Wednesday, April 26, 2006

The Game of Monopoly

In today's Washington Post, Secretary Rice has finally addressed Gazprom. But as I stated before, Greece will use caution when it makes a decision.

The headlines............................

Rice Warns Against Russian Gas Monopoly

ANKARA, Turkey, April 25 -- Secretary of State Condoleezza Rice on Tuesday warned Greece and Turkey against allowing Russia to obtain a monopoly over Europe's supply of natural gas, implicitly bolstering a planned pipeline from Azerbaijian that would weaken Russia's tight grip on European energy supply.

"It's quite clear that one of the concerns is that there could be a monopoly of supply from one source only, from Russia," Rice told reporters in Athens after meeting with Greek Foreign Minister Dora Bakoyannis.

Rice waded into the battle over the increasing dominance of Russia's state-owned energy giant Gazprom -- which recently sought a stake in a Greek-Turkish pipeline -- even as she sought to build support in Greece and Turkey for sanctions against Iran concerning its nuclear program.

Her trip to Athens was the first independent visit to Greece by a secretary of state in two decades. As she met with Bakoyannis, about 3,000 protesters marched with signs calling Rice a war criminal and urging her to "go home," and some youths clashed with riot police. She later flew to Turkey for another round of meetings.

Rice raised the gas supply issue ahead of a visit to the White House by Ilham Aliyev, the president of Azerbaijan, on Friday. The Bush administration has put aside its concerns about Aliyev's lack of democratic credentials in an effort to prevent Azerbaijian from coming under Russia's sway and eliminating what U.S. officials believe is the last chance to give European countries an alternative route for energy. In addition to the planned natural gas line, an oil pipeline has been constructed from Baku, the Azerbaijani capital, to Turkey.

The high-stakes battle over European energy has been largely hidden from public view but it emerged as a significant policy issue for top U.S. and European officials after Russia briefly shut off Ukraine's supply of natural gas in January in a pricing dispute.

Russia's gambit alarmed European governments and set off a scramble, backed by Washington, to seek new sources of gas. Russian officials, in turn, have privately complained about the aggressive tactics of U.S. diplomats to sell the Azerbaijian route.

"There is going to be a very strong emphasis for all of us on energy security," Rice said. "It's quite obvious that when you have the kind of demand growing around the world with big economic powers growing -- developing powers in places like China and India -- that it is going to be critical to have energy security."

Russia is the world's largest gas supplier and dominates many European markets. It supplies 100 percent of the gas imported by Finland, Slovakia and other Eastern European countries, 44 percent of Germany's imports and one-quarter of the gas bought by Italy and France, according to the U.S. Energy Information Administration.

U.S. officials have made the case to European officials that using the link to Azerbaijian would also improve relations with Turkey, which is eager for membership in the European Union. The pipeline would also traverse Georgia, helping a country that has angered the Russian government by resisting Kremlin influence and turning toward the West.

Gazprom has sought an interest in the Greek-Turkish pipeline, either as a shareholder or a supplier. While the United States has promoted the Greek-Turkish project as a way to reduce tensions between two long-time antagonists, U.S. officials now want the project to hook up to the Azerbaijian route, which is due to begin supplying gas in 2007.

Gazprom's deputy chairman, Alexander Medvedev, warned Tuesday that Gazprom may direct future gas supplies to China and emerging Asian economies should European leaders turn to competing suppliers. "There is no real alternative to Russian gas," he told Bloomberg News. "If there is a political decision made to cut dependence on Russian gas, we won't sit and wait while the mood changes."

In Turkey, Rice met with officials and had dinner with Foreign Minister Abdullah Gul. She reiterated her pledge to share more information with Turkey about the activities of Kurdish guerrillas in Iraq. Turkish troops in recent weeks have massed on the border with Iraq, leading to speculation in the Turkish press that the troops would cross the border. But Gul said the maneuvers were part of an annual effort to seal the border when the winter snows melt.

Of course Gazprom does not view itself as a monopoly. But Putin is playing the game well.

The headlines............................................

Gazprom Share Surge Takes Putin's Gas Company Past BP (Update2)

April 26 (Bloomberg) -- Russian President Vladimir Putin now controls the world's second-biggest energy company by market value, after shares of state-run OAO Gazprom surged to a record, making the company worth more than BP Plc.

Gazprom stock rose 7.7 percent, the biggest gain since Jan. 10, to $11.20 as of 4:56 p.m. in Moscow, after its weighting was raised in the MSCI Emerging Markets Index because Putin ended ownership curbs on the stock. At $265 billion, Gazprom is the world's fourth-biggest publicly traded company, after Exxon Mobil Corp., General Electric Co. and Microsoft Corp.

``Gazprom should be the biggest company in the world some day,'' said Tim McCarthy, who manages eastern European stocks at New York-based Red Star Asset Management. ``The economic center of gravity has shifted to the East, somewhere between India and China. Russia is exploiting this opportunity using Gazprom.''

The benchmark Russian Trading System Index of stocks more than doubled in the past year as energy prices soared to records, aiding an eight-year economic expansion in the world's largest oil and gas supplier. Putin used the cash generated by the boom to tighten control of the energy industry, including Gazprom, the world's biggest natural-gas company by output and reserves.


