Downstream dating
Gazprom's latest joint venture, Achimgaz ? which may become a
project finance target by the end of this year ? is the product of
one of its longest-lasting friendships, with the BASF group of
Germany.
Achimgaz was set up in Moscow on 17 July as a 50-50 joint venture between Gazprom and Wintershall, a BASF subsidiary. The project company will develop an experimental sector of the low-lying Achimov horizons, notoriously difficult-to-access but richly endowed deposits, 3150-3800 metres below ground, beneath the main workings at Gazprom's largest producing field, Urengoy in west Siberia.
Wintershall will finance an initial phase, costing $90 million, during which results of a feasability study will be examined and future development costed. A second phase is hoped to bring the project to production (of 8.3bcms of gas and 2.8 million tonnes of concentrate per year) by 2008. Total production expected from the 43-year project is 200 bcms of natural gas and 40 million tonnes of condensate.
If and when the Achimgaz project goes further, it is likely to need about $600 million of project finance ? and would certainly be one of the items covered by a project finance programme now being integrated into company strategy.
At a briefing for journalists on 26 June, Boris Iurlov, Gazprom's chief financial officer, said: ?This programme will be ready in the autumn. For large-scale development projects, it envisages partnerships with strategic international players and the use of classic project finance structures.? The programme comes alongside a broader plan for raising debt on the capital markets (see below), which has been welcomed by financiers for its coherence.
Members of Gazprom's finance team, who are now sketching out the project finance programme, will be acutely conscious of the possibilities demonstrated by the Shell-led Sakhalin II project, the world's largest-ever project financing, which will trail-blaze Russian liquefied natural gas (LNG) production and open up the Far Eastern market (for more details see www.projectfinancemagazine.com).
Although Sakhalin II is Russia's pre-eminent gas project, Gazprom as yet has no stake, and has only this year started talking to Shell about buying one. The competitive push from Sakhalin II, and the BP-led Rusia Petroleum project at the Kovykta field in eastern Siberia, is being felt at Gazprom's skyscraper headquarters on the south side of Moscow.
Observers believe that when it comes to choosing project partners, Gazprom will favour those who can help it to gain secure access ? or relatively secure access, in uncertain times ? to markets. Ruslan Vazetdinov of RPFB Project Finance, a financial adviser to Gazprom, said: ?In general Gazprom policy is not to share its resource base with western investors. It will only do this for intricate upstream assets and in broader context of cooperation with investor e.g. in return for help in going further downstream in Europe.? Another source close to Gazprom pointed out: ?The company is not short of money, or of sources from which to borrow. It is short of guaranteed export markets, and will work with anyone who can strengthen its position downstream.?
Wintershall is a case in point. Gazprom has allowed it unprecedented intimacy in its upstream operations not only because of the German company's technological expertise in accessing deep-lying gas, but also because of what the partnership brings in western Europe. There, Gazprom benefits from an aggressive marketing drive by Wingas, the gas trader it owns jointly with Wintershall, which grew sales by 11% in 2002 and announced earlier this year its determination to use continuing liberalisation to strengthen its position beyond the ?sluggish? German domestic market. Wingas has also participated in the construction of, and now owns, a series of trunk pipelines (the Stegal (Czech-Germany), Midal (Germany-Holland), Wedal (Germany-Belgium-Interconnector) and Yagal (Yamal-Europe-Stegal) pipelines).
From transport, the Wintershall-Gazprom alliance would like to move to distribution. The two companies are in talks about making a joint bid for shares in VNG Verbundnetz Gas of Leipzig, Germany's second-biggest gas importer, being divested by Ruhrgas following its takeover of Eon. A BASF-sponsored web site reported that the purchase might be partly paid for with Gazprom shares.
Just as the success of Sakhalin II ultimately hinges on the growth of the far eastern LNG markets, so many Gazprom-backed projects will depend on the shifting sands of the European natural gas market. Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says that market is less certain than ever. ?Although there is a widespread view that the market will need more gas during 2005-08, I believe there are a range of factors that suggest the opposite. In the short to medium term, there are no opportunities for Gazprom to arrange any large new export deals above the amounts covered by its current long-term contracts.?
