MOSCOW, June 25 (RIA Novosti) Washington advocates Azerbaijan's accession to NATO/ Power industry reform fails to create competitive market / E.ON willing to swap Gazprom shares for stake in Yuzhno-Russky deposit/ Rosneft may refuse to build oil refinery at ESPO's destination point/ LUKoil buys Italian refining asset/ Siemens shares knowhow with Russia/
Nezavisimaya Gazeta
Washington advocates Azerbaijan's accession to NATO
During U.S.-Azerbaijani security consultations, to be held in Baku in July, the sides may consider the possibility of Azerbaijan's accession to NATO, Anne Derse, U.S. Ambassador to Azerbaijan, said on Tuesday.
Russian President Dmitry Medvedev plans to visit Baku on July 3.
Azerbaijan is the third country in the GUAM block comprising Georgia, Ukraine, Azerbaijan and Moldova, which the West says should be admitted to NATO. As for Moldova, its non-bloc stance may change after the presidential elections this fall.
The Baku authorities claim to be surprised by Derse's words.
Kyamil Khasiyev, Azerbaijan's representative at the bloc, said: "Azerbaijan is not in a hurry to join NATO, although our cooperation with it is proceeding quite well."
He also denied the possibility of holding a referendum on NATO accession, as Georgia did.
Political analyst Rasim Musabekov said: "The Azerbaijani authorities have never voiced a desire to join NATO." He thinks this would have more serious consequences for the country than in the case of Georgia.
"Only Russia is against Georgia joining the bloc, but in our case we will also have to deal with the opposition of Iran. And don't forget about the frozen war with Armenia," Musabekov said, adding that the benefits of joining NATO were questionable. "The West wants this, but what would Baku gain?"
Alexei Malashenko, an expert at the Carnegie Moscow Center, said: "There is nothing surprising in the processes underway in Azerbaijan. They are logical, and I don't think Moscow views them as sensational. If Azerbaijan joins NATO, this will add a highly interesting factor to the Karabakh conflict."
David Babayan, a political analyst from the disputed Nagorno Karabakh republic, said: "The territory of Azerbaijan is one of the most desirable parts of the Europe-South Caucasus-Central Asia structure, with a potential link to China and India. In this sense, the West will, predictably, do its best to encourage NATO cooperation with Azerbaijan."
Babakyan said Azerbaijan's possible accession to NATO would influence the situation in Nagorno Karabakh, because the West needs stability in the South Caucasus and therefore settlement of the Karabakh problem to carry out its challenging geopolitical project.
Vedomosti
Power industry reform fails to create competitive market
Russian utility giant Unified Energy Systems (UES) will cease to exist on July 1, and its longtime CEO Anatoly Chubais will quit the power industry, as one of the most ambitious industrial reforms nears the finish line.
Although the power industry reform has been considered the only sphere of successful transformations in the past few years, little has been accomplished to date. The restructuring of power industry companies is the reform's only successful result.
Nevertheless, this is an important achievement because the Russian power industry's structure now matches top international standards despite initial claims that it would be inappropriate to divide loss-making vertically integrated power monopolies into power-generating and power-selling companies.
However, liberalized prices and a competitive power market are a long way off; and it appears that both goals will never be achieved. The market liberalization timeframe will probably be revised because it does not match the government's anti-inflation program.
Several major industrial groups, including energy giant Gazprom, Basic Element, and the Siberian Coal Energy Company (SUEK), have bought most wholesale and territorial power generating assets. And one-third of them are state-controlled.
Market players will, most likely, use lobby groups to merge generating companies and to reshape the power market after Chubais's resignation. Foreign investors will probably swap their stakes in wholesale and territorial generating companies for gas production assets.
Major industrial groups will sign cheap and long-term power supply contracts; and all other consumers will face such risks as the surplus-power market and the most ineffective generating assets.
In this situation, any competition seems impossible. Moreover, future price hikes and other problems will probably compel the government to revise the reform concept and to reinstate vertically integrated companies.
The reform became entangled in a web of tactical compromises and a desire to mostly attain short-term results. Its main results, such as free-market prices and competition, are not irreversible. Chubais's resignation leaves an impression of unfinished business.
