MILLER LED GAZPROM’S RESTRUCTURING

Irina Reznik

Vedomosti, 03.19.2004

Alexey Miller has unexpectedly made a first step towards the reform long and desperately awaited by Russian officials and independent gas producers.

Alexey Miller, Gazprom’s Management Committee Chairman, has unexpectedly made a first step towards the reform long and desperately awaited by Russian officials and independent gas producers. A. Miller told the Vedomosti newspaper that by 2005 Gazprom would have a separate financial accounting system of gas transmission expenditures. And this is a pre-requisite for reforming the gas industry.

RF President Vladimir Putin’s latest statements that Gazprom should be treated “gently” and that the gas industry reform will for now be limited to providing independent gas producers with free access to pipelines, have been largely perceived as a signal to freeze large-scale restructuring of the Monopoly.

Gazprom however seems to be ready now for changes. Alexey Miller, Gazprom’s Management Committee Chairman, told Vedomosti yesterday in what way Gazprom’s corporate governance structure would be altered till the year-end. The new structure aims to separate financial flows in the gas production, transmission, marketing, processing and underground storage sectors.

Officials and investors still keep reproaching Gazprom for its expenditure intransparency. According to Sergey Glazer from the Vostok Nafta company, there’s merely a formal differentiation between gas production, transmission and processing in Gazprom’s financial accounts. Judging by this data, one is unable to assess the company’s real expenditures, for instance, in the fuel transmission sector. “Everybody perfectly knows that most Gazprom’s gas transmission units simultaneously deal with gas production and processing as well as render various services, thus, subsidizing very often other sectors at the expense of transportation, - explains Glazer. – As a result, Gazprom’s accountants feel free to carry over expenses to the transmission sector although they have absolutely nothing to do with it.” This situation can’t but concern officials, as well. According to Andrei Sharonov, First Deputy Minister of the Economic Development and Trade Ministry, it is precisely the intransparency of gas transmission costs that prevents from calculating the reasonable gas transmission tariff rate.

But Gazprom is set to change this situation. According to Alexey Miller, the subsidiaries will have specialized divisions established till the year-end and each of these will file separate financial accounts. “We’re planning that Gazprom will enter the year 2005 already restructured, - maintains Miller. – These reforms will enable us to make the company’s gas transmission costs absolutely clear and transparent. And this is really important for fixing fair gas transmission tariffs. But what’s most important is that by consolidating our core business operations we’ll be able to raise the efficiency of managing all the subsidiaries. For instance, we’ll set up a 100% Gazprom’s daughter company that will lease underground gas storage facilities from its parent and will only deal with gas storage matters, non-Gazprom’s gas, inclusive. Similarly, says Miller, our service, repair and social infrastructure facilities as well as liquid hydrocarbon transmission, processing and marketing units will become separate legal entities. After being restructured, Gazprom will alter its international financial accounts and expenditures incurred from various activities (most of these are now included in the section “Other Operating Expenses”) will be described in detail.

Andrei Sharonov considers the decision to file separate expenditure accounts as “an important step towards improvement in the gas industry”. “The experience gained by international corporations shows that the separate cost accounting is usually followed by the company’s restructuring, - notes A. Sharonov. – And starting with separate filings on gas transmission expenditure, Gazprom will finally be able to calculate a real (not a virtual one, as it is now) gas transmission tariff.”

Mikhail Lozovoi, chief spokesman for the NOVATEK independent gas company, believes that by settling the issue of Gazprom’s expenses the company will receive an opportunity to determine the scope of investments to be earmarked for increasing the capacities of the gas transmission system. “Gazprom will significantly benefit from singling out transportation costs, - thinks Glazer. – What’s going to happen, in effect, is that gas transmission will be taken out of the Monopoly and, thus, the company could require from the state to stop regulating gas pricing and to restrict itself to setting the gas transmission tariff.” “Gazprom has decided to position itself at the head of the gas industry reform with the view of benefiting from the process in the end” – sums up a Troika Dialogue expert Valery Nesterov.