MOSCOW – The Russian government is moving to tighten its grip on the country’s lucrative hydrocarbon and energy sectors, trying to consolidate all of the government’s energy assets under one roof. President Vladimir Putin has given the green light to the merger of Gazprom, the world’s largest gas company, with state-owned Rosneft to form Gazpromneft. The deal will increase the state’s stake in Gazprom to 50% plus one share. State control over the gas giant is also expected to pave the way for Gazprom’s bigger role in a number of Asia-related projects.
Gazprom aims at supplying natural gas to China, its chief executive officer (CEO) Alexei Miller told journalists in Beijing during Putin’s visit there. He described the talks in Beijing as “a fresh page opened”, referring to Gazprom’s unsuccessful West-East project. Agreements, under which Russia’s Gazprom, Royal Dutch Shell and ExxonMobil were partners in the West-East Pipeline project, have collapsed, in part because of disputes over the pipeline’s proposed rate of return.
Nonetheless, during Putin’s official visit to China earlier this month, Gazprom and China National Petroleum Corporation (CNPC) signed an agreement on strategic partnership. According to the agreement, the two sides are to prepare for natural gas supplies from Russia to China. The agreement stipulates cooperation in oil and natural gas exploration, production, transportation and sale, gas-transporting and gas-distributing systems development, as well as underground gas storage construction and handling in China.
Russia and China set a goal for their bilateral trade last year, with the trade volume this year expected to hit US$20 billion, reaching $60 billion in 2010, presumably bearing in mind increasing Russian hydrocarbon supplies to China. However, little progress was made on the 3,000-mile gas link from the Kovykta field in eastern Siberia, first proposed nearly a decade ago, and a 1,500-mile oil link from western Siberia to Daqing, the heart of China’s refining industry.
CNPC presumably hoped Putin would approve the gas link during his talks with Chinese counterpart Hu Jintao, who reportedly raised the issue personally. But all CNPC got was a memorandum of understanding-style agreement on cooperation with Gazprom.
Meanwhile, with the Rosneft merger, Gazprom is set to inherit a number of important Asia-oriented projects. State-owned Rosneft, which acts as the government’s agent in foreign oil projects in Russia, is involved in five out of the six Sakhalin blocks in Russia’s Far East, potentially among the largest 21st century energy projects. Sakhalin crude and natural gas are aimed at nearby East Asian markets. Neighboring Japan is understood to count on Sakhalin to cut its dependence on oil supplies from the Middle East.
Sakhalin-1 and Sakhalin-2, led by Exxon and Royal Dutch Shell, are the island’s advanced projects. Russia received $6.5 billion in foreign direct investment (FDI) in 2003, with nearly half of that total invested in Sakhalin. Moscow expects the country will receive $8.2 billion in FDI this year, of which at least one-third is expected in Sakhalin.
Gazprom should have a bigger role in the Sakhalin oil and gas projects, Russian Prime Minister Mikhail Fradkov said recently, adding that Gazprom was holding talks with Shell about the Sakhalin-2 project. Moreover, at a meeting in London between Gazprom CEO Miller and BP chief Lord Browne earlier this month, Gazprom and BP agreed that “the development of the Kovykta field should be combined with the development of other fields in eastern Siberia and the Far East”. Miller has said that following agreements with CNPC, Gazprom prioritized the Sakhalin oil and gas projects.
Previously, TNK-BP – a Russian company in which BP holds a 50% stake – and Gazprom disagreed about Kovykta, which was conceived as an export project. Kovykta is a gas condensate field in the Russian region of Irkutsk. The field, which lies 450 kilometers northeast of Irkutsk city, is estimated to contain nearly 2 trillion cubic meters of gas.
During Chinese Premier Wen Jiabao’s visit to Russia in September, the two countries agreed to increase oil trade by rail. Oil deliveries from Russia to China by rail are expected to reach 10 million tons next year, and 15 million tons in 2006. Russia’s oil supplies to China have been dominated by the beleaguered oil major Yukos.
However, oil trade with China could also end up under the government’s control. Gazprom’s new oil arm, Gazpromneft, is seen as a major contender in the planned sell-off of Yuganskneftegaz, the core production unit of Yukos. Gazpromneft could thus well replace Yukos as China’s main oil supplier from the north.
Gazprom has also made inroads into Russia’s electricity sector by buying a 10% stake in state-controlled monopoly Unified Energy Systems. A Gazprom subsidiary has gained a majority stake in Atomstroiexport, Russia’s exporter of atomic technology. Incidentally, Russia is now mulling a new nuclear power plant project in Tianwan, east China’s Jiangsu province. Russian companies took part in the first phase of the Tianwan Nuclear Power Plant, which is expected to be completed soon.
In the meantime, Gazprom’s Asian reach could soon extend as far as the Indochinese peninsula. Gazprom could acquire state-owned oil major Zarubezhneft, the country’s predominant operator of state-controlled overseas oil projects, in addition to its planned merger with state-owned Rosneft, Miller announced earlier this month. Gazprom’s takeover of Zarubezhneft could give it a foothold in oil development projects abroad, including in Vietnam and possibly in Iraq.
Zarubezhneft is now a big player in Vietnam’s offshore oil fields. It operates – in 50:50 partnership with PetroVietnam – the $1.5 billion Vietsovpetro (VSP) joint venture, which accounts for the bulk of Vietnam’s oil exports. In 2003, Vietsovpetro pumped 13.12 million tons of crude, while Vietnam’s overall output reached some 17 million tons. The 50% stake in VSP is Russia’s most profitable state-owned asset. Russia earned some $500 million of profit from Vietsovpetro in 2003.
On the other hand, Zarubezhneft recently withdrew from a major venture, VietRoss, to build Dung Quat, Vietnam’s first oil refinery. In December 2002, Zarubezhneft pulled out of the $1.3 billion VietRoss joint venture and Vietnam reimbursed Russia the $235 million it had put into the VietRoss venture.
Apart from Vietnam, Zarubezhneft has interests in Syria, India, Turkmenistan, and Iraq, until recently, while it plans projects in Algeria, Libya and Yemen. Zarubezhneft has been estimated as being worth between $500 million and $1 billion. But it is only Vietsovpetro’s operator, not owner. Without lucrative Iraqi projects, the total value of assets owned by Zarubezhneft is estimated at less than $5 million.
Zarubezhneft has a 3.25% stake in the Russian-Iraqi consortium that Saddam Hussein’s regime had granted the rights to develop Iraq’s vast West Qurna field. Other shareholders were LUKoil (68.5%), Mashinoimport (3.25%) and the Iraqi government (25%). The consortium’s future has been put on hold following the US invasion.
Gazprom is thus moving toward becoming a dominant power in Russia’s hydrocarbon and energy sectors. However, it remains to be seen whether state control could become the world’s largest gas company’s answer to challenges in Asia, and elsewhere.
Based in Moscow, Sergei Blagov covers Russia and post-Soviet states with special attention to Asia-related issues. He has been contributing to Asia Times Online since 1996. Between 1983 and 1997, Sergei Blagov spent some seven years in Southeast Asia, mainly in Vietnam. In 2001 and 2002, Nova Science Publishers, NY, published his two books on Vietnamese history.