Investor's view

E.ON does not see political risks in Russia

Russia still remains an attractive market for the German energy concern E.ON from an investment point of view, said the company's chairman of the board, Wulf Bernotat, in an interview with Dow Jones Newswires. According to him, the concern does not see political risks for its work in Russia: “We do not consider the political situation in Russia as a reason not to invest in this country.”

The bulk of cooperation falls on the gas sector, while in the electricity sector E.ON is still preparing for purchases as part of the restructuring of RAO UES. Wulf Bernotat emphasizes that E.ON is already implementing specific projects together with Gazprom. In 2006, the concern purchased 26% of imported gas from a Russian partner, and long-term agreements with Gazprom covered gas supplies from Russia until 2036. The subsidiary company E.ON Ruhrgas, Mr. Bernotat recalled, has been doing business with Gazprom for more than 30 years . During this time there were many politically difficult periods, but interest in effective relations prevails: Russia needs markets for oil and gas exports, Europe needs these imports.

Speaking about the concern's immediate plans in Russia, Mr. Bernotat noted that E.ON has not yet made a final decision regarding its participation in the auctions for the sale of OGK-4 or TGK-10. He noted that there were "certain legal issues that need to be resolved before a decision can be made to participate." In Moscow, according to Mr. Bernotat, there is currently a special group of the concern working together with one of the investment banks. The head of E.ON notes that the purchase of assets in the Russian electric power industry must fit within the framework of the concern's strategy, which involves the creation of new capacities. According to an analysis conducted by E.ON, the investment need of the Russian electric power industry over the next 15 years will amount to about $20 billion annually. Through its participation in privatization, the concern strives to create strong positions mainly in industrial regions with intensive economic growth in the center of Russia, the Urals, Eastern Siberia and the Volga region.

Speaking about the prospects for the development of the Russian electric power industry, Wulf Bernotat pointed out the need for the rapid introduction of new generating capacities, the creation of which will require foreign capital and foreign technologies. “E.ON can provide this,” he emphasized. According to the head of the German concern, the situation in the electricity industry differs from the oil and gas sector, which is important for Russian exports and which is given special importance by the Russian leadership. Here the Kremlin seeks to maintain its leadership position. In the electric power industry, notes the chief of E.ON, the situation is different. In June, E.ON took part in the auction for the sale of shares in OGK-5. However, the Germans were ahead of the Italian competitor Enel, who paid $1.5 billion for a 25% stake in the generating company. Apparently, the auction for OGK-4 will be held in August. Analysts estimate the proposed package at approximately $3.5 billion.

In May, E.ON published its medium-term investment plans, according to which €3 billion was allocated for investment in the electricity sector of Russia and Turkey. In an interview with Dow Jones, Mr. Bernotat emphasized that the amount is not strictly fixed: “If necessary and the right agreements are reached, then we will be able to spend more.”

Additional money is also reserved for investment in the Russian natural gas market. Wulf Bernotat again expressed his conviction that the final agreement with Gazprom on participation in the Yuzhno-Russkoye field development project will be concluded before the end of 2007. In recent months, Gazprom itself has been focused on its entry into the Kovykta project and Sakhalin-2, explains the head of E.ON; Now negotiations on the Yuzhno-Russkoye field have begun again. According to E.ON estimates, gas production should begin there this year. "It would be logical if we were fully prepared by then," says Mr. Bernotat.

A special place in the interview with the head of E.ON was occupied by the question of his views on Gazprom’s possible plans in Western Europe. Wulf Bernotat noted that he “does not expect” massive or large acquisitions of energy assets from the Russian company. “I would be more careful with such rumors,” he says. And he adds: “Gazprom has other priorities.” Among them, the head of E.ON names the need to invest in its own infrastructure, develop new projects, as well as finance acquired assets in Russia itself. Gazprom, according to Wulf Bernotat, will strengthen its position in sales markets, for example, through a joint venture with Wintershall. “But I don’t see him as a buyer of large concerns,” Bernotat noted.

Yuri Shpakov, Berlin