. Last Updated: 07/27/2016

Gazprom Takes PwC Audit to Heart

Gazprom's board of directors on Tuesday moved to tighten up the gas monopoly's activities after reviewing an independent audit that found the company had often — although legally — acted in ways that benefited competitor Itera.

The audit by accounting firm PricewaterhouseCoopers found numerous instances when Gazprom had transferred assets to Itera that cost it hundreds of millions of dollars in lost revenues.

The audit, which was leaked to the media earlier last month, also stated that PwC had not received sufficient information to determine whether current and former Gazprom executives personally benefited from those transactions.

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The Gazprom board ordered company management to adhere to PwC's audit recommendations. It was unclear what the recommendations were.

The Audit Chamber, parliament's budgetary watchdog, earlier this year also found that the relationship between Gazprom and Itera was one of "unrelated legal entities."

The controversy swirling around Gazprom and Itera began to heat up a year ago when Gazprom board member Boris Fyodorov accused Gazprom management of transferring assets potentially worth billions of dollars to Itera, a private gas trading company registered in Jacksonville, Florida.

Much has changed since those accusations began to fly, most significantly the appointment of Alexei Miller to replace long-reigning Rem Vyakhirev as chief executive of Gazprom, which produces a quarter of the world's natural gas. Investors see Miller, handpicked by President Vladimir Putin for the job, as a catalyst for change.

"Now we see that a lot of capitalization meant for Gazprom went elsewhere," said a government minister after seeing the PwC presentation of the audit at the board meeting.

Purgas, a gas operator that accounts for 78 percent of Itera's production, was mentioned often in discussions of the audit, said Fyodorov, who represents minority shareholders on the board.

In 1998, Itera had a 49 percent stake in Purgas, which has a license to develop the Gubkinskoye gas field in the Yamal-Nenetsk Autonomous Region. The next year, Gazprom — the controlling shareholder — sold Itera 32 percent of the company for a nominal value of 32,000 rubles (about $1,300 at the time). PwC estimated that Gazprom missed out on $200 million to $400 million in revenues.

However, according to a contractual clause, Gazprom has until the end of 2001 to buy back the stake at its nominal price plus the value of Itera's investment. The board did not agree on whether to buy back the shares.

"The next step is to use the report, take each point and transform it into concrete action," Fyodorov said in a telephone conference with investors after the meeting. "We need to make the system of controls better. We need to determine what functions should be given to the board of directors. Perhaps some restitution will be possible."

Market watchers say such changes will have a better chance of becoming reality now that the government — which owns 38 percent of Gazprom — has a majority on the board of directors. Until the latest shareholders meeting in June, management held the board majority.

"By the general atmosphere of the meeting, it's clear a lot of things have changed over the last month or so," Fyodorov said. "It was different from the old days, when Vyakhirev and the old-style managers were behaving more aggressively. It was more business-like."

In other actions, the board decided to take whatever action was "expedient" — such as buying more shares — to re-establish a controlling stake in gas producer Zapsibgazprom.

Gazprom said in a statement that management had also been ordered "to analyze the reasons the company temporarily lost control of its subsidiary's commercial activities."

Gazprom voluntarily gave up control of the Tyumen region-based Zapsibgazprom last year when it declined to participate in an additional share emission. As a result, Gazprom's share in the subsidiary's charter capital dropped from 51 percent to 33.9 percent.

But a wrench has been thrown into Gazprom's plans in getting back control. At the board meeting, it was discovered that Zapsibgazprom's most valuable asset — the license to its gas field — has disappeared into a subsidiary created by Zapsibgazprom. So, if Gazprom succeeds in buying the subsidiary's shares, it might not regain control of the field's development.

The board also agreed that Gazprom and a consortium of Hungarian banks will try to raise $175 million to build the Yamal-Europe and Bluestream pipelines.

Fyodorov said he remained cautiously optimistic about more concrete steps being taken at the next board meeting, scheduled for Aug. 28, and in the upcoming months.

"This is not a real battle where all wrongs are righted immediately," he said.