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Gazprom plans to bid on Yukos' assets at auction

In an attempt to create a state energy leviathan, Russia's natural gas monopoly Gazprom said on Tuesday that it would bid for the prize oil assets of the crumbling oil giant Yukos, the country's No. 1 oil producer, at an auction this month.

Gazprom ended weeks of speculation when a top official told an energy conference assembled at the company's headquarters on Tuesday that the company wanted to bid in the Dec. 19 auction for Yuganskneftegas, the leading producer among Yukos subsidiaries. The operation pumps about 1 million barrels of oil a day, or 60 percent of Yukos' supply.

If Gazprom wins the auction -- and as the Kremlin-favored company, that is widely expected -- it would immediately join the ranks of the world's top five energy companies in oil and natural gas reserves.

"Gazprom should have two equal businesses," said Sergei Bogdanchikov, referring to gas and oil. Bogdanchikov is head of Gazprom's newly founded oil arm, Gazpromneft, which is expected to merge with the state-friendly oil concern Rosneft.

The Russian government owns 51 percent of Gazprom.

"We must have a world-class company" similar to Exxon Mobil, BP or Royal Dutch/Shell, Bogdanchikov said, adding, "Yugansk is the most attractive asset."

The board of directors of Gaz-prom will vote on whether to take part in the auction in the coming days.

"We hope we will be able to win the contest," he said.

Yukos, the nation's largest private oil company, is burdened by more than US$20 billion in back tax claims, part of what political analysts say is a Kremlin-inspired campaign to strip the company away from its founder, Mikhail Khodorkovsky.

Once Russia's wealthiest person, Khodorkovsky has been in jail for more than a year as he is tried on criminal charges.

The Dec. 19 auction of Yuganskneftegas was intended to help pay off a portion of Yukos' back taxes, but the Russian Federal Property Committee set a low starting price of US$8.65 billion, roughly half what analysts say the unit is worth. It is unclear whether Yukos' other assets will also be auctioned to cover the remainder of the tax bills.

For Gazprom shareholders, "the real concern here is whether buying Yuganskneftegas is accretive to earnings," said Adam Landes, an oil analyst at Renaissance Capital.

As Gazprom emerges as the government's favored vehicle for consolidating strategic natural resources, "that defers long-sought reforms of Russia's domestic gas market," he said.

"It's terrible news for shareholders in Gazprom," he said.

Domestic prices for natural gas are set far lower than gas for export. The disparity is popular with Russian consumers, but it holds down Gazprom's earnings.

By acquiring Yuganskneftegas, not only would Gazprom become one of the world's biggest energy firms, it would also put the Kremlin firmly in control of almost 20 percent ofRussia's oil production.

Gazpromneft will combine Gazprom's annual output of some 9.9 million tonnes of gas condensate with Rosneft's more than 18 million tonnes of crude oil, or about 400,000 barrels a day. With Yuganskneftegas, Gazprom would become a top Russian oil producer alongside Lukoil. Gazprom's oil output could double to as much as 81.6 million tonnes, or 1.8 million barrels a day, next year if it buys Yuganskneftegas, and as much as 113 million tonnes a year by 2010, Bogdanchikov estimated.

Credit rating and aid agencies have warned Russia that despite high world oil prices, dynamic domestic consumer demand and tight budgetary policies, Russia's strong economic growth could be hurt if the state tightens control over industries like energy.

Standard & Poor's added that the benefits of Gazprom's bid for Yukos assets "would depend on the extent of any bargain price Gazprom might pay, counterbalanced against its use of debt to finance the purchase and risk of future liabilities for past taxes or to parties, such as Yukos shareholders, who might challenge the fairness of the transaction."

Moreover, S&P said it might cut its rating on Gazprom if the company "were pressured by the government to implement large-scale, politically motivated, risky and uneconomical investments."
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