Debate begins over whether to break up Gazprom

By bne IntelliNews March 20, 2013

bne -

Russian oligarch Oleg Deripaska on March 18 brought into the public arena a debate that has been bubbling under for some time, about whether the state gas company Gazprom should be broken up.

In an interview with the Financial Times, Deripaska accused Gazprom of being too "preoccupied with its business in the West" at the expense of fast-growing Asian markets. To rectify this, he said the company should be split into two distinct entities: Gazprom International that is focused on the West and its traditional European markets, and Gazprom Russia that concentrates on the domestic market, specifically exploration and production in Eastern Siberia and the Far East, which has been starved of investment. "For the benefit of the Far East and Eastern Siberia, Gazprom should be split," he was quoted as saying.

Gazprom has been suffering a slow-motion crisis as it loses control of its traditional markets in Western Europe due to the rise of liquefied natural gas (LNG), which can be transported by tanker rather than pipeline, and the advent of shale gas in the US and elsewhere.

The company has already been forced to grant billions of dollars in rebates to disgruntled European customers who are now able to buy gas more cheaply from other sources - and it will probably be forced to offer more discounts this year too.

As Gazprom's stranglehold over its Western European markets weakens, so too is its political clout: Gazprom has been an explicit tool of Russian foreign policy over the last two decades, but as it increasingly simply becomes a cash cow the logic of breaking up the company to focus on two core, but very different markets, is increasing. The first crack in the wall was the Kremlin's admission it is considering ending Gazprom's monopoly over gas exports by granting Novatek, Russia's leading independent gas producer, the right to export LNG.

While Deripaska holds no official position, he is close to the Kremlin. And so to voice this option is to make public an idea that must already be in the Kremlin's mind.

As the Russian economy slows sharply and the federal budget falls into deficit, the Kremlin is refocusing its efforts on a hunt for revenue - and Gazprom is one of the biggest taxpayers in the country. It is also one of the worst run and least efficient companies in the government's portfolio. Without Gazprom having a political function, it is natural the state would start to think about how to get more profit from the company - and breaking it up is an obvious strategy.

Deripaska also said that rising energy costs were an obstacle for economic growth. Referring to the fact that the price of natural gas is now nearly double that in the US, he blamed Gazprom for the situation, accusing it of rent-seeking behaviour.

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