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. Last Updated: 07/27/2016

Yeltsin Signs Law Keeping Gazprom Off-Limits




A new law on Russia's gas supply siged Monday by President Boris Yeltsin ensures gas giant Gazprom keeps a monopoly on the industry for decades to come, analysts said.


The law, passed by the upper and lower houses of parliament in March, forbids the breaking up of the gas giant, a topic that has been broached in the past by the World Bank and the International Monetary Fund. The law also puts a limit of 25 percent on foreign ownership in Gazprom, while stating that the state cannot own less than 35 percent.


Perhaps the aspect of the law that has generated the most questions among analysts and industry players is a provision that allows the state to appropriate any gas fields it deems necessary for maintaining the security of the country's energy supply. This, however, applies only to fields for which extraction rights have not been granted already.


In a revealing glimpse into the legislators' psychology, the law never mentions Gazprom by name, referring only to "the unified gas supply system," but analysts said there can be no doubt what is meant by that phrase.


"They just wrote it that way so the politics behind the bill wouldn't be too completely transparent," said one analyst, who spoke on condition of anonymity.


The basic points of the law can hardly come as a shock to anyone familiar with parliament's long-standing belief in the value of gigantic, state-run companies.


"This law is mostly just indicative of [legislators'] attitude toward Gazprom," said Ruslan Nickolov, an oil analyst with Nomura International. "This just formalizes what everybody already knew."


Lawmakers have, for example, often expressed outrage about what they see as foreign-backed attempts to break up Gazprom into competing units.


They have also been opposed to foreigners owning very much of an essential part of the country's infrastructure.


The 25 percent cap on foreign ownership of Gazprom is unlikely to be much of an issue anytime soon, analysts said, pointing out that the new law was an improvement over the previous limit of 14 percent.


Currently, foreigners own less than 5 percent, including American Depositary Receipts and the purchase last year of a 2.5 percent stake by Germany's Ruhrgas.


"I don't see the stake as dangerously close to the limits imposed by the [State] Duma," said Nickolov, in reference to Russia's lower house of parliament.


The 35 percent limit on state ownership may have more immediate implications, he said, because it limits the government's ability to raise money by selling off Gazprom.


At the moment, the government's stake stands at 38.4 percent, giving it a mere 3.4 percent that is available for privatization.


Nickolov said even that small percentage is probably "more than plenty for now, as the likelihood of another large successful sell-off of Gazprom is rather low, at least before Russia achieves some tangible progress with sorting out its economic mess."


The 35 percent figure, in fact, may even have been requested by Gazprom, headed by Rem Vyakhirev, as a means of ensuring that the state didn't undercut its own efforts to raise funds through a sell-off, he said.


Though it is unclear what exactly the IMF would like from Gazprom, most analysts agree with the Duma that splitting up the gas giant would not be in Russia's interests.


"There are certain people in the IMF who would like to see a wholesale restructuring of Gazprom," said Stephen O'Sullivan, head of research at United Financial Group.


"There's a lot of very bright people [working for the fund] who are very well versed in efficient economies but don't really understand the realities of Russia," he said.


"I am all for transparency and efficient markets but at the moment a restructuring of Gazprom is probably not the right thing, the short-term losses for the Russian economy would be too great," he added.


"Breaking up Gazprom doesn't make sense in general terms," agreed Matt Thomas, head energy analyst at CAIB in London.


"It doesn't make sense for exports certainly," he said. "Gazprom should always have a monopoly there."


"Gazprom is quite able to keep up with demand as it is," Nickolov said. "Increasing competition would only lead to lower prices and that's the last thing that Russia needs."


This aspect of the law "is not a revelation, maybe it's even a step forward," he said.


"I don't think there is any need for deregulation in the short term," he said.


Analysts found more worrying the law's provision that allows the government to appropriate the gas fields it deems vital to the country's national interest.


"This could be Gazprom trying to back-door its way into a field like Kovykta," Thomas said.


Kovykta is a large field in eastern Siberia currently being developed by Sidanko subsidiary Rusia Petroleum, in which BP Amoco owns a 27 percent stake.


Production at Kovykta is still a long way off, but the site's potential as a gas supplier to China was one of the main reasons BP bought into Sidanko. It is one of the only major gas projects in Russia that Gazprom doesn't have a piece of and there have been persistent rumors that the gas giant is interested.


BP Amoco spokesman Howard Chase declined to comment about the company's position on the Gazprom law, saying only that it was "uncertain to what it applies and so the issue will have to be examined very closely."


He did confirm, however, that Rusia Petroleum has a production license for the Kovykta field that would seem to exempt it from expropriation under the law.


UFG's O'Sullivan added that the law was unlikely to limit future investment as new projects would likely only go ahead after having been granted a production-sharing agreement, which would place them out of the jurisdiction of the new law.