Bloomberg News

Gazprom Said to Stall on RWE Talks as German Power Falters

December 09, 2011

(Updates with closing share prices in fifth paragraph.)

Dec. 8 (Bloomberg) -- OAO Gazprom, the world’s biggest natural-gas exporter, is stalling on talks to create a European power-plant venture with RWE AG because of deteriorating profits in Germany, two people familiar with the matter said.

Gazprom and RWE agreed last week to keep talks going for several more months in a second extension since July, another person said. The companies haven’t yet agreed on the assets and need more time to monitor demand and margins in Germany, the other people said, declining to be identified because the matter is confidential.

“It’s difficult to see the strategic logic for Gazprom to get involved in the German power business,” Derek Weaving, a London-based utilities analyst at Renaissance Capital, said by e-mail. “The European power sector is highly competitive, with even established national champions like EON AG reporting mediocre profitability.”

Gazprom supplies about a quarter of Europe’s gas and the company announced plans to negotiate its first generation venture in western Europe with RWE in July, including coal- and gas-fired plants in Germany, the U.K., Belgium and the Netherlands. RWE is looking at ways to mitigate the costs of Germany’s decision to close all its nuclear reactors by 2022 and has pledged to sell 11 billion euros ($15 billion) of assets. The Essen-based utility raised 2.1 billion euros in a share sale earlier this week.

Gazprom rose 1.6 percent to close at 177.41 rubles in Moscow today, while the Micex Index gained 0.6 percent. RWE declined 1 percent to 27.40 euros in Frankfurt.

Price Mismatch

Gas-fired power generation, most interesting to Gazprom because it can supply the fuel, has been unprofitable for the entire year until the end of November, based on year-ahead prices for electricity, fuel and carbon emission permits. The spread turned positive for the first time on Dec. 1, according to data compiled by Bloomberg.

Annett Urbaczka, a spokeswoman at the German utility, declined to comment on “ongoing talks.” The Gazprom and RWE chief executive officers, Alexey Miller and Jurgen Grossman, agreed to continue “consultations” on the creation of the joint venture, the Moscow-based company said in a statement on Nov. 30 after the two men met.

Gazprom and RWE agreed in October to extend the three-month exclusive talks to the end of the year. For RWE, an agreement with Gazprom may allow the company to negotiate a better deal on the long-term gas supply contracts that are currently losing money because their rates are linked to oil prices rather than day-to-day gas prices in Europe.

‘Creative Approach’

Gazprom Deputy Chief Executive Officer Alexander Medvedev said in September that the company may adopt a “creative” approach on gas pricing after forming the power venture. The gas pricing talks are part of the discussions on the power venture. A deal with RWE could help the Russian gas export monopoly to maintain its share in the European gas market, which slipped to 23 percent last year.

The Moscow-based gas exporter is also looking to invest in other European countries such as Bulgaria and Romania, Denis Fedorov, head of the OOO Gazprom Energoholding electricity unit, said in October.

Germany’s plans to develop renewable energy to replace nuclear generation may also be an obstacle to the deal. The German government wants to boost the share of renewable energy to 35 percent of output in 2020 from 17 percent last year.

“Companies will struggle to recover the huge costs associated with reducing greenhouse gases and increasing the proportion of renewable energy,” Weaving said. “Expanding into the German power sector may be good for Gazprom egos, but doesn’t seem to offer any upside for shareholders.”

--With assistance from Brian Swint in London. Editors: Will Kennedy, Torrey Clark

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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