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Last Updated: Friday, 7 July 2006, 07:44 GMT 08:44 UK
Russian energy giants bring global clout
By Jorn Madslien
Business reporter, BBC News

With energy security central to the agenda at this month's G8 meeting in St Petersburg, it is becoming increasingly clear that Russia's growing geopolitical importance rests firmly on the wealth and power of the energy giants Gazprom and Rosneft.

Gazprom, which currently supplies a quarter of Europe's gas, is not only the world's largest gas producer but also the custodian of what is arguably the globe's largest proven gas reserves.

"The problem of dwindling reserves - a problem facing the gas business almost everywhere in the world - simply does not exist for Gazprom," according to the company's chief executive, Alexey Miller.

Gazprom's growth on the global stage is staggering.

The company has the US, the Chinese and the Japanese markets firmly on its radar, which means it is conceivably also the fastest-growing gas producer in the world.

"Russia is a huge, almost limitless, supplier of gas, and this makes it probably more powerful now than it was during the Cold War," observes Stephen Machin, the head of power and utilities at KPMG, a consultancy

Global players

For its part, Rosneft - which controversially took over Yuganskneftegaz, the main production assets of Yukos, in a series of deals in 2004 - announced plans last week that will virtually double its oil output.

Under the plans, output will increase from 10.2 million tons in 2006 to 20 million tons in 2020.

Rosneft is preparing for a $10bn (5.45bn) stock market debut this month that values the company in a range from $60bn to $80bn.

"One has to maintain good relations with Russia now," says Mr Machin.

"Gazprom and Rosneft are now able to play on the global stage, which they weren't able to do before."

All the president's men

Gazprom and Rosneft's growing clout in the market place has led to protests in the West, both at the way the two companies are run and at who they are run by.

Gazprom Chief Executive Alexey Miller and Chairman Dmitry Medvedev
Gazprom bosses Miller and Medvedev are close to Putin

Gazprom no longer makes up a unit of the energy ministry as it did during the Soviet Union era, yet it is once again closely linked to the state after Russia raised its stake in the company from 38% to 51% last year.

The political links are also close.

Mr Miller, the company's chief, is a former colleague of President Vladimir Putin, and its chairman, Dmitry Medvedev, is also the country's First Deputy Prime Minister.

Similarly, Igor Sechin, the chairman of Rosneft, has long been a close ally of Mr Putin, who has given him several key appointments over the years.

Mr Sechin is said to be ex-KGB and is seen as the leader of the "Siloviks" - former officers and security forces - who make up the president's inner circle of confidantes.

And to top it all, Rosneft's acquisition of Yuganskneftegaz is widely seen among Mr Putin's enemies as part of a politically motivated break-up of Yukos, the oil group created by the jailed oligarch Mikhail Khodorkovsky.

Insufficient investment?

Economic analysts raise other concerns about Gazprom and Rosneft's expansion. They say that although the firms are expanding fast, their growth has not always come from major investment in large-scale exploration projects.

Northern European pipeline under construction
Gazprom's current investment in the transport sector [such as pipelines and terminals] is approximately twice as large as those we allocate to gas production
Alexey Miller
Chief executive
Gazprom

Instead, much of it has come from strings of large and aggressive acquisitions of rivals - many of them further down the supply chain rather than in areas of exploration.

This trend has led industry observers to point out that inexhaustible reserves of gas and oil amount to little if there is not enough investment to tap them by developing new fields.

"Even in their own figures, there are concerns about Gazprom's ability to meet domestic and international demand," observes Andrew Gavin, a KPMG partner who advices Western firms on their Russian deals.

Mr Gavin is thus echoing worries about the security of supplies expressed by several European governments eager to reduce their dependency on Russian gas, and by the International Energy Agency in Paris, which says Gazprom must speed up its efforts to develop replacements for its existing gas fields.

Last month, in a speech, Mr Miller acknowledged: "Gazprom's current investment in the transport sector is approximately twice as large as those we allocate to gas production."

Moreover, amid speculation that the company is eyeing the UK's Centrica as a potential acquisition target, Mr Miller also acknowledged that Gazprom was pushing deeper into direct marketing and sales of gas in its European markets.

But he also insisted that Gazprom's "production capacity is far greater than the output of gas we actually achieve", that the company produces "however much gas the market requires of us", and that "any contracts that have already been signed will be honoured 100%".

Global markets

So in the short term, there should not be any problems, at least not for Russia's European energy customers.

"The gas pipelines are built to the West, we've got the cash to pay for it, we want to pay for it and they want to sell it to us," points out Mr Gavin.

But Mr Miller has also said: "The competition for access to energy resources between the three largest gas markets - Europe, Asia-Pacific and North America - will continue to intensify. This is good news for Gazprom."

The question at the forefront of many world leaders' minds as they gather in St Petersburg for this month's G8 meeting will be: "Is it also good for my country?"


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