Putin is trying to build Gazprom into an international energy provider big enough to compete with Irving, Texas-based Exxon, whose $390 billion market value makes it the world's biggest.

Billionaire George Soros and U.S. Secretary of State Condoleezza Rice are among those to raise concerns this week about Russia's growing role in world energy markets and the possibility Putin will use companies such as Gazprom for political means.

Putin installed ally Alexei Miller as Gazprom chief executive officer in 2001 and had OAO Yukos Oil Co.'s Mikhail Khodorkovsky, once the country's wealthiest individual, jailed two years later. Putin has insisted the Khodorkovsky case was carried out by independent prosecutors. The Yukos CEO said last year the charges against him were a response to his funding of opposition politicians.

Gazprom bought control of billionaire Roman Abramovich's OAO Sibneft, the country's fifth-biggest oil producer, for $13.1 billion in October, two years after Khodorkovsky's arrest doomed Yukos's bid to take over Sibneft.

`Unfair Competition'

Gazprom, which supplies a quarter of Europe's gas, wants to expand by buying stakes in retail companies delivering gas to consumers. Russian energy companies are facing unfair competition limits abroad, Putin said today in Tomsk, Siberia, where he's meeting with German Chancellor Angela Merkel.

``We know very well that we often run into unfair competition on world markets,'' Putin said. ``Despite large demand for energy resources, they try to use any reason to limit us, either to the North, to the South or to the West.''

Gazprom, which extracts a fifth of the world's gas, cut shipments to Ukraine in January as it sought to raise prices. The dispute reduced deliveries to European Union countries including Italy, Hungary and France.

`Devious' Aims?

``Europe is relying for a large portion of energy supplies on a country that does not hesitate to use its monopoly power in devious and arbitrary ways,'' Soros wrote today in a commentary in the Financial Times newspaper. Russia uses gas supplies to pressure Ukraine and Belarus, former Soviet states through which all Russian gas exports to Europe flow, he said.

Rice discussed concerns about possible Russian dominance of energy supplies for Europe yesterday during a meeting in Athens with Greek Foreign Minister Dora Bakoyannis.

``We talked about energy diversification,'' Rice said yesterday at a press conference in Athens when asked about recent European concerns regarding Russia and Gazprom. ``It's quite clear that one of the concerns is that there could be a monopoly of supply from one source only, from Russia.''

Gazprom, created out of the Soviet gas ministry in 1991, holds 16 percent of the world's known reserves. Its gas output of 547.2 billion cubic meters last year is equivalent to 9.42 million barrels of oil a day, about as much as the daily extraction in February in Saudi Arabia, the world's biggest oil supplier.

Targeting Exxon

CEO Miller, who worked for Putin in their native St. Petersburg, has said he expects Gazprom to compete with Exxon Mobil and Saudi Arabia's Saudi Aramco to become the world's largest energy producer within four to five years.

BP shares fell 0.2 percent to 700 pence in London, valuing the company at 142 billion pounds ($253 billion). The stock dropped 1.4 percent yesterday after BP said first-quarter profit dropped 15 percent. BP shares have gained 13 percent this year, in line with Exxon Mobil and surpassing the 11 percent rise at Shell. Gazprom's market value overtook Shell's earlier this year.

``The whole oil and gas industry in Russia is strongly undervalued and will stay so for quite a long time,'' said Andrei Ivanov, who helps manage $1.8 billion at Renaissance Capital Asset Management in Moscow, including Gazprom shares. ``The Russian companies are much cheaper based on reserves.''

Putin in the last year strengthened his control of the country's oil industry, the world's second biggest, with state- run energy companies now owning about a third of Russia's output, up from less than 10 percent.

Gazprom bought control of Sibneft in October 2005 and state-oil company OAO Rosneft bought a unit that was confiscated from Yukos in December 2004 for $9.3 billion.

Morgan Stanley today said it will increase Gazprom's weighting in the MSCI indexes as of June 1, after Putin last year lifted restrictions on trading Gazprom shares, allowing people who aren't Russian citizens to own more stock and trade the company's local shares.

Gazprom's weighting will be increased to 2.5 percent from the current 0.4 percent in the Emerging Markets index after the close of trading on May 31, the MSCI said in an e-mailed statement yesterday. The index is tracked by investors with more than $3 trillion under management.

Gazprom's market value may more than quadruple to as much as $1 trillion, Deputy Chief Executive Alexander Medvedev said yesterday. The company needs to consolidate full control of oil producer Sibneft and stakes in power generation companies for this to happen, he said, without giving a timeframe.

Back in January I wrote about Russia.

And what I believe we should do here in Alaska.

We live in a time where the dynamics are different in the world markets. Russia has opened its state owned companies to foreign investment and at $11.00 a share USD, Gazprom is very attractive to foreign investors.

Just today, Gazprom increased 9% per share. It has jsut passed B.P. and a few weeks past, it had passed Shell oil. B.P. announced that profits decreased 15%.

Gazprom is fast on its way to pass Exxon on capitalization and if estimates are correct, all other oil companies will be darwfed by the Oil Gaint in four years and past that.

Gazprom will have the capital to buy out oil companies here in the United States, companies that we may think could never be bought out.

The freemarket economy has its virtues but it will have its dangers and for Alaska, Gazprom is a dangerous monopoly that may eventually win.

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