Moscow Times November 28, 2007

Gazprom, Dow and Sibur Plan Linkup

Gazprom and U.S.-based Dow Chemical Company intend to study opportunities to create joint ventures for processing gas in Germany and Siberia, the companies announced Tuesday.

They stated the intention in a memorandum also signed by Gazprom's petrochemical subsidiary, Sibur, which seeks better technology and outreach to new markets to expand its plastics business, Gazprom said in a statement.

One joint venture would build a petrochemical plant in Germany where Dow has a solid presence, said a source close to the company. Gazprom could supply gas for that plant to process, the source said.

Germany is the biggest importer of Russian gas in Europe.

Dow could bring technology, experience and knowledge of the market, Dow spokesman Paolo Casciato said in comments about the possible joint venture. "From Gazprom, it could be availability of hydrocarbons," he said.

The three companies will set up a working group to estimate economic viability of the project and draw up plans for any further feasibility studies, the statement said. A Dow source said the group was expected to produce its findings next year.

The other joint venture would make Dow a partner in processing the gas from Gazprom's fields in the Yamal-Nenets autonomous district at large-capacity plants in Russia, the statement said.

Since Sibur's existing plants operate at close to capacity, the joint venture would apparently have to build new plants. Sibur declined to comment on the exact plans.

A joint venture would help meet Sibur's goals of building up its resource base and expanding the production of plastics, said company spokesman Rashid Nureyev. "It's the most competitive and profitable type of business," he said.

Sibur is interested in Dow's technology, experience and well-established marketing ties on the world market, Nureyev said. The joint venture would also supply the domestic market, he said.

LUKoil, another big player in the Russian petrochemicals industry, said there was enough place on the local market for many projects. A government program to the develop the industry, which the Cabinet considered last week and plans to adopt next year, calls for major investment, a LUKoil spokesman pointed out.

LUKoil, which has two petrochemical plants in southern Russia, is planning to complete a feasibility study for a third one in the region by the end of this year, the spokesman said.



Dow Chemicals, Gazprom Could Unite

Gazprom has signed up for joint ventures left, right and center with European energy companies but could alliances with American companies be next?

On Tuesday Gazprom announced its petro chemical division, Sibur Holding signed a memorandum of understanding to set up a joint venture with Midland, Mich. based Dow Chemicals. The deal would give Gazprom access to new petrochemical facilities set up by Dow in Germany. In return Dow would refine gas at Gazprom's fields in the Yamalo-Nemets region in the north of Russia.

Dow is the world's largest chemical company, ahead of Germany's BASF , and a partnership with Russia could help the country build up its petro-chemical industry.

"A potential joint venture at Yamal-Nenets would help Gazprom treat natural gas extracted in the region while enhancing its ability to export petrochemicals as well as gas," said Andrew Neff, senior energy analyst at Global Insight. "Furthermore, a joint venture based on Dow's new petrochemical facilities in Germany could give Gazprom a solid footing in the German petrochemical industry."

The companies stressed that the deal was in preliminary stages and they would consider whether it's economically viable. Nevertheless, the move is likely to raise the hackles of the European Commission, which has become increasingly concerned that Gazprom provides Europe with a quarter of its energy and could use gas as a tool of foreign policy. The concerns have prompted proposals that could require Gazprom to sell some assets. However, with some of the continent's other leading energy producers, including Eni opposing the legislation, there are doubts about if it will go ahead.

Gazprom has brushed aside concerns about the EU legislation, arguing it would not put a stop to its expansion plans in Europe. While the hostile environment for Gazprom may rule out plans to buy gas distributors such as Britain's Centrica, analysts have remained convinced that joint ventures--of the sort signed with Dow Chemicals--would continue to give Gazprom access to European assets. (See: " Gazprom's Medvedev Gives Europe A Warning")

Neff said that while the plans were in their preliminary stage, the memorandum was significant, particularly coming at a time in which "U.S.-Russian political relations have gone into a deep freeze, with business-to-business cooperation suffering as a result."



E.U. Considers Energy Market Competition

The European Commission is set to publish a draft law on energy market competition that will separate the ownership of energy production from the ownership of distribution systems. If adopted, these new rules would have implications for the assets Russian state gas giant Gazprom owns in the European Union.

E.U. Competition Commissioner Neelie Kroes has been campaigning for the "unbundling" of production from distribution systems in E.U. energy markets. Her concern is with gas and electricity:

--The weaker version of the unbundling law involves separating the management of production and distribution activities into separate companies.

--The strong version, preferred by Kroes, entails separating not just management but ownership as well.

