№6 June 2012Table of contents Issue Archive
№ 4 (April 2012)
Itera has set in motion the process of consolidating its assets with those of the state-owned corporation Rosneft. If the two companies succeed in implementing their current plans, their newly formed joint venture could well challenge NOVATEK for the top position on the independent gas producers market in Russia.
By Svetlana Kristalinskaya
A Great Beginning and a Somewhat Less Impressive Continuation
For a long time now, Igor Makarov, Itera’s main stockholder has been looking for a partner that could help him expand his company and boost its development potential. With the change at Gazprom’s helm, the once-mighty Itera has seen its former position on the gas market significantly reduced and has lost much of its former leverage. It was during the days of the former Gazprom boss Rem Vyakhirev that Itera was able to acquire its principal production assets as well as the right to supply Turkmen gas to Ukraine. When Alexei Miller became the head of Gazprom, Itera was able to retain its interest shares in production companies but it was displaced from the Turkmen market. Nevertheless, Makarov, who calls Turkmenistan his home, together with other top managers and owners of the company, had already managed to forge close ties with that former Soviet republic and, in the absence of prospects for their business development in Russia, has continued vigorously to look for further application points there.
In the meantime in Russia itself, Itera had tried for four years and failed to make fully operational the Beregovoye Gas Condensate field, its main natural gas production asset (not to count the Purgaz Project operating under Gazprom's supervision). Over the course of four years, it lost control of the Beregovoye Field to Gazprombank, with the prospect of its eventual transfer to Gazprom.
Here, too, however, things did not go the way they had been planned. Early in 2010, first, there appeared some reports of preparations being made for the sale of 51 percent of Sibneftegaz shares to Gazprom, which holds the license to Beregovoye field, together with two other fields, but, toward the end of the year, the asset was ultimately acquired by NOVATEK. So, once again, Itera was out in the cold. After all, when it was in partnership with Gazprombank it was the professional among the two, but with NOVATEK the balance of power was clearly tilted and not in its favor.
In Search of a Better Deal
Itera had plans to join forces with Leonid Mikhelson way back in 2002 but then it sold him all of its assets there in exchange for a long-term gas delivery contract. Itera needed that gas badly as it had acquired the right to act as operator to supply natural gas to Sverdlovsk Region, one of the country’s biggest industrial regions. But Igor Makarov was clearly ill at ease, remaining just another trader while seeing how his former rival NOVATEK was gaining so much momentum, what with the IPO, a foreign partner from among the world’s major corporations and the government’s blessing to develop a number of complex and challenging projects. So, in 2008, his company also started to plan for an IPO. But then came the global financial crisis which upset all his plans in that direction.
Then, in 2011, the market was expecting an alliance, in one form or another, between Itera and TNK-BP. The Russian-British joint venture had already filed a require for a purchase of 50 percent of Itera’s assets to the Federal Antimonopoly Service (FAS) and to the Government Commission for Control over Foreign Investment in the Russian Federation.
TNK-BP was prepared to pay for its share in an amalgamated company with its own assets or with cash to be used for repayment of debt. According to the International Financial Reporting Standards (IFRS) findings, during the course of the year 2010, Itera’s long-term debt increased 1.7 times to reach $1.2 billion.
In the end, however, TNK-BP and Itera didn’t have it the way they had planned originally, with the price proving to be the stumbling block. Mikhail Slobodin, TNK-BP Vice-President says, “Basically, Itera is a holding company that owns two minority stakes in the assets. What it controls directly is the sale of natural gas in Sverdlovsk Region. That is not at all a bad asset in terms of production. But there may well be some other ways to access the Sverdlovsk Region’s stable natural gas market.” According to Slobodin, what had ultimately impacted the price of the transaction was, in particular, the doubling of the Purgaz mineral extraction tax (MET) starting from 2012.
Remain Independent and Be More Profitable
The Russian government’s decision to increase the tax burden on the gas industry was made in such a way as almost not to affect the independent producers, such as NOVATEK and the oil companies, for which, as had been promised, the MET was only increased to off-set the rate of inflation, while it was doubled for companies with Gazprom’s interest share of 51 percent or more and for Gazprom itself. As far as Gazprom is concerned, it can make up for lost revenue from other sources such as higher prices on the export markets or increased wholesale prices and so on. It is an altogether different story, however, for Purgaz and Nortgaz, another “ugly duckling”, which has been, for a long time, in a state of permanent conflict with the gas monopoly. These two stand to incur substantial revenue losses as a result of the government decision.
One possible solution could be the selling by Gazprom of 1 percent of its shares in the two companies, but the gas concern does not seem to care very much about that situation, one way or another.
