RUSSIA - The UK.

UK-based Gazprom Marketing and Trading (GM&T) director of trading Keith Martin in July told the British Trade and Industry select committee the company would first seek to bed down its recent acquisition of privately-owned Pennine Natural Gas Ltd, its first foray into the British supply market. His view was echoed by GM&T chief executive Vitaly Vasiliev, who said the company would use Pennine to "understand how the retail business is working". Gazprom later bought another UK firm NGSS.

Martin confirmed Gazprom wanted to buy Centrica PLC, owner of British Gas (BG), telling MPs: "I think what we are looking to do is diversify our portfolio. Up until recently Gazprom has been trading at the wholesale level, so we have been doing that with other wholesale counterparts, including Centrica, for example. What we have done with our recent acquisition of the Pennine customer base and the deal that we have structured with NGSS is to actually give us a different access to the market". As part of the Pennine deal, which includes clients like William Hill betting shops, Debenhams department stores, and Sunderland football club, Gazprom got the option to buy NGSS, a billing and metering business which works for Pennine. Martin said: "What we are looking to do is move to the SME sector so that will give us effectively full exposure to the wholesale all the way right down to small restaurants, pubs, and chains apart from the domestic. I think what we are looking to do is substantially grow our SME share over the next year or so in particular. Immediately what we are looking to do is embed our Pennine customer base into GM&T, make sure we serve those customers well and then look to rapidly expand after that and grow our portfolio... In terms of absolute market share we've heard quite a few different stories...but obviously Gazprom is well positioned with its Interconnector, with its commodity position, and also with the ability to diversify its portfolio".

Martin said GM&T would look to diversify its portfolio by structuring deals similar to the one with Danish utility DONG Energy "with other players as well". Vasiliev said Pennine was "very important" as it was "the first time in the history of our company we are coming to the retail business. I think we need to understand how the rules of this market are working, how regulation of the market is working. So right now...we are concentrating more on our current acquisition seeing how to make this particular company scaleable. Whether it's going to be organic growth or whether there is going to be further acquisition is already the second step, we are looking at that, but I think we need to understand and develop what we have".

Italy is the next most important market for Gazprom. Italy depends on imports for 80% of its gas needs. It receives about 32% of its gas from Gazprom and 37% from Algeria. There are several JV between Gazprom and Italy's biggest energy group ENI, including the huge Blue Stream gas pipeline from Russia to Turkey, an infrastructure which will be extended indirectly to West Europe as well as Israel and Lebanon (see background in Vol. 63, Gas Market Trends No. 10).

President Putin and Italian PM Romano Prodi on June 20 reached an agreement over mutual access for their countries' companies to each other's markets. At a joint press conference Putin said the deal, announced on the Kremlin's Website, amounted to "implementation of the Energy Charter without formal judicial ratification", adding: "We are prepared to do this, but not for everybody, only with those partners who come to meet us half-way, and with whom we can agree on co-operation as equal partners". Prodi said it signalled a "new phase in the realm of energy - relations are no longer those of client and seller, but rather of a Russia that is present in the Italian market for producing electricity". It was, however, unclear what additional rights either had granted the other which did not already exist. There are already no formal restrictions on the kinds of activity outlined. Putin made no mention of any exemptions for Italian firms from such curbs as will be introduced on all foreign companies in the government's planned new law on subsoil use, nor did Prodi give any details on which Russian firms would become active in Italy's power market. EU states have bridled at the leverage this would give the Russian giant.