Italy’s Eni becomes a full-fledged operator in Russian gas market

21 Jul '08
On July 1 Italian gas company Eni through its subsidiary Eni Energiya signed a gas supply contract with Ekaterinburg-based power generating and distributing company TGK-9. Supplies are scheduled to start in 2008.

Doesn’t that sound sensational? For the first time ever a Western company would supply natural gas to a Russian power company.

As Marchmont reported earlier this year, by 2010 TGK-9 is expected to receive 350 million cubic meters of gas. Experts are unanimous concluding: if TGK-9 has decided to buy gas from a foreigner, it can only mean that the Italians have offered better terms than Gazprom.

Under the agreement the Italian company will be trading gas in Russia’s internal market, which is also an unprecedented move. There is no specification as to how exactly Eni is going to do that: at a stock exchange or directly with companies. Kommersant reports that Eni and Gazprom have agreed on gas transportation.

Russian power companies have sounded positive about the emergence of a new trader, Kommersant notes. The newspaper cites Vladimir Paliy, head of sales at OGK-1, Russia’s leading player in the power market, who said in an interview that “the fact that yet another company has accessed the gas transportation system is a good sign for power companies.” He also emphasized that OGK-1 had been working with independent gas suppliers for a long time already. Among the company’s business partners are Novatek, Itera, and TNK-BP.

Eni’s executives are undoubtedly pursuing their own commercial interests. Its corporate website says the Italian company is gearing up in earnest for the selling of natural gas that Eni’s Russian subsidiaries Arktikgas and Urengoil are to start extracting from 2010 onwards. Arktikgas and Urengoil were purchased in April 2007 at YUKOS auctions by Enineftegas, an SPV that two business partners, Eni and another Italian firm Enel, had registered for their Russian operations. The SPV was later reregistered as Severnaya Energiya.

By 2011 the Italian alliance plans to be selling in Russia 900 million cubic meters of natural gas a year. Kommersant with reference to a source in Eni reports that Severnaya Energiya is likely to be selling 28 billion cubic meters of its own extracted gas by 2016.

The Italians in Russia

For Eni expansion in Russia’s internal gas market is a scramble for the world’s second largest gas consumption market after the USA. Fittingly enough, the RF government is also gradually increasing internal gas prices. The company believes Russia’s prices will be adjusted to level off with Europe’s in 2011-2014 (without taking into account transportation costs and export duties).

Well-informed sources claim that Severnaya Energiya plans to provide 50 percent of all gas required for power stations owned by power generating and distributing company OGK-5, in which Enel holds a major stake.

As if countering the Italian plans, Gazprom publicly announced in June it was going to buy all raw stock produced by Severnaya Energiya. However, analysts tend to think the Italian consortium has a better idea regarding its Russian-produced “blue fuel.”

It looks like Eni has found no difficulty in becoming an independent player in the Russian gas market. Indeed, no other foreign companies that extract gas in Russia have ventured to start supplying gas to Russian consumers, notes investment company Veles Capital’s Dmitry Lyutyagin. But the main reason for Eni’s persistence and self-confidence are regulated and relatively low internal gas prices, he adds.

The regulatory nature of Russia’s hydrocarbon market, which is virtually the realm of one natural monopolist, Gazprom, has not scared Eni off its intentions. As gas consumption is rising, the limited amount of gas supplied by Gazprom at a fixed and low price is not enough for Russian power companies.

As a result they are forced to buy more gas at free market prices. TGK-9 is most like to also be buying gas from Eni Energiya at free market prices, analysts believe.

Eni’s partner, Enel, became known in Russia in 2004 when in alliance with the ESN group owned by Russian billionaire Grigory Berezkin (ranks among top 100 richest people in Russia, according to Forbes Russia) it signed a contract with RAO UES on managing the North-Western thermal power station in St. Petersburg. This was Russia’s first-ever contract enabling a foreign company to run a Russian power station.

The aim was for the Russian party to observe and assess the experience of European companies in managing power generating facilities. The contract remained in force until September 2007. Enel, in turn, gained valuable experience in operating a Russian power station and is now ready to apply it.

