MOSCOW Russia's state-controlled oil company Rosneft (ROSN.MM) is planning to take over local gas firm Itera for $3 billion, two sources close to Rosneft said on Tuesday, strengthening its hand in challenging Gazprom's (GAZP.MM) industry dominance.
Rosneft already owns a 51 percent stake in Itera, which was the top gas supplier to the former Soviet Union republics in the 1990s before Gazprom secured a monopoly on Russian gas exports in 2006, and has now approved the purchase of the remaining 49 percent of Itera for around $3 billion, the sources said.
Rosneft acquired the controlling state in Itera last year when Igor Sechin, powerful ally of Russian President Vladimir Putin, was appointed as head of the country's largest oil producer.
Gazprom's domestic gas sales are dwarfed by the take from its exports to Europe, but just when the Russian giant faces more competition in foreign markets it has lost share at home to rivals producing lower cost gas.
With the Russian economy slowing, worries about Gazprom losing its competitive edge have prompted open speculation by analysts and media about Gazprom's future and Putin has already ordered a rethink of Russia's gas strategy.
Gazprom said its share of the domestic market fell to 73 percent last year from 80 percent in 2008, reflecting rising output of low cost gas from independent producer Novatek NOTK.MM as well as increased sales by oil companies with associated gas.
"We are certain that Gazprom's share will remain around 75 percent to 2020," Kirill Seleznyov, the head of Gazprom's gas marketing and processing department, told a news conference on Tuesday.
"The volumes that go to the independents (in future) will be compensated for by the addition of new consumers," he said.
As chief executive of Rosneft Sechin is building it into a global player, buying up domestic businesses and partnering with ExxonMobil (XOM.N) to explore for and develop its potentially vast offshore oil and gas prospects.
In the biggest coup since he moved from government to head Rosneft a year ago, Sechin also completed the $55 billion purchase of Anglo-Russian oil firm TNK-BP in March, in a deal that turned Rosneft into the world's largest listed crude oil producer by output.
That is not enough for Sechin, a former deputy chief of staff to Putin who has set a goal of increasing gas production at Rosneft by 150 percent by the end of this decade.
"Rosneft has ambitious plans to produce 100 bcm (billion cubic metres of gas) in 2020, so strengthening its gas project portfolio is in line with that strategy," VTB Capital analysts led by Dmitry Loukashov said in a note.
The reported price of the Itera deal, at $78 per barrel of oil equivalent reserves, looked expensive, VTB Capital said.
But the buyout would mark the end of an era for Itera and its founder, former racing cyclist Igor Makarov, who prospered in the 1990s as a reseller of gas from Turkmenistan but was sidelined after Putin purged Gazprom's management a decade ago.
Both Rosneft and Itera declined immediate comment.
Rosneft and Itera formed a joint venture last year that plans to produce 13 billion cubic metres (bcm) of gas this year, or 2 percent of Russia's total output. In comparison Gazprom's output last year was 479 bcm of gas.
Since buying into Itera Rosneft has agreed to sell 4.65 billion cubic metres of locally produced gas in 2013-2015 to the Surgutskaya GRES-2 power station owned by E.ON EONG.DE, one of several sizeable contracts sealed in the last year between large consumers and non-Gazprom producers.
A number of similar contracts sealed over the past year by gas independent Novatek (NVTK.MM) with most of Russia's steelmakers have also eroded Gazprom's share with key industrial customers and other existing supply deals are gradually expiring, prompting consumers to consider switching supplier.
Rosneft has also joined forces with Novatek to lobby for the right to export liquefied natural gas (LNG) - challenging Gazprom's goal of increasing exports of LNG to Asia to reduce its reliance on pipeline gas exports to Europe.
Rosneft aims to increase its share of the domestic gas market from 9 percent to 19-22 percent by 2020 and expects to produce more than 40 bcm of gas in 2013, over 60 bcm by 2016 and 100 bcm in 2020, of which more than half is to be produced at newly acquired projects.
Rosneft shares closed 1.1 percent at 213.72 roubles, outperforming the overall market edged down 0.1 percent.
(Additional reporting by Vladimir Soldatkin; Writing by Katya Golubkova and Melissa Akin; Editing by Greg Mahlich)