Global Insight Perspective | |
Significance | The vast cooperation deal signed by Gazprom chief executive officer (CEO) Alexei Miller and Rosneft president Sergei Bogdanchikov stops well short of a merger of the two companies, but it nevertheless represents a formal "truce" in the confrontation that has marked their relationship recently. |
Implications | The agreement appears designed to stem the competition between the two firms for assets and projects in Russia, while providing mutual benefits to both companies in the gas sphere, in particular. |
Outlook | Enhanced cooperation between Rosneft and Gazprom will cement the Russian state's tightening grip on the hydrocarbon sector, thereby boosting the government's leverage in dealing with foreign investors and probably further limiting the opportunities available in Russia to international oil companies (IOCs). |
What Rivalry?
With yesterday's signing of a long-term pact on strategic cooperation between Rosneft president Sergei Bogdanchikov and Gazprom chief executive officer (CEO) Alexei Miller, the two majority state-owned Russian oil and gas giants appear to have cast aside their well-documented differences. In signing a deal that envisions cooperation in 'exploration, production, transportation and refining of hydrocarbons; the acquisition of and sale of natural and associated gas; the development of electricity and heating; the construction of oil, gas and electrical hardware," as well as joint participation in tenders for oil and gas licences and joint ventures, Gazprom and Rosneft have effectively denied that a rivalry between the two companies ever existed.
Of course, the competition between Rosneft and Gazprom has been in full force for much of the past two-plus years since the Kremlin (Russia's presidential administration) initially sought to orchestrate a merger of the two companies in September 2005 (see Related Articles below). However, following Rosneft's acquisition of Yuganskneftegaz, the top production unit of Yukos, at a controversial auction in December 2004, the Rosneft-Gazprom merger plans hit the rocks, prompting the government to abort the merger in May 2005 and pursue a different path to regaining majority control of Gazprom. Since that time, Gazprom and Rosneft have butted heads over control of Sibneft (now Gazprom Neft), with the enmity between the two firms cracking the surface in recent months in the behind-the-scenes manoeuvring for position in the coming dismemberment of Yukos. Both Gazprom and Rosneft have also loudly hinted that they would be interested in a potential acquisition of the Russian stake in TNK-BP, were it available for purchasing.
Yet, suddenly, all talk of rivalry has been subjugated with yesterday's cooperation agreement, which will remain in place until 2015, at which time it could be renewed for five-year periods. Although the agreement was short on details, one of the key components of the partnership is a promise to work together in the gas sector, with Gazprom agreeing to buy gas produced by Rosneft in Western Siberia "in volumes corresponding to actual production, but no less than that produced in 2006." This will give Rosneft the incentive to develop and monetise its gas reserves in the region, providing access to Gazprom's gas pipeline system for the first time. For its part, Gazprom secures another source of gas supplies with the deal, helping the company to meet increased domestic demand requirements and fulfill export commitments amidst rising concern over Gazprom's ability to do just that.
Cooperation At the Expense of IOCs?
The agreement also envisions cooperation between Gazprom and Rosneft in gas production in Russia's Far East, although both companies said that additional agreements will be necessary for Gazprom to start purchasing gas from Rosneft's fields beyond Western Siberia. Still, by joining forces in gas production in the Far East, as well as planning to bid jointly for new oil and gas licences, the Gazprom-Rosneft partnership holds out the promise of a true "national champion" for Russia in the hydrocarbon sector. The prospect of a pseudo-unified, national oil company (NOC) operating in the Russian oil and gas industry will further put pressure on international oil companies (IOCs), which are already feeling squeezed in today's business climate in Russia.
Following the cooperation agreement between LUKoil and Gazprom Neft earlier this month, the Rosneft-Gazprom deal will no doubt trigger IOCs to question their future role in the development of Russia's natural resources. Although Europeans concerned about Gazprom's ability to meet its gas export requirements in the next few years may be comforted by the fact that the deal will see Rosneft's gas boost Gazprom's overall gas supply balance, those same European governments will likely be less enthused when energy firms from their countries are shut out of projects in Russia's upstream oil and gas sectors. The Russian government was already in the process of exerting greater state control over the natural resources sector by restricting foreign investment, so the curtailment of the competition between Rosneft and Gazprom will further close the small window of opportunities available to foreign investors in Russia's oil and gas sectors.
Outlook and Implications
Although the cooperation agreement stops well short of the originally intended merger of Gazprom and Rosneft, it nevertheless marks a formal truce in their relationship, if nothing else. A declaration of an end to hostilities between the Gazprom and Rosneft camps, which are controlled by two different power bases in the Kremlin, will pave the way for what should be a relatively seamless, if not equitable, distribution of Yukos assets between the two companies once the bankrupt oil company moves into the formal liquidation phase of its dismemberment next year. Furthermore, cooperation rather than competition between Rosneft and Gazprom will allow the two companies to exercise greater power in potential joint purchases abroad, while keeping a lid on costs by avoiding bidding wars from breaking out.
On the home front, with companies such as BP, Shell, and Total under heavy administrative pressure for licensing and environmental violations, the Rosneft-Gazprom partnership will solidify the state's hold on the energy sector by eliminating a source of potential confrontation between the two companies. With parliamentary and presidential elections in Russia due in December 2007 and March 2008, respectively, a potential schism between the two Kremlin groups that control Rosneft and Gazprom is still possible, but the cooperation agreement may address that potential problem before it erupts. By tying Gazprom and Rosneft more closely together, the Russian government will cement its growing hold over the country's hydrocarbon sector, increasing the Kremlin's already substantial leverage in dealing with foreign investors, while further limiting the opportunities available to IOCs in Russia.
Related Articles
- Russia: 28 November 2006: What Future for Foreign Investment in the Russian Oil Industry?
- Russia: 17 November 2006: LUKoil, Gazprom Neft to Team Up in Expansion Effort in Russia and Beyond
- Russia: 26 October 2006: Rosneft Reportedly Lining Up Huge Loan to Finance Potential Yukos Asset Acquisitions
- Russia: 4 October 2006: Gazprom-Rosneft Rivalry Set to Resurface in Competition for Russian Oil Assets
- Russia: 29 September 2006: Gazprom Neft Targets Expansion, Including Possible Stake in TNK-BP
- Russia: 15 September 2006: Rosneft Eyes Yukos Downstream Assets; No Plans for Further Share Offers
- Russia: 21 December 2005:The New Class of Russian Oil Majors: State-Owned Giants
- Russia: 29 September 2005: Gazprom Announces Oil Intentions with Acquisition of 73% Stake in Sibneft
- Russia: 19 August 2005: Gazprom Angles to Sideline Rosneft, Secure Control of Sibneft
- Russia: 18 May 2005: Gazprom-Rosneft Merger Shelved; Russia to Pay Cash for Gazprom Control