Title: 3rd Eurasian Corporate Governance Roundtable
13rd Eurasian Corporate Governance
Roundtable Shareholder Rights, Equitable
Treatment and the Role of the State April
17-18, 2002 hosted by Securities and Stock
Market State Commission of Ukraine State Property
Fund of Ukraine PFTS with the support of The
Government of Japan
The Global Corporate Governance Forum
2Gazprom gifts to ITERA Review of PWC Audit of
Itera By Mr. Vadim Kleiner Hermitage
Capital Management
3Outline of Presentation
- Introduction of the problem
- Analysis of PWC conclusion
- Recommendation
4Introduction to the Problem
- In October of 2000, Hermitage Capital Management
investigated and discovered a number of dubious
transactions that stripped value out of Gazprom
SourceWeighted estimates of PWC and
reserve-based valuations.
5Hermitage Investigation
- The findings were exposed to a number of
shareholders, board members and international and
domestic media organizations
Media
Date
Key Facts Exposed
6Origination of Audit of those transactions
- As a result of public outrage, investors pushed
for an explanation of those transactions
Step 1 Step 2 Step 3 Step 4
Step 5
Analysis and Exposure of dubious transactions
10.11 shareholders of Gazprom called for
independent audit of assets stripping using new
auditor (Deloitte Touche instead of PWC)
Gazprom management rejected call for independent
audit by Deloitte Touche
Board of Directors of Gazprom appointed PWC to
audit alleged relationship with ITERA
Audit undertaken by PWC
Oct-Dec Dec
Dec Jan
Jan-Jun 2000 2000
2000 2001
2001
7PWC was asked to look at number of issues
- The basis for business between Gazprom and Itera
- Did Itera pay a fair price for assets?
- Analysis of Yamal-Nenetsk and Nadym tax payments
- Justification of Gazprom - Itera business
dealings - Analysis of alleged asset stripping for Itera
benefit
8Highlights
1. Gazprom gift of Purgas to Itera 2.
Yamal-Nenetsk Nadym tax scam 3. Vyakhirev
negotiating with Turkmenistan on behalf of
Itera 4. Gazprom gift of Belorussian market to
Itera 5. Gazprom gift of Tarkosaleneftegaz to
Itera 6. Summary of lost reserves
91. Gazprom gift of Purgas to Itera
- Background Itera purchase of Purgas
- In 1998 Gazprom put 381 bln. m3 of reserves into
joint venture with Itera named Purgas (51 vs.
49) - Itera received 49 without any meaningful
consideration - In 1999 Gazprom sold another 32 in Purgas to
Itera for 1,200 only - PWC valued Purgas at 1,768 mln. (PWC report
p.30), which implied a value of 566 mln. per 32.
101. Gazprom gift of Purgas to Itera
- PWC conclusion on Itera purchase of Purgas
- It is difficult to evaluate those transaction
from the commercial point of view due to the
absence of comparative information regarding the
acquisition of Russian gas fields (PWC report
p.32) - Significant cash shortages forced Gazprom to let
Itera and other companies to obtain stakes in the
companies which held licenses for gas reserves
(PWC report p.21)
111. Gazprom gift of Purgas to Itera
Economic Analysis Cash shortages were caused by
transfers from Gazprom to Itera
Total amount of financing provided by Gazprom to
Itera
SourcePWC investigation of Gazprom - Itera
relationship PWC 2000 audit of Gazprom Audit
Chamber report on Itera, 2001.
122. Yamal-Nenetsk and Nadym tax scam
Background The tax scam Gazprom entered into
with Itera drained even more cash from Gazprom
SourcePWC investigation of Gazprom - Itera
relationship Audit Chamber report on Itera, 2001.
132. Yamal-Nenetsk and Nadym tax scam
PWC conclusion Gazprom benefited from this
arrangement because they saved scare cash
resources. Otherwise Gazprom should raise debt
financing when the interest rate reached 50 (PWC
report p. 51, p. 2)
Economic Analysis of PWC conclusions Interest
rate should have had to be 1600 to justify
selling gas at 2-4/ thousands m3 vs. borrowing
money
143. Vyakhirev negotiating with Turkmenistan on
behalf of Itera
- Background
- In December 1999 after tough negotiations of CEO
of Gazprom Rem Vyakhirev with President of
Turkmenistan S. Niyazov Turmenistan agreed to
supply about 10 bln. m3 of gas at about 36 per
1,000 m3 - It turned out that Mr.Vyakhirev was negotiating
on behalf Itera which bought Turkmenian gas at
35.4 per 1,000 m3 and further resold it to
Gazprom at 45 per 1,000 m3
153. Vyakhirev negotiating with Turkmenistan on
behalf of Itera
PWC conclusion The price is roughly based on the
price paid by ITERA to the Turkmenistan
government plus transportation costs (PWC report
p.14)
- Economic Analysis of PWC conclusions
- Itera earned about 87 mln. on the transaction
negotiated by Gazprom - Transportation costs were reimbursed by Gazprom
by separate agreement
164.Gazprom gift of Belarussian market to Itera
Background Belarus occupies the third place
among CIS countries in terms of gas consumption
- Belarus consumes about 16 bln. m3 of gas
- ...valued at about 500 mln. per annum
- Gazprom granted to Itera 35 of Belarus market
without any compensation
174.Gazprom gift of Belarussian market to Itera
PWC conclusion Profit margins of these
operations were hardly of any significance (PWC
report p.61, p.4)
- Economic Analysis of PWC conclusions
- According to information from reports of PWC and
Audit Chamber gas was exported to Belarus at 57
margin
99.7 mln annual loss to Gazprom
185.Gazprom gift of Tarkosaleneftegaz to Itera
Background Tarkosaleneftegaz intrinsic value is
between 112 mln. and 896 mln.