Stern believes that while long-term contracts will continue to dominate the market, the oil price link may not. ?We are at the breaking-point for oil linked contracts. New Dutch and Norwegian sales in to the UK will not be linked to the oil price, and Russian sales contracts may have to be completed on different terms in future.?
The alternative to marketing gas in Europe is to dispose of it on the Russian domestic market. The trend there is more predictable: but only in the sense that there is no chance of tariffs rising to a level sufficient to fund capital investment in a hurry.
There may well be a cautionary tale to be told about the Zapolyarnoe-Neocoman project, apparently the cause of tension in another long-term Gazprom relationship, with Shell. The two sides have been talking about a production project at Zapolyarnoe since declaring their ?strategic alliance? in 1997, but the creation of a project company has been postponed again and again.
This year, Shell is ploughing ahead with Sakhalin II, and is also in talks with Gazprom about the planned North European gas pipeline that would take Russian gas under the Baltic Sea and ultimately to the UK. But what about Zapolyarnoe?
Stern of the Oxford Institute says: ?In terms of technology, and the finance needed, Zapolyarnoe is probably more straightforward than Achimgaz. But I would expect that Shell would be hoping to take its own gas from the project and sell it.? That's a direction in which Gazprom may not be prepared to go, at least without many additional assurances. The Achimgaz agreement provides for all gas from the project to be sold to Gazprom on a price formula linked to prices at the German border and in the key gas producing region of Yamal-Nenets. So if and when the project becomes viable, it will contribute to, not detract from, Gazprom's role as the single Russian gas exporter to western Europe.
Kovykta
The principle of maintaining control over export sales, and the gas transport infrastructure, has also guided Gazprom's attitude to Rusia Petroleum, the BP-led project company that holds licences for the vast (1.9 trillion cubic metres of reserves) Kovykta gas field in Irkutsk, eastern Siberia. The merger of BP's Russian assets with those of TNK oil company, announced in February and signed in June during Putin's London trip, put Kovykta on Gazprom management's ?urgent? list: it meant that a western-managed competitor, with its eye on Far Eastern markets, now had not only the Kovykta licence but a majority shareholding.
On 22 July Rusia Petroleum met in Beijing with CNPC and Kogas of South Korea, to discuss the cost of a 4000km pipeline that would be needed to take Kovykta gas to the Far Eastern market. Sources close to the talks said that the pricing formula for exports remains the main stumbling block. On the Russian side, though, there is another issue: Gazprom, which on 26 June agreed with Rusia Petroleum to set up a joint working group on the Far East, argues that export pipelines should be constructed within a state-led programme; that Gazprom should operate them; and that producers should be paid a fixed price for exports, in order to avoid competition between Russian producers in export markets.
In March, the government approved a gargantuan Gazprom-drafted 17-year Programme for the Formation in East Siberia and the Far East of a Unified System of Production, Transport and Supply of Gas, which would keep Kovykta and other Far Eastern export pipelines clearly under Gazprom's control. A Gazprom spokesman argued at the time that only an integrated development plan could make gas projects in the region profitable, and that ?if export prices are set at a level allowing investors to achieve a reasonable return, these proposls will encourage them?. Observers say that Gazprom and government officials are determined, above all, to cut across the possibility of the Kovykta shareholders financing their own pipeline to China and Korea.
Other production projects
While Gazprom's relationships with Shell and BP seem to be turbulent but full of potential, an old friend it perhaps thought it knew better, the state-owned oil company Rosneft, has lately become unexpectedly waspish. A renegotiation late last year of agreements covering the Shtokmanovskoe gas field in the Barents sea and the nearby Prirazlomnoe oil and gas field has resulted in Gazprom effectively ceding its leading role at Shtokman.
Until December last year, the Shtokman licence was held by Rosshelf, a subsidiary of which Gazprom owns 52.7%. But the government transferred that licence, together with those for Prirazlomnoe and three smaller deposits, to a new company, Severmorneftegaz, which is owned 50% by Rosneft-Purneftegaz, a 100% Rosneft subsidiary, and 50% by Rosshelf. Rosneft now holds sufficient shares in Rosshelf ? a 12.55% stake bought last year and further indirect holdings ? to give it indirect control of Severmorneftegaz.
