Gazprom is making a move — with apparent government support — to take over Russia's electricity generation and Russia's nuclear industry. The implications of such a move would be truly massive, as such a firm would dwarf even mighty ExxonMobil by some measure and give a single government company control over the bulk of Russia's energy infrastructure. As the world's largest natural gas firm, Gazprom is hardly small-fry. The implications of the formation of a Gazprom Inc. are deep and so numerous it might be easier to list the things in Russia that would not be affected dramatically. Gazprom is the Russian government-run natural gas giant, the largest firm of its type in the world. Every year Gazprom produces some 540 billion cubic meters (bcm) of natural gas — more than all of the world's supermajors combined — and single-handedly supplies nearly all of the Russian market while constituting Europe's single largest source of natural gas. The mega firm is run by 42-year-old Alexei Miller, an old comrade of Putin back during their days in the St. Petersburg mayoral office. Miller is a loyal Kremlin yes-man — though he keeps his own business interests. As would be expected from such a large state-run company controlling the economic lifeblood of not merely Russia but also Europe and most of the former Soviet Union, Gazprom is often used as an arm of state policy. Gazprom regularly supplies fuel at no or low charge to entities the state favors, such as the breakaway Georgian province of South Ossetia or the breakaway Moldovan province of Transdniestria, while cutting off supplies to entities it is put out with, such as Georgia and — recently — Belarus. Life at Gazprom As the world's natural gas leader, Gazprom spends most of its time puzzling out how to get more of its product out of the ground and to its customers, but it does so with very uneven alacrity. Some 350 bcm of its production stays within the country and is used to supply feedstock to Unified Energy Systems (UES), the government-run power monopoly. By law UES is only required to pay Gazprom about one-fourth to one-fifth of the going European price for the natural gas, leading Gazprom to just barely break even on its domestic sales — which account for slightly more than two-thirds of its production efforts. Gazprom's bread and butter, therefore, comes not from Russia, but from its customers abroad. Unlike the domestic market, Gazprom can charge full international prices for its exports, taking in some $100-125 per 1,000 cubic meters, as compared to $25 per 1,000 cubic meters back home. Nearly all of these exports head west through Belarus and Ukraine to the European Union. This pricing situation has led Gazprom to do two things. First, it constantly rails against the government to raise domestic gas and power prices in order to force UES to adopt more efficient power generation techniques, and to promote efficiency and reduced consumption in Russia. The idea is that if Russians use less gas — either because they have become more energy efficient or because they simply cannot afford to purchase it — Gazprom will have more natural gas available for export, with which it can earn oodles of hard currency. Second, it has made Gazprom jealously protect its export monopoly status. Gazprom under Miller has raked back a number of assets and supply contracts that his predecessor, Rem Vyakhirev, handed out to friends and family, allowing them to profit from Gazprom's once-monolithic export deals. For financial reasons — and political control — all of those contracts and assets are now back under Gazprom's wing and Miller regularly fights tooth and nail to ensure that the government does not franchise out its export rights. This determination has had the effect of stalling TNK-BP's efforts to build a mammoth natural gas export project from the Kovykta superfield near Irkutsk to China and South Korea. Gazprom is not the operator of the project — it does not even have a stake — so it has moved heaven and earth in the Kremlin to make sure Kovykta's gas stays in the ground. Gazprom is in the midst of a major reorganization that is about to go into overdrive. The Russian government announced Sept. 14 that Gazprom would absorb Russian state-owned oil firm Rosneft as a wholly owned subsidiary. The move will complete a number of goals at once. First, Gazprom will "purchase" the 100 percent of Rosneft shares the government owns with the 10.7 percent of its own shares that its subsidiaries hold. That transfer to itself will leave the government in outright majority control of Gazprom, as a whole. Second, Gazprom will probably pick up more than simply Rosneft. In the five weeks since the announcement, Gazprom stock has steadily marched forward as investors have slowly realized that the company is an up and comer. Since Gazprom planned to purchase Rosneft with some of its own shares, it now has some extra money to play with, so on Oct. 19 Miller publicly flirted with the idea of picking up Zarubezhneft, another state oil firm, as part of the deal. Considering Miller's closeness to the Kremlin, sources