Russia`s Double-Headed Monster
When Gazprom and Rosneft join forces, they will either become the world’s largest private corporation or yet another inefficient state monopoly like those in Iran or Saudi Arabia
Andrei Vinkov, Ivan Rubanov, and Dmitri Sivakov
The oil company Rosneft’s takeover of Gazprom is the largest deal (if we don’t count the unsuccessful Sibneft-YUKOS merger) in the history of the post-Soviet Russian economy. According to announcements by Gazprom CEO Alexei Miller, Gazprom plans to give the state 10.7% of its shares for a 100% stake in Rosneft. Gozprom’s current capitalization is $58 billion, which means the deal can be estimated at $5-6 billion.
Without any apparent cost, the state will gain a controlling stake in the natural gas monopoly. This will allow the government to begin the long awaited liberalization of the market for Gazprom stock. This move was postponed as long as the government did not have a controlling stake, which is why limits were placed on purchases of the stock by non-residents. Now, foreign investors have no chance of getting their hands on a controlling stake. Instead, everyone will have a chance to witness the appearance of a super-company, a super-monopoly, the largest petroleum corporation in the world, not only in terms of reserves but also in terms of market value.
The Gazprom game
The state directly owns 38.37% of Gazprom stock, and 0.9% of the company’s shares are held by the state company Rosgazifikatsia. More than 16% of Gazprom’s stock is held by subsidiaries entirely under its control. However, officials had no way of getting the subsidiaries’ 16% under direct state control without significant cost. The Rosneft maneuver solved this problem incredibly successfully. And another thorn in the state’s side was eliminated at the same time, the legislative division of the market for Gazprom stock into two parts, one large one for the “good guys” (Russian investors) and a small one for the “bad guys” (foreign investors). The only way to unite these markets was to get rid of one obvious obstacle, the limited stake in the company under direct state control. Otherwise, on a single market, the government would have quickly lost control of its national property. Now this obstacle is gone.
The practice of applying double standards to Russian and foreign investors is slowing Gazprom’s capitalization growth. The company is currently worth exponentially less than other private transnational oil and natural gas giants. With the markets united, the door is open to increased capitalization. But here is where several questions arise. It is not possible to simply unite the two markets, as the very next day foreigners will hold 49% of the shares and will skim off the cream of all subsequent development of Gazprom as an international corporation. What did other companies that swiftly increased their market value do? The owners of YUKOS, for instance, first got complete control of the company (more than 75% of all shares), and then from 1999 to 2003 increased the company’s capitalization by 319 times. Only after this growth did they begin to discuss the possibility of expanding foreign investors’ share in the company’s capital. Other companies have followed this same path, ignoring the interests of multitudes of minority shareholders. Gazprom, however, can’t. It could avoid trouble by using other approaches. But these approaches are either connected to creating transnational holding companies (which the government surely will not agree to) or are extremely complicated. At the moment, neither Gazprom nor the government have exhibited any interest in these complicated schemes, and for this reason there is a risk that problems with minority shareholders could arise at some point in the reorganization of Gazprom and Rosneft. There is only one way to avoid any unpleasantness, the future mergers of state assets under the banner of a double-headed gas and oil giant.
Just the beginning
Here, we have to recall long suffering YUKOS, whose assets will soon be on the auction block. Let’s assume for a minute that these assets go to Gazprom-Rosneft. The company thus formed would be the biggest petroleum producer in the world and the second in terms of reserves, but only the eighth in terms of market value. The example of YUKOS makes it clear that the state has many ways to increase Gazprom-Rosneft’s assets and increase its stake to 75%. The government has many useful tools to reach this goal such as the state oil transport monopoly Transneft and the largest consumer of natural gas, Mosenergo.
It doesn’t really matter who else will be forced to join to Gazprom. The most important issue is that the growing monster will have practically unlimited prospects for capitalization growth.
But the managers of the super-monopoly will have to work extremely hard, because passive and lame management will almost inevitably turn the new giant into a highly inefficient structure like the current world leader in oil production, Saudi Arabian Oil. This company simply serves as a source of income for Saudia Arabia’s ruling elite, not as an instrument of development for the whole country. Saudi Arabian Oil’s efficiency is close to zero according to American oil executives.
The risk that Gazprom could turn into something resembling an inefficient Soviet state concern in the late 1980s is real. However, something else is equally obvious. This petroleum monster could solve a crucial strategy issue for the government and unite Russia’s disconnected and far-flung parts by actively exploiting the natural resources of Eastern Siberia and the Far East and creating a single, united economy from Kaliningrad to Vladivostok.
Conquering Russia
In early September, Rosneft received from the Ministry of Natural Resources ten licenses to survey areas for oil deposits with the potential size of 700 million tons. These areas are located in direct proximity to the Bankor oil fields in Krasnoyarsk Territory that already belong to Rosneft. With this acquisition, Rosneft could increase its oil reserves from the current 327.7 million tons to 1 billion tons and more. Maxim Moshkov of Brunswick UBS informed us of this fact, commenting that, “Taking only this event into account, the role of Rosneft in the Russian oil industry should increase dramatically. Rosneft’s asset base was the worst out of all the oil majors.” Now the situation had changed completely. According to Brunswick UBS, with Bankor and the ten new licenses, this group of oil deposits alone will give the company another 30-35 million tons of production a year after 2010. In addition, analysts assume that Gazprom’s main gas condensate deposits, also located near Bankor, could give the company another 30-40 million tons of gas condensate. These condensates, once processed and purified into high-quality oil, can also be transported along the pipeline that will be built from Bankor. This means that the total oil production for Gazprom and Rosneft by 2010 will be 100 million tons, making the company the largest oil company in Russia.
Uniting the two companies could end the standstill and help make strategically important plans to build natural gas and oil pipelines to the Pacific a reality much faster. Only an oil giant would be able to find the funding for this, with support from the federal budget.
The path to the multifaceted exploitation of Eastern Siberia’s resources, which should in the long term replace the aging oil fields in Western Siberia, is also clear. Of course, private companies, first and foremost YUKOS, were the key players in Eastern Siberia and the Far East until recently. The Gazprom-Rosneft union will make it significantly easier to squeeze out or take over YUKOS and other independent companies. To all appearances, this is exactly what government officials want. In this context, attempts by the Ministry of Natural Resources to take the Kovyktinsky gas condensate deposit away from the Rusia-Petroleum Consortium (one of its co-owners is TNK-BP) makes sense.
It only needs to be added that a total production and transport monopoly on petroleum in Eastern Siberia could rip out all private initiative in the industry and the region by the roots. For this reason, the officials creating the super-monopoly and this monopoly’s functionaries should think of how to leave room for private interests, as well. Without the enthusiasm of private capital, any project, even the most economically appealing, is sooner or later doomed to failure, as the Soviet economy demonstrated.
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