The rationale behind this approach is that competition does not function properly in the European electricity and gas markets. The Competition Commission argues these markets are dominated by a small number of vertically integrated companies, often with national monopolies. Furthermore, international competition is weak.

Liberalizing the gas and electricity markets across the E.U., along the lines already followed by the U.K., is seen as the way forward. The lobby group of industrial energy users, the International Federation of Industrial Energy Consumers (IFIEC), supports Kroes, as does the European Council. For advocates of the reform, the aim is to create a single European energy market.

A number of member states will oppose ownership unbundling. The heavyweight opponents are several large national champions, including:

--Italian companies Eni and Enel, both over 31% state-owned;

--Gaz de France, which will be GDF Suez after the merger with utilities company Suez, about 40% state-owned;

--Germany's powerful E.ON group, incluing E.ON Ruhrgas.

--Russia's Gazprom will also strongly resist the initiative.

The E.U. imports about 58% of its gas. Around half of that comes from Gazprom, whose monopoly on the export of Russian gas is entrenched in Russian law.

As a supplier of gas, Gazprom would present no problem for the Kroes strategy. In a speech to the IFIEC General Assembly in June, Kroes said long term supply contracts were not themselves a problem for competition, but they became a problem when they involved a dominant supplier accounting for a large part of the market.

Gazprom already has stakes in distribution businesses in several E.U. countries. It has also formed joint ventures in gas reservoirs and gas distribution hubs in Hungary, Belgium and Germany. The E.U. competition policy, if it followed the Kroes strategy, would require on principle that Gazprom be treated like all other vertically integrated energy businesses in Europe: It would have to divest itself of distribution assets. However, this plan would encounter three major problems:

--E.U. Links: Vertically integrated national champions in several E.U. states are already intertwined with Gazprom. Together, they can successfully resist any unbundling.

--No reciprocation: E.U. Trade Commissioner Peter Mandelson and German Chancellor Angela Merkel have voiced concerns that E.U. companies are being acquired by state-owned entities from non-E.U. countries, which do not open their own economies to acquisitions by E.U.-based firms. These concerns may prompt the commission to propose additional measures aimed at non-E.U. state companies, such as Gazprom.

--Russian sensitivities: The present Russian leadership appears to be highly sensitive to any action that could be interpreted as a threat to Russian interests. Restrictions on Gazprom's activities would be readily interpreted in Moscow as being anti-Russian. This would further spoil the already strained relations between Brussels and Moscow.



Gazprom's Medvedev Gives Europe A Warning

Gazprom has remained remarkably silent since the European Union launched its plans to liberalize the region's gas market, which could require the Russian company to sell off some of its European assets. But that changed on Wednesday with a warning from the energy giant's deputy chief executive Alexander Medvedev that the proposals could lead in up to a 50.0% increase in gas prices on the continent.

Medvedev, who has been a significant but less public figure at the center of Gazprom's rapid rise than Chief Executive Alexey Miller or Chairman Dmitry Medvedev, said that the rules which would prevent energy producers owning distribution networks in Europe, would inevitably lead to higher gas prices.

According to reports by several European and American publications Medvedev said that the European Union plans would not have an impact on Gazprom's current investment plans for Europe. However, he said that if the plans went ahead they could lead to the suspension of new deals, and therefore limit supplies to the continent, leading to a hike in prices.

The comments add to fears about energy supplies to the continent, particularly given the spiralling price of oil, which on Wednesday moved close to the $100 a barrel barrier.

Though the proposals being drafted by the EU competition commissioner Neelie Kroes are still in their infancy they are likely to include proposals to "unbundle" the markets, requiring separate energy production and distribution networks. Though a number of the continent's top energy companies such as Eni, Gaz de France and E.ON which have distribution networks will be opposed to the move, the actions are seen to be primarily targeted at Gazprom.

Over the past year Gazprom has repeatedly alarmed European markets and leaders, not only with its decision to forces the likes of BP and Royal Dutch Shell out of their stakes in major projects in Russia.

Their threats to cut off supplies to both Ukraine and Belarus have also added to concerns that Russia could use Gazprom as a foreign policy tool.

Since talk of the EU regulations began the Russian government has strenuously denied that it would be forced to sell part of its stake in Gazprom or break up the company into two or three divisions. Though analysts expect that the current anti-Gazprom environment and the risk of it being forced to sell assets should the EU legislation come into effect will prevent it making any major acquisitions in the distribution sector, including acquiring the British company Centrica which it was rumored to be mulling over in the past.