Germany's E.ON buys into Russian electricity (News Feature)

By Peter Lessmann May 24, 2007, 17:11 GMT

Dusseldorf, Germany - German utility E.ON entered the Russian electricity business Thursday, establishing a joint venture in the western Siberian area of Tyumen with Russian partner STS.

The venture indicates E.ON chief executive Wulf Bernotat has shifted his gaze eastwards after a vain takeover struggle for Spanish utility Endesa.

The venture, E.ON-STS Energia, is the Dusseldorf-based giant's first electricity operation on Russian soil, but it has extensive experience with Russia through its gas wholesaling subsidiary E.ON Ruhrgas.

Ruhrgas is closely linked to Russian gas monopolist Gazprom. E.ON is Germany's biggest utility group.

Bernotat clearly hopes that the liberalized Russian electricity market offers an investor good returns.

E.ON's brief announcement said, 'Russia's market is growing 5 to 6 per cent annually, making it one of the biggest and strongest growing markets in Europe.'

Bernotat has often voiced interest in the past in entering the Russian electricity business and this week said Russia provided 'attractive framework conditions' for an investor.

Analysts have suggested more than 20 billion dollars must be invested in the next 15 years in new power-generating capacity, modernizing existing stations and upgrading the Russian distribution grid.

E.ON has not disclosed how much it is investing in the Tyumen venture.

However experts on the sector said the outlay would probably come to about 1 billion euros (1.3 billion dollars) with STS providing assets for the joint venture.

TGK-10, a generating company, will be purchased as part of the deal.

That outlay represents a considerable saving compared to the 40 billion euros E.ON contemplated spending on Endesa.

Bernotat is set to brief the public next week on E.ON's strategy, expansion plans and investment budget, and Russia is now likely to play a big role in the blueprint.

'Our objective is to make E.ON the most effective company in the European energy business,' he said several weeks ago as he unveiled quarterly figures.

Experts on Russia warn that expansion into that country is not risk-free.

The Kremlin is sensitive about foreign business entering the key energy sector as Shell discovered to its cost: the oil company had to abandon a project under Russian pressure.

E.ON may have a defter touch, thanks to experience gained from its E.ON Ruhrgas link.

Ruhrgas is a minority shareholder in Gazprom and has a seat on the Gazprom board, occupied by Ruhrgas chief executive Burckhard Bergmann. That business tie-up has not always been plain sailing.

It took arduous negotiations for E.ON to win a stake in the Yuzhno-Russkoye gas field in the Tyumen area of western Siberia under a deal in which Gazprom gained former E.ON assets in Hungary.

Even now, Gazprom wants to pick apart the deal.

Sources close to E.ON said Gazprom was demanding to renegotiate the contract, with the Germans providing more collateral for the Siberian assets.

E.ON may have to oblige to ensure itself a trouble-free entry into the power sector.