Kommersant
E.ON willing to swap Gazprom shares for stake in Yuzhno-Russky deposit
Light has been shed on new proposals made by Germany's E.ON to Gazprom in exchange for a stake in the Yuzhno-Russky deposit. The offer is not E.ON's holdings in Europe, on which Gazprom insisted, but its own stock worth $7 billion. But even this scheme will not help the partners to seal a four-year deal - they already have new differences to settle. According to the Germans, Gazprom has turned down the offer, while Gazprom says things have not gone so far yet.
The idea is for E.ON to get a 25% minus one share stake in Severneftegaz, which owns the license for the field. Talks on the subject began in 2004. Since then, BASF of Germany has successfully joined the project in exchange for $2 billion worth of stock.
The sides are not revealing the new scheme. But a high-placed source in E.ON said that during the St. Petersburg Economic Forum, E.ON Ruhrgas AG's new chairman Bernhardt Reutersberg proposed to Gazprom chief Alexei Miller that it swaps the gas monopoly' shares for a stake in the deposit. E. ON owes 6.43% of Gazprom stock and the amount offered is worth $7 billion.
The Yuzhno-Russky deposit in the Yamal-Nenets region must be keyed up to its design capacity of 25 billion cubic meters of gas a year in 2009. The field's gas reserves, according to the ABC1 category, amount to 825 billion cubic meters, and oil, to 5.7 million metric tons.
In 2004, E.ON made a similar proposal to Gazprom as part of a deal on Yuzhno-Russky, but Gazprom showed no interest. It wanted to get a share in E.ON Ruhrgas trading or gas distribution companies operating on the domestic German market. E.ON, however, was firmly opposed to a division of the home market with a Russian partner.
On the other hand, in 2004 Gazprom was worth $60 billion, and now $340 billion. A Gazprom source said E.ON's bid was being considered. But an E.ON top manager said Gazprom had already turned it down.
Valery Nesterov of Troika Dialog said Gazprom has recently disclosed the price of its deal with BASF: $2.06 billion. So, the analyst said, a year ago Yuzhno-Russky was estimated at $8.24 billion, and its reserves, at $2 per barrel of oil equivalent. But since then oil has gone up in price greatly and NOVATEK's reserves, for example, are now estimated at $5.5 per barrel. "Within one year a stake in Yuzhno-Russky could have grown by two to three times. Basing on Gazprom's market capitalization, the deal could be equivalent to 1.5% of its stock," Nesterov said.
But, according to Maxim Shein from BrokerCreditService, if the deposit fails to go on stream before the end of the year, E.ON might go back on the deal. However, Gazprom still has an option to start negotiations with the Dutch-based Gasunie, which is a Gazprom partner in the Nord Stream gas pipeline project, which is to get its first gas from Yuzhno-Russky.
RBC daily
Rosneft may refuse to build oil refinery at ESPO's destination point
With the existing tax regime, Russia's state-controlled oil major Rosneft could find it unprofitable to build an oil refinery in Nakhodka, the final destination of the East Siberia - Pacific Ocean (ESPO) oil pipeline. The company has already sent its proposals to ease the tax burden to the government. However, the question of a choice between an oil refinery and a petrochemical plant is still open. Experts think Rosneft will totally give up its previously voiced plans.
According to Sergei Kudryashov, Rosneft's first vice president, high-level oil processing is ineffective under the current tax legislation.
In early June, Rosneft asked the government to give it an opportunity to import special equipment necessary for building and equipping the new plant. It counted on zero tax duties and profit tax cuts for several years until the project starts recouping the investment.
Back in March, Rosneft's president Sergei Bogdanchikov talked about the construction of a petrochemical plant instead of an oil refinery. According to him, a petrochemical plant would be more preferable considering that Japan, Korea and China, where the plant's products could be sold later, can meet their fuel requirements from their own oil refineries.
Konstantin Simonov, director general of the National Energy Security Fund, doubts that Rosneft is interested in building an oil refinery or a petrochemical plant in Nakhodka. "It is more interested in the Chinese market than the markets of Japan and the Far East where it will appear after an ESPO branch to China is commissioned," the expert says. He believes that Rosneft managers' statements made on June 24 look like an attempt to justify the company's refusal to implement this project in the future.
