Russia 090423 Basic Political Developments

EU-Ukraine Gas Deal Is No Pipe Dream

http://online.wsj.com/article/SB124043755044245165.html

APRIL 22, 2009, 6:47 P.M. ET

A real plan to improve the network should please Europe and Russia.

By ALAN RILEY From today's Wall Street Journal Europe

One could have been forgiven for suspecting that this month's deal for the European Union to help reform Ukraine's gas market was just more political window dressing. It is true that the scale of the incompetence, double-dealing and corruption in the Ukrainian gas market is enormous. However, this time the EU and Ukraine may have achieved a breakthrough.

For the first time, a reform plan for the Ukrainian gas sector is backed up by a detailed, stage-by-stage program to fundamentally reform the market. If this program is implemented, it would not only drive out the corruption and opacity in the market. It would also provide a basis for increased revenues for Ukraine while enhancing EU energy security. What Europe needs to do now is work with Ukrainian politicians to implement the deal while taking parallel measures to ensure it really does work on the ground.

The core of the deal is a pledge by Ukraine to adopt EU energy legislation and to make this law binding by joining the European Energy Community. Under the agreement, the Ukrainian national gas company, Naftogaz, will turn its transmission subsidiary, Ukrtransgaz, into an independent operator. Full legal unbundling will follow, allowing Ukrtransgaz to offer access to the network to all potential gas suppliers on transparent and commercial terms. Tariffs will reflect actual costs and will be levied on a nondiscriminate basis. Equally, there will be third-party access to gas-storage facilities, again on transparent and commercial terms.

On its own, this first part of the deal would raise much skepticism with most commentators. It amounts to no more than another pledge to comply with EU rules. What distinguishes this deal from Kiev's previous pledges is the extremely detailed master plan for renovating the Ukrainian gas pipeline network. The plan shows the Ukrainians are serious this time.

The master plan provides a network-by-network, section-by-section analysis and costing for what needs to be done to restore the network, what is technically involved, and the potential for enhancing network capacity. Under the master plan foreign investors, together with the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank, would provide capital to renovate the network.

This renovation proposal is vital. The Ukraine network delivers 80% of Russia's European exports. Even if Nord Stream and South Stream -- two Russian projects to deliver gas straight to Western Europe, skirting Ukraine and other transit countries -- are actually completed, Ukraine will still deliver significantly more gas to Europe than these two pipelines.

The Ukrainian domestic gas incumbent cannot afford to pay for the gas it needs for the Ukrainian economy as well as maintain the pipeline network. The renovation proposal, if implemented, will ensure the continued flow of gas into the EU and provide the capacity for more gas to flow -- at least an additional 20 billion cubic meters (bcm) and perhaps as much as 60 bcm. The total cost is approximately between $2.5 billion and $3 billion.

Given the economic crisis, it is unlikely that Gazprom will be able to afford the $20 billion South Stream project, and Nord Stream is also under financial pressure. Hence both Europe and Gazprom should welcome the funding of additional capacity via the Ukrainian pipeline network at a relatively modest cost.

Taken together, the liberalization of the Ukrainian gas sector and the renovation of the network should enhance EU energy security. Liberalization will root out most of the Ukrainian sector's opacity and corruption. Renovation and additional capacity will also ensure that the gas will flow securely and that more gas can be made available.

Furthermore, as Ukrainian President Viktor Yushchenko has pointed out, "a single, competitive gas market would help depoliticize the EU-Russia gas relationship." The EU-Ukrainian deal, together with the extension of the European Energy Community to Ukraine, will help create a single European gas market in which commercial, not political, principles will prevail. This will reduce the scope for politics in gas supply.

The EU and the international institutions need to do more, however, to ensure that the deal is implemented in practice. We already know from our experience of energy liberalization in the EU that energy companies backslide when it comes to market-opening measures. For instance, subsidiary companies that own networks have a habit of swinging preferential deals to their holding companies which supply gas. The EU and international institutions such as the EBRD and EIB could insist that Ukraine significantly upgrade the powers and resources of its antitrust agency so that it can effectively police liberalization.

A further consideration for the EU, Ukraine and the international institutions is Russia. Prime Minister Vladimir Putin has indicated he very strongly opposes the EU deal. The facts, however, plainly stand against him. Two-thirds of Gazprom's revenues come from European sales. Given that its market capitalization has fallen by more than 70% since January 2008, that its gas revenues have collapsed, and that it has accumulated more than $35 billion of debt, Gazprom can barely afford to build Nord Stream, never mind South Stream. If there is additional Russian gas available for sale to Europe, it needs a cheap supply route. The Ukraine/EU deal can provide that route.