In early March 2006 Enel purchased a 49.5-percent stake in Russia’s power trading company Rusenergosbit for $105m. The latter supplies electric power to subsidiaries of such national companies as Gazprom, Rosneft and Rusian Railways, to name but a few.

At the same time Enel bought a 59.8-percent stake in wholesale power selling company OGK-5, which runs several key power stations across Russia.

Sources in the firm report Enel plans to invest as much as $3.6bn in OGK-5 before 2012. “If everything goes well, we may continue investing in the Russian power sector,” - says Enel’s President Piero Gnudi.

Gazprom in Italy

Experts are sure that Eni’s activity in Russia’s internal market will strengthen a mutually beneficial relationship between Eni and Gazprom, which has been trying hard and failing to enter the Italian gas market so far.

It is obvious that Gazprom is interested in direct sales to end consumers, but for now it has managed to just make one step closer to this goal. And there is a lot to aspire for: gas prices in Italy’s domestic market are Europe’s highest hovering between $550 and $650 per cubic meter.

In an attempt to bridge the gaps that remain between the two gas giants politicians have also come up on stage. In May 2005 Russia’s President Vladimir Putin and Italy’s Prime Minister Silvio Berlusconi signed an agreement that envisaged creation of a JV, Central Italian Gas Holding AG (CIGH), with Gazprom-Export’s majority interest.

From 2006 onwards CIGH was to have started selling gas in Italy’s internal market. But in the fall of 2005 Berlusconi had to step down, and Eni saw a managerial reshuffle as a result. The company’s new president, Paolo Scaroni, backpedalled on all agreements. A year later Gazprom’s selling SPV, Gazprom Marketing&Trading, registered its division in Italy, which ultimately failed to expand too.

It took the Kremlin 18 months to forge a new agreement with Berlusconi’s successor Romano Prodi. In spring 2007 Alexander Medvedev, deputy chairman of the board at Gazprom and CEO of Gazprom Export, said in his interview to Italy’s L`Espresso that Gazprom was planning to effect trial gas supplies to Italy.

However, direct commercial supplies did not begin. A source in Gazprom explained that without political backing Gazprom could not work directly with municipal authorities in Italy. In mid-April 2008 Berlusconi staged his spectacular comeback to power.

Most observers are still wary about any forecasts as to if and when Gazprom can get hold of real assets in Italy to be able to sell gas directly to end consumers. Analysts from the Moskva bank, however, sound a bit more knowledgeable believing that Gazprom will thrust its way into Italy’s retail market and operate mediator-free by the end of 2008.

Eni does not seem to be anxious about warding its strategic competitor off the market. On the contrary, in November 2006 the two companies inked a strategic agreement on joint projects in the field of gas extraction and transportation, as well as new technology.

Under this agreement the Italian partner conceded to Gazprom the right to effect gas supplies to Italy, which are expected to reach three billion cubic meters by 2010. The agreement has already been prolonged until 2035.

The planned expansion of the Trans-Austrian gas pipeline connecting Austria and Italy will enable Gazprom to further increase supplies to eight billion cubic meters. It is obvious that the two “partnering competitors” are not vying with each other at the moment as there is still enough room in the European market, while the demand for gas is expected to rise significantly in the near future.

But still Eni’s efforts in the Russian market have turned out more successful than those of Gazprom. Eni has already bought some of Russia’s raw stock and power assets and is now set for future success.

Vedomosti with reference to Yury Philiptsov, deputy head of Krasnoyarsk’s regional office of the Federal Agency for the Use of Natural Resources, reports that Eni Energiya has already submitted applications for participation in a tender for exploration and development of the Olenchiminsky, Tanachinsky and Moktakonsky gas fields in the Krasnoyarsk Region.

You scratch my back and I’ll scratch yours

Eni’s official site says the company’s business relations with Russia date back to the early 1950s. The first joint project with Gazprom was launched in 1969. Links have become fairly strong since the signing of the abovementioned strategic agreement. In June 2007 the partners signed a letter of intent related to the South Stream project (construction of a Russia-Europe gas pipeline on the Black Sea bottom).

