Gazprom to recapitalise for China gas infrastructure deal

Russia and China recently signed a 30-year, $400bn deal for Gazprom to deliver Russian gas to China. The deal was signed by the state-owned gas companies Gazprom and China National Petroleum Corporation (CNPC) in the presence of the countries’ leaders, Vladimir Putin and Xi Jinping to underscore the importance attached to the transaction by the two countries. The deal underscores Russia’s shift towards Asia amid strained relations with the west. The contract involves the provision of 38 billion cubic metres of gas each year

The Russian president – who has been pushing to close the deal after almost a decade of negotiations – called the agreement “the largest in the gas sphere during the era of the USSR and Russia”.

It’s no secret that the Russian government wants to open new markets in reaction to increasingly hostile relations with the west over the Ukraine crisis. Whereas the US and the EU have threatened economic sanctions against Russia, China has refused to take a side in the conflict and remains more independent from US pressure than other large economies.

The quest for investment capital 

Gazprom will be responsible for all infrastructures on its side which will entail largely financing the pipeline to China but the Chinese will handle construction in their own country. In addition, to the China deal, Gazprom is also involved in other projects among them is the planned “South Stream” pipeline through the Black Sea, which could see some benefit from added liquidity. The implication is that Gazprom will need more investment capital. 

Russia plans to invest $55 billion in exploration and pipeline construction to China’s border, and China’s CNPC said it would build the Chinese section of the pipeline. A Gazprom executive said China would provide a $25 billion pre-payment.

Russian government angling for more stake

President Vladimir Putin said that Russia should consider recapitalising state gas company Gazprom after a $400 billion deal with China which will require multi-billion-dollar investments in pipelines and new fields.

Putin did not say how exactly Gazprom could be recapitalised but hinted it could be done from Russia’s gold and foreign exchange reserves. Russia’s gold and foreign exchange reserves, the world’s fourth largest, stood at $468.4 billion as of first week of June 2014, down almost $41 billion since the start of the year because of market volatility caused by the Ukraine crisis.

Gazprom may also issue shares raising concerns the Russian government will acquire a bigger stake in the nation’s largest company which is already about 50 percent state-owned.

Analysts say that the proposal to sell shares in Gazprom is “strange” because the company has ability to build the pipeline without selling shares. Alexander Medvedev, Gazprom deputy chief executive had earlier said that the company has the ability to build all needed infrastructure for the Chinese agreement using loans, prepayments and its own cash.

All Gazprom shareholders have a preferential right to purchase additional stocks if there is a new issue under the Russian law.

FRANK UZUEGBUNAM