There is another consideration. Given Gazprom's lack of capital, the company will need significant foreign investment into its gas fields and its own gas network infrastructure. Foreign capital is easier to raise if there is a comprehensive, legally binding regime that applies to your principal route to market. In other words, the Ukraine/EU gas deal should make it easier for Gazprom to obtain foreign investment for its gas fields and pipeline network.

The plan provides for initial funding and due diligence to be carried out in the next couple of months, and for Ukraine to take practical steps toward the liberalization agenda. So we will soon see if the promise of the Ukraine/EU deal is delivered. But of all the deals that have been done between the EU and Ukraine over the last few years, this one appears to be the most promising.

Mr. Riley is a law professor at City University in London and an associate research fellow at the Center for European Policy Studies in Brussels.

Russia must offer maximum high price for Azerbaijani gas: Interview with head of Russian Gas Association

http://capital-en.trend.az/oil/oilgas/1459825.html

23.04.09 10:59

Russia, Moscow, April 22 /Trend Capital, I.Bragina/

Russian Gas Association President Valery Yazev spoke with Trend Capital in an exclusive interview.

Trend Capital: What are the prospects for the supply of Azerbaijani gas to Russia?

Valery Yazev: Russia has established a very constructive relationship with Azerbaijan. I'm confident that we will sign major documents. However, it is early to speak about the form and conditions. I think the situation becomes clearer in the near future.

Q: Will the technical capabilities permit to transport the expected volumes of gas via the existing pipeline systems between Azerbaijan and Russia?

A: Azerbaijan's export opportunities will increase as the work on the development of Shah Deniz field and will reach its limit approximately in five years. The transport facilities are significantly higher of production capacities. However, a pipeline to Russia must be repaired.

I'm sure that Azerbaijan will be able to find resources to sell natural gas to Russian company [Gazprom]. Russia must offer the highest possible price for Azerbaijani gas and transport gas after reconstruction of the pipeline infrastructure.

Q: Can we count on Gazprom's investments in repair and reconstruction of the pipeline on the Azerbaijan's territory?

A: I think that such actions are possible and would be appropriate.

Q: Does Azerbaijan's participation in transporting gas to Russia call EU's position on energy security into question?

A: Russia and Azerbaijan need to establish constructive cooperation as a gas producer. What is playing Europe? It tries to crush gas producers, to create a controversy between them, so that to deal with each country separately. This is a cartel of consumers, who plays on contradictions that arise in this context between Russia, Azerbaijan and Turkmenistan. Our countries will only suffer as a result of such contradictions.

Europe's willingness to build a Transcaspian pipeline is impossible until the status of the Caspian Sea is determined.

Our countries need to coordinate their positions clearly. Azerbaijan is geographically closest to Europe among gas producing countries in the region. Therefore, Moscow wants to develop energy dialogue with Baku.

Gazprom

Gazprom, E.ON could close Siberian asset deal in summer

http://en.rian.ru/business/20090423/121258825.html

MOSCOW, April 23 (RIA Novosti) - Gazprom and Germany's E.ON could close a deal for the German company to join the development of northwest Siberia's Yuzhno-Russkoye oil and gas field as early as the summer, the E.ON head said on Thursday.

"We hope that it [the deal] will be closed in the second half of the year, possibly in summer," Wulf Bernotat said in an interview with business daily Vedomosti.

Under the asset swap deal, signed in St. Petersburg late in 2008 in the presence of German Chancellor Angela Merkel and Russian President Dmitry Medvedev, E.ON, the world's largest utility company, will receive 25% minus one share in Gazprom subsidiary Severneftegazprom, while the Russian energy giant will get a 49% stake in E.ON's ZAO Gerosgaz, which holds a 2.93% interest in Gazprom.

Severneftegazprom holds a license for the Yuzhno-Russkoye oil and gas deposit, which has recoverable reserves of 800 billion cubic meters of gas and 5.7 million metric tons (41.7 million barrels) of oil.

Gerosgaz, founded in 1999, is a joint stock company in which Gazprom Export holds 51% interest, and E.ON Ruhrgas AG has 49%.

