Italians stand in for Gazprom in auction of Yukos assets

By bne IntelliNews April 5, 2007

Ben Aris in Berlin -

Italy's energy giants Eni and Enel won the second auction of bankrupted oil firm Yukos on Wednesday, but were only standing in for the Russian state-controlled gas monopolist Gazprom.

The Italian companies were doing the Kremlin a favour, and paid $5.8bn for a grab bag of assets – about $200m more than starting price – the most valuable of which was a 20% stake in Gazprom Neft, formally known as Sibneft.

There were four bidders in all, including Gazprom rival Rosneft, and the auction lasted a mere seven minutes. The winner was the holding Enineftegas, which is 60% owned by Eni and 40% by its sister company Enel, the two firms said after the auction.

Gazprom bought the rest of Gazprom Neft from Chelsea Football Club owner and Russian oligarch Roman Abramovich last year, but Yukos still owned a fifth of the company as a result of their aborted merger attempt.

Within hours of the end of the action, Gazprom said it will exercise an option to buy the 20% of Gazprom Neft from Eni for $3.7bn plus costs. Analysts say the stake is worth about $3.8bn.

The option agreement was signed prior to the auction and gives Gazprom the right to the Gazprom Neft stake at any time over the next three years. Gazprom Chairman Dmitri Medvedev told reporters shortly after the auction finished that the gas giant would immediately exercise this right.

Gazprom said it would also buy at least 51% of Arcticgas, another of the Yukos assets on offer at the auction. Together, these companies will make Gazprom a major oil player and rival of its sister company Rosneft, the second biggest producer of oil in Russia.

Yukos' council Robert Amsterdam was livid following the auction, and told bne the auction was an "obscene event," accusing the Russian government of "criminal acts" and saying the foreign companies that participated in the bidding had been "turned into whores."

"The Kremlin is the big looser from this auction as it has absolutely lost any chance of convincing anyone that any of these auctions are anything other than a staged manifestation of the gas OPEC the Russian government is trying to build," said Amsterdam.

The number of potential bidders fell steadily as the auction approached and the final line up was clearly stacked in Gazprom's favour. The only other bidder was RMK-Kyoto, which is linked to Gazprombank.

Analysts say Rosneft is widely expected to win the lion's share of the remaining auctions of Yukos assets and has already arranged a $22bn credit line to pay for it all.

Italians over barrel

Russian President Vladimir Putin and Italian Prime Minister Romano Prodi had talked on Tuesday, a discussion the Kremlin said covered economic cooperation as well as other topics. The meeting highlights the political nature of deals involving both foreigners and strategic assets, but this is part of the Kremlin's plan. It is has not only blurred the line between business and politics - a division that is axiomatic to Western political systems - but the Kremlin has removed it completely.

The Kremlin is hoping that what companies lose in the way of efficiency because of the state's involvement in their management, can be compensated by the advantages of having Russia's full political weight behind it. The Kremlin also wants to prise open the rich markets either through supply contracts, but better by buying into the leading companies in each of these markets. It is offering limited access to its own crown jewels in exchange.

However, this model is proving hard to implement. Other countries have resisted the Kremlin's attempts to enter their companies through the proxies of state-owned companies or those that are "friendly" with the Kremlin. The most recent example was Germany's rebuff of state-controlled bank VTB's expressed desire to increase its stake in European aviation giant EADS.

The Kremlin has had more luck with less rich countries like Algeria, where Putin signed a gas cooperation deal last year. Russia accounts for 25% of the EU's natural-gas imports and Algeria 10%. However, together the two countries dominate Italy's gas imports. Wednesday's deal between Eni and Gazprom is intimately tied up with the Algerian cooperation.

"Putin signed an MOU with Algeria and now controls 70% of the Italian [gas supply market]. Together Algeria and Russia have Italy over a barrel," said Amsterdam. The Italians complained bitterly to the EU following this deal, but their protests largely fell on deaf ears. Italian Economic Development Minister Pierluigi Bersani called on the European Energy Commissioner Andris Piebalgs to grant protection against the possible price collusion of the two gas suppliers, which provide 36% of Europe's gas, but over 80% of Italy's gas.