Vitaly Kryukov of Kapital Investment Group thinks that the company will have to refuse to build an oil refinery anyway because of the country's export policy. According to him, Rosneft should choose a petrochemical plant. With the current prices, it is more profitable to export dark petrochemicals (mazut or vacuum gasoil) than light ones received through deeper conversion," Kryukov said.
Business & Financial Markets
LUKoil buys Italian refining asset
Russia's largest private oil producer, LUKoil, is implementing its plans to acquire oil refining and marketing assets in Europe. It has signed an agreement with ERG SpA, Italy's main independent energy and petroleum group, to set up a joint venture to operate the ISAB oil refinery in Priolo, Sicily.
LUKoil will own 49% in the venture and ERG will retain the rest. The value of the deal is 1.347 billion euros without the cost of feedstock.
According to ERG, it currently accounts for about 19% of Italy's total refining capacity and about 9% of its petroleum products market.
LUKoil announced in 2007 that it would spend $9 billion within a decade on the acquisition of oil refining and marketing assets in Europe, but many of its projected deals have fallen through.
Artyom Konchin, an analyst at the Unicredit Aton, part of the international Unicredit Group, said the Russian company got lucky with the seller this time.
"ERG has substantial debts and has lately focused on energy production from renewable resources," Konchin said.
The ISAB refining facility in Sicily is one of the largest in the Mediterranean and "is well positioned to meet the growing middle distillate demand in Europe (mainly kerosene and diesel fuel)," LUKoil said.
It comprises two assets united by a pipeline system and integrated into a single technological unit with an annual capacity of 16 million metric tons (117.6 million bbl) of oil, three piers, storage tanks of 3,700 cubic meters, a 99 MW power generation plant and other infrastructure.
LUKoil vice president Leonid Fedun said yesterday the ISAB refinery can process Urals crude, which allows LUKoil to fully integrate it into its supply chain. Under the agreement, the company will annually supply 8.3 million metric tons (61 million bbl) of oil to the refinery.
LUKoil plans to start oil deliveries to Sicily in late 2008. It will use a loan of $1 billion to finance the transaction, which will increase LUKoil's overall refining capacity by 13% and overseas refining capacity by 60%. Net profit in Europe will grow by 1% in 2009.
Under the agreement, ERG can sell another 25%, or even the entire 51% package, in the joint venture to LUKoil within five years at the price of the initial transaction based on the price of $85 per barrel, Fedun said.
Mikhail Zanozin, an analyst at Sobinbank, said the deal is a breakthrough. "This is an expensive transaction," he said. "But LUKoil is now buying many refining assets outside Russia and building a ramified marketing network, which will ensure it maximum profits and lower its dependence on oil prices."
Vedomosti
Kommersant
Siemens shares knowhow with Russia
Germany's Siemens has sold Russia's Power Machines a license for the production, sale and servicing of the 285 MW SGT5-4000F gas turbine, the Russian company said. Power Machines and Siemens are not disclosing the terms of the deal. Analysts are at a loss to estimate the worth of the license.
Power Machines plan to supply turbines to plants in Russia, Belarus, CIS and Baltic countries, India, Pakistan and other countries, the company said in a press release. Power Machines will start manufacturing components for the first Russian SGT5-4000F turbine in 2009.
Russia is experiencing a power construction boom and Power Machines timely obtained a license for making the latest type of turbine, said the manager of one of the contractor companies building power plants. He hopes a Russian-made turbine will be slightly less expensive than its foreign counterpart. One such turbine is priced at $30 to $35 million, a spokesman for OGK-5 said. Its thermal power plant at Nevinnomyssk has ordered such a turbine.
Siemens and Power Machines are running a joint project to make gas turbines with 160 MW and 165 MW capacities. The Russian company opened talks to buy a license as early as 2006, yet Siemens was in no hurry to give away such profitable service contracts. The service carries a profit of 40%, which is more than the margin in selling turbines, said Mikhail Pak, an analyst at Metropol.
Power Machines is not forthcoming with explanations on how the sides reached agreement. In the view of spokespersons for EMAlliance (which supplies boiler equipment for power plants), Siemens "had no other option but to hand over the technology to the Russian side." EMAlliance has said Siemens' European plants are running at full capacity, and a licensed production of gas turbines in Russia is the most sensible and sure way of entering this rapidly growing power market.
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