Prime Minister Vladimir Putin has proposed merging Gazprom with Ukraine's much smaller national energy company, Naftogaz Ukrainy, a seemingly offhand idea that could effectively mean a swap of assets between the companies.
The proposal came as Moscow and Kiev are exploring ways of profiting fr om their newfound political proximity, cemented by new Ukrainian President Viktor Yanukovych's agreement last month to extend the lease of a Russian naval base in exchange for cheaper gas imports. If it materializes, the merger would give Russia a say in running Ukraine's pipelines — which are essential for gas transit to Europe — and the headache of taking on losses generated by Naftogaz.
Following talks with Ukrainian Prime Minister Mykola Azarov that focused on joining forces in nuclear energy and aircraft building, Putin on Friday told reporters that the countries could also consider combining their gas companies.
“I made another proposal that could be given thought to,” Putin said, unexpectedly taking the floor again after he and Azarov delivered their prepared statements in Sochi. “We spoke about integration in the nuclear area, and we are ready to do the same in the gas area, that is, to unify Gazprom and Naftogaz Ukrainy.”
Putin — who had earlier floated the idea of pulling together assets in both countries to generate nuclear energy, mine uranium and make equipment for the industry — stepped off immediately afterward, taking no questions, as did Azarov. It remained unclear Monday whether Putin's vision of a joint gas colossus ruled out any involvement of European Union energy companies in running Ukrainian pipelines through a consortium with Naftogaz and Gazprom, a model that Azarov had pushed for.
Putin's counterproposal appeared to come out of the blue for Azarov, whose spokesman said Putin and the Russian delegation had not mentioned the subject Friday.
“Vladimir Putin was offhand about this,” the spokesman, Vitaly Lukyanenko, quoted Azarov as saying. “Well, we will consider offhand remarks as well and study concrete proposals.”
Gazprom chief Alexei Miller sounded better informed when he made himself available to the press a few minutes after the prime ministers were done with their statements. He said he would hold talks with Energy Minister Sergei Shmatko, his Ukrainian counterpart Yuri Boiko and Naftogaz chief Yevhen Bakulin after May 9 to discuss possible asset swaps that could give Ukraine access to develop Gazprom's reserves.
Gazprom, which has practiced similar swaps with Germany's E.On and Italy's Eni, would choose from Naftogaz's property in the business of producing, transporting and storing gas, Miller said. Ukraine's pipelines carry 80 percent of Gazprom's lucrative exports to Europe. In addition, Ukraine has the facilities to store 32 billion cubic meters of gas underground, the second-biggest capacity in Europe after Gazprom's.
“We are merging, and that's why we are interested in investing in both production and transportation facilities,” Miller said, Interfax reported.
Andrew Neff, an analyst at IHS Global Insight, said Putin likely put much thought into the ostentatiously unpremeditated remark.
“Putin's comment caught everyone offguard, except for, maybe, Alexei Miller,” he said by e-mail from Washington. “I can't help but think it is a case of testing the waters, seeing just how willing Yanukovych is to repair relations with Russia.”
Putin's spokesman, Dmitry Peskov, said it was in Ukraine's interests to have a co-owner for its pipelines that would care to fill it with transit gas. Gazprom, which said it would complete a route bypassing Ukraine by the end of 2015, would not neglect Ukraine's pipelines if it owned part of them, Peskov said Friday on Kommersant FM radio.
He said it was important for Gazprom to have a reliable overland line in addition to the planned alternative, the South Stream pipeline, which is designed to connect Russia and Europe across the bottom of the Black Sea.
Ukraine's previous leaders, former President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, attacked the prospect of Russian ownership of any piece of Ukrainian pipelines as denting the country's independence.
“It's almost self-evident that Gazprom's engineers and technicians arriving at the gas transit units across our entire country would be accompanied by Russian military garrisons for the so-called defense of Russian citizens and property on the Ukrainian territory,” Yushchenko said in a statement Monday.
He may have been referring to Russia's brief war with Georgia in August 2008, when Moscow said it had to defend Russian citizens in the Georgian breakaway region of South Ossetia from an attack by Georgian troops, to justify a Russian counterstrike. Yushchenko, who dubbed the idea an “imperial project,” also urged the European Union to prevent it from developing.
Tymoshenko said any joint projects between the countries' gas, nuclear power, telecoms or railway companies would amount to Russia's “takeover” of Ukraine.
“I understand that you can lump together anything you want from Yanukovych's maleability. Your creativity will have no lim its,” Tymoshenko said in a statement. “But Yanukovyches come and go, in contrast to Ukraine and its interests, which are forever.”
Gazprom's shares dropped to a monthly low in Moscow on Friday after Putin's statement, retreating 2.4 percent to 170.33 rubles, while the broader MICEX Index fell 1.3 percent. Trading was closed in Moscow on Monday because of the Labor Day holiday, but the company's shares were rising in New York after a similar fall Friday.
The market reaction indicated that even Gazprom's own private shareholders did not like the idea.
“There is more concern over negative aspects of the deal, such as Gazprom having to take on Naftogaz's debt, than there is any real commercial benefits from a potential merger,” Neff said.
Putin's rationale may have been to find a potential way around the Ukrainian legal ban on the transfer of the gas transit system to partial foreign ownership. Presumably, an actual merger of Naftogaz with Gazprom would not be in violation of this ban, he suggested.
Another possible aim may have been an effort to make a potential consortium with Gazprom to operate the pipeline system, which Azarov has been offering, look much more palatable to the opposition by raising the prospect of a deal that would frustrate them even more, Neff said.
It's hard to see a straight-up merger of Gazpom and Naftogaz as a partnership or a "union of equals" since Gazprom is much bigger and enjoys a much stronger financial footing, he said. Also, Gazprom is publicly traded while Naftogaz is not.
“I would assume a merger would mean Gazprom with around 90 percent or more in the merged company, so it would really be Gazprom absorbing Naftogaz rather than a 'merger,'” Neff said.
Chris Weafer, chief strategist at UralSib, said an outright merger of both companies seemed very unlikely, if not impossible, for political and financial reasons. One of them would be a considerable political backlash if Yanukovych supported the move.
Other problems include valuing the fully state-owned Naftogaz; Russia's unwillingness to upset investors in the world's biggest gas producer; and the need to arrange an equity issue to prevent the government's controlling stake in Gazprom from dropping below the current 50 percent plus one share, he said.
An asset swap would almost certainly involve Naftogaz getting equity in upstream gas production in Russia, which would allow it to move away from being just a gas utility, he said.
A joint venture deal between Gazprom and Naftogaz would not exclude EU companies, but it would be up to Gazprom to invite them, Weafer said.
If Gazprom were an equal equity partner in Ukraine's gas pipelines, Moscow could reverse its objections to the proposal to upgrade the country's transit system and use it as a link to take Caspian and Central Asian gas across the Black Sea to Europe, which would be a variation of the so-called White Stream project that Ukraine proposed under the previous government, he said. Nabucco would be a dead project because it would have no access to a gas supply, Weafer said.
A joint venture to control the transit pipeline would almost certainly eliminate any risk of a repeat of the gas disputes that left parts of Europe shivering in early 2006 and early 2009, he said, although Russia still would not abandon South Stream because it is also a political priority.
“It's like throwing a net woven from gas pipes across the Balkans and southeastern Europe,” Weafer said.