within the Kremlin indicate that adding Zarubezhneft to the deal will most likely be little more than a technicality. Third, the merger adds oil expertise that Gazprom has been desperate to develop for years in its efforts to diversify its economic base. Fourth, an oil-savvy Gazprom could almost certainly take over Yuganskneftegaz, the 1 million barrels per day (bpd) producer of beleaguered Yukos that the government committed Oct. 12 to selling at auction. Such a purchase would catapult Gazprom into the leagues of the supermajors — with oil production in excess of 1.6 million bpd — before its gas assets were even considered. Already the Kremlin is manipulating events to ensure that Gazprom wins the upcoming "auction" of Yuganskneftegaz. The government announced Oct. 18 that the opening bid for the subsidiary would be $3.73 billion — about one-sixth of its estimated value one year previous, but within perennially cash-strapped Gazprom's means. Finally, the clearer ownership structure paves the way for Gazprom shares — in the new, more valuable Gazprom — to be sold on stock exchanges around the world, instead of the current limited access. That raises the possibility of a tripling — or more — in demand for a piece of the world's largest natural gas firm. Creating Gazprom Inc. This most recent expansion is only the tip of the iceberg. Gazprom is capitalizing on its control of the country's natural gas infrastructure, export monopoly and government connections to become a far larger entity than merely Russia's largest firm. Already well in progress are plans to harness the natural gas produced by Russia's other oil firms into Gazprom's network. Until now, Gazprom scoffed at the possibility since it was forced to sell its own gas at a loss because of government subsidies for which the company hefted the bill. No oil firm would bother to pay to ship its gas to a non-profitable market, particularly since Gazprom refused to let the gas be exported and charged for use of its pipelines. However, with Kremlin-dictated price increases in the last few years, gas can now be sold domestically just above the break-even point — and Russian oil firms are giving Gazprom a second look. LUKoil is the first oil firm to bite, and test amounts of some 0.75 bcm of its gas from the Yamalo-Nenetsky region will soon be redirected into the Gazprom network for sale within Russia. That should increase to 8 bcm by 2006, and other firms are sure to follow if LUKoil can make it work. Gazprom is also negotiating with German energy major E.ON to construct some $1 billion of power stations in Hungary, Italy and Finland. In parallel, E.ON is also looking to partner with Gazprom in the construction of a pipeline from Russia's gas-rich Yamal Peninsula which will pass under the Baltic Sea directly to Germany. E.ON Ruhrgas, a division of E.ON, owns 6.43 percent of Gazprom (pre-Rosneft merger). But the big play is back at home, where sources within the Energy Ministry indicate Gazprom is throwing a wide net to capture the country's nuclear and power industries. Currently the country's nuclear technologies are husbanded by the government's Federal Atomic Energy Agency, a bureau within the Energy Ministry. With full government approval, Gazprom recently purchased a majority stake in Atomstroiexport, the part of Russia's nuclear agency which oversees the export of nuclear technology. Now Gazprom possesses the expertise and personnel to potentially run the country's nuclear power plants. More challenging — and rewarding, from Gazprom's point of view — would be controlling the Russian power grid and power generators. By virtue of government edict, Gazprom's largest — and worst-paying — customer is UES. UES CEO Anatoly Chubais has already proclaimed that Gazprom owns some 10 percent of UES' outstanding stock, while the government owns another 52 percent. Should Gazprom prove able to get direct control over the bulk of UES' generating units, it would be both Russia's natural gas and electricity provider. Since that electricity which is not nuclear in origin is largely derived from burning natural gas, for once the power generator would have an interest in investing in fuel-efficient upgrades. Add in that Gazprom is also seeking control over the country's nuclear power plants and the stage is set for a more gas efficient, more nuclearized civilian power industry where ever more natural gas can be shipped abroad to earn precious hard currency. That's a key concern both in Gazprom's boardroom and at the Kremlin; Gazprom is the Russian government's single largest taxpayer, providing some 25 percent of annual revenues. Gazprom's appetite is not limited to the UES parent company. It is already doing what it can to buy up chunks of the various regional power generation companies due to be spun off from UES in an ongoing mammoth corporate reorganization. Market rumors are already rife that Gazprom has designs on Mosenergo, a power company that supplies 7 percent of Russia's power along with 70 percent of the capital's. Most market watchers believe the energy giant already controls a blocking stake.