Consolidation In Russia’s Energy Sector?

Courtesy of STRATFOR (subscription required and recommended), a report on the possibility that Russia will implement another round of consolidations in its energy sector to improve efficiently and competitition.  As the article notes:

“…STRATFOR sources in Moscow report that Russia is preparing for another round of consolidations in its energy sector, like those in 2005 and 2007 that shaved off assets of numerous foreign, private and independent firms. This time around, the Kremlin is consolidating energy companies not only to entrench its political control of the sector, but to make sure the sector is run efficiently and competitively.

The energy firms Moscow intends to consolidate are the heavy hitters: Gazprom and Rosneft. These firms have a long-running rivalry with each other, even though Gazprom’s primary focus is on natural gas and Rosneft is focused mostly on oil and regionally on East Siberia — but the two have crossed into each other’s domain before. The rivalry is rooted in the firms’ positions under Russia’s rival political clans: Gazprom belongs to Deputy Presidential Chief of Staff Vladislav Surkov’s clan, and Rosneft falls under the purview of Deputy Prime Minister Igor Sechin.

Gazprom and Rosneft are by no means the only energy players in town. There is LUKoil, a leading energy firm that is run privately, but knows that in order to stay private, it must do the Kremlin’s bidding. There are other lower-profile firms, such as Novatek (a largely non-political firm focused on natural gas production for domestic consumption, since Gazprom has a monopoly on exports) and TNK-BP (a Russian-British venture that has had its share of scandals and complications). In addition, there are the predominantly Muslim region-based firms, Tatneft and Bashneft (from Tatarstan and Bashkortostan), who operate relatively autonomously. All of these firms (along with a smattering of smaller firms) have substantial production figures and natural gas and/or oil reserves, though they do not share the same strategic position as Gazprom and Rosneft within the Russian state.

The problem with the high-profile rivalry between Gazprom and Rosneft, in Moscow’s eyes, is the negative effects it has had on productivity and the level of investment that has been funneled into Russia’s energy sector. Particularly after the global financial crisis that tore through Russia and its energy sector in the past two years, these companies’ maneuvers did not financially benefit the Kremlin. That is why Moscow has decided to shake things up.

Chart - Russian oil firms

STRATFOR sources say Novatek is about to shed its apolitical status and form an alliance with Rosneft, with the son of Rosneft President and Kremlin insider Sergei Bogdanchikov, Alexei, set to join Novatek in March. This is important because Gazprom has always viewed Novatek suspiciously and has been at odds with its ownership. Gazprom owns 19 percent of Novatek, primarily to make sure it is kept in check. The Kremlin has decided to reduce Gazprom’s stake in Novatek to under 10 percent in order to pull back on Gazprom’s meddling, and instead have Novatek become a junior partner in an alliance with Rosneft.

But while Moscow is taking this key leverage away from Gazprom, it will give the energy firm more leverage in other areas. Gazprom will be given its own junior partner in an alliance. This will be a new company created out of three existing firms — Sibneftegaz, Purgaz and Nortgaz — in conjunction with Itera. These companies are relatively small in terms of production and reserves individually, but together they will nearly equal Novatek. This will essentially leave the Russian energy sector with five major firms divided into three distinct factions. There will be Rosneft and Novatek; Gazprom and its newly-formed junior company; and LUKoil. TNK-BP will be targeted by the state and stripped of many of its assets.

The Kremlin is doing this because it wants Gazprom to work more effectively and efficiently and is therefore subjecting it to increased competition. This competition will not come from foreign companies or privately owned companies, but from the partnership between Novatek and Rosneft — a sort of controlled competition. Moscow wants Rosneft to face competition as well, however. That is why, according to STRATFOR sources, Gazprom will be given the rights to take over the Kovytka field (the largest natural gas field in East Siberia) from TNK-BP, with a public announcement set for the week of March 8. Rosneft has dominated the energy game in East Siberia, and this will give Gazprom the opportunity to challenge Rosneft there.

The thinking within parts of the Kremlin, led by chief decision-maker Prime Minister Vladimir Putin, is that this newly created controlled competition is a solid plan that will boost the economy’s health and efficiency while consolidating powerful companies under the state’s control. Rosneft would be working in Gazprom’s domain of natural gas and keep it competitive and accountable, while Gazprom would do the same in Rosneft’s turf in East Siberia.

Others in the Kremlin who are more loyal to the energy firms, however, think this competition could spell trouble and could have massive political implications. It is dangerous to consolidate companies that are in the thick of the Kremlin’s clan wars, and this move could get messy, but that is a risk Putin appears to be willing to take.

This entry was posted on Tuesday, March 2nd, 2010 at 11:03 am and is filed under Gazprom, Rosneft, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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