GAZPROM’S ACQUISITION OF SIBNEFT SEEN AS DOUBLE-EDGED SWORD

On October 17, Gazprom’s Board of Directors approved the acquisition of a controlling share in Sibneft, Russia’s fifth-largest oil producer. The deal is a major victory for the Kremlin, which in recent years has built an ever-expanding state-controlled energy giant. With shipments of some 550 billion cubic meters annually, the 51% state-owned Gazprom is already among the largest energy-producing companies in the world. Acquiring Sibneft, however, will boost Gazprom’s ability to compete for new oil and gas projects in Eastern Siberia and the Far East, despite louder warnings of Gazprom’s growing domestic monopoly.

Gazprom chief executive Alexei Miller explained that the company is seeking to boost oil production and would therefore be spending more on oil exploration in order to expand its reserves (RIA-Novosti, October 21). According to Dmitry Medvedev, chair of the Gazprom Board of Directors and head of the Kremlin administration, by acquiring Sibneft, Gazprom “will not only become the world’s largest natural gas producer, but also one of the world’s biggest energy companies” (RIA-Novosti, September 29).

Gazprom Finance, a wholly owned Gazprom subsidiary registered in the Netherlands, now owns 72.66% of Sibneft, according to a company statement released on October 21. In September 2005, Gazprom and Millhouse Capital, which is registered both in Russia and Britain, signed an agreement on Gazprom’s acquisition of a 72.663% stake in Sibneft for $13.09 billion. Gazprom also acquires a 3.016% stake in Sibneft from Gazprombank, thus taking over 75.679% of the oil company.

The Russian government approved Gazprom’s acquisition of Sibneft, as did the Federal Antimonopoly Service.

Sibneft expects to pump 45.2 million tons of crude in 2005, up 0.3% on 2004. However, Sibneft’s own planned 2005 output (33.1 million tons) is expected to drop; the overall growth would come from the company’s 50% share in Slavneft’s crude production (12.1 million tons).

Meanwhile, Sibneft has been developing its gas business in Eastern Siberia. Last September, Sibneft won the right to explore the Khotogo-Murbaisk deposit in the Republic of Sakha, with estimated natural gas reserves of 10.6 billion cubic meters. The deal was Sibneft’s third acquisition in eastern Siberia and second in Sakha after it bought the Tympuchikan deposit in July 2005.

The state’s growing role in the energy sector appears to enjoy significant popular support. Some 45% of the population of Yamalo-Nenets region, a major hydrocarbon-producing hub, welcomed the Sibneft deal (UralPolit.ru, October 21).

However, the purchase could bring negative repercussions for some Russian Far Eastern regions. Specifically, Gazprom has indicated it would be unwilling to bankroll Chukotka region. Sibneft former owner and Chukotka governor Roman Abramovich reportedly funneled some Sibneft tax payments to Chukotka, including his own personal income tax of some 1 billion rubles a year (Vedomosti, October 13).

In a separate development, Sibneft’s official headquarters could move from the Siberian city of Omsk to President Vladimir Putin’s hometown, St. Petersburg. Already a number of other Russian companies have moved westward, including state-owned Vneshtorgbank, in an apparent attempt to give the city extra income (Kommersant, October 20).

Overall, the Gazprom-Sibneft deal is good for Gazprom, which has acquired a value-added asset and, as a result, has become an integrated energy company (RIA-Novosti, September 29). However, analysts such as Mikhail Delyagin, director of the Institute of Globalization Problems, warn of a possible drift towards nationalization. With this deal, a major slice of the country’s energy business has officially passed into state hands (Moscow News, October 24).

Even some government ministers sounded critical. Russian Economic Development and Trade Minister German Gref complained that Gazprom’s acquisition of Sibneft was not a good deal from a macroeconomic point of view. Instead of the state boosting its influence over the economy, Gazprom should focus on gas production and investments in the gas infrastructure, Gref said (RIA-Novosti, October 18).

Russian Industry and Energy Minister Viktor Khristenko also criticized Gazprom’s takeover of Sibneft, saying, “This deal raises concerns linked to the size of Gazprom, the state’s role in the company, and the fact that it is already a monopoly — and will also have an oil business” (Vedomosti, October 13).

Russia’s political opposition lashed out at the acquisition in stronger terms. Alexei Melnikov, a top member of the Yabloko party, described the Gazprom-Sibneft deal as “the biggest fraud of 2005.” Under the terms of the deal, the federal budget and the state-owned company — and ultimately Russian society — are paying huge bonuses to private individuals (Moscow News, October 24).

In the meantime, the Sibneft deal may be followed by subsequent Asia-oriented transactions. Notably, the 20% of Sibneft that is currently frozen because of the failed Yukos-Sibneft merger may be offered for a buyout. Last month, Russia’s Khristenko reportedly told Indian Petroleum Minister Mani Shankar Aiyar that the Russian government would not block any Indian company from acquiring shares in Sibneft. The two ministers met in Sakhalin while visiting the $12.8 billion Sakhalin-1 oil and natural gas project in which India’s ONGC Videsh Ltd. has a 20% stake.

Gazprom also has plans to expand its core business in Eastern Siberia and the Far East, including acquiring a 25% share in the enormous Sakhalin-2 project. Gazprom also figures prominently in the two proposed pipelines to deliver gas to China, one from the Kovykta field and the other from Sakhalin. The company has repeatedly indicated interest in joining the Kovykta project, which would supply three to four billion cubic meters of gas to Irkutsk region Russia from 2007.

To this end, on October 20 Gazprom’s Miller traveled to Irkutsk to meet regional governor Alexander Tishanin and discuss regional natural gas projects. Gazprom already owns exploration licenses in Southern Kovykta area. Following the meeting, Gazprom said in a statement that Eastern Siberia and the Far East offered good prospects for gas business because little more than 8% of gas fields there have been explored so far. Gazprom estimates gas reserves at 33 trillion cubic meters in Eastern Siberia and 12 trillion in the Far East.