The chief executive officer of Russia’s largest oil and gas corporation Gazprom Mr. Alexei Miller gave an upward revision of forecasts for the company’s production for 2009. According to Miller’s statement made at the general convention of Gazprom’s shareholders that was held in the end of June, Gazprom now expects to finish the year with 500 to 510 billion cubic meters of gas produced. The company is now producing around 950 million cubic meters of gas daily, which is 50 million cubic meters more than the average rate for the past accounting period.

Another encouraging sign is that gas consumption in Central and Western Europe has normalized and does not differ significantly from what it was a year ago. Gazprom plans to implement a large-scale investment program in 2010 with a price tag of RUR 800 billion. The company is also proceeding with the development of the Shtokman offshore field. 

According to Mr. Miller and other high-ranking executives of Gazprom, the company has no intentions to levy fines on Ukraine for its failure to purchase the volume of gas required in the agreement signed by Russian and Ukrainian officials this spring. Gazprom will also not cut off supplies to Ukraine during this winter.

At the time of the general convention, Gazprom was intensely engaged in negotiating with Turkmenistan on the price of its gas imports into Russia. The company also held talks with Beijing to reach an agreement on the supplies to the Chinese market. Among other developments that took place abroad was Gazprom’s signing of an agreement with the state-owned oil company in Azerbaijan. Gazprom may also soon become involved in the construction of a pipeline across the Sahara Desert that would deliver gas from fields in Nigeria to European customers. While the company chose not to sign a lease on the Canadian Rabasca liquefied natural gas terminal, Mr. Miller noted that he was convinced of the huge prospects that the North American LNG market presented.   

Viktor Zubkov, First Deputy Prime Minister of the Russian Federation remains the chair of Gazprom’s board of directors. Russia’s Minister of Energy Sergei Shmatko was elected to the board during the general convention of the shareholders, replacing Viktor Khristenko, who serves as the Minister of Industry and Trade. Other decisions adopted during the annual meeting included resolutions to limit management bonuses for the previous year, to decline to pay options, and to set dividend payments at RUR 0.36 per share. Gazprom’s issuance of bonds for 2009 was also discussed, and company officials were reluctant to say that the overall amount of bonds would reach the figure of RUR 35 billion that was quoted earlier. 

Production

At the start of the year, Gazprom made a forecast that its production would reach the level of 450 to 460 billion cubic meters in 2009. Mid-year developments prompted the revision of the original estimate to 500 to 510 billion cubic meters. At the same time, Gazprom’s representatives did not rule out the possibility of lower results should the situation become extremely “unfavorable.”

Positive market changes have been quite fast-paced in the recent months. Gazprom’s volume of exports to Western and Central Europe are now the same as they were a year ago, before the crisis started. Analysts have predicted that these auspicious developments will continue in the third and fourth quarters of the year, although it is difficult to speculate as to the balance of supply and demand by the end of 2009.   

Mr. Miller is certain that the most difficult phases of the crisis in the energy sector have now ended. Gradual increases in prices on hydrocarbons and other commodities show positive dynamics. Europe’s rapidly falling demand that shocked and surprised a number of energy producers has now stabilized.

As for Gazprom, the remainder of the year is expected to be more favorable than the first six months. While oil prices are holding at USD 70 per barrel, experts believe that the price may reach USD 100 in 2010. Total gas exports since the start of the current year are already climbing to last year’s figures despite the reduced purchases in the first few months.

Programs for investments

Gazprom’s investment programs and its capital outlays will be more expansive in 2010 than they were in 2009. At the same time, according to Gazprom’s deputy chief executive officer Andrei Kruglov, the cost of these programs will not be larger than RUR 800 billion. Detailed proposals on the extent of the company’s investment schemes will come up for consideration and review in December of 2010.     

For 2009, investments and capital outlays were expected to be cut by 30 percent. Gazprom’s upstream operations have so far been the ones most hurt. Such significant downward reductions on the part of Gazprom are based on the company’s contingency investment plan that is calculated with the price of oil at USD 41 per barrel.

Gazprom’s initial plans called for investing RUR 920 billion this year. Close to RUR 700 billion was allocated for capital expenditures. According to Alexander Ananenkov, who also serves as the deputy chief executive officer of Gazprom, capital expenditures may be limited to only RUR 500 billion this year. The exact figures for funds allocated to investment projects will be discussed during the meeting of the company’s management board in the fall.

The Shtokman field

Gazprom executives have assured the company’s stockholders and buyers that the launching of the offshore Shtokman field will happen on schedule. The pre-investment phase of the Shtokman project will be completed in December of this year. Final investment plans for Shtokman will be made by March of 2010.

Completion dates set for the project earlier are still in force. In the latter half of 2013, gas from the Shtokman field will begin flowing through the pipeline. Deliveries of liquefied natural gas will also begin by 2014.       

