Russia 111117 Basic Political Developments

Gazprom Export chief shrugs off cartel claims

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Gazprom Export chief shrugs off cartel claims

Gazprom manager Alexander Medvedev has hit out at European politicians and competition watchdogs.

Asked whether Eastern Europe (EE) must brace for another gas crisis this winter due to the conflict between his company and Ukraine, the Gazprom deputy chairman told Austrian newspaper Die Presse: "(The) energy (sector) has always been connected with politics, but not with political show. We have been observing the staging of such a show by Europe recently."

Medvedev heads the Russian gas company’s export branch Gazprom Export. European Commission (EC) investigators searched the offices of Gazprom and around 20 other energy sector firms operating in Europe in September. The EC suspects their involvement in a possible cross-country cartel.

A spokesman for OMV AG announced that the Austrian company would "of course fully cooperate" with experts sent out by the EC to clarify the issue. The offices of the Vienna-based enterprise were searched too.

"If there is a company with intentions to create competition then it is Gazprom. We don’t dream of sky-high prices, we only want to earn what was invested. There has been a will to abandon fair prices since the crisis," Medvedev told Die Presse about the cartel allegations.

Speaking about the current crisis in the Eurozone, the group of 17 European Union (EU) members which use the Euro as their currency, Medvedev said: "We put trust into the leading Euro(zone) states. Russia offered its help, but based on economic cooperation. Europe would harm itself by preventing us from investing into the production of electricity or the creation of pipelines."

Gazprom masterminds the Nord Stream project, an offshore natural gas pipeline of a length of 1,222 kilometres from Vyborg in Russia to Greifswald, Germany. The Nord Stream endeavour has been under scrutiny for possibly making Europe more dependent on Russian gas. Those in favour of the project point out that Europe would benefit from cooperation with the large Eurasian country in economically difficult times.

Nord Stream is expected to reduce Europe’s cooperation with other Eurasian nations with large gas reserves. The project, which was inaugurated earlier this month, also puts more pressure on OMV bosses who are in key positions of economic partnerships behind Nabucco.

The Nabucco pipeline is supposed to bring gas from the Caspian Sea to the Austrian province of Lower Austria from where it would be transferred to several European countries. Its construction was postponed to 2013 after suffering setbacks of political and economic background. Planners recently said Nabucco would start transferring gas in six years while business press speculate that the project could be scrapped.

OMV is headed by Gerhard Roiss who said in September the firm would invest 2.4 billion Euros in the next 10 years altogether. He explained that a firm-internal efficiency programme would be carried out at the same time. The Republic of Austria’s Federal Industry-Holding Stock Corporation, ÖIAG, holds an interest of 31.5 per cent in the company which has more than 31,000 employees in Austria and abroad.

Asked whether a decline of gas prices was possible due to overcapacities and the increasing share of shale and liquid gas on the market, Medvedev said he doubted whether shale gas would establish itself for economic reasons. "And there are, of course, limits to the infrastructure for liquid gas. (...) There is no cheap gas and there will be no cheap gas ever again," the Gazprom Export boss told Die Presse.

Gazprom’s share in Europe may be halved
Published: 17 November, 2011, 09:08
Edited: 17 November, 2011, 09:13
Russia’s gas industry will face some stiff competition Sergey Kulikov

Gazprom’s export revenues have been placed in jeopardy. Yesterday, Kiev made the announcement that it has achieved the desired price reduction for Russian gas. A day earlier, a long-term forecast was published, promising a 50 per cent reduction in Russia’s share in the gas market, as well as loss of competitive power due to costly gas production from new fields. The unit cost of production in the Arctic, East Siberia, and Russia’s Far East will be higher than similar costs of gas suppliers from Asia, Africa, and the Asia-Pacific region.

“The Russian government is going by the premise that negotiations [with Ukraine – Nezavisimaya Gazeta] are continuing. Finalization of agreements means signing new documents,” prime ministerial spokesman Dmitry Peskov told Interfax yesterday.
“Until that happens, we believe it is premature to talk about anything.”

But the Ukrainian question is only an episode in the new series. This was Moscow’s response to Kiev’s announcement about the agreement, made with the Russian Federation, to lower gas prices from $270 to $220-230 per 1,000 cubic meters of gas. However, the loss of profits from supplies to Ukraine is not the worst news. A much greater effect on profits could be produced by a sharp rise in the supply of gas on the global markets.

At the ninth annual International Russian Gas Forum, which was held last Tuesday, head of the Russian Natural Gas Association (RGA), Valery Yazev, said that “Russia may expect some stiff competition for markets and reduction of production cost on Europe’s natural gas market, which will happen while the unit cost of production in the Arctic, East Siberia and the Far East is higher than the analogous expenses of gas suppliers from Asia, Africa, and the Asia-Pacific region.”