In an unprecedented frank criticism of Gazprom management at the company's open annual shareholders' meeting on 27 June, Burckhard Bergmann, Ruhrgas chairman and Gazprom board member, said: ?I still doubt that the contracts with Rosneft on Sevmorneftegaz ... are in Gazprom's best interests.? Observers believe that the ownership shift underlines how hard Rosneft, like the privately-owned Russian oil companies, is pushing to get into the gas business. Leonid Mirzoyan, oil and gas analyst at Deutsche Bank in Moscow, said: ?As a trade-off for putting resources into Shtokman, Rosneft may get access to Gazprom infrastructure to develop its gas fields in Siberia.?
Of course financing of the Shtokman project, which would require an estimated $18-$20 billion investment, is a long, long way off. But again, markets will be crucial. At an investors' conference in Moscow in June, Rosneft vice president (business development) Aleksei Kuznetsov told journalists that Shtokman is now being considered as an LNG project to serve the US market. Gazprom and Rosneft are in talks with Conoco Phillips about bringing the US company into the Shtokman consortium, with a view to building an LNG terminal in the Barents Sea and shipping LNG to the US, Kuznetsov said.
Gazprom also views Russia's small independent gas companies as potential partners for new production projects. Attention is concentrated on Novatek, which has pulled away from a business relationship with the transport company Itera, and has majority stakes in three significant licence holders, Tarkoseleneftegaz, Khancheineftegaz and Purneftegazgeologia. It is understood that Gazprom is also watching Tambeyneftegaz, which holds licences on the Yamal-Nenets peninsula, closely.
Transport projects
The North European pipeline, which will have a capacity of about 20bcm of gas and run from Vyborg in north-west Russia to Greifswald in Germany, is at the front of Gazprom planners' minds. That 1189-km portion of the pipeline will cost about $3 billion; further branches to the UK, Sweden and Finland are also being considered, which would bring the total cost to nearly twice that sum. If it goes ahead, this will be Gazprom's next major project financing for transport, after the Yamal-Europe and Blue Stream pipelines.
There is political backing from the EU for the North European pipeline, and the Russian and UK energy ministers signed a memorandum of understanding on the project during Putin's London trip. Fortum, Ruhrgas, Wintershall, Gazunie, Shell, Norsk Hydro, TotalFinaElf and BP have all been in talks with Gazprom about the project, and on 18 July Gazprom ceo Aleksei Miller said he expected approvals to be obtained, and a feasability study to be ready, in the course of next year.
But the future of this, and other, transport financing projects is bound to be influenced by events in Turkey. Attempts by Botas, the national gas company, to renegotiate gas import contracts with Gazprom have thrown a shadow over the Russia-Turkey Blue Stream pipeline, commissioned in 2001 and until now considered a succesful model for future gas transport projects.
In March this year, Botas halted deliveries via the $3.3 billion pipeline, for which a major project financing was raised by Gazprom and ENI of Italy in 1999. Botas, which overestimated its import requirements, is trying to renegotiate the terms of its agreements with Gazprom. In June, after talks in Istanbul, Interfax news agency reported that Gazprom offered to reduce Botas' obligations under three five-year contracts, slightly reduce prices and reinvest funds from gas sales into Turkish infrastructure. After a further round of talks in Ankara on 10 July, a Gazprom spokesman said that negotiations would continue further.
Sounder finances
Perhaps the best news about Gazprom as project finance sponsor is that its debt portfolio has never looked more soundly managed. At his 26 June briefing, Gazprom cfo Iurlov said that the company's medium-term investment programme comprises $2-$2.5 billion per year to increase annual gas production in the medium term to 540bcm, plus $7.5 billion over the next five years to modernise the existing gas transport. Large production and transport projects will be done separately and off balance sheet.
