From The Wilderness Publications

[Criticism of Schroeder aside it looks like a very smart move by Germany to have a former Chancellor so well placed. That might guarantee Germany’s energy future if there are disruptions, war or political conflict. Germany then could play the role of power broker in seeing how supplies are distributed throughout the rest of Europe. I’d watch for increasingly close ties between Britain and Germany. – MCR]

The Kremlin controls the company with a quarter of global gas reserves. The question is what it uses that power for, writes Conal Walsh

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It has been a busy week for the world's largest gas company. As well as getting into an argument with the Ukrainian government, Gazprom unveiled a high-profile new recruit: Gerhard Schroder. The former German Chancellor joins the board of North European Gas Pipeline, Gazprom's new consortium.

His appointment aroused condemnation in the German press, who objected to their recently deposed leader taking a highly paid job for a firm whose $5 billion pipeline project he personally championed while in office. But what the move says about Schroder's conduct is probably less important than what it says about Gazprom's growing status.

Owning more than a quarter of global gas reserves, this Kremlin-controlled behemoth is set to become western Europe's leading energy supplier within the next 10 years. Schroder and other appointees will help it to present a friendly and reassuring face to its western partners. But is Gazprom really a liberalising company we can do business with, or a dangerously large and powerful arm of the Russian government?

Even before it began making hirelings of Europe's best-known statesmen, nobody doubted its geo-political importance. Led by chief executive Alexei Miller, Gazprom saw its market capitalisation race past $100bn this year, a figure that could grow significantly once its shares become more accessible. An idea of the company's sheer size can be gauged from the fact that its most high-profile deal of recent months - the $13.1bn purchase of Roman Abramovich's oil firm Sibneft - added only 5 per cent to its asset base.

That, incidentally, was just one of a flurry of recent acquisitions and consolidations in Russia's energy sector. Gazprom is reported to have its eye on Slavneft, another oil firm, and is leading what seems to be a state-sponsored drive to bring the country's energy assets back into government ownership. To that apparent end, President Vladimir Putin has also imposed restrictions on foreign ownership of 'strategic' oil and gas fields, and, in effect, renationalised Yukos, the oil company formerly run by jailed tycoon Mikhail Khodorkovsky.

Controversial measures such as these raise the fear that Putin plans to make energy supplies a blunt instrument of Kremlin foreign policy. His government has always had de facto control over Gazprom but this year it made sure by spending $7.5bn to build its stake up to 51 per cent.

But William Browder, chief executive of the Moscow equity fund Hermitage Capital Management, rejects the notion that Putin is 'reSovietising' Russia's most important company. Browder, whose fund has a small stake in the gas giant, has long been a critic of Gazprom's management but insists that the company is actually liberalising. Officially, foreign ownership of Gazprom stock has been limited to 4.5 per cent until now, but the indications are that Putin will soon raise the threshold to 49 per cent.

'Historically, Gazprom was forced to subsidise neighbouring countries in exchange for those neighbours being supportive of Russia,' says Browder. 'It was an economics-for-politics swap. Now that Ukraine and Georgia no longer want such close ties with Russia, they are being asked to pay market prices ... That will mean greater profitability.'

Demand for Gazprom shares will surely be high, but whether the company is yet an entirely good investment is debatable. By the standards of the western oil majors, it is badly run. Last year staff costs went up by more than 30 per cent, while net revenues increased by only 24 per cent. Many analysts decry its wide portfolio of non-core operations, which include holdings in banking, media and electricity.

Its market capitalisation per barrel of reserves is one of the lowest in the global industry. It produces 550bn cubic metres of gas a year but is obliged to sell 400bn of these to Russian buyers at low, state-regulated prices, leaving scant funds to develop new fields. Prices will eventually rise as a condition of Russia's membership of the World Trade Organisation, but for now exports to Europe, worth $30bn a year, are Gazprom's only source of serious profits.

