Bloomberg News

Gazprom Chases China as Europe Demand Falters: Russia Overnight

February 20, 2012

Feb. 17 (Bloomberg) -- OAO Gazprom, the world’s largest natural gas producer, will strive to forge supply deals with India and China this year as it seeks to win customers outside of Europe, where demand is waning.

Gazprom will sign a contract in 2012 to supply liquefied natural gas to India, Alexander Medvedev, the company’s deputy chairman, said in an interview in New York yesterday. Moscow- based Gazprom also “optimistically expects” to cut a deal with China this year, though pricing is still an issue, he said.

“The ball is on their side, a growing Chinese economy will need Russian gas,” Medvedev, 56, said. “I hope that our arguments will prevail in the talks.”

Futures expiring in March on Moscow’s dollar-denominated RTS index gained 1.2 percent to 165,885 in U.S. trading yesterday, as Brent, the oil type pricing for Russia’s Urals Crude is derived from, jumped to an eight-month high. Gazprom’s American depositary receipts added 0.7 percent to $12.74 in New York, after shares fell 0.8 percent on Moscow’s Micex Index to 190.08 rubles, or $6.31. One depositary receipt is equal to two ordinary shares.

Gazprom supplies about 25 percent of gas in Europe, where utilities companies are protesting prices and at least two winter supply disruptions since 2006 have spurred countries to seek out alternative sources of energy. A boom in U.S. shale gas production is driving additional supply through the Atlantic to Europe, and Gazprom’s exports to Germany, the largest economy in the European Union, Norway and Holland all fell last year.

Russia ETF Climbs

The Bloomberg Russia-US 14 Index of Russian companies traded in New York rose for the third time in four days, adding 0.8 percent to 109.11 yesterday, while the Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, gained 1 percent to $31.86. The RTS Volatility Index, which measures expected swings in the index futures, fell for a second day, dropping 2.6 percent to 31.19 points.

The LNG contract with India is in the final stages of preparation and the price of gas supplied will be indexed to oil, Medvedev said yesterday.

Gazprom has been courting China for more than 10 years as the world’s second-biggest economy has preferred lower gas prices from the former Soviet republic of Turkmenistan. The company accounts for as much as 20 percent of global gas production.

Russian gas prices are “near parity” with those for Europe so Gazprom doesn’t intend to “subsidize” Chinese customers, Medvedev said. Gazprom expects to supply China with its first gas four years after a contract is signed, he said.

Jobless Drop

Brent gained as U.S. government data showed that Americans filed the fewest claims for jobless benefits since 2008, beating the most optimistic economist’s estimates. U.S. housing starts also rose, supporting the case for a recovery in the nation’s economy. Oil and natural gas constituted almost 50 percent of Russian government revenue last year while Urals crude is the nation’s biggest export earner.

OAO Lukoil, Russia’s largest independent oil producer, advanced to the highest price in U.S. trading since Aug. 3 as oil futures on the New York Mercantile Exchange rose to a six- week high, gaining 0.5 percent to settle at $102.31 a barrel. Lukoil ADRs added 1.7 percent to $62.85, while its shares were little changed on the Micex at 1,878.60 rubles, or $62.55. One ADR is equivalent to one ordinary share.

Brent crude for April settlement increased 1 percent to $120.11 on the London-based ICE Futures Europe exchange. Urals gained 0.5 percent to $119.48.

Bullish Russian Energy

“There’s a three-letter word that always drives Russia, and that’s oil,” Tom Furda, director of Russian equity sales at Auerbach Grayson & Co.’s Moscow-based brokerage partner UralSib Financial Corp., said by phone yesterday. “The U.S. economy drives oil to a large extent, and anything calming about Europe is also supportive of the Russian case.”

Grantham, Mayo, Van Otterloo & Co., a Boston-based investment manager, is “most overweight” and bullish on Russian energy assets because of their valuations, Peter Chiappinelli, a portfolio strategist for asset allocation at the firm, said at the Bloomberg Link Portfolio manager Mash-up Conference in New York yesterday.

Gazprom is “optimistic” that it will settle its pricing disputes with European companies outside of arbitration, according to Medvedev.

Germany’s largest utilities EON AG and RWE AG are embroiled in a dispute with the company over prices and volumes after losing money buying fuel at above-market rates. Gazprom said on Jan. 17 that it revised the price formula for clients including Germany’s Wingas, GDF Suez SA of France and Sinergie Italiane Srl.

European ‘Compromise’

“I do hope that within the course of a couple of months we will reach a compromise,” Medvedev said. Customers currently in disputes with Gazprom over prices “will accept approximately the same terms” that the company reached with other European clients, he said.

Imports of Russian gas into Germany in the first 10 months of 2011 fell 3.7 percent compared with the same period a year earlier, according to data from the nation’s Economy Ministry. Imports from Norway dropped 3 percent while Dutch imports declined 0.2 percent. Most of Gazprom’s gas supplies to Europe go via neighboring Ukraine, and disputes with the country have led to supply disruptions.

Mechel Gains

European governments may cut interest rates on emergency loans for Greece and use contributions from the European Central Bank to bolster a second bailout package, two people familiar with the discussions said yesterday, declining to be named because the talks are still in progress. Euro finance chiefs meet on Feb. 20 to decide whether to dispense the the 130 billion-euro ($170 billion) bailout and approve a bond exchange with private investors.

The prospect of a resolution to the European debt crisis boosted ADRs of OAO Mechel, Russia’s largest coal producer for steelmakers.

Mechel, whose $9 billion of net debt at the end of September was the highest among Russia’s steel and coal producers, gained 3 percent in New York to $10.79, pushing the premium over its Moscow shares to 2.1 percent, the most in 10 days.

The company’s shares in Moscow fell 4.2 percent to 318 rubles, or the equivalent of $10.58. One ADR represents one ordinary share.

Medvedev declined to comment on whether Gazprom will bid for any of $5 billion of assets that BG Group Plc, the U.K.’s third-largest natural-gas producer, plans to sell in the next two years.

Gazprom is looking into some assets with “lots of capacity” in Mozambique, Medvedev said in the interview. The company’s interest is “subject to political stability” in Mozambique, and Gazprom is also looking at an “asset swap” with a firm already working in the African nation, he said.

The RTS Index declined 1.2 percent yesterday in Moscow to 1,641.51, while the 30-stock Micex lost 0.6 percent to 1,570.36, retreating from a six-month high.

--With assistance from Anna Shiryaevskaya in Moscow and Jim Polson in New York. Editors: Marie-France Han, Emma O’Brien

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Leon Lazaroff in New York at llazaroff@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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