Iurlov announced four capital markets instruments to follow up on the success of the $1.75 billion, 10-year eurobond launched in February. First, a 10 billion ruble domestic bond, to be issued shortly. Second, a European Medium-Term Note programme to raise up to $3 billion in revolving credits, for which UBS Warburg and Deutsche Bank were appointed lead arrangers in early July. Third, a securitised bond, envisaged as the main source of funding for the transport system reconstruction, to be lead managed by ABN Amro and Merrill Lynch, to be issued in the autumn, for anything between $2 billion and $5 billion; Gazprom is working with rating agencies to achieve a rating on this instrument that will pierce the Russian sovereign ceiling, which is two notches below investment grade. Fourth is a potential convertible bond issue on the back of 4.6% of Gazprom held by Gazprom Finance BV, an offshore holding company, which could be up to $2 billion in volume.
Gazprom will also continue to borrow from the bank market, and on 25 June announced a $200 million, two-year unsecured loan from a syndicate led by West LB at Libor + 4%.
Gazprom has also moved to reduce its short-term ruble borrowings. Iurlov said that on 1 January 2003, total debts stood at $13.2 billion, of which $9.8 billion were long-term borrowings ? and that since then more than $1 billion of its loans from Russian state-owned banks had been repaid. The company has also almost completely refinanced its programme of veksels (ruble promissory notes), the total volume of which has fallen from 76 billion rubles on 1 January 2002 to 49 billion rubles on 1 January 2003. Iurlov said it is projected to fall to 20 billion rubles by the end of the year.
Now that Gazprom is adding vastly improved financial management to its long-established primacy in terms of reserves and production, it will have no shortage of eager would-be partners to step out with. Project financiers have much to look forward to.
West-East China pipeline
Gazprom's board of directors agreed on 21 July to establish a 100% Gazprom-owned subsidiary in Holland to manage its 15% interest in the Chinese West-East pipeline project. This company in turn will hold shares in a joint venture pipeline company, and a unified trading company, to be constituted in China. It will also manage Gazprom interests in Chinese gas production projects under Production Sharing Agreement legislation.
The 45-year West-East project ? in which Gazprom, Exxon-Mobil and Shell hold 15% each and state-owned Chinese companies the other 55% ? envisages the development of the Tarim gas field in western China, the construction of a 4000km pipeline to Shanghai and surrounding areas in eastern China and gas sales and marketing activity. First delivery of gas via the pipeline is expected at 12bcm per year in 2007; the volume may then rise to 20bcm per year.
Achimgaz was set up in Moscow on 17 July as a 50-50 joint venture between Gazprom and Wintershall, a BASF subsidiary. The project company will develop an experimental sector of the low-lying Achimov horizons, notoriously difficult-to-access but richly endowed deposits, 3150-3800 metres below ground, beneath the main workings at Gazprom's largest producing field, Urengoy in west Siberia.
Wintershall will finance an initial phase, costing $90 million, during which results of a feasability study will be examined and future development costed. A second phase is hoped to bring the project to production (of 8.3bcms of gas and 2.8 million tonnes of concentrate per year) by 2008. Total production expected from the 43-year project is 200 bcms of natural gas and 40 million tonnes of condensate.
If and when the Achimgaz project goes further, it is likely to need about $600 million of project finance ? and would certainly be one of the items covered by a project finance programme now being integrated into company strategy.
At a briefing for journalists on 26 June, Boris Iurlov, Gazprom's chief financial officer, said: ?This programme will be ready in the autumn. For large-scale development projects, it envisages partnerships with strategic international players and the use of classic project finance structures.? The programme comes alongside a broader plan for raising debt on the capital markets (see below), which has been welcomed by financiers for its coherence.
Members of Gazprom's finance team, who are now sketching out the project finance programme, will be acutely conscious of the possibilities demonstrated by the Shell-led Sakhalin II project, the world's largest-ever project financing, which will trail-blaze Russian liquefied natural gas (LNG) production and open up the Far Eastern market (for more details see www.projectfinancemagazine.com).
Although Sakhalin II is Russia's pre-eminent gas project, Gazprom as yet has no stake, and has only this year started talking to Shell about buying one. The competitive push from Sakhalin II, and the BP-led Rusia Petroleum project at the Kovykta field in eastern Siberia, is being felt at Gazprom's skyscraper headquarters on the south side of Moscow.
