A Russian Giant Tromps Onto The World Stage

Gazprom is boosting natural gas exports
and opening up to foreign investors

By Jason Bush in Moscow
OCTOBER 19, 2005

Does Gazprom have a U.S. business in its future? With two-thirds of its production going to the home market, the Russian natural gas behemoth traditionally has been more of a domestic and regional player than a global one. But now it's laying the groundwork for a multibillion-dollar project that will enable it to ship liquefied natural gas (LNG) in tankers from the Arctic Circle to North America by 2010. "Gazprom is implementing a new strategy to become a global energy company," says Gazprom spokesman Sergei Kupriyanov.

At the heart of the plan is the giant, undeveloped Shtokman gas field in the Barents Sea, 560 kilometers off Russia's northern coast. To get at the 3.2 trillion cubic meters of reserves, Gazprom is working to bring in Western energy companies as partners to build LNG facilities. The foreign businesses will own up to 49% of the project, which is expected to cost $10 billion to $20 billion.

Among the hopefuls: Chevron (CVX ) and ConocoPhilips (COP ) from the U.S., Statoil (STO ) and Norsk Hydro (NHY ) from Norway, and France's Total (TOT ). Early next year, Gazprom is scheduled to make a decision on which two or three will be the winners. "Every oil-and-gas company is interested in getting more reserves, and Shtokman is a huge field," says Henrik Carlsen, senior vice-president for the Barents region at Statoil.

The potential to export to the U.S. is another attraction: "If we look at Shtokman's position, it's closer to the U.S. east coast than [are] gas fields in the eastern Mediterranean and the Middle East," Carlsen says. In 2005, U.S. gas import prices have been about six times higher than those Gazprom fetches in Russia. And demand is soaring. The U.S. consumes a quarter of the world's natural gas supply, and the U.S. Energy Dept. forecasts that, by 2020, LNG imports will account for a fifth of gas needs, up from 3% now.

FLOWING TO BRITAIN

The Russians also are spending big money to ramp up export capacity to Europe. On Sept. 8, President Vladimir V. Putin signed a landmark deal with German Chancellor Gerhard Schröder to begin work on a 1,200-km pipeline under the Baltic Sea from northwest Russia to north Germany. The line, due to open in 2010, will cost around $5 billion to build and eventually carry 55 billion cubic meters of gas a year. The idea is for Russian gas to reach other northwest European markets, including Britain. Gas in Western Europe currently fetches prices around five times higher than at home, so boosting exports to the region is crucial to increasing Gazprom's revenues.

Gazprom and its Kremlin masters are also keen to raise Gazprom's international standing by reaching out to foreign investors. Putin recently reiterated a promise to let foreigners freely invest in Gazprom stock, saying restrictions on foreign ownership would be lifted by the end of this year. That would turn Gazprom into a must-have stock for international portfolio managers, boosting its $100 billion market capitalization.

Gazprom's plans to boost exports and open up to investors make good business sense, but they won't necessarily turn the company into a world-class player. Even after shares are made available to foreigners, the state will retain a controlling 51%, and concerns about Gazprom's efficiency are sure to linger.

Critics note that Gazprom's pipeline construction costs are around three times the industry standard. Its drilling costs are about 50% higher than in North America. "By and large, they're still operating on Cold War infrastructure and Cold War economics, and need to adjust to a new world," says William F. Browder, CEO of Hermitage Capital Management, the largest portfolio investor in Russia. Even so, the world seems eager for what Gazprom has to offer.