Commercial logic suggests it will want to build constructive partnerships with western customers, but how much its performance improves may depend on how often the Kremlin chooses to interfere in its decision-making.

'Gazprom is a political animal and a major source of Russian government influence abroad,' says Stephen O'Sullivan, an analyst at UFG, the Moscow-based investment bank. But O'Sullivan feels that the company is driven by a business agenda more than a political one.

'Gazprom has some very smart people running its export businesses. It is moving into liquefied natural gas [a form of gas transported by sea rather than pipeline] and looking at exports to China.

'It is gently withdrawing from the domestic market, allowing some of the smaller independent companies to take that business, and focusing on exports. That ought to promote liberalism.'

MOSCOW: Russia’s gas monopoly Gazprom yesterday finalised its $13.1bn purchase of oil firm Sibneft by reshuffling the company’s board and management.

A Sibneft official said the firm’s extraordinary shareholders meeting elected seven managers from Gazprom to Sibneft’s nine-seat board, while representatives of oil firm YUKOS obtained the two remaining seats.

The purchase of Sibneft from its previous shareholders, led by Chelsea soccer club’s billionaire owner Roman Abramovich, became the first step in Gazprom’s new strategy to add large crude operations to its gas activities.

The world’s largest gas producer now controls 900,000 barrels per day of crude oil and gas condensate production.

The EGM also confirmed Gazprom’s deputy chief executive Alexander Ryazanov as the new president of Sibneft. A Sibneft official quoted Ryazanov as saying the firm was keen to boost production and would help Gazprom develop untapped oil deposits in the Arctic Urengoi region and Siberian Tomsk.

Sibneft’s core operations are mainly located in West Siberia’s Noyabrsk and Tomsk regions.

Ryazanov also said Gazprom was still committed to splitting Slavneft — a joint venture between Sibneft and BP’s Russian vehicle TNK-BP — despite earlier press reports that Gazprom might prefer to swap its half share in Slavneft against other assets of TNK-BP.

Ryazanov also said Gazprom was currently not discussing buying out YUKOS’s 20-percent stake in Sibneft because these shares were still frozen alongside other YUKOS’s assets as part of a tax evasion investigation.

YUKOS, formerly Russia’s top oil producer, was hit with billions of dollars of back tax claims in 2003, several months after having agreed to acquire Sibneft for $11bn.

The election on Friday of two YUKOS’s men — oil production manager Yury Starodubtsev and refining manager Yury Khudyakov — to the board came as a surprise after years of unsuccessful attempts by YUKOS to have its director at Sibneft. (Reuters)

Russian President Vladimir Putin acted ahead of forecasts and signed a Gazprom liberalization decree on Friday, Dec. 23 instead of next Wednesday, Dec. 28, as was expected by Gazprom officials and market observers. Putin reported that he signed the decree during his meeting with permanent members of Russia’s Security Council.

The president’s move opens up the way for the liberalization of the Gazprom share market and should help the national gas giant become one the world’s largest companies in terms of market capitalization. Up until now foreign ownership of Gazprom shares was capped at 20 percent, but now that the Russian state brought its own holding in the gas monopoly to a controlling 51 percent, foreigners are allowed to own as much as the remaining 49 percent of Gazprom shares.

The company’s current market capitalization amounts to about $150 billion and it is expected that it will grow to about $300 billion after liberalization takes effect. Gazprom is the world’s single largest natural gas producer.

Liberalization of the Gazprom share market was promised by Vladimir Putin in September 2004 when the Russian leader announced the upcoming merger of state-owned Rosneft Oil Company and the gas giant. Although the merger didn’t take place, the Russian authorities devised a scheme to bring their stake in Gazprom to controlling and to go ahead with the promised liberalization.

