Gazprom Sweetens Naftogaz Merger Offer

Gazprom has offered Ukraine specific gas fields with reserves of up to 1 trillion cubic meters if Naftogaz Ukrainy agrees to contribute its gas assets to their joint venture, chief executive Alexei Miller said Friday.

The two state energy giants are destined to be together, Miller said, suggesting that Moscow was prepared to offer additional perks to make an eventual merger more palatable to deeply skeptical political leaders in Kiev.

“It's already time to discuss the possible size of reserves,” he said, adding that a decision on fields would depend on Naftogaz's willingness to hand over its pipeline network and gas production assets, as well as how they were priced.

Speaking at a news conference after Gazprom's annual shareholders meeting, Miller did not name the fields Gazprom had offered, although he said they would hold 800 bcm or “say, 1 trillion cubic meters.”

Gazprom's total proved, probable and possible reserves amount to 33.6 trillion cubic meters by Russian reserves standards. Its major Chayandinskoye field alone holds 1.2 tcm.

The company has been seeking to use warming political ties between Moscow and Kiev to gain greater control over the transportation of its gas supplies to Europe, about 80 percent of which pass through Ukraine.

Regular disputes over prices for the fuel and transit costs have led to cutoffs through Ukraine and Belarus, damaging Gazprom's reputation and prompting European consumers to seek alternative suppliers.

Prime Ministers Vladimir Putin and Mykola Azarov first discussed a possible merger of Gazprom and Naftogaz in late April, although the companies later agreed to start by contributing gas assets to a 50-50 joint venture.

Gazprom insists that the venture must be a prelude to a full merger of Gazprom and the much smaller Naftogaz. Ukrainian President Viktor Yanukovych and his government have said the merger would be impossible unless Kiev and Moscow had equal weight in the final holding.

In a bid to sweeten the deal further, Miller on Friday offered additional concessions.

Ukraine's households — hit hard by the local economy's 15 percent drop last year — would continue to pay “subsidized regulated prices” for gas if the merger materialized, he said.

And an eventual Gazprom-Naftogaz merger would be “advantageous” for Ukraine's big business as well.

“It would increase efficiency for the Ukrainian gas industry and the industries that are large consumers of the gas,” he said.

The energy-intensive steel industry is a key exporter and mainstay of the Ukrainian economy.

Miller went so far as to say Gazprom and Naftogaz — once part of the single Soviet gas industry — were destined to reunite.

“It's a historically predetermined step,” he said in a speech at the shareholders meeting earlier Friday. “Gazprom's and Naftogaz's gas transmission systems represent a single network that functions only in close connection with each other.”

Miller said earlier this month that it was possible that Gazprom could lay its South Stream pipeline through Ukrainian — rather than Turkish — waters in the Black Sea, which would be another major boon because of the transit fees it would generate. But the move would be conditional on the full merger, he said.

Ukrainian deputy prime ministers Serhiy Tihipko and Boris Kolesnikov could elaborate on the progress of the joint venture and merger talks when they speak at a Renaissance Capital investment conference Monday.

A full merger of the two state energy companies could be politically risky for Gazprom because future Ukrainian presidents could seek to reverse the deal, said Konstantin Yuminov, a gas industry analyst at Rye, Man & Gor Securities.

Yanukovych's opponents, including former President Viktor Yushchenko and his prime minister, Yulia Tymoshenko, have been vocal opponents of any deal giving Russia influence over the country's gas infrastructure.

"Should someone like Yushchenko come to power, he would order a pullout from a merger," Yuminov said.

A joint venture is all Gazprom really needs, since it would give Moscow a say in the operations of Ukraine's pipeline network, he said, adding that the venture could be formed and operating in three years.

Earlier this year, Gazprom boosted its stake in Beltransgaz, the Belarussian gas pipeline operator, to 50 percent, sparking complaints last week that its interests were being ignored during a pricing dispute between Moscow and Minsk.

Deputy Prime Minister Igor Sechin had said before the conflict that the government saw no economic reason to raise its stake in Beltransgaz.

Miller also reiterated on Friday that Gazprom would shepherd through the South Stream project, scheduled to come under construction in 2013 and start operating in December 2015.

“Gazprom will not make a single step back from its plan,” he said.

In addition to swallowing Naftogaz, Gazprom is seeking one or two global strategic partners, Miller said. They could be European or Persian Gulf companies, he said, adding that, “we, of course, needn't set any time frames.”