Gazprom may be technically bigger but the market values the privately-owned and profit-driven Novatek more
Something strange happened last week: Russia’s largest independent gas producer, Novatek, surpassed in market value state behemoth Gazprom for the first time ever. Yet, as strange and possibly even unnatural as this may seem to some more casual observers of the Russian gas market, Novatek’s value has been rising consistently over the last years while Gazprom’s has kind of stagnated.
The most obvious difference between the two is ownership. Gazprom is majority owned by the Russian state. This means it caters mostly to its interests rather than the interests of its minority shareholders, as Bloomberg’s Elena Mazneva and Dina Khrennikova note in a recent story. It also means the company undertakes projects with uncertain returns as a state company, and private shareholders like certain returns. So, that’s one reason for Novatek’s appeal right there: it’s private. It is also a lot more focused on LNG than Gazprom.
The world seems to be firmly on its way to an energy era in which LNG will feature a lot more prominently than oil or coal as the fuel of choice for power generation, heating, and even transport in the maritime sector. Liquefied natural gas is in huge demand from a lot of industries.
Shell’s latest LNG Outlook says LNG demand will grow at a compound annual growth rate of 4 percent between 2017 and 2035. This compares to total gas demand growing at half that rate over the period. Among the reasons Shell gives for this higher growth are the advantages of LNG over natural gas transported via pipelines, including geopolitical issues, pipeline disruptions, and supply and demand uncertainty.
Novatek is the world’s eight-largest public gas producer in terms of output. It accounts for 9 percent of Russia’s gas production and it liquefies a lot of it at its Arctic LNG—officially Yamal LNG—plant, with an annual capacity of 17.4 million tons. It shipped the first cargo at the end of last year, and Novatek is already planning Arctic LNG 2, in which French Total has bought a 10-percent interest.
Total is also a shareholder in Novatek (19 percent), along with CNPC and the Chinese Silk Road Fund. Arctic LNG 2 will have a capacity of 19.8 million tons of LNG annually. So, that’s 37.2 million tons of LNG capacity that is planned to be operational in the mid-2020s. This in itself is reason enough to invest in Novatek.
But, hard skeptics would say, what about political uncertainty? As Putin gives (freedom to operate a private business), Putin may take away, the argument would probably go. It would also continue by mentioning Mikhail Khodorkovsky and Yukos. What these skeptics ignore, however, among many other things, is that the era of settling scores between the government and the oligarchs is over. Now it’s all about expanding Russia’s international presence and clout, and what better way than through its biggest asset: natural resources. Why on earth would Putin turn on his ally Mikhelson, whose company is challenging the dominance of Qatar and Australia—as well as the growing importance of the United States—on the global LNG market?
Novatek, in short, is very well positioned to pursue both its own business interests and some parts of the state agenda. Gazprom will not shrink and die, that’s for sure. But Novatek seems to have much better growth prospects. So, next time Novatek’s shares overtake Gazprom’s, you’ll know why and it won’t look so strange.