195.Gazprom gift of Tarkosaleneftegaz to Itera
Background Gazprom being one of two founders of
Tarkosaleneftegaz decreased its stake in
Tarkosaleneftegaz through a set of controversial
new share issues.
SourceFSCM website.
205.Gazprom gift of Tarkosaleneftegaz to Itera
Background Gazprom is selling cheap and buying
expensive
SourceFSCM website.
215.Gazprom gift of Tarkosaleneftegaz to Itera
PWC conclusion Gazprom allowed its share to be
reduced by non-participation in new share issues
and direct sale of 16.2 to Itera to avoid taking
future obligations on financing this project (PWC
report p. 36, p. 2)
- Economic Analysis of PWC conclusions
- Gazprom passed five rights issue required 7.9
mln. and participated in one rights issue where
they contributed 65.5 mln. - The new owners lack financing and have been
making roadshows to raise capital for last
three months with no success
226. Summary of lost reserves
Background Gazprom gave up control over 2.9
trln. m3 of its reserves, which comprises 10 of
Gazprom total reserves
Yamal-Nenetzk region
236. Summary of lost reserves
A 325 mln. compensation was paid for control
over the total of 2.9 trln. m3 of gas reserves in
7 companies (0.11 per 1,000 m3 of reserves)
- Economic Analysis of PWC conclusions
- At the same time, PWC estimated the fair price
for Purgas (381 bln. m3) at 1,768 mln. which
implies 4.6 per 1,000 m3 (PWC report p.30) - Based on this valuation, the total of 2.9 trln.
m3 of gas reserves should have cost 13,340
mln., not 325 mln. Itera paid for it.
..the squirrel cannot overweigh the rhinoceros
24Conclusions
- PWC confirmed assets diversion from Gazprom to
Itera - PWC identified Itera compensation for former
Gazprom assets, but did not find anything wrong
with it, despite an enormous discount to the fair
value of these assets - PWC did not make any conclusion on whether
relations between Gazprom and Itera had
commercial nature or resulted in the losses for
Gazprom - PWC failed to address an involvement of Gazprom
management and its family members in ownership of
Itera - PWC investigated Gazprom tax payments in kind and
did not find anything wrong with it - PWC report mislead the
government
25Government Actions
- 1. Reopen forensic audit of transactions
immediately - new auditor
- include non-Itera asset stripping.
- 2. Sack PWC as official auditor at AGM and
replace with a new auditor under a transparent
tender procedure. - 3. Launch international lawsuit against PWC for
malpractice. - 4. Improve audit legislation
- introduce rules and liabilities for auditors
malpractice - strengthen regulatory body overviewing auditors
activity. - 5. Set up inter department government task force
to - retrieve lost assets
- fire responsible Gazprom managers
- prosecute responsible executives.
26Shareholders Actions
Hermitage Capital Management has made the
following proposals for Gazprom AGM to improve
the value of the Company 1. Adopt FSCM Corporate
Governance Code of Gazprom 2. Various Charter
amendments in order to implement Board of
Directors oversight of assets transactions 3.
Charter amendments to allow Board of Directors
instigate any audit of any transactions using
any audit 3. Boards oversight over financial
activity of Gazprom (lending, borrowing,
encumbrance) 4. Set up Audit sub-committee of
Board of Directors to control all auditing
process in Gazprom 5. Sack PWC as official
auditor at AGM and replace with a new auditor
under a transparent tender procedure
27Recommendations for FCSM
- 1. Reopen forensic audit of transactions
immediately - new auditor
- include non-Itera asset stripping.
- 2. Sack PWC as official auditor at AGM and
replace with a new auditor under a transparent
tender procedure. - 3. Launch international lawsuit against PWC for
malpractice. - 4. Improve audit legislation
- introduce rules and liabilities for auditors
malpractice - strengthen regulatory body overviewing auditors
activity. - 5. Set up inter department government task force
to - retrieve lost assets
- fire responsible Gazprom managers
- prosecute responsible executives.
28Disclaimer
The information is based on data obtained from
publicly available sources, which have not been
verified by Hermitage Capital Management Limited,
or any of its respective associates or
affiliates. As a result of the difficulty in
obtaining reliable data in Russia, we do not
represent this information to be accurate and
complete and we do not accept any responsibility
for the reasonableness of any conclusions based
upon such information.