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Thursday, June 25, 2009

Total, Novatek Seal $900M Gas Deal

25 June 2009 - The Moscow Times by Anatoly Medetsky, Ira Iosebashvili – French energy major Total and Novatek, Russia's largest independent gas producer, ended a two-year quest to join forces Wednesday, sealing a $900 million project to develop a Siberian gas field, Prime Minister Vladimir Putin said after meeting the companies' chiefs. The agreement -- in which the companies will jointly develop the Termokarstovoye gas field on the Yamal Peninsula after Total takes a 49 percent stake in Novatek unit Terneftgaz -- is the largest foreign investment in Russia since the country was caught in the grips of the global economic crisis last September. Putin called Termokarstovoye a "very promising field," which along with adjacent sections could eventually expand and be designated as a deposit of national importance. He also opened the door for the French company to participate in other Russian energy projects, including the second phase of the $25 billion Shtokman gas field. No foreign partners have been selected, but Total is helping develop the first stage. "I know you have offered to expand our cooperation and participate not only in the current stage of the project but in future stages," Putin said, referring to Shtokman. "This is entirely possible." The Yamal Peninsula is strategically vital for Russia's gas industry. The remote province is expected to produce 250 billion cubic meters of gas per year by 2020, require $60 billion in investment and supply a majority of the gas that Russia will sell to Europe in the coming decades. By comparison, Russia exported 158.8 bcm of gas to Europe last year. Total also said it had spoken with Gazprom about participating in liquefied natural gas projects on the Yamal Peninsula. The deal comes just days after Total announced the sale of a major stake in a Dutch refinery to LUKoil, Russia's largest private oil producer, for $725 million. The purchase was announced during President Dmitry Medvedev's visit to the Netherlands on Friday. Putin said Wednesday's agreement illustrated that the country's strategic gas fields were open to investment from foreign corporations. "For this, of course, you need the approval of a special government commission, but if you are going to be involved in this level ... investing money, then of course, we will take this into consideration," he said. Foreign investors were spooked after Gazprom took control of the Sakhalin-2 project from Shell in 2007, following heavy pressure from the government. Further limiting the options for foreign investors, the government drafted a law that requires them to get approval from a special government commission if they want to take part in developing strategic oil and gas fields. Fields are considered strategic if they hold at least 50 bcm of gas or 70 million tons of oil. Gazprom also holds a monopoly on Russian gas exports, meaning that other companies must either sell their output to Gazprom or Russian consumers. "I don't think it's difficult to work in Russia," Total CEO Christophe de Margerie said after the signing. "One only needs to learn to work efficiently with Gazprom, Novatek and Rosneft. "We're prepared to invest more into the Russian economy," he added. Neither of the companies identified the price for the 49 percent stake. Gazprom owns about 19 percent of Novatek, and Russian businessman Gennady Timchenko, co-founder of commodities trader Gunvor and an acquaintance of Putin, recently raised his stake to 18 percent, from about 5 percent. Management controls about 48 percent. Leonid Mikhelson, Novatek's founder and chief executive, agreed to let Timchenko increase his stake in exchange for allowing Novatek to gain control over the Yuzhno-Tambeiskoye field, Kommersant reported Wednesday. Another condition was that Novatek would be allowed to bring Total in as a partner to develop the massive deposit, the newspaper said. A spokesman for Timchenko declined to comment on the report. Calls to Novatek went unanswered. Analysts said the deal could have positive implications for Novatek and Total. The deal will provide Total with a foothold in an important gas-producing region and give Novatek cash to pay for the acquisition of Yuzhno-Tambeiskoye, said Alexander Nazarov, an analyst at Metropol. Novatek's board approved a deal last month to buy 51 percent of Yamal-LNG, which holds the license for the 1.2-trillion-cubic-meter field, from Timchenko's Volga Resources holding for $650 million. As for the Termokarstovoye field, Novatek could have potentially developed the small deposit itself, Nazarov said. The small field may be a trial balloon for the two companies, said Svetlana Grizan, an analyst at VTB Capital. They could later join forces on Yuzhno-Tambeiskoye, she said. "This may be the beginning of broader cooperation," she said. Total and Novatek signed a cooperation agreement in May 2007 and have been trying to partner up on projects for the last two years without success. Total even tried to buy a blocking stake, but the deal did not win anti-monopoly approval. Novatek's founding shareholders sold 19 percent to Gazprom instead. During the three-way meeting, Total's de Margerie described past attempts to negotiate with Mikhelson. "We tried to establish cooperation with Mikhelson several years ago," de Margerie said, Interfax reported. "He's a scary person in negotiations." Putin didn't miss the chance to offer a rejoinder. "That was a compliment," he said.

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