IHS World Markets Energy Perspective | |
Significance | Gazprom Energoholding, Gazprom's electricity division, announced yesterday (7 July) that it plans to merge with the Renova Group's Integrated Energy Systems (IES), a move that would create Russia's largest power firm by generation capacity. |
Implications | A merger of Gazprom's electricity assets with those of IES would see Gazprom take a 75%-minus-one share, leaving Renova with a blocking stake in the new entity, but the transaction—if approved by regulators—would expand state control of Russia's power generation capacity to around 70% of the total, from around 50% at present. |
Outlook | The proposed deal represents a reversal of the government's previous efforts to divest state stakes in the power sector and create competition; in that regard, Russian regulators will be hard-pressed to approve the merger without substantial changes, lest the government de facto acknowledges the failure of the privatisation programme. |
Gazprom Goes Big…Again
Gazprom does not really do "small" well; the Russian gas firm is more into doing big things. The company, which is the world's largest gas producer, also controls the most gas reserves around the globe. When Gazprom builds a pipeline—such as Nord Stream or the Yamal-Europe pipeline—it thinks big. When the firm diversified into the oil sector in 2005, it did not look for a mid-size producer or a small fish—it acquired a controlling stake in Sibeneft, at the time Russia's fifth largest producer (since renamed Gazprom Neft). In carrying out the Russian government's vision for developing gas reserves in Eastern Siberia and the Far East, Gazprom laid out a blueprint calling for the construction of massive pipelines connecting gas fields as far apart as Sakhalin and Irkutsk.
Hence, it should come as no surprise that Gazprom's latest move is another big undertaking—a proposed merger of the company's electricity assets with those of the Renova Group (see Russia: 7 July 2011: Gazprom, Renova Reportedly Agree to Merge Russian Electricity Assets). Gazprom's CEO Alexei Miller and Renova Group's chairman Viktor Vekselberg announced the deal yesterday (7 July) by signing a memorandum of understanding (MoU) in the Russian capital, Moscow, that would see Gazprom Energoholding, Gazprom's electricity unit, establish a joint venture with Integrated Energy Systems (IES), the power division of the Renova conglomerate, with Gazprom Energoholding receiving a 75%-minus-one share in the new entity, while Renova would hold a blocking stake with a 25%-plus-one share.
The proposed merger would create Russia's largest power firm, controlling 52GW of installed generation capacity. Although the fine details of the merger still need to be hammered out, the outlines of the transaction appear to be agreed on, with Gazprom Energoholding contributing its controlling stakes in generating companies (gencos) OGK-2, OGK-6, Mosenergo and TGK-1, which have a combined generation capacity of 36GW, while IES would contribute its controlling shares in territorial gencos TGK-5, TGK-6, Volzhsky TGK (formerly TGK-7) and TGK-9, which together have an aggregate capacity of 16GW. Vekselberg, the Russian tycoon who is also one of the core shareholders in TNK-BP (via the Alfa-Access-Renova consortium), said that Gazprom and Renova hope to close the deal by the end of the year.
Outlook and Implications
This is not the first time that Gazprom has sought to expand its electricity portfolio via a merger. The Russian gas giant—which acquired its stakes in the various gencos through the UES-led privatisation programme that saw the former state power monopoly unbundled and then liquidated, with its generation assets hived off into wholesale and territorial gencos and then sold off—previously attempted to establish a dominant electricity venture via a proposed combination of its assets with those of SUEK, the Siberian coal producer. Regulators strongly objected to that deal, arguing that it would quash nascent competition in the Russian power sector—one of the cornerstone goals of the reform programme launched in 2003—and although the Federal Anti-Monopoly Service (FAS) eventually approved the deal, Gazprom and SUEK called off the merger, in part because of the myriad conditions and constraints that FAS imposed as part of its approval (see Related Articles).
With the ink barely dry on yesterday's MoU, the FAS is already signalling that Gazprom's new electricity merger proposal may face a similar uphill battle to receive the blessing of regulators. Igor Artemyev, the head of the FAS, said that the merger was "undesirable" from the standpoint of Russia's anti-trust legislation, adding that the FAS would try to structure the deal to exclude Gazprom's controlling stake in the new power company. Aside from hindering the development of competition in the Russian power market by establishing a dominant firm, dwarfing the size of state-run Inter-RAO UES, RusHydro, and Rosenergoatom, the deal—if it goes through—would also mark a rollback of the previous privatisation programme, putting the state in control of more than 70% of the country's power generation assets, up from 50% at present.
The FAS has a duty to scrutinise the Gazprom-Renova merger proposal for its effects on competition, which could result in the deal being blocked, but the regulator may come to this same conclusion for other reasons. Indeed, the FAS's decision on whether or not to allow the merger to proceed has important ramifications for Russia's investment climate. A straight approval of the deal would signal the de facto failure of the earlier privatisation efforts, with the state acknowledging the negative effects of the financial crisis and global economic downturn in 2008-09 in stunting the electricity reform programme and hampering private investment. Allowing the Gazprom-Renova deal to go through as announced would effectively tell other private buyers of Russian gencos—among which are several European utilities—that the government has decided that the state should expand, not reduce, its role in the electricity sector. This could serve to further discourage private investors, many of whom are already disappointed in the government for its weak follow-through on promises to raise end-user prices and liberalise the market. The FAS will have to take these political considerations into account, as well as the impact on competition, in its regulatory review of the Gazprom-Renova merger.
Related Articles
- Russia: 25 April 2011: Gazprom Plans to Merge Russian Gencos OGK-2 and OGK-6
- Russia: 25 February 2010: PM Criticises Russian Oligarchs for Failure to Invest in Privatised Power Generation Companies
- Russia: 13 May 2009: Norilsk Continues Power Asset Divestiture, Selling Stake in Russian Genco TGK-1
- Russia: 16 April 2009: PM Says Continued Power Investments Needed in Russia, Warns of Electricity Shortages
- Russia: 9 June 2008: Gazprom, SUEK Call Off Electricity Asset Merger; Plan to Co-Operate in Coal Sector
- Russia: 21 October 2008: Financial Crisis Threatens to Undermine Russian Power-Sector Privatisations
- Russia: 16 October 2008: Power Firms Seek Russian Government Loans, Revisions to Investment Conditions Amid Financial Crisis
- Russia: 7 February 2008: Power Sector Reform in Russia—Progress Thus Far, Challenges Still Ahead
- Russia: 5 October 2007: UES CEO Calls for Strong Oversight to Ensure Competition in Liberalised Russian Power Market
- Russia: 1 March 2007: Regulatory Authority Criticises Planned Gazprom-SUEK JV