US seeks pacts with Russia to raise natural gas exports

Jun 20, 2004 02:00 AM

In an effort to ramp up natural gas supplies to the United States, US government officials are pursuing long-term natural gas export agreements with energy-rich Russia.
At the same time, Russia's largest natural gas company, Gazprom, is grappling with complaints from minority shareholders that its business and profits are not transparent enough.

US Deputy Energy Secretary Kyle E. McSlarrow met with executives from the Russian oil producer Yukos, Gazprom and Transneft, Russia's oil pipeline monopoly, just 10 days after Energy Secretary Spencer Abraham met with Kremlin officials and Russian companies.
Their hope is to increase Russia's energy exports to the United States and accelerate Gazprom's projects to liquefy gas in the Arctic.

The United States is so serious about pursuing natural gas deals with Russia that the US Export-Import Bank may help finance a $ 15 bn project to develop Russia's giant Shtokman gas field.
"The subject of investment has been discussed, including in the context of proposals which US ExImBank may put forward," Russia's deputy industry and energy minister, Ivan Materov, said. Materov also said that Russia was interested in large American energy companies participating in the project.

His American counterpart, McSlarrow, said LNG projects have emerged as one way to stave off an anticipated shortfall in North American natural gas supply.
"Under everybody's scenario, LNG imports will have to increase," said McSlarrow, referring to LNG. "I think Russia realizes that it ought to be a major player when it comes to LNG."

The Shtokman deposit, on the shelf of the Barents Sea beyond the Arctic Circle, has estimated reserves of 3.2 tcm of gas and 31 mm tons of gas condensate. The license to develop it belongs to Gazprom and a subsidiary of state-owned oil company, Rosneft.
Gazprom wants to sign a deal to develop Shtokman and build a liquefied gas plant, and potential partners mentioned in press reports include Norsk Hydro, ConocoPhillips, ChevronTexaco, ExxonMobil and Shell.
"All the US companies would like to do business with Gazprom," said one US official.

But industry analysts said they are sceptical about liquefied gas plant projects between Gazprom and US companies given the delays on other energy projects in Russia.
"There is clearly interest in the US on Russian energy exports to the West -- whether gas or oil," said Stephen O'Sullivan, co-head of research at the United Financial Group. "There is a lot of talk, but not practical support for projects like an oil pipeline to Murmansk to go ahead," from which Russia would be able to ship oil across the Atlantic to the United States. "That's my worry at the moment."

Meanwhile, a minority shareholder is raising questions about a trading deal that he claims not only hurts Gazprom's bottom line but appears to cede most of a lucrative market to a third-party company for no clear business reason. Hermitage Capital Management, with $ 1.5 bn under management the largest foreign investment fund in Russia, alleges that the Gazprom deal is costing shareholders potential profits, and wants its head of research, Vadim Kleiner, to win a board seat on Gazprom at the company's annual meeting in Moscow at the end of this month.
Hermitage alleges that Eural Trans Gas, a company set up in December 2002 and chaired by Cedric Brown, the former head of British Gas, acts as a middleman in two of Gazprom's most lucrative markets, Ukraine and Turkmenistan, and has been given more than half of that business by Gazprom. Eural, Hermitage says, made $ 767 mm in 2003 on the contract.

"One of the main questions for Gazprom's board of directors is why Eural Trans Gas exists when Gazprom could be earning this profit itself," said William F. Browder, CEO of Hermitage. Hermitage's effort to win a board seat has become something of an annual rite. Browder is known as an aggressive activist for minority and foreign shareholders in Russia.
Finally, Gazprom continues to dangle in front of foreign investors the often-mentioned possibility of scrapping its two-tiered share system known as the "ring fence."

Foreign investors are prevented from owning much cheaper, locally-traded shares of Gazprom, although Russian President Vladimir V. Putin last fall said getting rid of the ring-fence was "a matter of months, not years." The local shares fetch $ 1.95, while shares for foreigners trade at $ 2.90, a 48 % premium.
The ring fence "is coming to an end soon, probably before the end of this year," said Harvey Sawikin, co-manager of the Firebird Fund hedge fund and a shareholder in Gazprom.
As for Hermitage's allegations on Gazprom, Sawikin said, "The Kremlin is going to have to deal with this if they want Gazprom to become the blue chip of the Russian market."

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