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Analysis: Enter Gazpromneft

"There is no greater nonsense than the separation of internal from external policy." Vladimir Lenin

The proposed takeover of state-owned oil company Rosneft by the state-controlled natural-gas monopoly Gazprom is close to completion. On 11 November, the cabinet gave its approval to the proposal, under which Rosneft will be traded for an increase in the government's stake in Gazprom to 50 percent plus one share.

On 2 November, Gazpromneft, a fully owned subsidiary of Gazprom, was registered in St. Petersburg with 30 million rubles ($1 million) in capitalization. Gazpromneft will unite all of Gazprom's oil-sector holdings, including Rosneft and, according to some reports, state-owned Zarubezhneft. Rosneft President Sergei Bogdanchikov was appointed general director of the new company, whose main activities will include oil-and-gas-condensate production, transportation, and storage.

Gazpromneft, according to RBK, is expected to produce 34 million tons of oil in 2004, while Bogdanchikov told Interfax on 12 October that "Rosneft plans to produce 8 billion cubic meters and Gazprom 540 billion cubic meters of natural gas in 2004." Gazprom CEO Aleksei Miller has said that the company intends to boost oil production to 45 million tons annually over the next few years, reported on 16 November.

On 3 November, embattled Yukos, Russia's largest oil exporter, informed its shareholders that it will hold an extraordinary shareholders meeting on 20 December to discuss initiating bankruptcy proceedings, in the wake of a new Russian government demand that it pay $9 billion in back taxes. Yukos CEO Steven Theede told Interfax on 3 November that the 2002 tax claim of $11.5 billion against Yukos and Yuganksneftegaz, its largest production unit, was strange since Yukos's total revenues that year amounted to just $11.4 billion.

Adding to the sense of impending doom for Yukos was an earlier announcement in late October by the State Property Fund that Yuganskneftegaz will be sold at auction with starting price considerably less than the $18 billion evaluation made by the investment bank Dresdner Kleinwort Wasserstein.

Many observers in Russia have predicted that Yuganskneftegaz will be sold to Gazprom, and that it will go for far below its market value. The sell-off of Yuganskneftegaz has been seen as the beginning of the breakup of Yukos, and government officials have said that other Yukos subsidiaries could go under the hammer as well.

Reacting to the spate of articles in the world press criticizing President Vladimir Putin's apparent decision to break up Yukos and gain even greater control over Russia's energy sector, presidential aide Igor Shuvalov told a conference in Moscow on 28 October that the merger of Gazprom and Rosneft is connected to Russia's integration with the global economy. "We are not striving to gain full control over Russia's fuel-and-energy complex, and this is not even possible now," Shuvalov said, according to Interfax.

Many oil-and-gas analysts and politicians, however, think that globalization is not the key issue driving these developments. Instead, they focus on how the Kremlin has used Gazprom to advance its political goals in such places as Belarus, Georgia, and Armenia, and they speculate how it intends to use the newly formed Gazpromneft.


On 17 February 2003, "The Moscow Times" reported a speech Putin delivered at a reception marking the 10th anniversary of the founding of Gazprom. "Gazprom, as a strategically important company, should be kept, and has been kept, as a single organism," Putin told the gathered guests. "Gazprom is a powerful political and economic lever of influence over the rest of the world."

The use of Gazprom as a "lever of influence" has not gone unnoticed throughout the region. At a Polish parliamentary hearing on 25 October, former Polish foreign-intelligence chief Zbigniew Siemiatkowski said, "we are facing a restoration of the Russian Empire through economic means and by the principle of 'yesterday tanks, today oil.'"

Writing in the Ukrainian weekly "Zerkalo nedeli" in August 2003, Oxford University's James Sherr argued: "By the end of 2000, Putin had used Russia's debt and energy cards to acquire control of Moldova's energy and financial sectors and secure a distinct revision to Ukraine's geopolitical course (albeit one substantially balanced, then and now, by the NATO-Ukraine relationship). In February 2002, Putin proposed a 'single export channel' for all exports of gas from Central Asia. Since then (June 2002), he has secured agreement to route nearly all of Kazakhstan's current and projected oil production via Russia's transit network and in April 2003 concluded similar long-term agreements over the export of gas from Turkmenistan, which has the third largest reserves in the world." "It would be prudent to conclude that Putin's talk of 'globalization' is boltovnya [empty talk]," Sherr concluded.

A recent study by the Organization for Economic Cooperation and Development (OECD) titled "Russia's Gas Sector: The Endless Wait For Reform" points to yet another reason why the Kremlin is taking oil companies under its control by subsuming them into Gazprom. Production at Gazprom's major gas fields is declining dramatically, and in order to offset this, it is critical for new supplies to come from low-cost sources within Russia and abroad. "This points to an increasing role for the oil companies and the independents," the study concludes.

In 2004, Gazprom extracted 540 billion cubic meters of gas from existing gas fields. However, these fields are projected to yield only 28 percent of Russia's predicted 2020 total production of 580 billion cubic meters. As of 1 January 2004, Russia had proven natural-gas reserves of 46.9 trillion cubic meters.

An important goal for the Russian government is to supplement Gazprom's current production with associated gas from oil drilling, and therefore the merger with Rosneft, which is currently producing 8 billion cubic meters of gas annually, will help to make up for Gazprom's future projected production declines. This is the cheapest way for Gazprom to make up for dwindling production, one that avoids spending billions of dollars that it does not have for start-up costs and new pipelines.

Without an expansion of Gazprom's capacity to supply more gas to Europe, the chances of a future European energy crisis are greatly increased. At the same time, the stronger Gazprom is, the greater its potential leverage over European policies. Moreover, a decrease in gas exports could mean budget shortfalls for Russia, since a large slice of the state budget comes from Gazprom's taxes, which are paid for by gas sales to Europe.

Neil Thomas, head of European energy research for Wood Mackenzie, told Platts news service in 2003 that a new study has forecast that Europe will be 60 percent dependent on imported gas by 2015, compared with 40 percent currently. And much of this gas must come from Russia.

Europe currently imports about 160 billion cubic meters per year from Russia. By 2015, volumes could reach 300 billion cubic meters, equivalent to 40 percent of overall European demand.

Apparently, Putin has mastered Lenin's axiom of combining internal and external policy goals. The addition of Gazpromneft, with or without Yuganskneftegaz, could turn the notoriously opaque Gazprom, into a much more "powerful political lever" than anyone has imagined.