So, rejecting the offer from TNK-BP whose relations with Gazprom are much like those between two partners, Itera has chosen, instead, the state-owned company Rosneft which, for several years now, has tried and failed to negotiate with Gazprom admission to the gas pipeline system, something that has prevented Rosneft’s vast gas reserves from being monetized. Those reserves are quite large standing at almost 0.5 trillion cubic meters of natural gas in proven reserves.
Under a cooperation agreement signed by Rosneft President Eduard Hudainatov and Itera’s Igor Makarov, it is planned that a new joint venture will be created to include Itera-Group-owned natural gas assets such as its 49 percent interest share in Sibneftegaz, 49 percent in Purgaz and 67 percent in Uralsevergaz-NGK, the Sverdlovsk Region gas supply operator and some other assets. Rosneft will contribute its Kynsko-Chaselsk license block gas fields where, at the moment, there is almost no production to speak of.
According to a company statement, “in the future, some other Rosneft gas assets are planned to be transferred to the joint venture.”
A source close to one of the two companies explains that the reference there is made to the plans to further transfer to the joint venture the Rosneft-owned Kharampur field, with all its reserves.
The Kynsko Chasel group’s total reserves are estimated at 40.2 million tons of oil and 284.2 billion cubic meters of natural gas, with the proven gas reserves there being only 61 billion cubic meters, compared with Itera’s contribution to the joint venture of some 350 billion cubic meters of gas in proven reserves. It would seem therefore that the two partners’ contributions to the new JV are not of equal worth. No details have been disclosed by the companies, however, as to whether any transfer of funds would be involved in that transaction.
In the initial phase, the joint venture’s total recoverable reserves of liquid hydrocarbons and natural gas will stand at about 51 million tons and 600 billion cubic meters, respectively. If Kharampur field deposits are included in the deal, the JV’s total reserves would grow up to 1.2 trillion cubic meters of gas, its proven reserves up to one trillion cubic meters and its liquid hydrocarbons reserves up to 60 million tons.
In coming years, the joint venture plans to sell more than 40 billion cubic meters of its own gas, and gas it purchases. At the moment, out of 23 billion cubic meters of gas sold by Itera, its own volumes account only for about half of that total. Rosneft had previously spoken of its prospective plans to produce some 40-50 billion cubic meters of gas annually at its Kharampur Field.
Rosneft will own 51 percent of the new joint venture and, just a few weeks after the agreement was signed, Eduard Khudainatov stated that the deal would also cover Itera’s assets in the Baltic states and in Turkmenistan. Itera has a 10 percent interest share in Eesti Gaas, Estonia’s only gas purchase and distribution company and owns a further 16 percent interest share in the Latvian gas distribution company Latvijas Gaze. In Turkmenistan, Itera was able to acquire the offshore Block 21. Given that the site requires some $6 billion in investment to develop and that, on top of that, Itera has no previous experience of offshore field development, the company has given 51 percent of ownership in the project to the Russian state-owned company Zarubezhneft. There had been plans for Rosneft also to become part of the project. Deputy Prime Minister Igor Sechin in his capacity as Chairman, Rosneft Board of Directors made a statement to that effect over a year ago. For political reasons, however, the state corporation’s joining of the Turkmen project was delayed. Perhaps, now Rosneft will finally become a partner in that project. According to preliminary estimates, License Block 21 holds about 219 million tons of oil, 92 billion cubic meters of associated gas and 100 billion cubic meters of natural gas in recoverable reserves.
A Major New Player on the Independent Gas Producers Market
It is planned that the new Rosneft and Itera joint venture will become the gas production and sales operator for the two companies and will operate under the gas company’s brand name. Igor Makarov is set to become the new joint venture’s Chairman of the Board of Directors.
Market analysts say that, as a result, Itera will acquire a strong administrative and financial resource represented by Rosneft and will expand its resource base, given that the parties have agreed on joint acquisition of their new production assets. In this connection, it is worth noting that Makarov has been invited to join the Rosneftegaz Board of Directors, as part of a move to replace government officials there, managing the state-owned bundles of shares in Rosneft and Gazprom.
If the two companies succeed in implementing their plans, their new joint venture could become Russia’s second biggest independent gas producer, second only to NOVATEK, with Makarov still hoping to lead his JV to the No. 1 spot. Commenting on the Itera and Rosneft plans, Leonid Mikhelson said only that his company had already developed long-term plans up to the year 2020 to produce 112 billion cubic meters of gas, signed contracts with the customers and established a strong resource base.
As far as Rosneft is concerned, the company that had never really been involved in the natural gas business will now be able to monetize its gas reserves with the help of an experienced player on the gas market.