RUSSIA - Big Dues & Cash-Flow Problems

Gazprom, Russia's biggest tax payer is owed money by most of its Russian and CIS clients, including state companies in the power and industrial sectors. As a result, it has a cash-flow problem. It cannot finance big development projects out of its resources. This is despite the fact that it has its own bank, Gazprombank, and equity in Vnshtorgbank and Imperial Bank. Some clients have not paid their bills for years. Only 26% of Russian consumers paid their bills to Gazprom in 1997 and the company was owed Rbs82.4 bn ($13.7 bn) by end-1997.

Gazprom Chairman Vyakhirev complained in mid-1998 that the company was losing about $1 per 1,000 cubic metres of gas on its exports to Europe because of high taxes. He warned that, unless the government reduced the VAT from 22% and excise taxes from 30%, Gazprom would stop signing new export contracts. He said Gazprom accounted for 25% of the state's tax revenue.

On Aug. 3, 1998, after months of wrangling, Gazprom and the government signed an agreement under which the company would pay about Rbs3.1 bn ($496.8m) a month in tax dues. In return, the government was to press Russian consumers to pay their bills to Gazprom.

A few days earlier President Yeltsin ordered the sale of a 5% stake in Gazprom. This is out of the government's 40.87% equity in the company which has been handled personally by Vyakhirev. The current market price for the 5% would be either about $425m on the local stock exchange, or $1.14 bn if sold in American Depository Receipt (ADR) form. Foreigners cannot own Gazprom shares except through ADRs. And international demand for the latter instruments is so strong that ADR-traded shares are nearly three times the price of the local shares. The money for the stake would go to the government, to pay debts and overdue wages, rather than invested in Gazprom projects.

Gazprom has been negotiating on its own with its strategic partners Shell and ENI for them to buy the stake. But on July 27, Gazprom Deputy Chairman Pyotr Rodionov said the company would not insist that the 5% equity be sold to Shell and ENI.

Gazprom wants to keep its status as a monopoly indefinitely, despite calls for reforms in the gas sector inspired by the IMF and the World Bank, and Chairman Vyakhirev has been resisting government plans to break up the company. Gazprom is secretive and no one outside its circle knows its real balance sheet.

Yamal Gas: The biggest project for Gazprom at present is the development of huge gas fields in the Yamal Peninsula and the Barents Sea, said to cost almost $100 bn including $40 bn for pipelines. The Yamal development could bring gas deliveries of 170 BCM/year to the western European market, where demand is expected to rise by 30-40% to 400 BCM/year by 2010.

More than 25 oil/gas and gas/condensate fields have already been discovered in the Yamal region, with their reserves put at 9.7 TCM of gas, 460 million tons of condensate and 1.2 bn tons of oil. Exploitation of these massive reserves should generate considerable revenues for the nation and foreign partners. The priorities are to build a gas trunkline network to Europe and develop the Bovanenkovsk and Kharasaveisk gas/condensate fields.

In mid-1998, Moody's Investors Service gave a B1 foreign currency debt rating to a forthcoming Eurobond issue from the Yamal-Nenets Autonomous region (YNAO), the same as the country ceiling for the Russian Federation. Moody's said the rating recognised YNAO's strong revenue base, this having become the heartland of Russia's gas business. The region accounts for 90% of Russia's gas production. YNAO, in the Tyumen Oblast, is one of ten autonomous regions which are recognised under the constitution as being independent subjects of the Russian Federation. About 10% of Russia's oil production comes from YNAO. Gazprom's subsidiaries there account for 99% of YNAO's gas production.

However, the government is giving much consideration to environmental and socio-economic problems that would arise from the Yamal project. In the late 1980s Gazprom began thorough studies into the possible environmental impact of gas production facilities. Since then four research programmes involving more than 100 institutes have been implemented. These have formed the basis for feasibility studies done for the first facilities at the Yamal complex.

Petergaz, a joint venture between Gazprom and Heerema, is pushing ahead with plans for a marine section of the Yamal pipelay, across the Baydaratskaya Bay. Eight 48-inch diameter pipelines will eventually be needed to transport the

gas across the bay, a distance of 70 km. Petergaz has made two of the pipeline crossings operational in early 1997. The six subsequent pipelines would be installed on a one-per-year basis. Gas will be transported at sub-zero temperatures to prevent cryogenic processes. The crossing itself will form a major part of the massive pipeline project, which has yet to receive final approval. The main stumbling block is raising the finance which will involve billions of dollars beyond Gazprom's means.

The first phase of onshore pipeline construction will comprise the laying of three lines from the Yamal fields to Torschok, north of Moscow. These will connect to two pipelines running through Belarus and Poland to Germany to join the European gas grid. Customers would include Wingas, a JV between Gazprom and Wintershall, and Ruhrgas. The three initial lines will have a combined annual throughput of 84 BCM of gas. Cost estimates for this first phase development are about $40 bn.

The Yamal project is based on six 55-inch, 2,500 km pipelines. The system would have a combined annual capacity of between 160-170 BCM of gas. Russia's current share of the West European gas market is 25%, which Gazprom hopes to increase to 30%. New markets are developing in countries including Spain, Turkey, Greece and Italy and consumption in 1995 was almost 7% higher than in 1993 (see Part 3).