This turn of events, according to the head of RGA, is possible based on the US Energy Information Administration and the International Energy Agency (IEA) predictions for an annual rise in gas production in the countries of the Middle East, North Africa, Central Asia and Australia, which by 2035 may amount to 700 billion cubic meters of gas. “There are some more-daring predictions out there, based on scenarios with significant rise in gas production in Iran and Saudi Arabia,” said Yazev. “In this case, the total rise in production will be around 1 trillion cubic meters of gas. Of course, all this gas will find consumers, but its price could plummet, in which case the profitability of Arctic and offshore gas production, as well as production of shale gas, will fall sharply.”

According to Yazev, temporary reduction of natural gas prices has led to a sharp rise in introduction of gas-powered generating units, which also raises the demand for gas in the long term. Forecasts, predicting a rising natural gas demand in Europe before 2035, compiled by various forecast centers, vary between 100 billion and 155 billion of cubic meters of gas a year – without the consideration of a decline in production and abandonment of the use of nuclear energy. However, an increase in the share of liquefied natural gas on the European gas market, the rise of gas supplies from the South Mediterranean, as well as supplies from Central Asia and South Caucasus, give some experts reason to suggest a significant decrease of up to 13 per cent in Russia’s share in the European gas market by 2040. “Thus the Russian gas industry will face some stiff competition for the share in the European gas market, which will amount to anywhere between 13 per cent and 40 per cent by 2030. We should, of course, be closer to 40 per cent,” said the head of the RGA.

Meanwhile, experts interviewed by NG do not entirely agree with the pessimistic assessments. Department director at 2K Audit – Business Consulting/Morrison International, Aleksandr Shtok, agrees that production volumes, mainly in Africa and Asia, will rise, because these regions possess an enormous resource potential for development of gas production. “However, whether or not this will lead to a redistribution of the gas market itself remains unclear,” he says. “First, the demand for gas will also increase. Given the decline of nuclear energy, consumer interest in gas will rise. It should also be mentioned that, in addition to the rise in gas production, national demand in the supplier countries will also skyrocket. Secondly, it is still too early to say as to where the gas will be supplied and what markets it will target. Here, cooperation between Europe and Tajikistan provides an illustrative example. The parties have been engaged in negotiations on gas supplies to the EU for already a number of years, though the Turkmen gas is not yet being delivered to Europe. And third, if we are to talk about the gas market of Europe, it loses to the potential for development of the Asia-Pacific markets, as its rise is limited.”           

Nevertheless, in order to hold on to its positions in Europe, Russia needs to start working on reducing the costs of natural gas production already today, argues the analyst. Russia’s most promising natural gas deposits are located either on the Arctic shelf or Siberia, which implies a very high cost of their development. At the same time, transport infrastructure, which connects Russia and Europe, will be an additional competitive advantage over Middle Eastern suppliers.   
Head of the Investment Analysis Department at Univer, Dmitry Aleksandrov, says that, most likely, the potential growth of production volumes significantly surpasses the potential growth of demand: “However, as evidenced by the recent meeting in Qatar, producers understand the production risks and do not want to sacrifice prices for production volumes.”

In turn, director of the National Energy Institute, Sergey Pravosudov, also does not dramatize the situation. “Gas production will indeed rise, but so will its consumption,” he says. “Based on the IEA’s forecasts, by 2035, global consumption of gas will rise by 65 per cent; therefore assertions that gas production will increase at a faster rate than consumption could be said to be rather questionable. As for the EU, it is necessary to consider the decline in Europe’s production in the North Sea, abandonment of nuclear energy, and more frequent application of gas as motor fuel. Russia’s main argument is implementation of joint production, processing, transportation, and marketing projects, which it is offering its partners in the EU and the Asia-Pacific region.”

Co-director of the analytical department at InvestCafe Grigory Birg explains that it is the European companies, whose interest in production in Russia continuously rises, that are, first and foremost, risking losing their share of the market. “Gas production in Europe practically has not changed since 2000: in 2010, it equaled 285 billion cubic meters, while consumption rose by 16 per cent, reaching 550 billion cubic meters in 2010,” he says. “The difference between domestic consumption and production increased by more than 40 per cent, and for the next 10 years, the situation will not change.”

17 US energy firms, Russia's Gazprom mull investing in Turkey


The rapidly growing Turkish economy has started to garner more attention from international investors, indicated by the fact that 17 American firms and Russia's largest company, Gazprom, are now considering investing in Turkey's energy market. The companies from the US are mostly interested in the renewable energy business in Turkey, while Gazprom, the world's largest national gas extractor, is seriously looking for an opportunity in the country's electricity market.