[“But for Russia there are significant problems. About three-quarters of Russian gas production comes from three super-giant gas fields in western Siberia - Medvezhe, Yanburg and Urengoye. These are going through a severe decline in production and need a great deal of investment.” OK, so where’s all this abiotic gas we’ve been told was there? – MCR]

As arguments over Ukraine's pipelines to the West heat up, Europe's energy supplies are at stake, writes Oliver Morgan

Russia and Ukraine are wrangling bitterly over how gas is exported from Russia through its southern neighbour via a network of pipelines to destinations beyond the former Soviet Union.

Far from being a remote dispute in a far-away part of the world, it poses a problem for western Europe and the UK. According to the International Energy Agency, 50 per cent of Europe's gas supplies now comes from Russia - of which 85 per cent comes through Ukraine. In France, the 11.2 billion cubic metres (bcm) it gets from Gazprom, the monolithic Russian gas operator, amounts to around a quarter of all gas imports and dwarfs its 1.9bcm domestic production. In Germany, the 32.6bcm it imports accounts for more than a third of its total imports, and is far more than its 22.2bcm domestic resource.

Fatih Birol, chief economist at the International Energy Agency (IEA) says: 'There could be serious implications for western Europe if the problem is not resolved. This highlights the fact that relying on one supplier for a major part of a supply is very very risky.'

Despite the fact that Britain relies less on gas imports than other western European countries it is not isolated from these implications.

In fact, its location at the 'end of the pipe', raises fundamental questions about the future security of our energy supplies. And the timing could hardly be more sensitive. UK gas prices have recently been at historic levels but there are potential shortages. Doubts have been expressed about the true openness of a European gas market filled with state monopolies that is not supplying to the place where the price is highest - the UK.

On top of that, two weeks ago the government launched its energy review, looking to tackle the two key issues facing policymakers over the coming decades. The first is climate change, the second is security of supply. As energy minister Malcolm Wicks pointed out, production in the North Sea has declined so that we are now a net importer of gas. On this matter the review boils down to asking whether we should build new nuclear power stations and boost renewables to avoid the need for imported gas as the major generator of power.

That is where worries over Russia loom large. The government drew attention to the question in its 2003 energy white paper. It made clear how important engaging with Russia and the Caspian region states, as well as with north African and Middle Eastern countries, was to encouraging investment and the availability of supply.

It added that it needed to focus its attention on 'good governance and the development of stable investment and transit regimes'.

More recently, ministers have tried to press home the issue. Trade and Industry Secretary Alan Johnson talked about energy supply and transit at the Permanent Partnership Council with Russia on 3 October, and it was raised again at the EU-Ukraine summit on 1 December. Wicks discussed security of supply in Moscow at the end of October.

But events suggest that vigilance will be needed. Last week, Alexander Medvedev, the man in charge of export at Gazprom, said that the volume of gas it supplies to Ukraine could be cut in the dispute over how much Kiev pays for its supplies and how much it is allowed to take in lieu of payment for pumping the gas through its territory under the terms of a 2003 agreement between the two states. This could affect the volume ultimately passed through to western Europe.

According to industry analyst Wood Mackenzie, Russia is selling gas to members of the Commonwealth of Independent States (CIS) at $50-$80 (£28-£45) per thousand cubic metres (mcm). Ukraine is at the lower end of this scale. This compares to $160 per mcm on the border between the former Soviet Union and Europe.

Ukraine is also expected this year to receive 23bcm of Gazprom's output as 'payment' for shipping under the agreement in 2003. This represents some 18 per cent of the total 128bcm Gazprom will transport through the country.

Ukraine receives 30 per cent of its gas direct from Russia and a further 45 per cent from Turkmenistan via Russia. Gazprom wants to increase what Ukraine pays for the gas it uses, replacing the 2003 agreement and demanding cash for all of the supply instead of an output share.

In some ways Russia and Gazprom have a strong hand, according to Hilary McCutcheon, analyst at Wood MacKenzie: 'There is leverage because Ukrainian industry is very reliant on Russian gas.' In addition, there are threats that other interests can make - for example switching oil refining from facilities owned by Russian companies in Ukraine to spare capacity at home.