Gazprom Neft on Bourse

http://www.themoscowtimes.com/article/1009/42/376507.htm

Gazprom Neft became the third of Russia's top five oil producers to start trading on the ruble-denominated St. Petersburg International Mercantile Exchange, the exchange said Wednesday. Gazprom Neft followed Rosneft and TNK-BP in selling refined oil products on the bourse, it said. (Bloomberg)

Gazprom primes South Korea study

http://www.upstreamonline.com/live/article176467.ece

News services

Russian gas giant Gazprom is poised to carry out an investment study covering shipments of natural gas to South Korea and is looking at possible transportation routes.

Today, Gazprom chief executive Alexei Miller led an internal meeting to discuss the planned supplies, possible routes and other commercial terms, a Platts report said.

Earlier this month, the president of South Korea's Kogas visited Moscow for talks with Gazprom.

Transportation of gas from Russia to South Korea has been one of the key discussion points. One of the possible options considered was the laying of a pipeline via North Korea, though this has been thrown into doubt following the country's latest rocket launch earlier this month.

Gazprom is said to be also looking at developing a subsea pipeline to South Korea.

However the head of Gazprom's foreign projects department, Stanislav Tsygankov, told Platts earlier this month that while the plan would face numerous technological difficulties, Gazprom was confident of meeting South Korea's gas demands.

Kogas plans to import 10 billion cubic metres per year of natural gas from Russia for a 30 year period beginning 2015, according to a $90 billion agreement signed with in September last year.

Wednesday, 22 April, 2009, 10:06 GMT  | last updated: Wednesday, 22 April, 2009, 10:06 GMT

Gazprom Neft Buys Italy Assets

http://www.themoscowtimes.com/article/600/42/376521.htm
23 April 2009 Combined Reports
Gazprom Neft extended a Russian push into European refining and marketing on Wednesday by buying Italian oil operations from U.S. oil major Chevron.

Gazprom Neft will buy a plant in Bari, in southern Italy, which produces 30,000 tons of oil and 6,000 tons of lubricants a year for cars, trucks and other industrial uses, and fuel marketing and sales operations in Rome, the companies said.

The plant produces 150 types of oils used in cars and commercial transport as well as industry including drilling, according to the statement.

Gazprom Neft will also get the right to use the Texaco brand in the Italian market until 2010.

Chevron, the second-largest U.S. oil company, and Gazprom Neft, Russia's fifth-largest oil producer, did not reveal the price of the deal.

Gazprom Neft said in a statement that it expected production and marketing synergies between the Chevron assets and the Serbian oil refiner NIS, which it took control of earlier this year.

Chevron said last month that it would push ahead with streamlining its lubricants product line and would exit retail markets.

Russian oil companies' push into downstream activities in Europe reflects Gazprom's own effort to acquire gas distribution and power-generation assets across the continent and consolidate control of the country's domestic assets.

Rival LUKoil bought a 49 percent stake in ERG's Isab di Priolo refinery on Sicily last year and held talks to buy a large stake in Spanish oil company Repsol, which has a large refining portfolio.

Last month, Russian oil producer Surgutneftegaz agreed to buy 21 percent of Hungarian oil refiner MOL.

Earlier this month, Gazprom spent $4 billion to buy back a 20 percent stake in Gazprom Neft from Italy's Eni, which had picked up the stake at a 2007 auction of the assets of bankrupt oil firm Yukos.

(Reuters, Bloomberg, MT)

Gazprom lets Ukraine off gas fine

http://businessneweurope.eu/users/subs.php
bne
April 22, 2009

After a lot of sabre rattling, Gazprom has backed down on its threat to fine Ukraine for buying less gas in the first quarter than it is contractually obliged to.

Almost as soon as Ukraine signed a gas supply deal with Russia at the start of this year, bring the annual gas row to an end, Kyiv was put in the embarrassing position of asking for less gas than it had just asked for as the crisis accelerated and tanking industrial production (GDP fell by a whopping 20% in January alone) meant demand for gas disappeared.

Initially Gapzorm was being nice and let the Ukraine off the hook, but once a fresh row broke out following Ukrainian Prime Minister Yulia Tymoshenko trip to Brussels where she signed off on a deal to upgrade the country's transport pipeline network, Gazprom took a hard line and said it would hold Ukraine to the contract after all. In the same week Gazprom let Belarus off the same hook.

The Kremlin is concerned that if any work is done on the pipelines it wants a piece of the action. Kyivian politicians have said that they don't have a problem and Brussels, which is even more afraid of sparking a fresh gas row, doubly so.

Tempers seems to be cooling now as Gazprom said on Friday April 17 that it would let Ukraine off the fine after all, Ukrainian Fuel and Energy Minister Yuriy Prodan said at a press conference at Interfax-Ukraine.

