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. Last Updated: 07/27/2016

Squabbling Resumes Over Merger

Bitter infighting over the proposed merger between Gazprom and Rosneft broke out into the open again Thursday as unnamed senior government officials told Reuters a full merger between the two companies had been scrapped.

But another state official said on condition of anonymity that the original deal in which Rosneft would be folded into Gazprom was still set to go ahead.

"This report is not true," the state official said. "The variant in which Gazprom would be a minority shareholder [in Rosneft] is not going to happen."

"There are conflicting reports on this all the time," he said. "It's like a game. But in fact the deal is going to take place as planned."

A Gazprom source told Reuters that his company would not consider taking a minority stake in Rosneft, while a spokesman for the state-owned oil firm declined to comment.

Reuters reported that Yuganskneftegaz, the former Yukos production unit, would not be spun off as initially planned and would be integrated into Rosneft, leaving it likely that Gazprom could only take a minority stake in the greater Rosneft-Yugansk entity under a share swap deal.

Under the original deal, Gazprom was to have gained full control over Rosneft, with Yugansk, which produces about 1 million barrels of oil per day, remaining a separate entity.

But with no official denial of the Reuters report immediately forthcoming Thursday, it looked likely that the terms of the merger were still far from decided and that wrangling over the spoils of the state's takeover of Yugansk could drag on for some time.

The Gazprom-Rosneft merger had been seen as a watershed event for the Russian investment climate when first approved by President Vladimir Putin last fall.

It was touted as a deal that would create a national energy champion and pave the way to lifting restrictions for foreigners on holding Gazprom shares. Under the intended share swap, the government would boost its current 38 percent stake in Gazprom to a controlling one, a condition vital for liberalizing the share market.

But the deal began to fall apart last December after Rosneft acquired Yugansk at the last minute instead of Gazprom. Then this March, the newly powerful company, whose assets had effectively more than trebled overnight, openly disputed the original merger plan and said it would retain control of its assets, while saying the plan to spin off Yugansk was "not true."

If Yugansk were to remain under Rosneft's control, such an outcome would be seen as a major victory for Rosneft president Sergei Bogdanchikov and the firm's chairman, Kremlin deputy chief of staff Igor Sechin. The two men have been seen as being among the main instigators of the attack on Yukos.

The infighting has threatened to expose a major rift in the Kremlin. Putin's chief of staff Dmitry Medvedev, who is Gazprom's chairman, has been thought to be in favor of Gazprom taking control of Rosneft.

Whatever happens, the government is intent on liberalizing Gazprom shares, no matter what the swap ratio is for merging the two companies, Reuters reported.

Three independent sources close to the situation told the agency that the state remained committed to increasing its stake in Gazprom to more than 50 percent.