The EU's energy policy is so fragmented that it is unable to protect member states in weak and weakening positions, such as the Italians, as it is unable to present a united front to Russia. Some voices, such as the French, are being raised to call for a united European energy policy, but the prospects of any sort of meaningful agreement being reached in Brussels any time soon are almost nil.

In the meantime the Russian-Algerian relationship is developing very fast. Only last week Energy Commissioner Andris Piebalgs warned Russia and Algeria that if they considered forming a cartel, he would push the development of nuclear power in the EU.

Earlier this week Algeria sent Russia an official invitation this month to participate in $7bn worth of tenders for the building of a frigate and joint construction of other new ships. If the contract package is signed, it will make Algeria Russia's largest foreign military trading partner, ahead of both India and China.

Algeria is the world's fourth largest liquefied natural gas (LNG) exporter and in 2005, the country sold 25.7bn cubic metres (cm) of LNG to eight countries, also making it a world leader in terms of geographic diversification in its gas exports. These are technologies and markets that the Russians are very interested in and since January Gazprom has been deepening its cooperation with Algeria's gas company Sonatrach.


Yukos, once Russia's largest and most valuable oil company, was declared bankrupt in August last year after a three-year battle against charges of tax evasion. The company collapsed after being hit with a $27bn-plus tax bill in what was widely seen as a politically motivated attack by the Kremlin.

Eni was clearly standing in for Gazprom, which didn't bid on its own behalf for fear of legal reprisals by Yukos. Indeed, several international companies have been press ganged into helping out the Kremlin in the last year, no doubt hoping for favours in return.

Indeed, the deal to stand in for Gazprom in the Yukos deal is an attempt by Eni to rescue its relationship with Gazprom, which was all but killed by the entry of the Algerians.

Italian Economic Development Minister Bersani's complaints to the EU following the Gazprom and Sonatrach deal last summer was spearheaded by Eni CEO Paolo Scaroni, according to local reports.

Eni had been negotiating an asset swap with Gazprom at the time, and Scaroni offered stakes in Italian companies, which was worth €300m-350m, while Gazprom had been taking about swaps on the order of $3.5bn to $4bn.

Tired of negotiating, Gazprom formalized its deal with Sonatrach on August 4, 2006 and cut Eni out of any future cooperation deals. In particular, the Algerians were offered a slice of the construction of a Baltic Liquid Natural Gas project. Only a week ago BP found itself in a very similar position and waded in by bidding for Yukos' 9.44% stake in Rosneft via its Russian joint venture.

The auction was a forgone conclusion and won by Rosneft, but BP's participation lent a measure of respectability to the proceedings (BP's shareholders are apparently not happy and have demanded an explanation). Coincidently, BP CEO Lord Brown was in Moscow to meet with Putin just ahead of that auction too.

"BP has walked away from this deal despite the fact that the government are holding a gun to his head. Lord Brown is trying to save [the troubled gas field development at] Kovykta which [the environmental inspectors] are threatening to take away," says Yukos' council Amsterdam.

Yukos shareholders say the sell-off is illegal and have threatened to sue anyone buying Yukos assets, alleging the Kremlin has deliberately destroyed what was once Russia's most valuable company. "I represent someone who is being held hostage, but there is lots that can be done but first we need to remove Khodorkovsky from prison," says Amsterdam.

Another prominent foreign oil company Chevron was prominent by its absence.

"Where was Chevron? The Kremlin were desperate for them to participate and even announced they would participate. But they walked away," says Amsterdam.

Gazprom released more details of its plans to bring foreign companies into help develop the Shtokman gas field in the Barings Sea. However, after making the shortlist last year, Chevron has reportedly pulled out from any deal.

Chevron's office wouldn't return calls to comment.

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