Shares in independent natural gas producer
Novatek plunged after energy giant
Rosneft
announced a dramatic expansion into the domestic market Thursday with
the signing of an $80 billion contract to provide gas to state-owned
electricity provider
Inter RAO for 25 years.
As fear gripped investors that the company’s long-term future was
under threat, Novatek closed down 7.1 percent on the Moscow Exchange.
The company’s global depositary receipts had fallen over 15 percent by
mid-afternoon in London.
The agreement mandates Rosneft to deliver 35 billion cubic meters of
natural gas annually under “take or pay” clauses to Inter RAO’s power
stations from 2016 to 2040, according to a statement published on
Rosneft’s website.
Novatek currently has a supply contract with Inter RAO, which it wrested from gas giant
Gazprom in 2009.
“The key, as always, is price,” said Denis Borisov, an oil and gas
analyst at Nomos-Bank. “Nobody has ever competed that brutally with
Novatek.”
This latest success for Rosneft gives a significant boost to the
expansion of its gas business inside Russia and follows on the heels of a
$55 billion deal that will see the state-owned titan takeover TNK-BP to
become the world’s biggest listed crude producer.
In August, Rosneft finalized the merger of its gas operations with
those of independent producer Itera into a joint venture in which
Rosneft holds a majority stake. It will also acquire a burgeoning gas
business from TNK-BP, particularly the large Rospan project.
“Rosneft has significant reserves of gas, so producing and selling
this gas is a priority in terms of generating additional profit for
Rosneft shareholders,” said Rosneft president Igor Sechin
in the statement. “Concluding an agreement to supply gas directly to
Russia’s largest generating utilities is the most effective way to
monetize our reserves.”
Rosneft is a minority shareholder in Inter RAO after it bought a 1.36
percent stake in the power company last year. Sechin has said that
there are no plans to purchase more equity.
“Our partnership with Rosneft, a global oil and gas major, is
strategic in nature and will guarantee stable supplies of fuel,” said
Boris Kovalchuk, chairman of Inter RAO and son of Yury Kovalchuk, the
billionaire banker rumored to have close ties to President Vladimir Putin.
Novatek’s contract with Inter RAO is a significant part of its
portfolio and is estimated to account for between 20 and 30 percent of
the gas producer’s sales.
“The news underscores the danger of Rosneft’s foray into the gas
market,” analysts at Bank of America wrote in a note to investors.
“Rosneft is also planning to go after Novatek’s existing customers.”
Some have speculated that personal animosity between Sechin and
Gennady Timchenko, the billionaire oil trader and co-owner of Novatek,
might be spilling over into business.
Sechin and Timchenko deny that any such animosity exists. Last month
they stressed the intimacy of their relationship in a series of photos
where they pose laughing and embracing each other.
Rosneft’s deal is significant not only for Novatek. All the country’s large oil companies, including Gazpromneft and
LUKoil, are currently seeking to grow their gas businesses.
Selling natural gas helps oil companies avoid penalties for
non-utilization and is a way of profiting from the gas that is produced
as a by product of oil extraction.
Analysts said that, despite the setback, Novatek had not been dealt a mortal blow.
“The damage is significant for Novatek,” said a banker in Moscow who
requested anonymity because he was not authorized to speak to the media.
“But until 2016 there is plenty of time and I expect a rebound in the
shares.”