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Between 1994 and 1997, Sovereign acquired a 3% shareholding in Surgutneftgas, at the time the third largest oil company in Russia and the tenth largest in the world. But it was between 1998 and 2004 that Sovereign really concentrated its portfolio on the oil and gas sector, including investments in Lukoil and in particular Gazprom.
An Industry in Decline
By the time the curtain fell on communism and the capital markets started functioning in Russia in 1994, the oil and gas industry was in serious decline. Production had halved from 600 million tonnes in 1987 to just 300 million tonnes in 1994, due to a lack of investment and outdated extraction methods. Significant investment was needed, as well as the adoption of industry best practices if this trend was to be reversed and production of the wells maximised.
Gazprom, A National Champion
Gazprom is the world's largest hydrocarbon company supplying approximately 20% of Western Europe's gas requirements annually. Recognising the long-term potential of Gazprom, and identifying the opportunity to help establish Russia's largest company as a role model for all Russian companies, Sovereign became a significant minority investor with a 5% holding.
Supporting Governance Reform
This investment led to a sustained corporate governance campaign which saw Sovereign highlight management abuses and lobby for reform at the Russian energy giant. Notable victories included the appointment of former Finance Minister, Boris Federov, as an independent director to the board, and the replacement of the incumbent CEO with Alexei Miller. Marshall Goldman, a Harvard professor has commented "Until [Alexei] Miller was brought in, Gazprom was being run as a private gift bag. It was a black hole of graft for his predecessor and their families."
New Leadership Creates Over USD 200 billion of Shareholder Value
Under Miller's leadership, Gazprom made progress towards better corporate governance, recovering misappropriated assets and pushing for the introduction of rational tariff policies. Since he became Chief Executive, profitability has increased from USD 361 million in 2001 to USD 7.1 billion in December 2005 and the company's market capitalisation has exploded from USD 14 billion to over USD 250 billion as of May 2006, ranking Gazprom as one of the world's three most valuable companies.
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Background
Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Large natural gas reserves discovered in Siberia and the Ural and Volga regions in the 1970s and 1980s enabled the Soviet Union to become a major gas producer. Gas exploration, development, and distribution were centralized in a state ministry.
In July 1989, President Mikhail Gorbachev merged the Ministries of Oil and Gas as part of his economic reforms into a single industry, the Ministry of the Oil and Gas Industry of the USSR. In September 1990, the Gazprom board discussed transforming Gazprom into a joint-stock company. In 1991-92, talks were held between Russia, Ukraine and Belarus over creating a tripartite joint-stock company with all three states holding shares.
The plan, however, was abandoned by June 1992, and Gazprom in Russia became a state company. In November 1992, Gazprom became a joint-stock company and it was to be partly privatized as a single unit. Gazprom was privatized in 1994, with the state holding 40% of shares. 15% were to be sold to workers and management at preferential prices.
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