Proposed Gazprom-BASF Swap Deal Fails Amid Rising Russian Sanctions

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Researched by Industrial Info Resources (Sugar Land, Texas)--The growing number of sanctions against Russia after its annexation of Crimea has struck Russian companies hard, as well as its European partners. BASF SE (XETRA: BAS) (Ludwigshafen, Germany), the world's biggest chemical maker, has cancelled an energy asset-swap deal with Russia's state-owned gas monopoly, OAO Gazprom (PINK: OGAZPY) (Moscow, Russia). The decision was announced on the same day that European leaders had agreed to tighten sanctions for Russia.

The asset swap deal called for two additional blocks of the Achimov formation of the Urengoi natural gas and condensate field in western Siberia to be jointly developed by Gazprom and BASF subsidiary Wintershall. The Achimov IV and Achimov V fields contain an estimated 274 billion cubic meters of natural gas and 74 million tons of condensate. This is equivalent to 2.4 billion barrels of oil, according to Gazprom's figures. In return, Wintershall would have transferred the jointly operated natural gas trading and storage business to Gazprom.

The companies had signed the preliminary contract for the energy asset swap deal in November 2012. For additional information, see November 16, 2012, article - Russia's Gazprom Swaps Stakes with BASF, Flexes Muscles in Europe.

For Gazprom, the deal's collapse represents a further setback in its efforts to increase exposure to midstream assets and storage in Europe, following the cancellation of the South Stream pipeline. "A change of the Russian gas distribution strategy in Western Europe was already mentioned when the cancellation of the South Stream pipeline was announced. Full control of the gas trading and gas storage in Germany seems not to fit with the changed strategy either," said Andreas Heine, an analyst at Barclays Capital in London. "BASF, therefore, will have to stick to its gas trading business. Given the 50% stake of Gazprom in the gas trading business, we see it as highly unlikely that there will be a potential buyer around the corner," Heine said.

The assets BASF planned to swap contributed about 12 billion euros to sales and 500 million euros to earnings in 2013. The cost of the failed deal could be more than 300 million euros. "BASF accounted for the gas trading business as disposal group and has not booked any depreciation since the contract was signed. This is no longer possible. BASF, therefore, has to restate 2013 and 2014 earnings. The earning figures will be 113 million lower in 2013 and 214 million lower in 2014," said Evgeny Solovyov, an analyst at Societe Generale in London.

Despite the higher expenses in 2014, BASF is sticking to its guidance of slightly higher earnings before interest and tax (EBIT) before special items, based on the restated 2013 level of 7.1 billion euros. BASF has a target of 190 million barrels of oil equivalent oil and gas production for 2018.

In early December, Russia scrapped the South Stream Pipeline Project, which would have bypassed Ukraine to supply natural gas to Europe. For additional information, see December 3, 2014, article - Russia Scraps South Stream Natural Gas Pipeline, Chooses New Route to Turkey.

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