One of Gazprom’s most senior executives met investors in Hong Kong last week. Against a background of escalating Western financial and economic sanctions against Russia, Andrey Kruglov, the gas company’s deputy chairman, was in town to prepare investors for a possible listing of depository receipts in Hong Kong next year.
Kruglov, who is also head of Gazprom’s financial and economic department, inevitably encountered anxiety and scepticism as he explained the company’s Asia strategy. On September 13, the US Treasury widened a ban on the export of goods, services and technology for deep-water, Arctic offshore and shale oil projects in Russia to include Gazprom and four other Russian energy companies. The restrictions followed limitations on dollar borrowing by several top Russian banks and a raft of sanctions imposed by the EU.
“Clearly investors are concerned about the conflict in Ukraine and the effect of Western sanctions,” Kruglov told FinanceAsia in an interview at Hong Kong’s Landmark Mandarin Oriental Hotel. “Gazprom’s share price has suffered as a consequence. But, at such depressed valuations and with sentiment so negative, now is a good time to invest in Russia and its leading businesses.”
The Hong Kong listing is scheduled for next year. Gazprom issued depository receipts in Singapore last June, and its shares are also listed in Moscow, London and New York.
“Although the company’s name is obviously recognised, it is important to establish an active presence in the region’s markets, so that we matter to investors,” Kruglov said. “The proportion of Asian investors on our register has already risen 150% during the past four years and now make up about 10% of the company’s shareholders.”
Gazprom will come to Hong Kong after Russia is admitted to the International Organisation of Securities Commissions (Iosco).
“The [Iosco] negotiations are progressing well so far and Russia might gain admission by the end of the year,” said Kruglov. “This would mean a possible Hong Kong listing in the second half of next year as long we can satisfy the disclosure requirements of the regulator. We’re obviously keen to cooperate at all levels.”
Kruglov said that there were no plans to issue new shares in Hong Kong, but will look for suitable opportunities to launch bond issues in Asian currencies too, including offshore renminbi.
Gazprom’s economic and strategic importance to Russia can hardly be exaggerated. The state-owned, vertically integrated oil-and-gas leader earned revenues of $165 billion last year, amounting to more than 8% of the country’s GDP, and posted a 38% Ebitda margin last year.
The company made tax payments of $55 billion, which accounted for more than 16% of tax receipts to the Russian government, employs more than 400,000 staff and its $43.9 billion capex makes up more than 10% of aggregate national capital investment.
The group’s share of Russian gas reserves is 72% and it holds 17% of the world’s reserves of natural gas and is active in every continent. Gazprom ranks top among global oil-and-gas companies for proven and probable reserves and also for production, according to data from Wood Mackenzie, FactSet and Bloomberg.
It is also Europe’s leading energy supplier. Gazprom’s share of European gas consumption in 2013 was 30% and its proportion of European gas imports was 64%, which indicates the extent of the region’s dependence on Russia.
Although Kruglov insists that the company’s much-vaunted focus on the Asian market — notably a 30-year $400 billion deal agreed in May to supply China — makes commercial sense and is not driven by political motives.
“The deal to send 38 billion cubic metres (bcm) of gas annually for 30 years to northeast China from new fields in East Siberia is a clear indication of our ambitions,” he explained. “It will be the first time that Russia has piped gas to China, and the agreement follows a decade of talks. Our best projection is that flows will begin in 2018 and more conservatively that they will start in 2020.
“We also hope to sign a second deal by the end of this year to export another 30 bcm to China’s northwest through a new pipeline from existing West Siberia fields,” he added.
“So a Hong Kong listing is consistent with the company’s strategy of building its market in the fast-growing Asian market for energy resources and gas in particular, and where we can expect to sell at premium prices,” said Kruglov. “It makes sense for us to diversify our customers; it gives us optionality.”