Observers believe that when it comes to choosing project partners, Gazprom will favour those who can help it to gain secure access ? or relatively secure access, in uncertain times ? to markets. Ruslan Vazetdinov of RPFB Project Finance, a financial adviser to Gazprom, said: ?In general Gazprom policy is not to share its resource base with western investors. It will only do this for intricate upstream assets and in broader context of cooperation with investor e.g. in return for help in going further downstream in Europe.? Another source close to Gazprom pointed out: ?The company is not short of money, or of sources from which to borrow. It is short of guaranteed export markets, and will work with anyone who can strengthen its position downstream.?
Wintershall is a case in point. Gazprom has allowed it unprecedented intimacy in its upstream operations not only because of the German company's technological expertise in accessing deep-lying gas, but also because of what the partnership brings in western Europe. There, Gazprom benefits from an aggressive marketing drive by Wingas, the gas trader it owns jointly with Wintershall, which grew sales by 11% in 2002 and announced earlier this year its determination to use continuing liberalisation to strengthen its position beyond the ?sluggish? German domestic market. Wingas has also participated in the construction of, and now owns, a series of trunk pipelines (the Stegal (Czech-Germany), Midal (Germany-Holland), Wedal (Germany-Belgium-Interconnector) and Yagal (Yamal-Europe-Stegal) pipelines).
From transport, the Wintershall-Gazprom alliance would like to move to distribution. The two companies are in talks about making a joint bid for shares in VNG Verbundnetz Gas of Leipzig, Germany's second-biggest gas importer, being divested by Ruhrgas following its takeover of Eon. A BASF-sponsored web site reported that the purchase might be partly paid for with Gazprom shares.
Just as the success of Sakhalin II ultimately hinges on the growth of the far eastern LNG markets, so many Gazprom-backed projects will depend on the shifting sands of the European natural gas market. Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says that market is less certain than ever. ?Although there is a widespread view that the market will need more gas during 2005-08, I believe there are a range of factors that suggest the opposite. In the short to medium term, there are no opportunities for Gazprom to arrange any large new export deals above the amounts covered by its current long-term contracts.?
Stern believes that while long-term contracts will continue to dominate the market, the oil price link may not. ?We are at the breaking-point for oil linked contracts. New Dutch and Norwegian sales in to the UK will not be linked to the oil price, and Russian sales contracts may have to be completed on different terms in future.?
The alternative to marketing gas in Europe is to dispose of it on the Russian domestic market. The trend there is more predictable: but only in the sense that there is no chance of tariffs rising to a level sufficient to fund capital investment in a hurry.
There may well be a cautionary tale to be told about the Zapolyarnoe-Neocoman project, apparently the cause of tension in another long-term Gazprom relationship, with Shell. The two sides have been talking about a production project at Zapolyarnoe since declaring their ?strategic alliance? in 1997, but the creation of a project company has been postponed again and again.
This year, Shell is ploughing ahead with Sakhalin II, and is also in talks with Gazprom about the planned North European gas pipeline that would take Russian gas under the Baltic Sea and ultimately to the UK. But what about Zapolyarnoe?
Stern of the Oxford Institute says: ?In terms of technology, and the finance needed, Zapolyarnoe is probably more straightforward than Achimgaz. But I would expect that Shell would be hoping to take its own gas from the project and sell it.? That's a direction in which Gazprom may not be prepared to go, at least without many additional assurances. The Achimgaz agreement provides for all gas from the project to be sold to Gazprom on a price formula linked to prices at the German border and in the key gas producing region of Yamal-Nenets. So if and when the project becomes viable, it will contribute to, not detract from, Gazprom's role as the single Russian gas exporter to western Europe.
Kovykta
The principle of maintaining control over export sales, and the gas transport infrastructure, has also guided Gazprom's attitude to Rusia Petroleum, the BP-led project company that holds licences for the vast (1.9 trillion cubic metres of reserves) Kovykta gas field in Irkutsk, eastern Siberia. The merger of BP's Russian assets with those of TNK oil company, announced in February and signed in June during Putin's London trip, put Kovykta on Gazprom management's ?urgent? list: it meant that a western-managed competitor, with its eye on Far Eastern markets, now had not only the Kovykta licence but a majority shareholding.
