Romanian government times IPO of Transgaz to a "T"

By bne IntelliNews November 27, 2007

Nicholas Watson in Prague -

Bankers will tell you the success of any particular IPO is often down to the timing. So it's fortunate for the IPO of Transgaz that it kicked off just two weeks after the announcement of a huge new find at a gas field that will feed the Nabucco pipeline, a project in which the Romanian gas transmission company is a big shareholder.

The subscription period for the IPO of Transgaz started Monday, November 26 and will run until December 7. The Romanian government said in October it plans to raise roughly €67m by selling a 10% stake in Transgaz through an IPO on the Bucharest Stock Exchange. The firm will offer 1.17m new shares at €53.31 per share in two stages: 60% of the IPO is to be allotted to large investors with subscriptions over €140,000; the remaining 40% will be open to small investors. The listing is expected sometime in February.

Finance and Economy Minister Varujan Vosganian told journalists on November 20 that the government might raise the stake it will sell if the IPO proves successful. "We are taking into account the possibility of increasing the Transgaz offer as a percentage of its capital in case the market will react favourably," Vosganian told a news conference. "We are obviously counting on an oversubscription."

The chances of that happening have now been given a lift by news of a new gas find in Azerbaijan.

Timely discovery

Transgaz is the operator of the country's gas transmission system, whose network of pipelines stretch over 11,000 kilometres. However, it's not just the creaking system of pipes that feed the domestic market that investors are looking to buy into, but crucially the network that connects to those pipes running through Hungary, Ukraine and Bulgaria.

One of those international pipelines on the drawing board is Nabucco, an ambitious - overly so, argue some critics - project to reduce Russia's stranglehold over gas exported to the EU. The EU wants to limit the region's level of Russian gas imports at 25% of total consumption, partly by opening up a fourth supply corridor from the Caucasus and Central Asia. "The big area where you have plenty of gas resources and which is an unexploited area for the EU is the Caspian area, so the goal is to get 10-15%, or about 100bn cubic metres per year, from the Caspian region," says a source at the European Commission's electricity and gas unit.

Nabucco, in which Transgaz holds a 20% stake, would form a key part of that "fourth corridor," by bringing gas from the Caspian and perhaps the Middle East some 3,300 kilometres across Turkey, Bulgaria, Romania and Hungary to OMV's gas hub at Baumgarten in Austria, where it would then be sold onto the EU's deregulated gas markets. With an initial capacity of 8bn cubic metres per year (cm/y) and a target capacity by 2020 of 31bn cm/y, the EU deems it so vital to the region's energy security that financial support has already been earmarked for the project. That is important, because at $4.6bn (initial estimates) Nabucco is not a cheap solution to the EU's overdependence on Russia. However, the pipeline's main drawback is not the cost, but whether there will actually be enough gas to fill it.

OMV, the Austrian oil and gas firm that leads the consortium building the pipeline, which also includes Turkey's Botas, Bulgaria's Bulgargaz and Hungary's MOL, says the gas for Nabucco will come from the Caspian and Central Asia, as well as perhaps Iran and Iraq. However, Iran and Iraq suffer from the obvious political and security problems, while Kazakhstan and Turkmenistan have the gas but no real way to transport it to Turkey, where the Nabucco pipeline will begin (see map below).

Azerbaijan, with its enormous Shah Deniz gas field in the Caspian Sea, is regarded as the major supplier of gas for Nabucco, but until recently there were doubts whether it could supply the gas necessary to make the pipeline viable. That changed on November 14 when BP, the operator of Shah Deniz, discovered a huge gas deposit that could end up doubling production from the field.

The oil company hasn't confirmed the size of the discovery, but BP insiders have indicated to bne it could add a "fourth" phase to the development of Shah Deniz. The gasfield is already on stream, having begun production last December. Small volumes of the gas are already supplying the domestic market, as well as Georgia and Turkey. BP says plateau production from stage-1 of 8.6bn cubic metres a year (cm/y) will be reached "over the next few years." Two additional phases have already been planned at Shah Deniz, which together should increase production to 20bn-24bn cm/y, and help fill the eventual capacity of the new South Caucasus Pipeline, which stretches from Shah Deniz to the Turkish border.

A fourth phase from this new discovery could see eventual production from Shah Deniz rise to over 32bn cm/y. Experts say that won't be enough to fill the Nabucco by itself, but certainly goes some way to making the pipeline a more realistic proposition.

And that's music to the ears of Transgaz, which will be responsible for some 435 km out of the total length of 3,300 Km of the Nabucco pipeline - second only to Turkey with 1,935 km.

"Nabucco is important to Transgaz and its valuation because of two reasons," says Carmen Lipara, an analyst at Ieba Trust in Bucharest.

Starting from 2009, the investments estimated by Transgaz that will be directed to the Nabucco project will increase. Between 2008 and 2012, Transgaz expects to invest some RON619m in Nabucco, with the investments reaching their peak in 2010 at RON164m.

Then there will be the increase in transit revenues, which have been falling recently, once the pipeline comes on line. "Probably, if the investments in Nabucco will be made and the project will be a success, the transit revenues will increase more likely after 2011-201," says Lipara.

As well as the transit revenues, Transgaz holds a 20% stake in Nabucco Gas Pipeline International, the consortium formed to build and manage the pipeline. NGPI is currently searching for another partner or two to join the consortium. While Gaz de France and Germany's RWE have both expressed some interest, the new find at Shah Deniz will make a stake in the consortium all the more enticing and thus more valuable for the present shareholders, including Transgaz.

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