The project’s initiator was Vladimir Putin. To jointly implement the project, in January 2008 Gazprom and Eni set up on a parity basis an SPV, South Stream AG, registered in Switzerland and tasked at the inception phase with market research and a feasibility study.

The firm expects to complete the preparatory work before the end of 2008. More foreign partners can get involved. When built, the South Stream gas pipeline will pump 30 billion cubic meters of Russian gas into Europe each year, Reuters reports.

As part of another agreement on exchange of assets Gazprom is being offered Eni’s foreign extracting facilities worth a total of $350m. This information came at the end of April from the national informational channel Vesti with reference to Eni’s President Paolo Scaroni. Eni, in turn, will invest in a number of production facilities in Russia.

Paolo Scaroni has clarified that under this latest agreement Gazprom is expected to get one-third of Eni’s 33-percent stake in the Elephant gas field in Libya. But to finalize the deal, Libya’s consent is required.

Gazprom and the EU: a love-and-hate relationship

At present Gazprom is responsible for almost a quarter of gas consumed by the EU. In view of the forecasted rise in consumption Wood Mackenzie predicts that Gazprom’s share of the EU market will soon swell to one-third.

Trying to counter Gazprom’s advancement, and to insure themselves against a relapse of “the Ukrainian syndrome” when Moscow suspended gas supplies to Ukraine two years ago for political reasons thus making Europe’s import schedule a complete mess, European companies are masterminding an independent, “non-Gazprom” pipeline. The EU is actively discussing ways of getting rid of its dependence on the “wayward” Russian leviathan.

One of such ways might be construction of the Nabucco pipeline from Central Asia and Caucasus through the Caspian Sea and bypassing Russia. Another discussion is currently on the agenda: competition between the Nabucco and South Stream pipelines.

Both Gazprom’s executives and some politicians, however, have already aired concern about any insinuations around the two projects. For example, EU Commissioner for Energy Andris Piebalgs hails the South Stream project saying it is no threat to the Nabucco project. In fact, the prospective aggregate capacity of the two pipelines would be much less than expected growth in demand, EU forecasts show.

By 2015 Europe will have faced a gas deficit, Deputy Executive Director of the International Energy Agency William C. Ramsay said at the CIS Oil & Gas summit in Paris. He thinks by that time Gazprom will be failing to satisfy the growing demand for gas in Europe, and there will be no “redundant” gas.

Nevertheless, the RF Ministry of Natural Resources has brushed off worries announcing that by 2020 gas extraction in Russia will have risen to 800 to 900 billion cubic meters, a volume quite impressive, supposedly, to appease Europe’s qualms.

This face-off between the two enormous camps promoting two different projects has already been nicknamed a “second cold war”. In this regard the partnership between Eni and Gazprom is undoubtedly aimed at mollifying the existing dissension.

By Svetlana Zabaluyeva

For reference:

Eni is an integrated energy company founded in 1953 by the government and partially privatized later. It operates in the exploration and production of hydrocarbons, also in the supply, transport, distribution and sale of natural gas. The company employs almost 76,000 individuals and is operative in 70 countries worldwide. 2007 gas sales reached 99 billion cubic meters. Adjusted net profit for the year rose 2.6 percent to $4.4bn.

Enel is Italy’s largest power company, and Europe’s second listed utility by installed capacity. It was founded in 1962 by the Italian government and partially privatized in the 1990s. The company produces, distributes and sells electricity and gas across Europe, North and Latin America. Enel has now a presence in 21 countries. The company employs 73,500 people. In 2007, Enel posted revenues of $65.5bn.

Gazprom is the largest gas producing company in the world founded in 1989. Its main activities include exploration, extraction, transportation, storage, processing and sales of natural gas and other hydrocarbons. The state is the major stockholder (50.002 percent). Gazprom’s share in the global gas resources is 17 percent, while in Russia Gazprom owns 60 percent of all gas resources estimated at 29.85 trillion cubic meters by volume and $182.5bn by value. Gazprom exports gas to 32 countries worldwide.
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