On 22 July Rusia Petroleum met in Beijing with CNPC and Kogas of South Korea, to discuss the cost of a 4000km pipeline that would be needed to take Kovykta gas to the Far Eastern market. Sources close to the talks said that the pricing formula for exports remains the main stumbling block. On the Russian side, though, there is another issue: Gazprom, which on 26 June agreed with Rusia Petroleum to set up a joint working group on the Far East, argues that export pipelines should be constructed within a state-led programme; that Gazprom should operate them; and that producers should be paid a fixed price for exports, in order to avoid competition between Russian producers in export markets.
In March, the government approved a gargantuan Gazprom-drafted 17-year Programme for the Formation in East Siberia and the Far East of a Unified System of Production, Transport and Supply of Gas, which would keep Kovykta and other Far Eastern export pipelines clearly under Gazprom's control. A Gazprom spokesman argued at the time that only an integrated development plan could make gas projects in the region profitable, and that ?if export prices are set at a level allowing investors to achieve a reasonable return, these proposls will encourage them?. Observers say that Gazprom and government officials are determined, above all, to cut across the possibility of the Kovykta shareholders financing their own pipeline to China and Korea.
Other production projects
While Gazprom's relationships with Shell and BP seem to be turbulent but full of potential, an old friend it perhaps thought it knew better, the state-owned oil company Rosneft, has lately become unexpectedly waspish. A renegotiation late last year of agreements covering the Shtokmanovskoe gas field in the Barents sea and the nearby Prirazlomnoe oil and gas field has resulted in Gazprom effectively ceding its leading role at Shtokman.
Until December last year, the Shtokman licence was held by Rosshelf, a subsidiary of which Gazprom owns 52.7%. But the government transferred that licence, together with those for Prirazlomnoe and three smaller deposits, to a new company, Severmorneftegaz, which is owned 50% by Rosneft-Purneftegaz, a 100% Rosneft subsidiary, and 50% by Rosshelf. Rosneft now holds sufficient shares in Rosshelf ? a 12.55% stake bought last year and further indirect holdings ? to give it indirect control of Severmorneftegaz.
In an unprecedented frank criticism of Gazprom management at the company's open annual shareholders' meeting on 27 June, Burckhard Bergmann, Ruhrgas chairman and Gazprom board member, said: ?I still doubt that the contracts with Rosneft on Sevmorneftegaz ... are in Gazprom's best interests.? Observers believe that the ownership shift underlines how hard Rosneft, like the privately-owned Russian oil companies, is pushing to get into the gas business. Leonid Mirzoyan, oil and gas analyst at Deutsche Bank in Moscow, said: ?As a trade-off for putting resources into Shtokman, Rosneft may get access to Gazprom infrastructure to develop its gas fields in Siberia.?
Of course financing of the Shtokman project, which would require an estimated $18-$20 billion investment, is a long, long way off. But again, markets will be crucial. At an investors' conference in Moscow in June, Rosneft vice president (business development) Aleksei Kuznetsov told journalists that Shtokman is now being considered as an LNG project to serve the US market. Gazprom and Rosneft are in talks with Conoco Phillips about bringing the US company into the Shtokman consortium, with a view to building an LNG terminal in the Barents Sea and shipping LNG to the US, Kuznetsov said.
Gazprom also views Russia's small independent gas companies as potential partners for new production projects. Attention is concentrated on Novatek, which has pulled away from a business relationship with the transport company Itera, and has majority stakes in three significant licence holders, Tarkoseleneftegaz, Khancheineftegaz and Purneftegazgeologia. It is understood that Gazprom is also watching Tambeyneftegaz, which holds licences on the Yamal-Nenets peninsula, closely.
Transport projects
The North European pipeline, which will have a capacity of about 20bcm of gas and run from Vyborg in north-west Russia to Greifswald in Germany, is at the front of Gazprom planners' minds. That 1189-km portion of the pipeline will cost about $3 billion; further branches to the UK, Sweden and Finland are also being considered, which would bring the total cost to nearly twice that sum. If it goes ahead, this will be Gazprom's next major project financing for transport, after the Yamal-Europe and Blue Stream pipelines.