"Gazprom bills us on actual consumption. Of course, each month we,re in correspondence on actual gas consumption and payments. Information appeared in the mass media now is an echo of correspondence between the two economic entities," he said.

Talks on the issue are ongoing and the fines could be reimposed if the Kremlin is not happy with the deals being offered, but for the moment the mini-row has been averted. Last week Ukraine was due to pay for its march gas and met the payment without problems.

"I think that all is well in our relations - we always reach agreements," he said, adding that Ukraine pays for gas supplied by Gazprom in time. Making payments on its gas bill should get easier for Ukraine going forward as the economy is so depressed that comapneis are not using as much gas, shaving tens of millions of dollars of the bill each month.

Prodan also said that Ukrainian industrial companies in January to March 2009 cut gas consumption by 40% year-over-year reports Interfax.

Gazprom: GDF Suez may get 9% stake in Nord Stream pipeline

http://businessneweurope.eu/users/subs.php

UralSib, Russia

April 22, 2009

Foreign partners are ready to reduce their shares. French gas company GDF Suez may gain a 9% stake in Nord Stream AG, a venture between Gazprom (GSPBEX - Not Rated), which holds a 51% stake, Gasunie (9% share), Wintershall (20%) and E.ON Ruhrgas (20%), Vedomosti reported yesterday, citing German news agency AFP. The venture was established to design, finance, construct and operate the Nord Stream pipeline. According to newswires, Gazprom's stake in the project remains unchanged; hence, foreign partners will have to reduce their stakes.

Nord Stream will supply gas to Germany. The 1,220-km Nord Stream pipeline will consist of two parallel strings (each with a capacity of 27.5 bcm), which will go under the Baltic Sea, from the Russian port Vyborg to the German town of Greifswald. The first string of the Nord Stream pipeline is planned to be constructed in 2010-11 and the second string by 2012. Currently, the EU is conducting an ecological assessment of the project and should announce the results of the study in 2H09.

Gazprom benefits from the Nord Stream. If GDF Suez becomes a partner in the Nord Stream project, this will greatly improve the chances of successfully completing the pipeline on time. This will enable Gazprom to secure gas sales to the French market in proportion to GDF Suez's share in the project.

Construction of both strings of the pipeline will solidify Gazprom's positions on the EU market and increase its share from 25% to approximately 34% by 2020, by our estimates. Gazprom also benefits from this project, since the Nord Stream pipeline will bypass transit countries and, therefore, minimize correspondent political risks. However, it is unclear yet whether GDF Suez will join the project, hence we regard the news as neutral for Gazprom's share price performance.

Victor Mishnyakov,

Kommersant

Liberalized European markets to prevent Gazprom from pressuring consumers

http://en.rian.ru/analysis/20090422/121252393.html

Tensions are growing around European gas pipeline projects as the European Commission intends in early summer to adopt the so-called Third Energy Package. It is a package of legislative proposals for Europe's electricity and gas markets aimed at further liberalization of the markets and prevention of abuse of market power.

These proposals are intended to prevent situations in which one company can produce, ship, distribute and market energy, writes Mikhail Krutikhin, a partner and analyst in Moscow's RusEnergy Consulting.
Gazprom, backed by the Russian government, does not support these initiatives, and neither do some of its European partners. The Russian monopoly's two major pipeline projects, Nord Stream and South Stream, make sense if Gazprom affiliates control upstream and downstream business in the countries to be crossed by the pipes, the analyst writes.
The EU-Ukrainian declaration on the modernization of Ukraine's gas pipeline network was an alarming sign for Gazprom. The document presumes competition-based access to the system. Consequently, to make good on its contracts with European consumers, Gazprom will have to buy transit capacities among other bidders.
New European regulations will jeopardize Gazprom's attempts to reach consumers directly with its two "streams," the analyst adds. European officials could simply ban Gazprom subsidiaries from participating in the distribution and marketing of Russian gas arriving through one of the streams.
That is why Russia is trying to replace the Energy Charter with a Moscow-drafted document, which would guarantee Gazprom a share in European transit and distribution business.
On the other hand, Gazprom would objectively benefit from the changes in Europe. Thrown into a free market environment to sink or swim, it will have to remember what competition is. It will have to improve management and use new technologies.
With improved efficiency, it will stand a good change of winning the respect of the international business community, as reflected in Barron's 100 Most Respected Companies list. This year, Gazprom was ranked 100th.