Gas sector reform breakthrough – good news for Russian oil companies

15 months ago, we predicted a demonopolization of the domestic gas market as a big investment theme in the Russian energy sector (A new reason to buy Russian oil stocks). I had expected the corresponding policy moves to start materializing in 2010. What actually happened last year was a kind of prelude to proper structural reform. This took the form of Igor Sechin (Putin’s right-hand man and the deputy premier responsible for energy policy) using companies in his orbit – Novatek and Inter RAO – to soften up Gazprom’s domestic monopoly.

Novatek has always had a special relationship with Gazprom in the sense that, unlike the oil companies, it has never had serious difficulties getting access to the domestic gas pipeline network for selling its gas direct to customers (rather than having to sell all its gas to Gazprom at knock-down prices). But Novatek pushed the envelope in late 2009 when it signed long-term supply contracts to the core domestic gas customer base in the form of two electricity generating stations – both subsidiaries of Inter RAO (a Sechin-chaired company). In late 2010, Inter RAO announced its acquisition of the 49 per cent stake in North Gas owned by the company’s entrepreneur founder whose ambitions to be a second Novatek were squashed by Gazprom in 2004 (he had to sell 51 per cent to the monopoly). Once this deal is closed, it will be safe to assume that Gazprom’s controlling share will be bought out.

9 February - red letter day

But today (9 February) the policy breakthrough itself has come – or, at least, been clearly heralded by Putin while chairing a meeting in St Petersburg on energy sector policy attended by senior officials and company managers. Putin’s words left no doubt that the turning point is nigh:

“At present, the interests of large companies [i.e., Gazprom] take priority over the interests of the sector as a whole. This state of affairs puts a brake on overall economic development.”

In other words, Gazprom’s equity gas will no longer have privileged status (in the domestic market), and that the market will be properly opened out to other (more efficient) producers. Turning to the Gazprom representatives present, Putin told them that either they start giving independent gas producers reliable and predictable pipeline access, or else laws and relevant regulations would be changed to force Gazprom to comply. He then specifically commissioned concrete joint proposals from Gazprom and the Energy Ministry in agreement with the “vice-premier who supervises this area” – that is, Sechin.

The beauty of the situation is that the content of these proposals has already been worked up by officials in the Federal Anti-Monopoly Service (FAS) which, under its gutsy reformist leader Igor Artemyev, has long been pushing for gas sector reform. The FAS formula quite rightly targets the root of Gazprom’s domestic monopoly – namely, its non-disclosure of information about spare pipeline capacity. According to the FAS proposals, Gazprom would be legally obliged to disclose pipeline capacity five years in the past and projecting five years forward; and if capacity fell short of demand from independent producers with long-term contracts (of more than one year) to fulfil, then access would be trimmed proportional to the actual contracts of all suppliers (including Gazprom).

This agenda will put Novatek’s business onto a transparently sound long-term footing, and create major earnings-boosting opportunities for Russia’s oil majors: Rosneft, Lukoil, TNK-BP and Surgutneftegaz.