Gazprom is vitally important to Russia’s future. There is even speculation that, after his second and final term as Russian president ends in 2008, Vladimir Putin might become leader of the natural gas monopoly.
It is already Russia’s biggest company and the world’s dominant gas producer. But its $13.1bn deal, agreed last month, to buy 73 per cent of Sibneft, Russia’s fifth-biggest crude oil producer, will also make it an important force in oil.
It represents a big step forward in the plans of Alexei Miller, chief executive, to transform Gazprom into a diversified energy giant serving markets at all points of the compass.
That plan is already turning Gazprom into a Russian flagship on international energy markets. So, too, is the move to lift restrictions on foreign ownership of Gazprom’s free float – though the first step was to bring the company back under de jure state control.
The state loosened control of Gazprom in the 1990s, its stake falling to 38 per cent. The government is now taking the stake back to 51 per cent by buying Gazprom treasury shares from its subsidiaries. Once that $10bn transaction is done, a 20 per cent cap on foreign ownership of Gazprom will be erased.
For now, just 4.5 per cent of Gazprom, traded in London as American Depositary Shares, is officially available to foreigners.
Richard Stevenson, director of sales at CentreInvest Securities, says: “The free float in the Gazprom ADS is too small to satisfy major emerging market investors.” Removal of the “ring fence” barring foreigners from trading Gazprom stock on the domestic stock market will, he adds, “be tantamount to an IPO of the world’s biggest gas company”.
Gazprom’s market capitalisation topped the $100bn threshold for the first time in August. Alexander Medvedev, the deputy chairman of Gazprom, says the company will be worth $300bn in five years.
But in spite of the apparent support of the president, some of the company’s expansion plans have already been frustrated.
A Gazprom-driven scheme to merge with Rosneft, Russia’s state oil company, collapsed earlier this year. Meanwhile, Rosneft has tripled in size by bagging oil reserves formerly held by Yukos, the oil company crippled by a prolonged battle with federal tax collectors.
It now looks as if Russia will end up with two competing, state oil and gas companies. But Gazprom remains determined to gain oil assets. After the Rosneft deal fell through, the consolation prize was Sibneft, a 600,000-barrels-a-day producer controlled by Roman Abramovich. Plans are to fund the $13.1bn deal – the biggest Russian takeover – with a $12bn foreign loan.
Gazprom is also venturing into the booming liquefied natural gas (LNG) business. LNG is transported by sea rather than pipeline and will allow Gazprom to expand its gas trade to Asia and the US.
Electricity is another new arena. Gazprom already has equity in Russia’s electricity monopoly United Energy Systems (UES) and in Mosenergo, a power utility serving Moscow.
Some analysts, however, fear that Gazprom may bite off more than it can chew.
Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says: “Gazprom has too many priorities. No company has the institutional capacity to focus on so many tasks. Gazprom has to do what the state wants even if that means following an unrecognisable model.”
Gazprom owns over a quarter of the world’s gas reserves. But its 545bn cu metres a year production is in a rut. Gazprom complains that the obligation to sell 400bn cu metres of gas a year to Russian buyers at low, state regulated prices narrows its profits leaving scant investment for new field developments.
But by providing cheap gas, Gazprom is bolstering Russia’s economic revival. The company’s $30bn a year exports to Europe are its only big source of profit.
Mr Stern says: “Gazprom can break even selling gas in Russia today. The question is to what extent the domestic market will be profitable in the future.”
Hermitage Capital, a minority shareholder and a stern critic, says the company wastes millions on ill-judged investments and runaway costs. Gazprom admits it has fat to trim. But that might be an attraction for incoming equity investors whose focus will be on the finances, not the operations.
According to Mr Stevenson, “More conventional shareholders will insist on improved efficiency. If Gazprom’s margins improve, so will its stock price.”
