Russian gas giant Gazprom has ambitious plans to become one of the world’s largest energy companies and it is looking to Europe to help it achieve this. Its focus on the European bloc is not surprising as this region is its largest customer, currently accounting for 65 per cent of its revenues. Gazprom has 25 per cent of the European Union natural gas market and is aiming to increase it to 33 per cent by 2010. In the past the company lacked the cash to invest downstream, but with energy prices high at the moment Gazprom has the opportunity to raise its international profile.

At the end of last year Gazprom struck a deal with Gaz de France securing direct presence in the French market. Furthermore, a study conducted by The Financial Times revealed that over the last 12-18 months Gazprom has struck deals or has been involved in serious discussions on improving its access to local markets or investing in local assets in more than a dozen European countries.

However, Gazprom’s European aspirations expand beyond natural gas. Last month, its UK subsidiary Gazprom Marketing & Trading Limited signed a ‘memorandum of understanding’ with Soteg SA of Luxembourg to create a joint venture to build an 800 MW combined-cycle plant in Germany, while the International Herald Tribune reported that Gazprom is currently assessing the construction of a power plant in the UK.

On the domestic electricity front Gazprom has made no secret of its desire for dominance in this sector. The company has expressed its interest in taking controlling stakes in OGK-2 and OGK-6 (wholesale generating companies) and TGK-1, TGK-3 and TGK-7 (territorial generating companies). Gazprom already holds a 25 per cent stake in TGK-3 (Mosenergo), as well as a minority stake in OGK-5. According to Alexander Kornilov, senior analyst at Alfa Bank, based on the value of these companies’ new share issues, Gazprom will have to pay about $11 million for the newly issued shares. However, given that it wants to buy all of the government’s stakes in these companies, it may have to spend another $5 billion. But Gazprom appears to have sufficiently deep pockets to achieve this.

It is also moving into the coal market with a joint venture with Siberian Coal and Energy Company (SUEK), Russia’s largest coal supplier. The merger will create a holding company worth $12 billion, with Gazprom holding the majority share. This is a very smart move by Gazprom. Currently, coal makes up 15 per cent of the fuel used in Russia’s power stations, but President Putin has said that this figure needs to rise to 35 per cent by 2015. Natural gas accounts for between 60-75 per cent of the country’s fuel balance, but a shift towards coal would free up gas for export, which Gazprom could sell for four or five times the domestic price.

At the end of last year Gazprom signed a deal with Russian oil company Rosneft in which both companies agreed to “join forces in the generation and sale of electricity and thermal energy”. According to Andrei Gromadin, oil and gas analyst at MDM Bank, even without Rosneft, Gazprom would have sufficient money for future investments. As gas and electricity tariffs are gradually freed up over the next five years, the prices of both will rise exponentially, as will Gazprom’s profits, Gromadin said.

With Gazprom’s growing dominance in the Russian electricity sector the long-held dream of Anatoly Chubais, head of RAO UES, of free-market electricity reform looks unlikely to happen. The main goal of Russia’s electricity reform was the break up of the national monopoly (RAO UES) and the introduction of competition. The preference of Chubais and Dmitry Akhanov, head of strategy at RAO UES has been for portfolio investors and foreign companies with industry expertize.

The risks associated with Gazprom’s dominance in the electricity sector are that minority shareholders of generation companies may suffer as Gazprom is more likely to capitalize its oil and gas operations, rather than its power activities, which requires $100 billion of capital for renovation according to UES’ latest estimates. Others, including elements inside UES, have defended Gazprom’s record, saying the biggest benefit of a monolithic power sector would be unity, because the ability to coordinate output is vital to meet Russia’s growing demand for power, which may not be achievable with a base of smaller investors.

Best regards,
Heather Johnstone
Senior Editor