Russian Energy Giant Gazprom Defends Record and Argues for Co-Operation with the US

Gazprom Deputy Chairman Medvedev made a stop at HBS during a US “goodwill” tour to improve the company’s image.

Gazprom, the Russian state-controlled natural gas monopoly, had in recent times openly declared its intention to be the world’s dominant oil and gas company. Not only is it well on its way of achieving that goal, the company is also starting to flex its political and economic muscle in the world economy.

Gazprom has a market cap of $275 billion (as of December 4), controls the largest share of the world’s known gas reserves (17%) for any single company, and supplies a third of the gas imports into Western Europe. However, it has recently increased prices on exports to once-subsidized former Soviet states such as Ukraine and Georgia, and cut off the gas supply to Ukraine in January this year over a contract dispute. On the other hand, having the Russian government as the majority shareholder may have helped Gazprom with the 2005 $13bn purchase of the majority stake in Sibneft, the oil company formerly owned by Roman Abramovich.

Gazprom is acutely aware that such negative publicity has a detrimental effect on its ability to expand internationally. Last week, it sent its Deputy Chairman, Alexander Medvedev, on a “goodwill tour” of the US to improve Gazprom’s image. On Monday, November 28, at a roundtable discussion on “Russia/US Relations: Can Energy Be a Bridge?” Mr. Medvedev spoke at HBS. The panel was moderated by Timothy Sutherland, chairman and CEO of Pace Global Energy Services, and included Robert Franklin, VP of New Business Development at ExxonMobil and Sigmund Cornelius, President of ConocoPhillips.

In his opening remarks, Medvedev blamed the “lingering suspicion from the cold war” for the sinister intentions the West has attributed to Gazprom. “Gazprom,” he said, “is a commercial enterprise managed for all stakeholders, which includes the Russian government.” He maintained that President Putin and the Gazprom management team had done well in ridding the old company of secrecy and inefficiency, allowing it to compete effectively in global markets, especially against gas companies still receiving government subsidies, such as those in Ukraine.

Pressed on the issue of state interference in company affairs during the Q&A session, Medvedev sounded slightly weary as he told the audience that the Russian government does not interfere with the day to day activities of the firm or its strategic direction, even though the government controls the majority of the seats on the board of directors. He defended state ownership of the firm on the basis that energy resources are the strategic assets of sovereign nations. “The ownership of gas fields will always remain in the government’s hands,” Medvedev said. While this does not preclude participation from foreign companies, this stance leads to the more substantial role a firm like Gazprom will play in the energy sector in Russia.

In his opening address, Medvedev also called for greater co-operation between the United States and Russia in the energy sector. He said that while American firms and Russian firms are competing most of the time, the competition is based on equal rules. He praised American firms for being creative in finding and exploiting new energy sources and said that he believed there was room for mutual benefit. Questioned on Gazprom’s decision to reject bids from five foreign companies, including American firms Chevron and ConocoPhillips, for the development of the deep-water Shtokman gas field in the Barents Sea, Medvedev defended it as a purely commercial decision-the bids were judged to be too low.

Robert Franklin and Sigmund Cornelius both maintained that investing in the Russian energy sector is a priority for ExxonMobil and ConocoPhillips respectively. Franklin believes that the technology necessary to reach ever more inaccessible energy sources will prove to be the bridge that will link the energy sectors in the United States and Russia. Cornelius on the other hand, expressed his belief that it would be necessary for the US market to open up to foreign investment and to co-operate with Russia to improve the technology and economics involved in extracting oil and gas from increasingly harsh operating environments. Both were bullish in their outlook for American businesses in Russia, despite ConocoPhillips’ recent setback and downplayed the political risks involved in investing in Russia. Franklin however, admitted that success will take time since relationships take a long time to build in Russia and there was a lot of learning to be done in the meantime.

December 11, 2006
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