Gazprom, Naftogaz Ukrainy May Seek Joint Venture

Gazprom and its second-largest foreign customer, state-run energy company Naftogaz Ukrainy, agreed Friday that they could move toward a complete merger after they create a joint venture, Gazprom said in a statement.

A merger of the companies, proposed by Prime Minister Vladimir Putin last month, has raised questions because Naftogaz was just 6 percent the size of Gazprom in terms of sales last year. Ukrainian President Viktor Yanukovych later said a merger would have to be on parity terms.

After talks Friday, Gazprom chief Alexei Miller and Ukraine's fuel and energy minister, Yuri Boiko, suggested that a 50-50 venture could be a “first step” in the eventual unification of the companies, the Gazprom statement said.

“The parties agreed that the process could be gradual,” Gazprom said.

At this point, the companies need to determine what assets they want to contribute to the joint venture, Miller said in the statement.

Separately on Friday, Energy Minister Sergei Shmatko told reporters that Russia hoped the companies would do their best to complete the talks on possible scenarios for the merger “as soon as possible.”

Naftogaz obviously could offer its sprawling pipelines, or a portion of them, said Alexander Nazarov, a gas industry analyst at investment company Metropol. Gazprom could give the joint venture partial ownership of the gas fields that it is developing, Nazarov said, adding that a full unification was out of the question.

“Most likely, a joint venture is all that the proponents of a merger can count on,” he said in a note to investors.

Gazprom has a market capitalization of more than $120 billion, and with sales of $98.5 billion in 2009, it is also the world's largest gas producer. Naftogaz, which is not publicly traded, reported sales of $5.75 billion for last year.

The proposal to merge the companies appeared after Putin said Russia cooled off to the idea of leasing Ukraine's pipelines in a consortium with Naftogaz and European Union energy companies to run and maintain the network. Yanukovych resurrected the plan, which his predecessor, Viktor Yushchenko, ditched in the early 2000s.

Gazprom initially wanted a say in running the Ukrainian pipelines to ensure the immunity of its Europe-bound transit to politically tinged pricing disputes. It said it would pay to upgrade the worsening lines.

The Russian gas export monopoly is interested in the merger now more for the sales on Ukraine's giant market than because of transit, energy industry expert Bohdan Sokolovsky, who advised Yushchenko, said earlier this month.

Gazprom sold 27 billion cubic meters of gas to Ukraine last year, an amount second only to the deliveries to Germany, which — according to Gazprom data released last month — were 33.5 bcm.

The European Union is prepared to consider a consortium to run the Ukrainian pipelines, Fernando Valenzuela, head of the bloc's office in Russia, said Friday.

If the issue makes it to the negotiating table, “the European Union will study all the proposals and state its position,” he said, Interfax reported.

European Energy Commissioner Guenther Oettinger said earlier this month that a decision "has to be made between Kiev and Moscow, and not in Brussels."