest at company headquarters in October 2003, at the end of May was sentenced to 9 years in jail for fraud and tax evasion. Rosneft still is caught up in the Yukos litigation.
Various analysts have suggested the Russian government could sell part of its interest in Rosneft to private investors.
OAO Rosneftegas, a special purpose vehicle created by the government, is expected to obtain loans to pay for the Gazprom shares, and the government is expected to sell shares in Rosneft to pay that loan.
“The reality is that the government is now talking about floating off a proportion of Rosneft to get back the cash that it has just had to pay for Gazprom,” Lambert said.
This raises the question of who might buy Rosneft shares. Until the Yukos litigation is resolved, it’s unlikely that western oil companies would take a stake in Rosneft, Lambert said.
“But the national oil companies, for example the Chinese or the Indians, might not be as concerned about litigation, and they might be offered a share in Rosneft,” Lambert said. Both nations are struggling to meet their own rapidly growing oil demand.
“I’m sure they are looking at it and are in discussion with the Russian government,” Lambert said of China and India.
Lelyveld noted that Russia will have two state-owned entities: Gazprom and Rosneft.
“For years, the idea was that less state ownership was good. Now, there is all this enthusiasm about more state ownership,” Lelyveld said. “People have a chance to make money on their investment, but you have to ask: What are they investing in?”
Lelyveld said a remaining question is whether Russia is creating or destroying value overall. During the last 2 years, Yukos shrank and lost value. ✦
