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Are the Russians Coming?

BY ANY MEASURE, Russia’s Gazprom is huge. With 30.4 trillion cubic meters of natural gas in reserves, it is the …

BY ANY MEASURE, Russia’s Gazprom is huge. With 30.4 trillion cubic meters of natural gas in reserves, it is the world’s biggest gas company, accounting for 25 percent of world supplies. It is Russia’s largest company with revenues of $35.2 billion and 330,000 workers, and represents 8 percent of Russia’s GDP.

Despite a recent flap over cutting off the flow of gas to the Ukraine, Gazprom is seeking billions in foreign investment for various projects, including supplying gas via pipelines to Western Europe and China, and through an ambitious liquefied natural gas (LNG) project to the U.S. within a decade. President Vladimir Putin has signed off on allowing foreigners to invest directly in Gazprom without limits. Of special interest is its gigantic Shtokman gas field above the Arctic Circle. Chevron, Conoco Philips, France’s Total, and Norway’s two energy companies Hydro and Statoil are on the short list to develop the field.

As reflected in the Ukrainian incident, Gazprom is taking a leading role in promoting President Putin’s nationalistic hard line. Last year, the state succeeded in its fraud conviction of maverick Mikhail Khodorkovsky, head of Yukos Oil. Putin also upped the government’s share of Gazprom from 38 to 51 percent as Gazprom bought oil company Sibneft to diversify into petroleum. Gazprom also hired former German Chancellor Gerhard Schröder to work on a controversial Baltic Sea pipeline project after he left office.

Alexander I. Medvedev, Gazprom’s No. 2 and head of its export unit, was in the U.S. prior to the Ukrainian cut-off. Here are excerpts from a conversation:

Why are you here?

It’s part of our marketing effort through a series of events in Washington, Houston and Boston to show the seriousness of our commitment to become an active energy player in the United States in the gas business. It was a priority to become an LNG player and also participate in downstream business in the U.S. We want to prepare public opinion and the investment community.

What are you going to try to do with your LNG?

Our strategic preference is known-it’s downstream. So for LNG, it’s gasification terminals plus marketing opportunities.

Right now, two-thirds of your gas output is used at home and one-third is exported. Do you foresee a change in the mix?

We are rather sure that our export volume will develop quickly because we have contracted on a long-term basis for a substantial amount of gas already. With respect to how demand in Russia will develop, we expect to see more energy-saving technologies. That is good for the energy balance of Russia.

Are your prices lower?

There are transport and distances to consider, but in general our prices are substantially lower now.

How do you plan to export directly to the U.S.?

Before our Shtokman project will be executed, we are planning to get access to LNG for the medium-term through companies interested in doing swaps with us. Shtokman will have its own facility to deliver gas to the U.S. The East Coast is relatively close. For the U.S. Gulf Coast, there are comparable advantages also. The earliest date this could happen is at the end of 2010.

How are you going to dealwith the problems of Shtokman being in an extremely cold and remote area?

First of all, the experience that Norwegian, American and French companies have is allowing us to be sure that the technology for the project is feasible.

You’re acquiring Sibneft. What does that mean?

It’s part of our diversification strategy. We are expanding our activity for crude oil products. Wholesale LNG is part of the diversification, plus petrochemicals, because Gazprom is exporting the full range of products. If you look at who the major players are, you can’t find pure oil or pure gas companies. It’s always a mixture. If you look at Exxon, Shell or Chevron, they all follow this route.

Have there been changes in how Gazprom is managed?

The change in the management style started approximately four years ago. [We had a new] chairman and CEO and he brought in a team of managers. The simple criteria was getting people who had confidence and could show their ability to deliver results.

Instability and sudden changes in the laws have been problems for foreign companies in Russia, right?

Russia made a big step ahead with adaptation of her tax regime. Not only foreign investors but also Russian investors need the same latitude. Now, the situation is probably one of the best in the world. The corporate profit tax is 24 percent.

Can you comment on Khodorkovsky?

I have some first-hand experience with him. I was an executive at Eastern Oil. They took it over in a privatization, which was an $850 million deal. But they milked the companyover the next nine months. They increased production without optimizing it, which could be very dangerous for the future of the country. These guys were thinking very short term. To believe that the wealth that you have in your hands was created by yourself, that’s a major p1sychological mistake. Khodorkovsky and his companions started to behave as if the wealth was theirs.

Are the state, the Kremlin and Putin consolidating control over the energy sector?

Gazprom will be a company with mixed capital. But other companies with no state participation will continue to play their roles, like Lukoil, Surgutneftegaz and TNK-BP. If you look at the energy sector as a whole, it’s a competitive environment. The state, in accordance with current legislation, is not trying to nationalize but to prevent cases like we saw with Yukos.

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