Speaking to a group of reporters in Ankara on Wednesday, Michael Lally, commercial counselor at the US Embassy, said American companies such as Abound Solar, AES Corporation, Clipper Windpower, General Electric, Megtec Systems and SolarReserve are among those that will make a business trip to Turkey starting Dec. 5. It will be the first time for 11 of those companies to seek business opportunities in Turkey, Lally said, adding that cooperation with Turkish companies in third countries, particularly in Russia, the Caucasus and Africa, will also be on the table during discussions to be held during their stay in Turkey.

Representatives from the Export-Import Bank of the United States and a number of other financial organizations will also be taking part in the meetings to be held in İstanbul, Ankara and İzmir as part of the planned visit, Lally also said.

The news related to Gazprom, on the other hand, hit online portals after Alexander Medvedev, director-general of the Russian company's export arm Gazprom Export, announced the company's intentions in Turkey. “We are ready to enter Turkey's electricity market, not only as a supplier but also an investor,” he was quoted as saying by the Anatolia news agency Thursday. Gazprom's venture into Turkey's domestic electricity market would likely be in partnership with a local operator.

Speaking with Today's Zaman on Tuesday, a spokesman for Gazprom declined to comment on specific targets being considered by the state-owned gas giant. “Gazprom is at the preliminary stage of discussions regarding investment in Turkey's electricity grid. We will continue to evaluate the different options in terms of electrical grids in Turkey and potential partners,” he said.

The move follows failed privatization tenders this year for the Akdeniz Elektrik grid in Turkey's Mediterranean region and İstanbul's Anadolu and Rumeli grids as well as the Toroslar, Dicle, Gediz and Trakya grids after the highest bidders for each failed to make payments by the respective deadlines.

The inability of top bidders provide funds on time reflects the difficulty of procuring funds from international investors in the current financial climate, analysts suggest. Gazprom, awash with cash after net profit jumped 56 percent to $25 billion for the first half of 2011, could fill the void, benefitting from one of the fastest growing electricity markets in the world, with energy demand expected to double between now and 2020.

Medvedev said on Wednesday that negotiations with private Turkish gas distributors were taking place this month in response to the cancelled western pipeline deal with the state-owned Turkish Petroleum Pipeline Corporation (BOTAŞ), which saw 6 billion cubic meters (bcm) of gas supplied through the Balkans annually. "We will decide on the procedure to be applied to Turkey regarding gas sale as of January 1, 2012 during our meeting with Turkish executives in November," with meetings scheduled for next week in İstanbul, Medvedev said.

Medvedev said that Gazprom would be seeking agreements reflecting the market price for gas, with the company pushing for further liberalization of the gas market and a move away from the subsidized rates that governed long-term contracts with BOTAŞ in the past.

In October, BOTAŞ cancelled the contract after Gazprom refused to offer a rebate on gas prices. Medvedev refuted analysts' suggestion that the terminated contract was surplus to Turkey's requirements, saying that Turkey needed Russian gas.

Gazprom supplied 63 percent of all of Turkey's gas imports in 2010, with the cancelled deal representing one-third of that.

Gazprom subsidiary interested in takeover / Production cuts continue in November

Even before the sales process for the government-owned stake of petrochemicals group Oltchim (Rîmnicu Vîlcea / Romania; officially began – see of 14.11.2011 – Romanian Economics Minister Ion Ariton was holding talks with a Russian delegation. According to a report from Bucharest, the managers of utilities company Tise (Moscow / Russia; "are interested in a takeover and in continuing the business". Ariton pointed to the invitation to tender which was about to be opened, saying that Tise could participate. The government wants to complete the sale of the 54.8% share package by the end of April 2012.

Tise was founded in 2003 by several Russian companies, including Tehnopromexport, Zarubejneft and Zarubejneftegaz. At least the latter is a wholly owned subsidiary of oil and gas giant Gazprom.

In the meantime, General Director Constantin Roibu has once again decreed technical unemployment due to a lack of working capital and a shortage of raw materials. As a result, 1,000 employees will stay at home from 15-30 November – with 80% remuneration.

For Q3 2011, the company reported sales of EUR 75m – down 7% compared with the previous year. The operating loss of around EUR 15m was considerably higher than in the same period of the previous year (EUR 500,000) and also higher than in Q2 2011 (EUR 5.5m). The net loss in Q3 amounted to EUR 24m compared with a loss of EUR 14m in the previous quarter. In Q3 2010, the figures were only just in the red.

Over the first nine months, although Oltchim managed to lift sales by 38% to a good EUR 296m, the net loss of EUR 41m is comparable with the figure for the same period last year.

Published on 17.11.2011

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