European Gas Markets, March 15, 2006

Taking back production assets is one way for Gazprom to try and halt the drop in gas production, particularly where other companies have already invested in developing the assets. Northgas, a former Russia independent gas producer which was last year taken back under Gazprom control, plans to produce 3.858 billion cubic metres (Gm3) this year, up 22.8% on the 2005 figure of 3.142 Gm3.

“The increase in Northgas’ forecast production volumes has been made possible in part due to regularising of relations with OAO Gazprom and agreement on the transfer of 51% of Northgas to the holding”, the company said.

Northgas received the production license for North Urengoy in 1994 and was regarded as one of the dubious Gazprom asset divestments that occurred under the chairmanship of Rem Vyachirev. A few years ago Gazprom began its efforts to regain control of Northgas by disputing the license and there was much to-ing and fro-ing through the Russian courts involving the two companies and ministries conferring the license. However the real pressure on Northgas came not so much from the courts as from Gazprom refusing pipeline access. Last year Northgas’ owner Farkhad Akhmedov finally ceded control over the company saying “it is better to have 49% of shares in an asset with no problems than 100% in an asset with problems”.

The settlement between the two companies meant that Gazprom would buy all Northgas’ production at a price no lower than the regulated price set by the Russian federal tariff service. Gazprom has now said its contract with Northgas is “to take up to 4.2 Gm3 dry gas this year at a price of RUB 450/thousand (K) m3 (excl. VAT)”. This price, equivalent to $16.1/Km3, represents cost plus a small margin according to Mikhail Korchemkin of East European Gas Analysis. “But it was an offer Northgas could not refuse – Gazprom is using similar bullying tactics in Russia today to those of Standard Oil in the US in the 1880’s. The same thing is happening at Beregovoe where Gazprom is forcing Itera to cede control of the production company Sibneftegaz by refusing pipeline access”.

Northgas says it will continue to develop the West Dome of the North Urengoy field, assigning particular importance to the preparation of necessary permissions and documents regarding both the West and East domes. Capital investment in 2006 is planned at $27.41 million. The company is regarded as being very efficient, having developed the difficult N. Urengoy deposits at two or three times less than the development costs of similar deposits in Russia. Northgas still retains some of its former managers so it may be able to maintain its efficiency despite its takeover by Gazprom, a notoriously inefficient producer.

As at 1.1.2006 Northgas has drilled 41 wells of which 35 were considered commercially viable. Total Neocomian reserves at N. Urengoy are 353.08 Gm3 gas and 74.72 million tonnes of oil and gas condensate.