Gazprom Called on Carpet Over Itera

A small firm called Itera was registered in Jacksonville, Florida, to distribute food and oil products in 1992.

Eight years later, Itera is Russias third-largest gas producer, a mammoth holding consisting of more than 120 companies and subsidiaries. Its headquarters are in Moscow, but its founders and ownership remain a mystery.

The breathtaking rise of the tiny company is taking center stage among foreign shareholders at gas giant Gazprom, the worlds No. 1 gas producer. Those shareholders fear that lucrative assets have been stripped from Gazprom to bolster Itera, and they are demanding answers.

"In 2000, Itera intends to produce 20 billion cubic meters of gas, which is 1,170 percent higher than its production in 1998," foreign shareholders wrote in a recent letter to Gazprom chief executive Rem Vyakhirev.

"But at the same time as Iteras production is growing, the volume of Gazproms own production is falling.

"Existing information gives reason to believe that Iteras reserves comprise assets acquired from Gazprom," said the letter, which was obtained by the Financial Times.

The shareholders, represented by Gazprom board member Boris Fyodorov, are hoping that some light will be shed on the gas giants relationship with Itera at a Gazprom board meeting scheduled for the end of November.

The government is also taking a closer look at Itera, a move that could help shareholders learn the truth. The Audit Chamber, parliaments budgetary watchdog, is investigating Gazproms export transactions with Itera as part of a larger audit of the gas giants books.

Additionally, the European Bank for Reconstruction and Development is demanding that Gazprom clarify its relationship with Itera before it approves a $250 million loan.

But in a country infamous for secretive backroom dealings, front companies and nontransparent ownership structures, any answers may be a long time in coming.

The sketchy path that led Itera into natural gas bewilders investors and observers alike.

Two years after its founding, Itera revamped itself into a natural gas supplier and teamed up for the first time with Gazprom, according to Itera officials. The companys initial joint project was to distribute gas from Turkmenistan to a number of countries throughout the former Soviet Union.

In 1998, the company expanded its operations into gas production. In collaboration with Gazprom, Itera began developing deposits of natural gas and gas condensate on the territory of the Yamal-Nenets Autonomous District, just north of the Tyumen region.

Last year Itera was the primary natural gas supplier for Ukraine, Armenia, Belarus, Georgia, Latvia, Lithuania, Moldavia and Estonia, and it sold more than 50 billion cubic meters of natural gas.

An Itera representative said that production and delivery of natural gas accounts for 80 percent of the companys business.

And its gas activities appear to just keep growing.

Under an agreement signed by Turkmenistan and Gazprom on Dec. 17, 1999, Itera is now charged with shipping 20 billion cubic meters of Turkmen gas a year to Uzbekistan, Kazakhstan and Russia.

With many of the former Soviet republics covered, Itera is focusing on local subsidiary Intera-Rus to boost domestic deliveries of natural gas.

The government is behaving more like a shareholder in Gazprom, said a UFG report.

The ownership structure of Itera remains a secret, although a number of analysts have suggested that Itera is run by representatives of Gazproms management or their close relatives.

Major Gazprom stakes are split between the government with 38 percent and foreigners with about 20 percent. The remainder is broken up between smaller Russian investors.

Describing its relationship with Gazprom, an Itera representative said in an interview that Itera perceives Gazprom as its "strategic partner."

"It cannot be otherwise, as far as Gazprom owns the main gas pipelines and one of Iteras most important activities is the delivery of blue fuel," said the official, who spoke on condition of anonymity.

Gennady Krasovsky, an oil and gas analyst at the Nikoil brokerage, said the mere fact that Itera has access to Gazproms pipelines confirms that the two companies have a close relationship.

"Gazprom takes some of Iteras transport expenses on its own account," Krasovsky said.

"Russian oil companies have no access to Gazprom pipelines, but Itera has the right to pump its gas through them," said Krasovsky.

Its impossible for a company to operate in the Russian gas business without the help of Gazprom, he said.

Independent gas producers, however, will soon be granted access to Gazproms pipelines. Taking another step to curb Gazproms gas monopoly, the government published a resolution on Nov. 8 that allocates at least 15 percent of pipeline capacity to independent producers.

Asked how Itera has become the key supplier to gas markets in the former Soviet Union, the Itera representative said Itera entered those markets after Gazprom was forced to cut off its deliveries on account of chronic nonpayments. The arrangement allows Gazprom to serve its domestic consumers and fulfill export contracts for deliveries to Europe, the official said.

Konstantin Reznikov, an oil and gas analyst for Alfa Bank, said Gazprom appears to have shifted CIS markets to Itera in order to concentrate on delivering gas to domestic consumers. Itera, being a private company, has no liabilities like Gazproms obligation to deliver cheap gas to domestic consumers, Reznikov said.

"Itera offered to do this job for some compensation," he said.

Reznikov said the compensation was provided to Itera in the form of rights to Gazproms gas fields.

A representative at Dragon Capital, a Kiev-based investment bank, said that Itera has greater success than Gazprom in exacting payments from Ukrainian customers for gas.

In late October, the Ukrainian government reached an agreement with Itera to allow the gas company to export electricity to Moldova as payment for its debts to Itera.

The Dragon Capital official, who asked not to be named, said that the bank would "prefer to see these payments made in a more transparent way," namely with more cash payments.

United Financial Group noted in a recent report that the government is behaving more like a concerned Gazprom shareholder and has started to demand that Gazprom raise its standards of corporate governance.

In a clear indication of the governments support for greater transparency at Gazprom, it insisted at a board meeting in June that the gas company hold shareholders meetings at least once a month.

Furthermore, resolutions passed at a Gazprom board meeting Oct. 27 showed that the government was growing increasingly critical toward Gazproms management. A particularly striking victory for shareholders was a resolution that forbade Gazprom from transferring its assets or diluting its holding in its subsidiaries without the boards prior approval.

Itera has acquired five gas fields in the Yamalo-Nenets region alone that formerly belonged to Gazprom. Total deposits in the gas fields which include Gubkinksy, Vostochno-Tarkosale, Novo-Urengoysky, Vostochno-Urengoysky and Vinrayahinsky are estimated to exceed 1.5 trillion cubic meters.

Gas analysts said the resolution was an obvious reference to Itera and applauded the clampdown on Gazprom management.

"This is a much closer level of supervision of the companys management by the board than would normally be expected and suggests at the very least that the board of the company does not have complete faith in the managements judgment," UFG said in a research note.

To the disappointment of shareholders, however, the Gazprom board did not agree to carry out an investigation of past asset transfers.

Itera is not the only Gazprom-affiliated organization that has been accused of asset stealing. A gas pipe construction company, Stroytransgaz, receives large contracts from Gazprom and acquired a 4.8 percent stake in Gazprom for only $2.5 million.

The Federal Securities Commission is planning to investigate the relationship between Stroytransgaz and Gazprom, according to Vedomosti.

At Itera, transparency will be a must if the company wants to continue to expand, observers said.

The Itera representative said the company is contemplating an initial public offering on Western markets a move that would require the disclosure of the companys ownership structure.

Reznikov said Itera will sooner or later have to float paper on foreign markets in order to continue financing its operations.

"Itera currently receives loans only from domestic Russian banks, particularly banks associated with Gazprom like Gazprombank," he said.

But until then, investors and gas experts could just be left scratching their heads about the link between Gazprom and the rapidly growing Itera.