Russia and Italy cement ties with new energy deals

Russia and Italy cemented close political and energy ties on Tuesday with a flurry of deals that included Gazprom spending over $4 billion to buy back oil assets from Italy's Eni (ENI.MI) at well above market price.

Gazprom's buyback of a 20 percent stake in its oil arm Gazprom Neft (SIBN.MM) from Eni advances the Kremlin's strategy of bringing key resources back under state control, and the economics of the deal underlines the closeness of the two sides.

"As a result of such cooperation, we are not only strengthening the energy security of our countries, but also of the entire European continent," Russian Prime Minister Vladimir Putin said at the signing.

President Dmitry Medvedev, who met Italian businessmen later, was also upbeat, saying bilateral trade with Italy had reached $50 billion last year.

"I hope that the crisis which is affecting our lives now will not affect our cooperation too strongly," he added.

Eni, the biggest Western buyer of Russian gas, acquired a 20 percent stake in Gazprom Neft and some gas assets at a state auction of bankrupt oil firm YUKOS in April 2007 but agreed to let Gazprom buy back the oil assets within two years.

Analysts said they believed Russia devised the arrangement to secure the assets for state-controlled Gazprom.

It was deemed politically difficult at the time for Gazprom to bid directly in the auction, because of the controversy surrounding the demise of YUKOS, which was orchestrated by the Russian state.

The auction made Eni a favorite with Gazprom, which chose the Italian company as a partner for its new South Stream gas pipeline to Europe, which will bypass Ukraine, the biggest and most politically troubled route for Russian gas to Europe.

"Italy is using its oil company as a bridgehead player," said Jason Kenney, analyst at ING financial markets.

"The wider agreements with other Russian players is very strategic and forward-looking. You have to go where the resources are. Eni has made itself into this lynchpin middle-man between Russian supply and EU demand," he added.

Putin's close ally Silvio Berlusconi was absent from Tuesday's signing ceremony. The Italian Prime Minister canceled his trip because of Monday's earthquake in central Italy, which has so far killed more than 200 people and injured about 1,500.

Gazprom shares were down 1.3 percent at 1130 GMT (7:30 a.m. EDT), slightly above the broader market , while Eni was down 0.4 percent.

Lucrative Deals

Gazprom currently owns 75 percent of Gazprom Neft, and many analysts had expected Gazprom to ask Eni to extend the deadline for the buyback beyond April 9 as the gas monopoly faces record debt repayments this year amid a steep decline in gas prices.

However, the Russian state agreed to lend Gazprom the funds, with state-run Sberbank (SBER03.MM), Russia's top lender, expected to provide the bulk.

Eni and Enel paid a total of $5.8 billion for the stake in Gazprom Neft and other gas assets at the 2007 auction and agreed to resell the Gazprom Neft stake for around $4 billion.

A fifth of Gazprom Neft is worth around $2.6 billion at today's market prices. Eni said Gazprom would pay $4.2 billion for the stake, while Gazprom said it would cost it $4.1 billion.

Gazprom also has a right to buy back a 51 percent interest in the gas assets, known as SeverEnergia, separately.

Enel's chief executive Fulvio Conti said the repurchase of gas assets by Gazprom from Eni and Enel would take place later in April when Putin and Berlusconi meet, while Gazprom said it now had the right to buy the assets back before May 30.

After the deal Gazprom would control 51 percent in SeverEnergia, while Enel and Eni would have 20 and 30 percent. The venture will produce and sell gas in Russia.

Among the other deals, Eni also signed a protocol with Russia's state-owned oil giant Rosneft (ROSN.MM) and agreed projects with state power exporter Inter RAO UES.

Italian aerospace group Finmeccanica SpA (SIFI.MI) bought 25 percent in Russian jet maker Sukhoi.

"Today's deals are highly strategic and very long term ... Italy and Eni are acutely aware long-term energy dynamics depend on good relations with the resource holders like Russia," said Kenney.

[Source: By Vladimir Soldatkin and Alberto Sisto, Reuters, Moscow, 07Apr09]

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