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№ 1 (January 2011)

NOVATEK Gets a Slice of Gazprom’s Pie

   A month ago Russia’s largest independent gas producer, NOVATEK, became the owner of core gas assets previously owned by gas monopolist Gazprom. NOVATEK’s development has recently accelerated and industry observers attribute that to Gennady Timchenko, the co-owner of the key Russian oil trader Gunvor, who has recently joined the company; and to Gazprom’s shrinking share of production in Russia.

By Svetlana Kristalinskaya

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   Fall brought its seasonal production decline and the news of two major deals by NOVATEK. First the market learned that Yamal Razvitie, a JV between NOVATEK and Gazprom’s oil producing subsidiary Gazprom Neft will acquire assets in SeverEnergia (in which a 51-percent stake was bought during YUKOS bankruptcy proceedings). The asset was initially acquired at the auction in 2007 by the Italian companies, Eni and Enel, who immediately gave Gazprom the option to buy a controlling stake in the future. Gazprom was wary of legal risks, as former YUKOS shareholders were fighting every legal battle as tough as possible.

   Subsequently, word spread in September that Gazprom was practically giving away half of its stake in the project to NOVATEK. Officially, Yamal Razvitie was formed to bring synergy and experience to gas-and-condensate fields, but another reason may also be the fact that Gazprom had to negotiate with NOVATEK for access to the Purovsky Condensate Stabilization Plant to effectively develop these fields. Ironically, while earlier independent producers suffered from Gazprom denying access to its gas pipeline, in this case, things were the other way around.

Lucrative Target

   As a result, NOVATEK landed itself a share in the huge gas stock – 1.3 trillion cubic meters, and very significant reserves of liquid hydrocarbons – 568 million tons of oil and 155 million tons of gas condensate. These reserves’ volume is far above the size of fields which qualify as federal-level deposits. The volume is virtually equal to the reserves at Chayandinskoye field in Yakutia which Gazprom received without the need to take part in a tender. Saying that, Gazprom will have to build its infrastructure in the remote republic from scratch, while SeverEnergia assets are located in Yamal-Nenets Autonomy, close to the gas transportation system.

   Gazprom forked out $1.6 billion for the SeverEnergia stake, while the JV between NOVATEK and Gazprom Neft will cost $1.8 billion, including $250 million in debts. This means that NOVATEK is getting the asset for about the same price as Gazprom did despite three years having passed.

   Remarkably, representatives of NOVATEK took over as Board Chairman and CEO of the Yamal Razvitie. In the case of SeverEnergia, this is explained by the fact that initially the company plans to develop gas reserves, followed by condensate and then by oil, says deputy general director Boris Zilbermints. Apparently, NOVATEK is set to play the first fiddle for some time, and not only in SeverEnergia, but also in other possible assets to be received by Yamal Razvitie.

Appetite Grows for Other Assets

   Together with SeverEnergia, NOVATEK is acquiring another asset of interest to the gas monopoly – the long-suffering Sibneftegaz. Sibneftegaz’s main field – Beregovoye – lay idle away for four years with no access to the Gazprom pipeline; the company started to produce gas only when Gazprom bought a 51-percent stake in Sibneftegaz via Gazprombank. This asset was earmarked for transfer to Gazprom, Sibneftegaz board chairman and Gazprombank board member Alexander Krasnenkov said. An independent evaluation valued the Sibneftegaz controlling stake at $1 billion. Krasnenkov suggested that Gazprom was unlikely to pay the cash and will probably offer some assets, such as NOVATEK shares. Gazprom has even confirmed that it is prepared to give Gazprombank about 5 percent of NOVATEK for the control over Sibneftegaz.
One can but imagine the shock of the investors on the news of NOVATEK acquiring a 51-percent stake in Sibneftegaz. They also learned about the possible sale of almost half of Gazprom’s stake in NOVATEK to Gazprombank at market price. This means that Gazprom is losing half its income from NOVATEK dividends; nevertheless, the gas monopoly will probably benefit from NOVATEK having higher market capitalization, revenue and, respectively, profits.
The terms of purchase for Sibneftegaz are also quite lenient – until the end of the year, when the deal is expected to close, NOVATEK has to pay only $150 million, while paying the remaining $715 million a year later and financing Sibneftegaz’s debt of 11 billion rubles by opening a four-year 10 percent APR loan. NOVATEK CFO Mark Jetway acknowledged that some of the $715-million payment will be supplied from the cash flow generated by Sibneftegaz. In 2011 NOVATEK will buy from Sibneftegaz up to 5.6 billion cubic meters of natural gas at 680 rubles per 1,000 cubic meters (ex. VAT) (in the third quarter of 2010 average gas price for NOVATEK consumers was 2,300 rubles per 1,000 cubic meters (ex. VAT), sale price of gas at the entry point to the Unified Gas Supply System (ESG) – 1,225 rubles (regulated price in the Yamal-Nenets Autonomous District – 1,457 rubles). NOVATEK has already signed five-year agreement with Itera to sell 4 billion cubic meters of gas annually. Basically, NOVATEK will already get 3 billion rubles ($100 million) simply reselling the Sibneftegaz product to Itera.