But Russia needs the money. 'Gazprom wants to increase the amount paid three times,' Birol says, 'But for Russia there are significant problems. About three-quarters of Russian gas production comes from three super-giant gas fields in western Siberia - Medvezhe, Yanburg and Urengoye. These are going through a severe decline in production and need a great deal of investment.'

The IEA estimates that in excess of $170bn will be needed to develop Russian gas production. 'Clearly Gazprom needs to maximise the revenues it gets from its current resources,' Birol explains.

McCutcheon suggests that the situation is part of ongoing friction between Russia and its neighbours over gas supply, but indicates that the most recent stand-off may simply come down to the fact that Gazprom simply does not wish to miss out on high world gas prices.

'The running down of the big three gas fields is not a new development,' she says. 'Gazprom have seen it coming for quite some time. They have taken some steps such as some additional investment to stave off serious production decline.'

However, she does not believe this is directly linked to the recent stand-off with Ukraine. 'Because prices are much more controlled in Russia and the CIS, the rising European price has not fed through so markedly to the domestic market. So the difference between the two has become more stark. Gazprom wants to maintain its control over the high revenue export market and take advantage of the higher price.'

Whatever Russia's short-term motivations, Birol believes its long term position, indeed credibility as a leading gas supplier to Europe and elsewhere, is affected by arguments such as it is having with Ukraine.

'Many consuming nations are becoming more and more aware of the security of gas supply and are looking at their gas imports very carefully. If such things continue to happen, it will play an important role in countries' plans for future supply.'

In his view, there are two alternatives. 'If they want to stick to gas they can look at other countries to import from, such as Algeria, Egypt and Qatar. If they want to look at other fuels and diversification, they may want to look at renewables and nuclear.'

This all sounds familiar to UK ears. Indeed, the government says that looking at other fuel renewables and nuclear is exactly what it has been doing since the energy white paper. When the recent energy review was announced the government re-emphasised the point that we are now importers of gas.

A DTI spokesman says: 'It's in everybody's interest that current negotiations between the Ukraine and Russia on gas and transit prices are constructive and businesslike. Both are aware of the importance of these negotiations for EU gas supply - 40 per cent of gas destined for Europe transits Ukraine - and we are confident that agreement satisfactory to both sides can be concluded rapidly.'

There are mitigating factors. Gazprom is building a controversial new pipeline under the Baltic Sea to Germany that will increase supply direct to western Europe. Notwithstanding this, ministers here do not want energy policy decisions as fundamental and politically expensive as building new nuclear reactors precipitated by spats between Moscow and Kiev.

CLEVELAND -- A bill on Gov. Bob Taft's desk right now is drawing a lot of criticism, NewsChannel5 reported.

One state representative said it resembles Gestapo-style tactics of government, and there could be changes coming on the streets of Ohio's small towns and big cities.

The Ohio Patriot Act has made it to the Taft's desk, and with the stroke of a pen, it would most likely become the toughest terrorism bill in the country. The lengthy piece of legislation would let police arrest people in public places who will not give their names, address and birth dates, even if they are not doing anything wrong.

WEWS reported it would also pave the way for everyone entering critical transportation sites such as, train stations, airports and bus stations to show ID.

"It brings us frighteningly close to a show me your papers society," said Carrie Davis of the ACLU, which opposes the Ohio Patriot Act.

"The variety of people who opposed to this is not just a group of the usual suspects. We have people far right to the left opposing the bill who think it is a bad idea," said Al McGinty, NewsChannel5’s terrorism expert.

"I think anything we do to enhance security and give power to protect the public to police officers is a good idea," he said. "It is a good law in the wrong direction."

WEWS was told that Taft is expected to sign the bill into law, but legal experts expect that it will be challenged in courts.