There is political backing from the EU for the North European pipeline, and the Russian and UK energy ministers signed a memorandum of understanding on the project during Putin's London trip. Fortum, Ruhrgas, Wintershall, Gazunie, Shell, Norsk Hydro, TotalFinaElf and BP have all been in talks with Gazprom about the project, and on 18 July Gazprom ceo Aleksei Miller said he expected approvals to be obtained, and a feasability study to be ready, in the course of next year.
But the future of this, and other, transport financing projects is bound to be influenced by events in Turkey. Attempts by Botas, the national gas company, to renegotiate gas import contracts with Gazprom have thrown a shadow over the Russia-Turkey Blue Stream pipeline, commissioned in 2001 and until now considered a succesful model for future gas transport projects.
In March this year, Botas halted deliveries via the $3.3 billion pipeline, for which a major project financing was raised by Gazprom and ENI of Italy in 1999. Botas, which overestimated its import requirements, is trying to renegotiate the terms of its agreements with Gazprom. In June, after talks in Istanbul, Interfax news agency reported that Gazprom offered to reduce Botas' obligations under three five-year contracts, slightly reduce prices and reinvest funds from gas sales into Turkish infrastructure. After a further round of talks in Ankara on 10 July, a Gazprom spokesman said that negotiations would continue further.
Sounder finances
Perhaps the best news about Gazprom as project finance sponsor is that its debt portfolio has never looked more soundly managed. At his 26 June briefing, Gazprom cfo Iurlov said that the company's medium-term investment programme comprises $2-$2.5 billion per year to increase annual gas production in the medium term to 540bcm, plus $7.5 billion over the next five years to modernise the existing gas transport. Large production and transport projects will be done separately and off balance sheet.
Iurlov announced four capital markets instruments to follow up on the success of the $1.75 billion, 10-year eurobond launched in February. First, a 10 billion ruble domestic bond, to be issued shortly. Second, a European Medium-Term Note programme to raise up to $3 billion in revolving credits, for which UBS Warburg and Deutsche Bank were appointed lead arrangers in early July. Third, a securitised bond, envisaged as the main source of funding for the transport system reconstruction, to be lead managed by ABN Amro and Merrill Lynch, to be issued in the autumn, for anything between $2 billion and $5 billion; Gazprom is working with rating agencies to achieve a rating on this instrument that will pierce the Russian sovereign ceiling, which is two notches below investment grade. Fourth is a potential convertible bond issue on the back of 4.6% of Gazprom held by Gazprom Finance BV, an offshore holding company, which could be up to $2 billion in volume.
Gazprom will also continue to borrow from the bank market, and on 25 June announced a $200 million, two-year unsecured loan from a syndicate led by West LB at Libor + 4%.
Gazprom has also moved to reduce its short-term ruble borrowings. Iurlov said that on 1 January 2003, total debts stood at $13.2 billion, of which $9.8 billion were long-term borrowings ? and that since then more than $1 billion of its loans from Russian state-owned banks had been repaid. The company has also almost completely refinanced its programme of veksels (ruble promissory notes), the total volume of which has fallen from 76 billion rubles on 1 January 2002 to 49 billion rubles on 1 January 2003. Iurlov said it is projected to fall to 20 billion rubles by the end of the year.
Now that Gazprom is adding vastly improved financial management to its long-established primacy in terms of reserves and production, it will have no shortage of eager would-be partners to step out with. Project financiers have much to look forward to.
West-East China pipeline
Gazprom's board of directors agreed on 21 July to establish a 100% Gazprom-owned subsidiary in Holland to manage its 15% interest in the Chinese West-East pipeline project. This company in turn will hold shares in a joint venture pipeline company, and a unified trading company, to be constituted in China. It will also manage Gazprom interests in Chinese gas production projects under Production Sharing Agreement legislation.
The 45-year West-East project ? in which Gazprom, Exxon-Mobil and Shell hold 15% each and state-owned Chinese companies the other 55% ? envisages the development of the Tarim gas field in western China, the construction of a 4000km pipeline to Shanghai and surrounding areas in eastern China and gas sales and marketing activity. First delivery of gas via the pipeline is expected at 12bcm per year in 2007; the volume may then rise to 20bcm per year.
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