Gazprom Puts Bomb Under Russian State

10.09.2009 — Analysis

The Russian Union of Oil and Gas Equipment Manufacturers has accused JSC Gazprom in the use of the general contract mechanism for hiding equipment imports from the public eye. The natural monopoly, experts claim, has recently been actively using general contractors when implementing infrastructure projects. The RusBusinessNews observer found out that it is the domestic manufacturers who pay through their noses for the concessional imports. Multibillion investments into the oil and gas industry, as a result, do not in any way reflect on the technological development of Russia

The economic crisis has not stopped the implementation of projects in the oil and gas industry. In particular, the Shtokman field is being developed in the Russian sector of Barents Sea; this field holds 3.8 trillion cubic metres of gas and about 37 million tons of gas condensate. Shtokman Development AG, a special purpose vehicle, is the infrastructure proprietor of the first train of the development. The controlling interest belongs to JSC Gazprom, the remaining shares are split between Total (25%) and StatoilHydro (24%).

Gazprom specialists claim that this is a very serious project – it is planned to produce 70 billion cubic metres of gas here which is comparable to the annual production of Norway, one of the largest fuel suppliers to Europe. This, in turn, means that the development of the field demands vast investments some of which will inevitably trickle to the allied industries. Experts estimate that the Shtokman project will need 700 dumper trucks, 120 trucks, 200 automobiles of other types, 20 bulldozers, 40 diggers, 240 buses, 75 cranes etc.

Russian machine builders were hoping to recover the business somewhat shaken by the crisis due to losses of domestic orders. Even getting some of these orders would be literally the salvation for many Russian companies. Sofia Podoksenova, the Head of the Sales Office of ChTZ-Uraltrac Ltd., told us that even an order for 5-7 machines is now considered a large batch. The company used to ship tens of machines. In the first half of 2009 there were no orders at all as Gazprom has shut down all its investment projects. In the second half of the year, having counted its profits, the gas monopoly decided to announce tenders for equipment supply. The Chelyabinsk tractor maker is preparing to take part in them but is cautious predicting the outcome.

The Russian Union of Oil and Gas Equipment Manufacturers raised the alarm, however. The largest infrastructure projects of Gazprom and Transneft do not result in the stream of orders for the domestic manufacturers and the Russian industry is continuing to decay. For instance, the situation on the continental shelf if far from normal. Aleksandr Romanikhin, the Union’s President, said that Shtokman Development AG, for the sake of appearances, invited representatives of JSC URAL Motor Vehicles Plant and KAMAZ Inc. to the first meeting organised by the Union. But later, instead of them, the bosses of large construction companies come – LLC Stroygazconsulting, OAO Stroytransgaz, JSC Ingtransstroy, CJSC Koksokhimmontazh and others. Contractors have no obligations to publish the tender results, and purchase equipment without disclosing anything.

And, of course, they prefer better quality, although more expensive, imported machines. According to the data from the Union of Oil and Gas Equipment Manufacturers Stroygazconsulting alone has more than 600 Mercedes-Benz dumper trucks in its fleet. The high cost of imported equipment does not deter the gas people – the monopoly either insists on raising the tariffs for businesses and households, or demands tax concessions for foreign manufacturers.

Aleksandr Romanikhin claims that at the meeting at Shtokman Development AG the representative of JSC Kazancompressormash asserted that the imported equipment for the Prirazlomnoye project had been supplied free of VAT and customs duties. Efforts are being made to continue similar practices at the Shtokman field.

The open lobbying of interests of foreign manufacturers looks like a mockery of domestic machine builders. According to Yuri Sychugov, the Chief Engineer of CJSC Uraltermosvar, the Gazprom structures are continuing to make the conditions of cooperation tougher: last year the payments for the products supplied were made within 45 days from the shipment date, now, however, this figure is 90 days. Having the interest free loan for three months the gas guys, nevertheless, threatening refusal of future purchases, force the machine builders to further reduce the prices, although Russian machines are already one and a half times or twice cheaper than imported. It is the price, claim the Urals manufacturers, that determines the Gazprom’s contractors’ decisions to buy domestic products while in official speeches they like referring to tough internal standards.

Dmitri Fadeyev, a Deputy Head of the Marketing Department of Gazprom komplektatsiya Ltd., informed RusBusinessNews that nobody is going to buy equipment which has not passed tests at Gazprom’s testing grounds and does not comply with the company’s requirements. There are many issues on price, quality, and lead time arise in case of Russian manufacturers, asserts the specialist.

Experts note that references to non-competitiveness of the Russian machine building sector may be acknowledged if the tenders were open and transparent, as opposed to secretive purchases via general contractors. Manufacturers reckon they can make machinery good enough for Gazprom. Vladimir Guselnikov, the Commercial Director of OJSC Stroydormash plant, claims that the plant can make virtually any machines. "We do work with power generation industry, with Transneft and Rosneft. Not long ago we shipped five machines to Stroytransgaz. We have received excellent feedback."

The problem, in the expert’s opinion, is elsewhere, in the lack of information of tenders being held. However, even when the plant does find out about a tender, the bid remains without reply as Gazprom’s contractors simply do not send out the tender documentation. "It is difficult to get into structures like Gazprom" Vladimir Guselnikov summarises. "They are used to chucking money around and order everything from abroad".

Aleksandr Romanikhin began working on the issue of the Russian participation in the development of the oil shelf in the nineties. He remembered how one plant designed and made 38 drilling rigs, including those for stationary sea platforms, for drilling depth of up to 5,000 metres. Instead of supporting all this effort, all the energy was focused on making the domestic manufacturers’ life hard. The plant was given conditions certainly impossible to comply with.

The expert reflects, "Of course, it is very easy to just say that they can’t make equipment in Russia. Having the will, you can substantiate anything. But then let’s import not just Varco drilling rigs, but Abrams tanks as well, and produce only gas, oil, timber, and metals."

Aleksanrd Romanikhin reckons that the problem of competitiveness of the domestic machinery can certainly be resolved. Quite recently Norway and China did not have own oil machine building but have managed to establish the production of rather decent machinery from scratch. Russia has spent all this time discussing whether the country needs a quota for Russian machines when implementing large scale projects as many developing countries do, like Iran that makes the raw materials producers purchase at least 50% of oil and gas equipment from domestic producers.

The Union of Oil and Gas Equipment Manufacturers had put the suggestion to the authorities to establish a quota as long ago as 2004. The then Chairman of the Committee on Energy, Transport, and Communications of the State Duma of the RF Valery Yazev had agreed that it is extremely difficult for the majority of manufacturers to become a Gazprom supplier and dropped a hint that the situation will change soon.

Five years has passed and the Manufacturers Union wrote a new appeal to the authorities. This non-governmental organization reckons that if investments destined to the development of the Shtokman field are carried out the way it is done today all the Russian machine building sector, at the time of crisis, will be out. The Union’s President Aleksandr Romanikhin suggested the RusBusinessNews observer to put the question why the quotas have still not been introduced directly to Gazprom.

The press service of the gas monopoly said that the request is being processed but nobody can say when an answer can be expected. However, on the website of the company you can find interviews with its top managers where they claim that the share of Russian participation in Gazprom projects amounts to 88% (!) and is continuing to grow.

Vladimir Terletski