Zubkov Subdued in Gazprom Debut

In a departure from his trademark brusque public style, First Deputy Prime Minister Viktor Zubkov read from prepared notes while delivering a carefully worded maiden speech as chairman of Gazprom on Friday.

Zubkov, known for the public dressings-down he administered to subordinates during his stint as prime minister, pledged to stick to existing Gazprom strategy and work for the good of shareholders Ч both state and private.

The shareholders of the state-controlled company elected Zubkov to its board of directors Friday. In a widely expected move, the board then chose him as its chairman to replace President Dmitry Medvedev, who stepped down in May after taking office.

With a background in agriculture and battling money laundering, Zubkov may not have the firmest grip on the gas business. Nevertheless, he opted to make a brief appearance at a news conference to take four questions Friday Ч a much more open approach than that of Igor Sechin, the chairman at the country's other state-controlled energy giant, Rosneft. Sechin didn't even bother to put in an appearance at the news conference after Rosneft's shareholders meeting earlier this month.

Zubkov's statements were apparently aimed at allaying possible concerns over how his Soviet-style management method would fit with running a blue chip corporation in which private investors, Russian and foreign, own just under half the shares.

"Gazprom is a market structure that must work by market rules, be competitive on the world energy market and generate profits for its shareholders, who include not only the state, but also hundreds of thousands with minority stakes," he said at the news conference after the general meeting. "As a member of the government, I see my responsibility in efficiently maintaining a balance between the interests of the state and the development targets of the company.

"I will work according to the existing strategy that has been worked out," he added.

One statement in particular betrayed a focus on government objectives. Zubkov said that what he "liked most" about Gazprom's work was the effort to provide gas to more households at subsidized prices.

"It doesn't simply count increasing access to gas in Russia as a commercial project, but its Ч Gazprom's Ч social responsibility," he said.

The prices households are charged for gas are far below the total cost of†production and delivery and are subsidized by Gazprom export revenues.

The government offered no explanation for its choice of Zubkov as chairman Ч nine of the 11 seats on the board are held by government members or Gazprom executives Ч but he himself said Friday that he had long known CEO Alexei Miller, who sat beside him at Friday's news conference. Their ties date back to 1992, when both worked on the St. Petersburg City Hall's committee for foreign relations, which was headed by Vladimir Putin, now prime minister.

"Our relations are very good," Zubkov said. "I think we will work together effectively."

As to the company's immediate plans, Zubkov said he Ч and the board Ч would look at future supply contracts with Ukraine and Belarus, countries that also serve as transit routes to the European Union. In keeping with Gazprom's pronouncements in the face of charges by the EU and the United States that the company uses gas as a political weapon, he stressed a number of times that contract negotiations were purely a business matter.

"We will look carefully at how a dialog develops between Ч I repeat again Ч economic entities, and, naturally, it will be proper for me, as board chairman Е to take part in the process," Zubkov said in his final answer to reporters.

Gazprom has had to defend itself against accusations that it was acting as an arm of Russian foreign policy when it briefly cut deliveries to Ukraine in January 2006, soon after a pro-Western candidate defeated a pro-Russian politician in a presidential race. Ukraine vehemently resisted a steep hike in prices for gas at the time.

With the negotiation of a new price for gas deliveries to Ukraine looming, sky-high global energy prices may mean pressure for the biggest jump in prices yet. Starting next year, Ukraine is likely to pay more than $400 per 1,000 cubic meters of gas, more than double this year's price of $179.50, Miller said at the news conference.

Ukrainian Prime Minister Yulia Tymoshenko, during a Saturday meeting with Putin in Moscow, made no public comment on the potential price. Deputy Prime Minister Hryhoriy Nemyrya warned against reaching any early conclusions but didn't reject the figure outright.

"The formulation of any prices takes place not during public discussions but in negotiations," he said in Kiev on Friday, Interfax reported.

The Gazprom general meeting appeared less tempestuous than the one held by Rosneft earlier this month, where minority shareholders were shown berating company officials on closed-circuit television (Reporters weren't allowed inside of either meeting.) The difference may have been because Gazprom has much fewer individual shareholders but more institutional investors. That shareholders could only ask questions by writing them down and dropping them in a special box was also likely a factor.

Gazprom rules allow a mere 10 minutes during which executives answer questions from the audience. Miller appeared improbably liberal about the rules, however, only wrapping up the question-and-answer session Friday after about half an hour. Fielding some of the questions, chief financial officer Andrei Kruglov said the company's assets were worth almost 4 trillion rubles ($174.4 billion), or about half of this year's federal budget. Throwing out another figure, he said the company paid 963 billion rubles in taxes last year.

Disrupting the smooth flow of the meeting, one woman yelled a question from her seat asking why Gazprom would wait to make dividend payouts for last year when most of this year had already passed. Kruglov said the company could only start handing out dividends in September because the large number of shareholders meant a lot of paperwork.

Some of those who spoke on behalf of shareholders were Gazprom representatives, such as Oleg Andreyev, chief of the company's production unit in western Siberia. He asked the federal government to leave more taxes to the local governments so that people there could enjoy further benefits from the company, instead of just being angered by the "loss of their deer pastures."

"The local people are absolutely not interested in developing gas production in the region," he said, adding that Gazprom pays 94 percent of its taxes to the federal budget.

The meeting also saw shareholders vote to approve a dividend package of more than 63 billion rubles ($2.7 billion), or 17.5 percent of profits. Dividends grew by 4.7 percent over the previous year.

In addition to Zubkov, Economic Development Minister Elvira Nabiullina was also a new addition to the board, replacing German Gref, who left the government to become CEO of Sberbank.

Among the other statement's that Miller made in his speech and during the news conference that followed:

Х†He said state control over Gazprom made it more competitive in the intensifying hunt for attractive global and local reserves. "Companies with state participation have considerable advantages in winning dominant positions on international markets," he said. In Russia, "the most current investment idea in the energy sector is to invest with the state."

Х†From May to January this year, Gazprom produced 246 billion cubic meters of gas, 6.3 billion more than in the same period last year, Miller said. It plans to pump up 563 billion bcm this year, he said, which would be 14.4 bcm more than last year, or equal to the company's sales to Britain.

Х†Miller estimated that Gazprom's revenues from sales to the European Union Ч its main money earner Ч would reach $62 billion this year, a huge jump from last year's record of $39.5 billion.

Х†Miller said he was hopeful about potential gas purchases from Azerbaijan, a prospect that threatens to derail the planned Nabucco pipeline that the EU wants to serve as an alternative to Gazprom's supplies. "We estimate that reaching an agreement is quite probable," Miller said. (He extended an offer to buy Azeri gas at "European" prices when he traveled to Baku earlier this year. Azeri officials said they would consider the proposal.)

Х†The Russian market has the potential to outdo the EU in terms of profitability for Gazprom in the very near future, Miller said. "In three or four years, a market will emerge in Russia that will exceed the traditional European one by twofold in terms of revenues," he said. From 2005 to 2007, gas consumption in Russia grew by 25.5 bcm, which exceeds Gazprom's deliveries to large customers, like Italy, Miller said.

Х†Dismissing biofuels as the reason for the current rise in food prices, Miller touted gas as a better alternative to oil. Gazprom, in conjunction with its European partners, could build a network of filling stations that would offer natural gas instead of gasoline. In Germany, it costs motorists 70 percent more to use gasoline than natural gas in their cars, Miller said.