Gazprom

Gazprom (; , sometimes transcribed as Gasprom) is the largest Russian company and the biggest extractor of natural gas in the world. Gazprom supplies almost all the gas needs of Central Europe, Eastern Europe, and the former Soviet Union.

With sales of dollar|US$" target="_blank" >^* 31 billion in 2004, it accounts for about 93% of Russian natural gas production and with reserves of 28,800 km³, it controls 16% of the world's gas reserves (as of 2004.) After the projected acquisition of the oil company Sibneft, Gazprom, with 119 billion barrels of reserves, would rank behind only Saudi Arabia, with 263 billion barrels, and Iran, with 133 billion barrels, as the world's biggest owner of oil and oil equivalent in natural gas.

Apart from its gas reserves and the world's longest pipeline network with 150,000 km, it also controls assets in banking, insurance, media, construction and agriculture.

With US$ 269 billion of market capitalization (as of May 2006), Gazprom is the world's 3rd largest corporation.

History

1989-1992: Inception

Due to large natural gas reserves discovered in Siberia, in the Urals and in the Volga region in the 1970s and 1980s, the Soviet Union became a major gas producer. Gas exploration, development, and distribution were centralized in a state ministry. In July of 1989, President Mikhail Gorbachev combined the ministries for oil and gas as part of his economic reforms, and later carved out Gazprom as the entity responsible for gas production, distribution, and sales. Viktor Chernomyrdin headed Gazprom.

After the break-up of the Soviet Union in 1991, Gazprom lost a large part of its assets outside of Russia - one third of its pipelines and one fourth of its compression capacity.

1993-1997: Privatization

After the new Russian President Boris Yeltsin appointed Chernomyrdin to be his Prime Minister in December 1992 (replacing him with Rem Viakhirev), the political influence of Gazprom increased markedly.

As the new government was committed to economic reform, Gazprom began to be privatized, becoming a joint-stock company in November 1992, and starting to distribute shares under the voucher method, where every Russian citizen received vouchers to purchase shares of formerly state-owned companies. However, trading these shares was heavily regulated, and the by-laws of the company prohibited foreigners to own more than 9% of the shares.

Gazprom slowly established credibility in the western capital markets with an offering of 1% of its equity to foreigners in October 1996 in the form of London Depository Receipts and a successful large bond issue of US$ 2.5 billion in 1997.

1998-2000: Scandals

In 1998 Chernomyrdin was fired from his position of Russia's Prime Minister by President Boris Yeltsin. At the same time, the Russian government suddenly started demanding billions of dollars in back taxes from Gazprom. When tax prosecutors started to seize assets of Gazprom, the company gave in and paid. The company's records started showing a loss for the first time. The reasons are unclear and were explained either by an aging pipeline transport network, by a management that was becoming increasingly corrupt, or by pre-existing losses that appeared because of more transparent accounting policies.

Gazprom conducted dubious transactions with Florida-based gas-trading company Itera and a Gazprom/Itera joint-venture, Purgaz, in the late 1990s, which allegedly benefited various management members and their relatives. Additionally, large-scale asset-stripping of Gazprom was going on by corrupt management and board members through various transactions involving the Gazprom daughter Stroitransgaz and the regional gas company Sibneftegaz. The Gazprom auditor PwC apparently had signed off and covered these transactions.

The investment fund Hermitage Capital Management, a minority shareholder of Gazprom, reported on the scandals in October 2000: "Investors are valuing this company as if 99 percent of its assets have been stolen. The real figure is around 10 percent so that's good news".

2001-2003: Reform years

Russian President Vladimir Putin was actively pursuing reforms in the management of the company in the years following the scandals. This was aided by shareholder activism by Hermitage CEO William Browder and former Russian finance minister Boris Fyodorov. Putin installed Alexei Miller, a former government employee, as the new CEO in 2001 to guide the reforms; Rem Viakhirev was moved to the position of Chairman of the Board, temporarily replacing Dmitry Medvedev.

2005-2006

On 1st January 2006 at 10:00 Gazprom ended the delivery of gas for the Ukrainian market, calling on Ukraine's government to pay increased fees that partially reflect the globally increased fuel prices. See: Russia-Ukraine gas dispute (2005/2006-01-04).

During the night of January 3-4, 2006, Naftohaz Ukrainy and Gazprom negotiated a deal that has resolved the long-standing gas price conflict between Russia and Ukraine, to the satisfaction of both parties.

On April 3-4, Gazprom indicated it would triple the price of natural gas sold to Belarus after December 31, 2006. Unlike Ukraine, Belarus has close political ties to Moscow and this action creates doubts about the supposed political motives of raising Ukraine's fuel rates.

Current structure

Until 2004 the Russian government held a 38.37% stake in the company, and had a majority on the company’s board of directors. Gazprom provides 25% of all Russian tax revenues (averaging over US$ 4 billion annually between 1993-2003) and accounts for 8% of the nation’s gross domestic product. Non-Russian investors may legally buy Gazprom shares only through Depositary Shares, which cost more than locally traded shares.

In 2004, President Putin announced that Gazprom is acquiring the state-owned oil-company Rosneft and that this will "eventually lead to the lifting of foreign ownership restrictions on Gazprom shares", as the stake of the Russian government in Gazprom will rise from 38.37% to a controlling position.

However, Gazprom was foiled both in its attempt to acquire Rosneft, and its earlier attempt to buy the core asset of Yukos, when Yukos filed for bankruptcy in Houston. Fearing that it would fall foul of US law, Gazprom backed away from buying Yukos' main asset when the Russian government auctioned it in December 2004, leaving the more gung-ho Rosneft to buy it. After Rosneft had appropriated such a large and controversial asset, the technicalities of merging it into Gazprom became too complicated. Instead, Rosneft remained independent, to the delight of its own management. The state increased its stake in Gazprom to over 50% instead by paying cash for a 10.4% stake, thus fulfilling the main pre-condition for the abolition of restrictions on foreign ownership of Gazprom shares. At the time of writing, the market is still awaiting this move.

In September 2005, Gazprom bought 72.633% of the oil company Sibneft for $13.01 billion, aided by a $12 billion loan from the west, which consolidates Gazprom's position as a global energy giant and Russia's biggest company. On the day of the deal the company was worth £69.7 billion/US$123.2 billion, about the GDP of Ireland in 2004.

In April 2006, Gazprom market cap is US$ 270 billion.

References

Numbers from Financial Times: "Energy of the State", March 14, 2006; older data is available online at Gazprom reserve statistics
Article about reserves after Sibneft acquisition
Gazprom and Hermitage Capital: Shareholder Activism in Russia, 2002, Stanford Graduate School of Business Case IB-36
Hermitage news item about the raising of the stake of the Russian government to a controlling interest in 2004
Market value taken from Russiaporfile.org

External links