By Vladimir Shlyomin

I

n a short time Gazprom, a Russian gas major, can acquire major oil production assets. To increase the company` s capitalization Russian Federal authorities have decided to sacrifice Rosneft, a Russian state owned oil company, which shall be incorporated into Gazprom. Russian President Vladimir Putin, the RF Government and Gazprom leadership have approved this incorporation. The deal is expected to be completed by the end of the year 2004.

A merger scheme looks like this. Rosneft` s assets are to be integrated into a newly established Gazpromneft Ltd, a company 100% owned by Gazprom. The company` s shareholders equity is to be paid at the expense of Gazprom. Upon estimation of Rosneft and determination of an assets exchange coefficient and a scheme of merger, Gazpromneft is to make an additional issue to be paid by Rosneft shares. In exchange reacquired stocks of the gas monopoly, which are currently kept on balance of its subsidiaries, are to be brought under the state control.

Gazprom has chosen Dresdner Kleinwort Wasserstein investment bank to tackle the deal on exchange of the shares. For this purpose DrKW has set up three expert groups, namely: a group of experts to estimate Rosneft assets, a group to estimate Gazprom shares and a group to work out a structure of the deal. A share exchange scheme is to be drafted both at the corporate level and at government institutions, including federal ministries and agencies.

It is supposed that this deal should eliminate obstacles for a merger between foreign and domestic markets of Gazprom shares and lift restrictions for foreigners to own Gazprom shares.

In a discussion with the Russaian President Valdimir Putin Michael Fradkov, the Russian Prime Minister, made a specific emphasis on a necessity to liberalize the market of Gazprom shares. The Prime Minister said that the Government considered the measure absolutely necessary. According to the Prime Minister to merge foreign and domestic markets of Gazprom shares would ensure a complete freedom for circulation of Gazprom shares on the domestic market for them to be traded on each trading floor, which has a license of the Federal Service on Financial Markets. It would also lift restrictions on depository registration of shares owned by Russian investors. Moreover, it was supposed to allot a 20% quota for foreign investors and to establish a sole depositary to register rights of foreign investors.

"Now we can say that an important step has been made to liberalize the market of Gazprom shares, which has been waited for long. The government was worried about getting a controlling interest in the gas monopolist. Now a way out of the difficulty has been found. One can say that the hand-brake of the reform mechanism has been released", - officially states Brokercreditsrvice company.

Victor Christenko, the head of the RF Ministry of Industry and Energy, outlines that "such consolidating processes fit well the fuel and energy strategy of Russia to strengthen the position of Russian companies first of all on the international scene".

It is obvious that incorporation of Rosneft meets the market strategy of Gazprom. Alexander Miller, the head of Gazprom, does not consider oil production a new business for his company. In his speech at a meeting of the Board of Gazprom Mr. Miller said: "Oil production has always been in line with Gazprom business. Today Gazprom` s production of liquid hydrocarbons has reached 11 million tones. Our estimation shows that restructuring this business to establish an independent Gazpromneft company will allow us, based on our own oil and gas condensate fields, to step up production of oil and gas condensate up to 40 -50 million tones per annum.

Sergey Bogdanchikov, president of Rosneft, in his turn reminded that over the recent six years an assessed value of his company had increased tenfold owing to its higher performance. According to Mr. Bogdanchikov Rosneft had increased its annual oil production from 12 up to 21 mln. tones and gas production from 4 up to 8 bln. c. meters of gas assuming that the company` s strategy of development for a period until 2015 provided for a yearly increase up to 45 mln. tones in oil production and up to 50 bln. c. meters in gas production.
While analyzing the figures above one can imagine an aggregate production capacity of the new oil and gas giant. However, the final result can excess an arithmetical sum of production potentials of the two state-owned companies.
"In terms of production a perceptible effect will be achieved with regard to several projects. There will be no grounds any more for competition between the two companies on development of Shtockmanovskoye and Prirazlomnoie, two major oil and gas condensate fields on the shelf of the Barents Sea", - notes Michael Krutikhin, an analysts of RusEnergy agency. Arkady Venedictov, a scientific research worker from the Institute of Open Economy, buttresses this opinion. He also reminds about plans of complex development of two major oil and gas fields in Eastern Siberia by a Gazprom-Posneft consortium.
Another likely scenario is that the state may wish to increase its presence in the oil production sector. "Not so long before official representatives stated that the share of the state owned Rosneft on the Russian oil market should have been increased up to 20%. To date this share amounts to 4.5% and it can hardly be increased more than fourfold despite the new licenses Rosneft has obtained for developing new oilfields with more than 700 mln. tones of oil in reserves, - analyzes Alexander Razuvayev, an analyst from Megatrustoil financial company, - It is very likely that Gazprom` s oil business will soon be supplemented with Yuganskneftegaz (a major oil production asset currently owned by YUKOS). In this case a direct influence of the state will cover 15% of the Russian oil production sector."
However, Mr. Miller, the head of Gazprom, was in haste to state that his company was not interested in purchasing YUKOS` s assets at the moment.
In experts` opinion the merger between Rosneft and Gazprom could take quite a period of time. "Depending on the corporate management structure of each of the companies the procedure can take them a year or two," – predicts Yakov Sadchikov, an analytical research director of RussiaDeal company.
A number of problems will arise in connection with the process. Thus, for example, misunderstanding has already surfaced with regard to estimation of the block of Gazprom shares to be transferred to the state in exchange of Rosneft shares. Mr. Miller said that Rosneft shares would be exchanged only for such amount of Gazprom shares required to get a 50% stake plus one share in the gas holding. In the meantime, according to Dmitry Tzaregorodtsev, an analyst of Interfintrade, with the deal completed state will get more than 54% stake in Gazprom.

It is also necessary to define more exactly the scheme of integration of Rosneft and clarify an issue of restructuring its oil production assets. Should Gazprom decide to consolidate Rosneft` s subsidiaries put on the balance of Gazpromneft Ltd., it will have to buy out their shares from minor shareholders, some of which can be unhappy about the merger. Hence, there is a possibility of litigation.

However, despite all the difficulties the merger between Gazprom and Rosneft would be a positive event for the market on the whole. The key benefit from the process is that liberalization of Gazprom shares circulation will result in higher prices for them to encourage the whole stock market. It will facilitate inflow of foreign investments into Russia. Moody` s agency has already announced its intention to reconsider Gazprom ratings. If after a thorough analysis Moody` s arrives at a conclusion that Gazprom investors may draw benefit from higher state influence in the company and such influence does not affect its commercial orientation, a decision may be made to increase the main rating of Gazprom up to sovereign credit rating of Russia.

In the margin:
• The state owns a 38.37% stake in Gazprom directly plus extra 0.9% owned indirectly through Rosgazificatsia, a state owned company. Taken together all Gazprom subsidiaries own a 16.2% interest in Gazprom, with another stake of 11.5 % owned by foreign investors (including a 4.58% interest owned by Gazprom Finance BV).

• In 2003 Gazprom produced 540.2 bln. cubic meters of gas and 11 mln. tones of oil and gas condensate.

• According to IAS standards in 2003 Gazprom` s net income totaled $ 6 bln. USD with $30 bln. USD in revenue. By US GAAP standards in the same year Rosneft reached $ 3.6 bln. USD in revenue and $386 mln. USD in net profit.