Reports about a possible merger involving Gazprom and the Ros-Neft state-run oil company have caused quite a stir on the Russian market. The Gazprom board is to hold its session already September 28, discussing current aspects of integrating Ros-Neft assets into the Gazprom infrastructure; this deal is to be completed by late 2005.
Many analysts perceived this Cabinet decision as a serious step aiming to overhaul the Gazprom-share market, as well as the entire fuel-and-energy sector.
Gazprom dominates the Russian gas sector in terms of gas-production volumes, gas deposits and basic infrastructure. The company had produced 540.2 billion cubic meters of gas, as well as 10.2 million tons of gas condensate and 0.8 million tons of oil, over the entire 2003 period. Consequently, there doesn't seem to be any difference between sectoral and corporate problems. Frankly speaking, Gazprom faces substantial problems nowadays. All the main corporate deposits in Urengoi, Yamburg and Medvezhye have already been depleted, yielding less gas than before. Speaking of other major deposits, the Zapolyarnoye deposit alone has been commissioned over the last several years. However, any other major investment projects are nowhere to be seen. Zapolyarnoye will attain peak capacity throughout the 2006-2010 period; however, then, after several years' time, Gazprom and Russia as a whole will face gas shortages.
Consequently, we must finance the development of new large deposits, such as the Yamal deposit, on a grand scale. However, corporate investment programs aim to build export-oriented gas pipelines and to expand the transport infrastructure. Annual investment to the tune of $3-4 billion is needed in order to discover new gas deposits. So, where will the money come from? This is a good question, indeed.
On the one hand, Gazprom seems to be rather prosperous. But such prosperity mostly hinges on a favorableforeign-economic situation, i.e. sky-high global oil-and-gas prices because such prices are something inter-dependent. The 2004 Gazprom budget stipulates a record-breaking $127 per every 1,000 cubic meters of gas in line with European standards. Such favorable average annual prices were posted only once over the last 15 years (that is, in 2001), totalling just $64 in 1999. However, such lucky strikes don't happen very often, you know. One should not count on regular all-out profits. A barrel of oil might eventually cost $15-20 in line with long-term European contracts, thus causing Gazprom to lose tremendous export revenues, which would total its current production outlays.
On the other hand, Gazprom has amassed sizeable debts; the corporate situation therefore leaves a lot to be desired. Gazprom's top management issues debentures on a regular basis for the sake of bridging cash gaps and implementing financial-independence plans. For their own part, creditors annually receive more than $6 billion. Debt payments used to exceed the corporate investment program well until 2004, with corporate debts soaring by 34 percent last October.
That's why gas tycoons started discussing the need for Gazprom reforms, which would help attract additional investment for the sake of expanded gas output. A favorable competitive environment must be ensured, in the first place; moreover, we've got to liberalize the corporate-shares market. As of today, non-residents can own not more than 20 percent of all Gazprom shares; this quota should now be abolished. It was believed that such a decision would serve as a major investment incentive, with strategic foreign investors eventually giving Gazprom a new lease of life. However, liberalization envisages state control over this gas monopolist. The state now owns 38.37 percent of all Gazprom shares, with the state-run Ros-Gazifikatsia owning another 0.9 percent. Meanwhile the state must obtain at least 50 percent of all shares plus one share, thus ensuring complete control over Gazprom.
So, what happened last week? President Vladimir Putin of the Russian Federation agreed with the Russian Government's proposal to the effect that Gazprom take over Ros-Neft in exchange for treasury shares being owned by its subsidiaries. (Gazprom subsidiaries control 17.33 percent of all shares - Ed.) Analysts then decided that the federal center's intention to control Gazprom more effectively highlighted sectoral reforms. Meanwhile the Russian leadership is still in no mood to abolish the afore-mentioned non-resident quotas.
And now a few words about the Ros-Neft company, which controls only 4.5 percent of the entire Russian oil market. Ros-Neft debts skyrocketed from $500 million to an impressive $2.5 billion over the last two years. Ros-Neft's sky-high per-barrel production costs exceed those of some Russian and foreign companies.
A gigantic corporation with a capitalization of more than $100 billion will make its appearance, after both troubled and ineffective companies merge into one single whole. However, its debts won't vanish into thin air during this projected merger. As of late March 2004, Gazprom's net debts stood at 398,404,000,000 roubles ($13.7 billion).
The projected Gazprom - Ros-Neft merger caused quite a stir on the local stock market, with both companies' shares costing more than ever before. Still even this doesn't highlight the emergence of a super-powerful giant on the market. You see, any stock exchange is supposed to speculate on various events, bulling or decreasing the stock market in the process. Predictably enough, Standard & Poor's international ratings agency has decided to change Gazprom's corporate-development from stable to developing; that of Ros-Neft has also been changed from negative to developing. At the same time, Standard & Poor's confirmed specific Gazprom and Ros-Neft BB and B ratings. According to its experts, these revised forecasts imply that the projected deal's influence on either company still remains unclear. Moreover, information concerning this merger highlights various risks, which have something to do with the Russian Government's sectoral strategy, which is marked by political, rather than economic, considerations.
An even simpler explanation seems possible. The Russian stock market made it possible to scoop up 50-percent profits through blue-chip stocks, whose value soared last year; this is true of Gazprom shares as well. The stock market attracted additional monies, with market players expecting similar records. Many experts claimed that such trends would persist this year, as well. Indeed, the local stock market grew by 38 percent over the January-March 2004 period, with the RTS (Russian Trading System) index hitting an all-time high of 900 points this past April. However, the market began to plunge later on, tapering off at 600 points by the summer of 2004. News of a projected Gazprom - Ros-Neft merger promoted stock-market activity, with the local stock market growing all the same. Hopefully enough, shareholders' current losses (30 percent) will be minimized by the end of the year. Quite possibly, this was the deal's main objective.
