Monday, June 11, 2007

Surprise-surprise, Mr. Blair - Gazprom goes for Britain

In an apparent test of Britain's free-market intentions, Gazprom's deputy executive Alexander Medvedev (not to be confused with Dmitri Medvedev, Gazprom's Chairman and potential successor to Mr. Putin) announced at the St. Petersburg Economic Forum on Sunday that the Russian gas monopoly was close to a deal increasing its presence in the British energy market. As CNN Money reports Mr. Medvedev' announcement:

"In the near future, there will be a deal to further increase the customer base on the British market," Medvedev said, according to media reports.

The executive added that anyone in London for the Wimbledon tennis tournament, which starts at the end of June, would hear about the deal.

The announcement comes as a surprise and bears a slight degree of mockery (perhaps unrelated) at the statements made by the departing British prime-minister Blair. Over the past month, Mr. Blair has been voicing concerns about Russia flexing its energy muscle as well as giving warnings to European businesses actively involved or considering to enter the booming Russian economy.

As soon as the statement by Gazprom was made, speculations were made as to the target of the gas monopoly's acquisition: Centrica (the UK's largest gas retailer) and Scottish Southern Energy (a UK utility) immediately appeared on the radar screen of most analysts. Although, according to The Herald, one of Gazprom's UK executives stated that SSE was not an acquisition target, the market still was optimistic about a possible Centrica takeover.

Gazprom has been eying Centrica since January of 2006, when as today controversial statements about acquisitions of UK downstream (to customers) operators were floating in the media. To date Gazprom has already acquired British energy retailer Pennine Natural Gas, and has planned to expand its stake in the energy market to 10% by 2010.

The Russian behemoth already has a presence in several countries. In Belgium it has signed a memorandum of understanding to look at potential gas storage projects in the north of the country. It supplies around one quarter of France's gas needs under term contracts with Gaz de France and has a similar deal with Italy's Eni. In the Netherlands it's in talks with pipeline operator Gasunie on a pipeline stake swap. According to analysts cited by CNN Money, the primary motivations behind Gazprom's expansion into Europe's downstream energy business is the higher profitability, as well as the removal of the middleman by directly selling its energy resources from Russia to European retail customers.

Russian companies have significant political bargaining power in such situations. While western energy giants such as BP and Shell are actively involved in the energy sourcing business in Russia, the presence of Russian companies in the downstream markets of Britain is minuscule. With BP facing possible license suspension in the Kovykta Siberian energy project, there is plenty of bargaining options on the table if the British government chooses to intervene in the situation.

Unlike its European counterparts, Britain has been a strong supporter of free-market principles and the principles of nonintervention of the government into cross-border acquisitions. With significant fears in the West about the Kremlin's seeming use of Gazprom as its foreign policy tool, Britain faces a tough test. If it acts to block a possible Gazprom deal, it faces the potential to look embarrassingly hypocritical, and doing more harm than good to UK energy companies who are shadowed by the heavy hand of the Kremlin at this moment. British executives have already criticized Mr. Blair for his criticism of Russia's business practices.

It still is not clear if Centrica is the company Gazprom was talking about in its announcement, but it is likely that Gazprom is very serious this time around. Its goals of expanding into the British downstream market have been a priority for some time, and with the departure of Tony Blair, there is a possibility for warmer relations between the two countries, at least in the business sphere.

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