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. Last Updated: 07/27/2016

Purgaz Sale To Itera on Agenda for Gazprom

A PricewaterhouseCoopers audit of Gazprom's relations with Itera has presented directors at the gas monopoly with a difficult question: Should Purgaz, which currently accounts for three-quarters of Itera's gas extraction, be returned to Gazprom?

The question is slated for discussion at Gazprom's next board meeting, scheduled for Tuesday.

Gazprom deputy CEO Alexander Pushkin has prepared a report for the board concerning the results of an investigation into the relationship between the two gas companies.

The report includes auditors' recommendations that Gazprom consider buying back the Purgaz shares it sold to Itera. "This recommendation will be approved at the board meeting on July 31," said a Gazprom executive who asked not to be named. "I doubt that the management will drag out the decision on the fate of Purgaz," he said.

Purgaz has a license to develop the Gubkinsky deposit, with gas reserves of 381 billion cubic meters. In 1999, Itera extracted 3.8 billion cubic meters of gas from the deposit and 14 billion last year. In total, Itera extracted 17.9 billion cubic meters last year.

Purgaz supplies about 70 percent of the gas extracted by Itera, though initially it was a Gazprom subsidiary. Itera owned 49 percent of Purgaz, which it received in exchange for agreeing to develop Gubkinsky.

In 1999, however, Gazprom sold a further 32 percent stake to Itera for 32,000 rubles ($1,092), keeping a mere 19 percent. Purgaz, meanwhile, turned into Itera's main extraction enterprise.

PricewaterhouseCoopers says the gas monopoly could regain control of the Gubinsky deposit for a very reasonable price. Under the agreement, Gazprom can buy back 32 percent of the Purgaz shares at their face value of 32,000 rubles before Jan. 1, 2002.

The deal, however, only seems attractive at first glance. If Gazprom wants to get back what it lost, it must be prepared for serious additional expenditures. Itera had financed gas extraction mainly via credit schemes and is presently a major Purgaz creditor.

From 1998 to 2000, Itera gave Purgaz 6.5 billion rubles ($222 million) to develop the Gubinsky deposit. Of this, 4.2 billion rubles was provided in the form of loans and 2.3 billion rubles in promissory notes. Purgaz has returned 1.4 billion rubles to Itera, while the remainder will be due in the next three to four years.

The question of returning the assets has already taken on political significance, particularly since the change of leadership at the monopoly.

"If Gazprom decides not to use the option in regard to Purgaz, this will demonstrate that the new leadership of the company has no plans to stir up relations between Gazprom and Itera," said William Browder, managing director with Hermitage Capital Management Fund.

Earlier this month Browder's fund sent an official letter to two members of the Gazprom board — Boris Fyodorov and Ruhrgas head Bruckhard Bergman — requesting that the problem be resolved as rapidly as possible. Fyodorov has already applied to the Gazprom board requesting that the Purgaz issue by discussed at Tuesday's meeting.

Both Bergman and Itera declined to comment.