Issues with Ukraine

No sanctions will be imposed on Ukraine far its failure to purchase the volume of gas, to which it agreed previously. Statistics for June of 2009 show that while Ukraine was under an obligation to purchase 3.4 billion cubic meters of gas, it actually bought only 1.1 billion cubic meters. Despite this reduction in consumption volume by more than 3 times, Gazprom is not going to place any penalties on Ukraine for taking less gas than was specified in the agreement.  Ukraine, of course, would have to meet its payment obligations for the energy resources it did buy from Russia. For June of 2009, the cost of the gas purchased was lower than USD 300 million. So long as Ukraine continues to make timely payments to Gazprom, no disruption in the supply of gas will occur.     

The officials of Gazprom do not believe that last year’s energy crisis with Ukraine would repeat itself at the start of 2010. Even if problems with payments on the part of Ukraine arise, Gazprom will take all the necessary measures to prevent the suspension of supplies.   

Benevolent sentiments notwithstanding, Gazprom’s ultimate objective is to see the contracts it made with Ukraine be fully adhered to. The country’s economic problems are not for Gazprom to resolve, and the energy supply contracts are not going to be redrafted.   

At the end of June, Alexei Miller met with Oleg Dubina, the director of the Naftogaz Ukrainy. Gazprom’s officials recognize that Ukraine is making great strides to pay for Russia’s gas. Still, some of these difficulties can be attributed to Ukraine’s own internal problems. There is no systemic framework in place for resolving the issue of paying for Russia’s gas.     

Right after the meeting with the Naftogaz director, Mr. Miller and Gazprom’s board chairman Viktor Zubkov flew to Brussels in order to discuss the Ukrainian issue with European officials. 

Turkmenistan and China

Gazprom is engaged in conducting talks with Turkmenistan to arrive at an acceptable price figure for the exports of gas to Russia. The Russian side has been trying for a long time to strike a compromise on what formula should be used for fixing the price of gas. Direct lines of communication have been set up between Gazprom’s officials and their Turkmen counterparts. The company signed a contract with Turkmenistan for the supply of gas until the year 2028, and many in Russia now view the Asian country as a key strategic partner. 

A pipeline accident in April of 2009 cut off Turkmenistan’s supply of gas to Russia. Russia imported no Turkmen gas through the summer months.   

Since Turkmenistan has not yet commenced the shipping of its gas to China, Gazprom’s executives believe that it is too early to talk about the facilitation of any swap commodity exchange transactions. Nevertheless, consultations with Chinese energy officials have intensified over the recent months. The talks that are currently being held touch the issues of volumes and times of shipments of Russian gas. The market of Asia and the Pacific Rim offers lucrative opportunities. 

Talks with China have entered the phase of realistic and rather concrete discussions. Joint pre-investment and pre-project activities have also been undertaken for the building of facilities for storing compressed and liquefied natural gas. 

Deals with Azerbaijan

During the visit of President Medvedev to Azerbaijan, Baku and Gazprom have made an agreement for the sale of Azeri gas to Russia. The contract was signed by Alexei Miller and the head of the State-Owned Company of Azerbaijan Rovang Abdullayev. Gazprom also inked a cooperation framework agreement with the Azeri producer.

If all goes smoothly, Russia’s gas purchases can begin as early as the start of next year. Even though the volume of fuel that is being purchased now is not high, imports will grow more significant overtime. 

According to Mr. Miller, the terms Gazprom offered to Azerbaijan are highly attractive from a commercial standpoint. While in Baku, Gazprom officials conducted discussions in relation to the implementation of the second stage of the Shah Deniz project. Gas supplies that would ultimately end up going to Russia would originate from Shah Deniz. Gazprom’s officials discussed both medium and long-range projects with their Azerbaijani colleagues, and the atmosphere for cooperation has become favorable.   

Pipeline across Sahara

Gazprom has made a joint venture agreement with the NNPC of Nigeria with a view on participating in the construction of the part of the Trans-Sahara pipeline that would traverse Nigeria.

The joint venture will be involved in setting up the infrastructure for transporting and producing natural gas. The processing of associated petroleum gas in Nigeria is also among the project’s priority agenda items.   

Gazprom and NNPC prepared the foundational documents for the joint venture in the city of Abuja at the end of June. The agreement was made after the meeting of the two countries’ presidents. Each party in the joint venture framework has equal rights.

In September of 2008, Gazprom signed an MOU with the NNPC that addressed such areas as exploration, generation, and transportation of hydrocarbons. The two companies also agreed on combining efforts to design systems for processing associated petroleum gas.

According to the director of Gazprom’s Nigerian arm Mr. Vladimir Ilyanin, the company plans to invest more than USD 2.5 billion for constructing the pipeline and processing petroleum gas.

The Canadian market

Gazprom chose to hold off with its prior plans to lease Canada’s Rabasca LNG terminal this year. The MOU Gazprom had in place for renting the facility in Canada lapsed. The existence of a number of negative factors makes the revival of the project unlikely. Still, the markets of Asia and North America have tremendous prospects for growth. 