NOVATEK Boosts Production

   At about the same time, in October, NOVATEK recently launched the third start-up complex for the second stage of the Yurkharovskoye field (which has estimated reserves of 7 billion cubic meters of gas per year), in a ceremony that was attended by Russian Prime Minister Vladimir Putin. As a result, NOVATEK production capacity swelled to 51 billion cubic meters of gas per year. By the end of 2010 NOVATEK, will produce 37-38 billion cubic meters of natural gas. With the Sibneftegaz acquisition, the company will further expand its portfolio by about 5.5 billion cubic meters of gas.

   In 2011 NOVATEK plans to sell some 10.3 billion cubic meters of natural gas to Gazprom at about 1,420 rubles per 1,000 cubic meters (ex. VAT), while in 2011 the regulated price in Yamal-Nenets Autonomous District is forecast at about 1,676 rubles per 1,000 cubic meters.

   Gazprom will also buy natural gas of SeverEnergia, but the latter plans to begin gas production only in late 2011.

   These transactions confirm that Gazprom is losing the domestic market to NOVATEK and other independent producers, UBS analyst Maxim Moshkov said. In 2010 Russia’s natural gas consumption grew by 5 percent, but this demand was conjured mainly by Gazprom itself – the company pumped gas remaining from the previous heating season in underground storage facilities. UBS estimates that between 2009 and 2015 the acquired stake from Gazprom will boost NOVATEK’s share in the total Russian production of natural gas from 6 percent to 10 percent, while Gazprom’s share in total production is predicted to fall from 86 percent to 79 percent and further to 70 percent by 2030, according to plans drafted by the government.

   Based on NOVATEK’s scheme for paying for Sibneftegaz shares, the full cost of Sibneftegaz is estimated at $2.5 billion; UBS points out that the total fair value of Sibneftegaz should be closer to $4.5 billion.

   According to Moshkov, SeverEnergia adds less to the current value of NOVATEK than Sibneftegaz, as it will require investments and extra work to start production, in contrast to already operational Sibneftegaz.

   NOVATEK’s production is set to grow substantially, thinks the expert. “According to our estimates, the state gets more revenue from the sales of wet gas and related products (stable gas condensate and liquefied petroleum gas (LPG)) compared to the export of Gazprom’s dry gas,” said the analyst.
UBS estimates that supply of liquid hydrocarbons provides 35 percent of NOVATEK total revenue, while EBITDA from the sale of gas condensate and LPG is forecasted in 2010 at about 57 percent of the total EBITDA of the company.

Everybody’s Happy

   Vadim Mitroshin, an analyst with Otkritie investment bank, has a different opinion – he believes that Gazprom has nothing to lose by sharing SeverEnergia with NOVATEK. According to Vadim, SeverEnergia fields are difficult to develop and Gazprom decided to dump the asset on NOVATEK and Gazprom Neft which already have experience in such projects. While the gas monopoly will continue developing the Yamal peninsula, which, though in dire need of investments in infrastructure, is much simpler considering the technology needed. At the same time, notes the analyst, there are still many uncertainties in how Gazprom Neft and NOVATEK will fare in their relationship, and how much investments the project requires.

   Sibneftegaz is a lucrative project for NOVATEK, says Mitroshin, as the project is already in production stage needs no major investments. The analyst does not rule out that in the future NOVATEK can buy the remaining shares of Sibneftegaz from Itera.

   Analysts at Troika Dialog believe that lower production volume of Gazprom and higher output by independent producers is because “natural gas produced by the monopoly is a touch more expensive than competition prices.” “This means that Gazprom market share is edging down, which is the other side of the strategy targeting controlled sale price,” Troika Dialog analysts say.

   Gas industry sources maintain that the strengthening of independent producers is a result of policies drafted by top officials and aimed at reducing the Gazprom monopoly. Still, there is a doubt about the true level of NOVATEK’s independence – market rumors claim Timchenko is close to Putin. Also unclear is the question of who will be the final benefactor of the almost 10 percent of NOVATEK stake full of lucrative assets.

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