Russia's dominant gas producer Gazprom has been probably the only one of the country's oil and gas producers to emerge from recent instability unscathed. Gazprom's size, as well as its government-linked status, has made it a favoured client for offshore lenders.

Gazprom plays a dominant role in supplying Europe with gas, a role that dates back to Soviet times. But Gazprom, which is the world's largest producer and exporter of gas and holds the largest reserves of gas of any corporation, has larger ambitions, as demonstrated by its $13.1 billion of Russia's fifth largest oil producer Sibneft last month. In short, Gazprom is on the path to becoming a global energy super-major.

In addition to diversification Gazprom is looking for new geographic markets, primarily in the fast growing and potentially much larger markets of North America and the Asia-Pacific. And the exigencies of serving these markets make the use of liquefied natural gas (LNG) essential.

In particular, Gazprom wants to expand its presence, even create a brand, in the US. In this it follows peers such as Lukoil, an oil producer that operates filling stations in the US, and Suez Energy, which has built a corporate brand around its current LNG importation and power generation capabilities. Yesterday's niche product, one that only really presented an opportunity for stranded gas producers to serve a small number of Asian markets, is today's mainstream fuel.

The three to beat

Gazprom's LNG strategy is focused on three main projects – Shtokman, St Petersburg and Sakhalin 2, the last of which Gazprom essentially chanced upon. Gazprom's involvement in Sakhalin goes back to its takeover of Rosneft in 2004, and while Gazprom's involvement may have settled some anxieties that foreign lenders had about the commitment of the Russian government to the project, it has not been of much assistance in keeping the project's costs down or easing the pressure from international NGOs.

The shape of the Sakhalin deal, in which Gazprom is still a minority partner, is in the hands of Shell, the lead developer: Gazprom gained a 25% stake in Sakhalin as part of an asset swap that it agreed with Shell on 5 July 2005. The other two schemes will, however, be Gazprom affairs, even if it involves foreign partners. This will be especially important if the Russian producer wants to become a meaningful player in the US.

Alexander Medvedev is the deputy chairman of Gazprom, and the director-general of GazExport, the arm of Gazprom tasked with the effort. Responding to questions at an appearance at the New York Stock Exchange on 1 September, he said "we'll start by importing third party LNG into the US, but we will switch to our own by 2009."

Shtok and awe

Meeting this target will be the Shtokman project, which consists of a gas field development in Western Siberia and an LNG terminal located near the Barents Sea. According to Medvedev, the cost of the entire Shtokman first phase is $10 billion, including production and liquefaction facilities. This would be largely self-contained, although Gazprom has previously announced plans for a pipeline that would carry gas from the Yamal peninsular, a region to the east of the Barents Sea where there are also large gas reserves, to Europe.

Shtokman has reserves of 3.2 trillion cubic metres, a figure which dwarfs the entire reserves of producers such as Indonesia and Canada. But it is located very far north, in a highly inhospitable area, and cost forecasts for the development are likely to be as unreliable as those for Sakhalin 2 proved to be.

The shortlist of outside partners for the project, which was announced on 14 September, consists of Norsk Hydro, Statoil, ConocoPhillips, ChevronTexaco and Total. The winners beat out competition from ExxonMobil, Sempra, Shell, Mitsui and Mitsubishi. Comment on the selection, on which Pace is advising, has focused on the relationship of the losing bidders to the Russian government, although the project's need for experienced operators (the Norwegian bidders) and reliable offtakers (the US players) was likely an equally important consideration.

Baltic building

The second priority LNG project, which also has an equivalent pipeline route, is the St Petersburg LNG plant. This project presents a much smaller set of technical challenges, since it is located much further south, and will probably draw gas from Gazprom's existing pipeline system. This plant would have a capacity of 3.5 million tonnes per year.

For this terminal, Gazprom has signed a memorandum of understanding with PetroCanada to work on a feasibility study, but it appears likely that Gazprom is looking to hook up with a larger and more influential player. Asked whether PetroCanada was still the preferred partner, Medvedev responded "PetroCanada has an agreement with us for a joint feasibility study, but unfortunately they have the same problem as other producers, in that they don't have permission for a regas terminal. So we are evaluating several options, and will come to a decision by the end of the year."

The US is the prize market for Gazprom – indeed Medvedev's visit was designed to highlight the arrival of a Gazprom-owned LNG cargo at the Cove Point regas terminal. The visit was overshadowed by the aftermath of Hurricane Katrina, which might have highlighted the advantages to US markets of viable import alternatives, but left his visit largely unreported outside of Russian-language media.

Is the timing right?

Moreover, it highlighted the sudden shifts to which a strategy such as Gazprom's – a massive and unwavering commitment of resources towards a single goal – might be vulnerable. Just as Gazprom's commitment to the US has stopped attracting doubters, its certainty about the viability of a US future attracts a similar crowd.