Currently, the most significant problem for implementing distant projects abroad is the difficulty of gaining access to terminals for regasification. Gazprom has already reviewed several offers that were submitted to it by terminal operators in Canada and the United States. Company officials now have a clear vision of what opportunities are available.

The Rabasca terminal project involves several major companies: Canadian companies Enbridge Inc. and Gaz Metro, as well as French company GDF Suez. The capacity of the terminal is 5 billion cubic meters a year.

Board of directors changes

The reelection of Deputy Prime Minister Zubkov as the chair of Gazprom’s board was no surprise. Alexei Miller also retained his position as the deputy chairman of the board of directors.

To replace Boris Fiodorov, who recently passed away, Gazprom’s shareholders voted Mr. Valery Musin to the board as an independent member. Mr. Musin chairs the Department of Civil Law at the St. Petersburg University. During the election, Mr. Musin received the second largest number of votes after Mr. Miller.

Others on the list of “newcomers” included Russia’s Minister of Energy Sergei Shmatko, who took the seat vacated by Viktor Khristenko, Russia’s Minister of Industry and Trade.

The majority of board members were able to preserve their seats. In addition to Mr. Zubkov, Mr. Miller, and Mr. Musin, Gazprom’s board includes Mr. Alexander Ananenkov and Mr. Mikhail Sereda, who are deputy chairmen of the management committee of Gazprom, Ms. Yelena Karpel, the head of the economic expertise and pricing department at Gazprom, Mr. Bergmann Burckhard, former head of E.ON Ruhrgas and a Gazprom deputy chairman, Mr. Farit Gazizullin, former Property Minister, Ms. Elvira Nabiullina, Economic Development Minister, and Mr. Igor Yusufov, Russian president’s special envoy for international energy cooperation.

Bonuses

Gazprom’s shareholders endorsed resolutions for limiting the awards of bonuses to company’s top-level executives for last year. Under normal schedules, bonuses to officials of Gazprom in 2008 should have been RUR 125 million, a number larger than the total amount of compensation due for 2007. 

At this stage, Gazprom’s executives are unwilling to buy out the company’s shares from the open market in order to implement a stock option plan. Andrei Kruglov said that the feedback of Gazprom’s employees about the stock plan in the first year since its inception can be characterized as equivocal and that the program is unlikely to continue this year.   

The voting members gathered for the general meeting fixed the levels of compensation for all of the company’s directors with the exception of those who are simultaneously serving as members of the Russian government. The annual compensation of each director for the past year was RUR 15.1 million. Mr. Miller received a larger sum of RUR 17.5 million in his capacity as the deputy board chairman.

While some of the shareholders originally voiced concern about these compensation arrangements, a consensus was found when Gazprom’s board members declared their intention to donate the money received to charities that help disabled persons and work to solve other social issues.   

Dividends

Gazprom’s shareholders also approved the payment of dividend in the amount of RUR 0.36 per one share of stock. Altogether, the company has allocated RUR 8.5 billion to dividend payments. RUR 4.3 billion will go to the state. The state shares belong to Russia’s Federal Property Agency. The disbursement of dividends will continue through the end of the year. The dividend yield per share is lowest in 7 years. In 2007, dividends on one share of Gazprom’s stock were RUR 2.66.   

Other issues that the shareholder meeting took up included the approval of several transactions between Gazprom and its subsidiaries. Also, PricewaterhouseCoopers was once again designated as the auditor of Gazprom’s financial books for 2009.

Bonds

The probability of Gazprom’s placing RUR 35 billion worth of bonds this year is extremely slim. As of the end of the second quarter, bonds with a cumulative value of only RUR 15 billion were issued.

Russia’s Federal Financial Markets Service registered RUR 35 billion of Gazprom’s bonds of 10th, 11th, 12th, 13th, and 14th series. Registration took place last September. Series 10th, 11th, and 12th of the bonds are for RUR 5 billion each. The last two series are for RUR 10 billion each. 

The yield on the first coupon of series 13 bonds was around 13.12 percent in late June. The first coupons of series 11 had a yield of 13.75 percent. Exchange trading of these bonds started on the last day of June. The period of maturity of the bonds is 5 years. A put option can be exercised after two years.   

Gazprombank

Gazprom has no intentions to dispose of its stock in Gazprombank in 2009. In 2008, Gazprom’s stake in Gazprombank was valued at RUR 25 billion. Gazprom’s ownership of Gazprombank is now 41.73 percent.

The announcement of Andrei Kruglov that no shares of Gazprombank will be sold this year shows that the company seriously reconsidered prior decisions to reduce its ownership of the bank. As late as October 2008, Gazprom’s officials made statements that the company wanted to dispose of all but 25 percent of the shares of stock of Gazprombank.