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Novatek: A Gas Giant You've Never Heard Of


It's a company few people have heard of. Little is known about its owners or its origins. It isn't listed on any stock exchange and only recently began publicizing itself to investors. Oh, one more thing: It's worth around $4 billion.

Meet Novatek, a Russian gas producer that has just clinched one of the biggest foreign-investment deals in Russian history. On Sept. 22, France's Total (TOT) announced plans to buy 25% plus one share of Novatek. According to market sources, Total will pay $1 billion. Not a bad price for a company that was only founded 10 years ago, began significant production two years ago, and is not exactly a household name even in Russia. But the price may well be worth it: "Novatek is an excellent platform for further expansion in Russia," says Kaha Kiknavelidze, oil and gas analyst at Moscow brokerage Troika Dialog.

Put Russia and natural gas together in a sentence, and most people think of Gazprom, the world's biggest gas producer. But independents such as Novatek pump out an ever-growing share. True, Novatek, with just 3% of Russia's gas output, is a mere fledgling compared with Gazprom. But while Gazprom managed to boost its output by just 3.7% last year, Novatek's was up 59%, and it's on course for a 48% hike this year, to 13.5 billion cubic meters. Novatek is sitting on top of an estimated 1.5 trillion cubic meters of gas, with audited reserves of 864 billion cubic meters of gas and 956 million barrels of crude oil.

Who are these Novatek guys anyway, and how did they acquire so much gas? Unlike most of Russia's energy companies, Novatek didn't pick up its lucrative acreage during the privatization free-for-all of the 1990s. It grew out of the Kuibishev Pipe Construction Co. in Samara, which was privatized and sold to management in 1991. Novatek's mineral wealth came later, when managers had the bright idea of diversifying into oil and gas extraction. "We didn't receive anything. Everything the company has was created during the last 10 years," says Leonid V. Mikhelson, Novatek's CEO and the former general director of the pipeline company. In 2003, Novatek reported net profits of $110 million, up from $20 million the year before.

SAVVY MANAGEMENT

Novatek owes much of its growth to smart investments. In 1994, Mikhelson and his partners teamed up with a geological exploration company to prospect for gas in the far northern Yamal-Nenets region. Mikhelson's background in pipelines gave him useful contacts there, and Novatek bought exploration licenses in the mid-1990s at a fraction of what they would cost today. "He's a smart and tough manager who has taken advantage of all the opportunities given to him," says Andrei Gavryushenko, editor of Delo, a Samara business weekly.

Pipeline access and regulated domestic prices are Novatek's biggest problems. Gazprom has no legal obligation to give access to independent producers. Russians pay $28 per thousand cubic meters for gas, compared with $120 in western Europe, while independent producers are shut out of lucrative foreign markets by Gazprom's export monopoly. Eventual liberalization of this sector may create openings for independents, and Russia has promised to hike domestic gas prices to $60. But reform has been glacial.

Novatek isn't waiting for the starter's gun. It aims to triple production of oil and gas condensate to 5.2 metric tons by 2010 and is investing heavily in refineries. Those ambitious plans require lots of cash. That's why Novatek struck a deal with Total, and why it's looking to international capital markets as well. It also explains why Novatek is revising its low-profile approach. "We weren't interested in PR. We just got on with business," says Mikhelson. The question now is whether Novatek can continue to do as well in the limelight as it has done in the shadows of Siberia.

By Jason Bush in Moscow


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