Publication: Eurasia Daily Monitor Volume: 5 Issue: 105

The state-run monopoly gas Gazprom, which aspires to become the world’s largest company, has pledged to give priority to the domestic market. Relying on the government’s support, it has been struggling to take over one major Eastern Siberian deposit.

The Kremlin has consistently backed the country’s gas monopoly. At a May 27 meeting of the Gazprom board, Russian President Dmitry Medvedev praised Gazprom, describing the state gas monopoly as not only the leading company in the Russian economy, but also as a global corporation. Gazprom accounts for about 20 percent of the Russian federal budget’s revenues, said Medvedev. Moreover, Gazprom’s market capitalization was up 46-fold since 2000, which he considered a very good showing (Interfax, RIA Novosti, May 27).

Gazprom was already the world’s third largest company in terms of market capitalization, and it aimed to become the world’s number one company, Gazprom CEO Alexey Miller announced at the meeting. He claimed, however, that the gas giant gave priority to its local gas sales, rather than its export operations.

Gazprom views its operations on the domestic market to be of the greatest importance, Miller said, and in the past three years, about 13 million people in Russia had received access to gas supplies (Interfax, RIA Novosti, May 27).

Miller made the statement against the background of a government decision to delay hiking domestic gas prices. Natural gas accounted for 42 percent of Russia’s energy consumption in 1991, but the figure has exceeded 50 percent in the past two years. Gazprom has repeatedly blamed low domestic gas prices for encouraging higher consumption, claiming that it had suffered huge losses due to domestic sales at regulated prices.

Russia’s domestic gas sales still remain strictly regulated by the government. In return for prospects of selling more gas at unregulated prices, Gazprom has been tasked by the government to develop “gasification,” or expand its retail supply network and provide more gas to individual consumers. “Gasification” is designed to improve the living conditions of the people, Medvedev announced in July 2007 in his previous capacity of first deputy prime minister.

Access to gas networks is very important to retail consumers in Russia’s extreme climates, as natural gas is an efficient and still relatively cheap way of heating private houses in the winter. Therefore, the government has been slow to allow significant increases in domestic gas prices.

Gazprom has been actively seeking to acquire new gas deposits. The company is understood to be struggling to acquire one major asset. In May Gazprom voiced concern about the delayed acquisition of the giant Kovykta gas field in Eastern Siberia’s Irkutsk region. While the price of $1 billion is more or less clear, details of the transaction are yet to be agreed upon with TNK-BP, Gazprom’s foreign trade department head Stanislav Tsygankov announced on May 20 (Interfax, RIA Novosti, May 20). Tsygankov’s statement showed Gazprom’s impatience over TNK-BP’s apparent reluctance to sell Kovykta.

TNK-BP, British Petroleum’s Russian subsidiary, is the main shareholder in Rusia Petroleum, which still holds the license to operate Kovykta. TNK-BP owns 63 percent of Rusia Petroleum, while Russia’s Interros controls 26 percent and the Irkutsk regional government holds 11 percent. TNK-BP chief executive officer Robert Dudley earlier pledged to close the Kovykta deal by the end of April.

In 2007 Russian authorities targeted the Kovykta project, ostensibly for failing to fulfill production quotas. The regulatory pressures were understood to be aimed at putting the Kovykta field, which is estimated to hold between two and three trillion cubic meters (some 71 to 106 trillion cubic feet) of gas, under the state control.

Last year Russia refrained from stripping TNK-BP of its Kovykta license, however, but administrative pressures apparently helped the state-run energy giant to clinch a deal. In June 2007 Gazprom, Britain’s BP and TNK-BP agreed that Gazprom was to acquire a 63 percent stake in Kovykta. TNK-BP, which is Russia’s third-largest crude producer, also pledged that its natural gas producing subsidiary, Rospan International, would form a joint venture with Gazprom. However, this venture has also been slow to materialize.

Incidentally, signs of Gazprom’s displeasure were followed by fierce infighting inside TNK-BP. On May 30 BP rejected demands from a group of Russian shareholders to fire Robert Dudley. On May 31 Dudley pledged to retain his post of CEO of TNK-BP. Dudley conceded, however, that negotiations with Gazprom on Kovykta were stalled (Interfax, May 30-31).

Prior to June 2007 deal, Gazprom repeatedly denied that it had any interest in Kovykta and insisted that any demand for Kovykta was not expected before 2015. The companies initially planned to finalize the Kovykta deal in the third quarter of 2007, but the deadline has repeatedly been postponed.

It remains to be seen whether government support will help the gas monopoly finalize the Kovykta acquisition sooner rather than later.