Gas company Gazprom on brink of sealing tax breaks

Sunday Telegraph

Gazprom, the world’s biggest gas producer, is on the brink of finalising substantial tax breaks in customs and mineral extraction duties as part of talks with several foreign oil majors about developing its Siberian fields.

By Rowena Mason
Published: 7:45PM BST 17 Oct 2009

Alexander Medvedev, deputy chairman of Gazprom and director-general of exports, said the Russian state-owned group would invest more next year than the last three years but finding foreign partners to work in the country’s Yamal region is a “strong priority”.

“The Russian government is preparing all the necessary measures to be applied,” Mr Medvedev said, in an interview with The Sunday Telegraph. “There are many different measures including lower customs duty, taxes on mineral extraction and other conditions. It will be finalised in the near future.”

The gas producer, majority owned by the Russian state, is already in talks with Spanish oil company Repsol and is believed to have shortlisted Shell and Total as part of its drive to bring Western money into the region.

Gazprom’s approach to foreign investment is a considerable change of strategy. Only three years ago, Shell, the world’s biggest oil company, was forced to give up control of the giant Sakhalin development, handing over half of its interest to Gazprom after a dispute over costs and the environment.

TNK-BP, the joint venture between BP and four Russian oligarchs, was forced to transfer Kovykta, another giant gasfield, to Gazprom. The then president Vladimir Putin also imposed laws restricting foreign ownership of energy assets. However, Gazprom’s turnaround comes after Mr Putin, now Russia’s prime minister, invited 10 foreign oil majors, including Royal Dutch Shell, Total, of France, and E.ON, of Germany, to Siberia last month in an attempt to woo their expertise and capital.

Gazprom estimates that the Sakhalin island gas field contains 16 trillion cubic metres – 10 times the size of the UK’s remaining North Sea reserves – but will need £100bn of investment for it to reach its potential output.

Analysts have speculated that Russia’s mellowing towards Western oil majors in recent months has been caused by a dramatic 22pc drop in output from 550 bcm in 2008 to between 450 this year, because of depressed demand.

Although Gazprom claims its investment will rise next year, its capital expenditure for 2009 has dropped by 17pc to Rbs761bn ($25.4bn) and borrowing is up by $6.8bn. But Mr Medvedev insisted that Gazprom’s finances have not been badly hit by the recession and a decline in demand in Europe and Russia for natural gas. “This slowdown is only a temporary one. It gives us more time to prepare for future growth.”

Gazprom has been making slow progress in developing the energy-rich Yamal peninsula in Siberia, where it hopes to find enough resources to double gas exports by 2030. “Yamal is our major source of future upstream resources, where we have 50pc of all Gazprom development,” he said.

Mr Medvedev, who would not answer questions about Russia’s volatile energy partnership with the Ukraine that led to tightening global supply last winter, said Europe could not afford to ignore the potential of Russia both as a place for investment and as a major exporter. He said the planned Nord Stream pipeline through the Baltic Sea and South Stream pipeline through the Black Sea to the Baltic states and Italy, are the best answer for stabilising Europe’s energy security, bypassing Ukraine. EDF, the French nuclear power company, is already in talks about taking a minority stake in the South Stream project, as Gazprom tries to hit ambitious targets to have the pipeline ready by 2015 and Nord Stream by 2012.

But the European Union, anxious about the dependence on Russian gas supply, is sponsoring a rival pipeline through Turkey called Nabucco. Mr Medvedev said Gazprom was relaxed about the threat of Nabucco, which has yet to sign any deals about a supply sources.

The Sakhalin fields, where Gazprom hopes to produce more liquefied natural gas (LNG), is part of the company’s drive to achieve a greater balance between pipeline and storage gas. Under pressure from rival LNG suppliers, such as Qatar, Gazprom is targeting a 20pc share of the storage gas market over the next decade, allowing it to transport gas further afield.

Mr Medvedev said. “LNG gives us a huge opportunity to expand into other countries. We will be a major player in the LNG market in 2020 but it is no threat to pipeline gas.”

Gazprom is also hoping to expand in the UK, where it has operations in Manchester and Kingston, in southwest London, mostly supplying small and medium-sized businesses.

“Our goal is to get 10pc of the UK market,” Mr Medvedev said.

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