This wariness stems not just from the projected costs of exploiting Shtokman, which will produce more expensive gas than, say, Qatar, but also whether the US' need for imported LNG will continue to expand over the next decade plus. Shtokman could produce one quarter of the LNG to come into the US, although the speed with which it can get this gas to market depends on hitching its fortunes to the right importer. Should its partner, say, be unable to secure capacity, or find its capacity underwater, then Gazprom might be better off turning its attentions east, or back to Europe.

But Medvedev is confident that despite the opportunities elsewhere for Gazprom, and the advantages that other gas producers might enjoy, the US strategy is still viable. "At the moment, we're more in a position to control capacity than physically provide LNG, but we believe that the window of opportunity is open, and is not yet closed. We'll select a Shtokman partner by the end of the year, and make a final investment decision early next year."

Europe provides many of the credentials that the Russian brings to its bid for the US. Asked by Project Finance whether Gazprom will be able to compete in a liquid market against large integrated majors that control, and own, their own regas capacity, Medvedev notes that "we have had experience playing in a liquid gas market in the UK." He also notes that US majors are not the only importers eyeing the US, and that Gazprom is likely to take positions in many elements of the LNG distribution chain.

Debt to go

And then there is the question of how Gazprom will finance the work in question.
Gazprom is a large international borrower, and now has a rating on the international scale of Baa3 from Moody's. At a time of high gas prices, and when lending sentiment has veered towards the larger and better-connected Russian corporates, Gazprom finds it fairly easy to raise debt.

The Sibneft buy-out, for example, features no project debt and is funded by a $12 billion bridging package from ABN Amro, Dresdner Kleinwort Wasserstein, Citigroup, Morgan Stanley, Goldman Sachs and Credit Suisse. The facility comprises short-term bank loans and $6.5 billion of bonds: the bonds were placed a week before the acquisition and priced at par on a coupon of 6.50%, to offer a spread of 190bp over mid-swaps. The deal will almost certainly be refinanced by the end of 2005, when a $7 billion payment is due from government-owned Rosneftegaz for its 10.7% stake in Gazprom.

Medvedev does not explicitly promise, as his counterparts at Russian electricity generator UES have, a raft of project financings. Instead he suggests that given the likely requirements of an all-equity deal, some sort of structured solution is a possibility to fund Gazprom's US ambitions.

Asked whether the Bluestream financing, the nearest deal yet to a project financing that Gazprom has closed, might be a template for the future LNG deals, Medvedev responds, "the Bluestream financing signed in the aftermath of the 1998 crisis – a very difficult time. A while later we refinanced this loan using Gazprom's conditions, and all but one of the existing lenders accepted them. We believe that the lending community is looking for quality assets." This does not add up to a promise, either way, of work for project banks. But it does mark the recognition that Gazprom can drive a much better bargain today.

Share capping

It is this, as much as any aversion to the structuring involved in a project deal, which makes project bankers cynical that any deal will come their way. "I just don't see why they'll put in all the work if current high oil prices persist," says one, "unless they choose a joint venture partner that prefers it." This cynicism is prevalent in the London market, where lenders say they have heard as much from Russian producers before.

The attitude will not, however, affect whether Gazprom gets the financing it wants, since at the moment banks are not holding the upper hand in potential negotiations. Moreover, while Gazprom is committing impressive resources to LNG, it is not betting everything on the market. "Despite the progress of globalisation," says Medvedev, "the proportion of LNG will remain small and limited, even if volumes do go up."

In the interim, and before the 2010-11 date for the start of LNG deliveries, Gazprom is also mulling a stock market listing abroad, either a formal initial public offering, or an American Depositary Receipt issue. According to Medvedev, "we are looking at it, but to be a cautious optimist, the process could take two or three years, and we have not taken a final decision."

Gazprom's presence in the US is unlikely to be as disruptive either to the US market – or to Gazprom – as the headline production forecasts might indicate. Pipeline projects, both to Europe and from Central Asia, will be an important part of Gazprom's plans for exporting its gas. On 8 September, in the presence of both the then German Chancellor Gerhardt Schroeder, and Russia's president Vladimir Putin, Gaszprom signed a basic construction agreement with Eon and BASF for the North European Gas Pipeline (NEGP).

NEGP is a 1,200km pipeline that will run from Vyborg in Russia to Germany's Baltic coast. Gazprom holds 51% of the project's equity, while the two German partners each hold 24.5%. The 27.5 billion cubic metres per year pipeline has an estimated cost of Eu4 billion, and would bypass Poland, which has complained bitterly about the project.

Moreover, reports from the region suggest that the NEGP might be combined with the St Petersburg LNG project, which is based nearby, with both onstream by 2007. However, these reports originate with the region's government rather that with Gazprom.