Good afternoon, dear colleagues!
Presentor: I would like to welcome you to the Press Conference on “Gas Deliveries to Domestic and Foreign Consumers”. The Press Conference is being given by Alexander Nikolaevich Ryazanov, Deputy Chairman of Gazprom’s Management Committee, Alexander Ivanovich Medvedev, Gazprom’s Management Committee Member and Gazexport’s Director General, and Alexander Dmitrievich Bespalov, Head of Gazprom’s Information Policy Department.
Before we proceed, let me start with a few opening remarks. First, we’ll listen to our conferees’ reports, after which we’ll open the floor for questions. It is for the 1st time in history that a press conference held by Gazprom is being aired on the Internet. All interested persons are welcome to make their questions live at Gazprom’s Web site and, in addition, we’ve got 4 cities on the phone line, including Minsk, Warsaw, Vilnius and Kaliningrad. In the course of the Press Conference we’ll get in touch with the aforementioned cities and local reporters will be able to ask their questions.
OK, let’s begin. Alexander Nikolaevich, you are welcome!
A. Ryazanov: Thanks a lot. I’d like to salute all the reporters present and I’ am pleased to see so many of you here today. Let me thank you all for giving us so much of your time and attention. I’d like to inform you of Gazprom’s last year’s gas deliveries to the CIS and Russia and of our rough plans as far as this year. And than I will, of course, take your questions, if any.
As far as the 2003year, Gazprom delivered 282 bcm of gas to the domestic market, worth some RUR 248 billion. The average gas price (VAT included) throughout Russia (as you know we’ve got a handful of price zones) accounted for RUR 877 or some USD 28.6 per 1000 cubic meters. In order that you could compare indices, I can tell you that the gas price in 2002 accounted for RUR 641 or some USD 20.4, meaning an annual rise of USD 8. The increase was due to higher gas pricing, on the one hand, and lower dollar currency rate, on the other hand. Mezhregiongaz was last year’s major gas supplier delivering about 80% of the total gas volumes traded in Russia. The rest was marketed by independent gas producers, suppliers and traders.
In 2003 we received RUR 250 billion as payments for 98.4% of the gas supplied. It’s not bad at all for the moment as, in addition, we see annual boost in gas payments. It is our task to achieve a 100% level of gas payments within 2-3 years. Old debts accumulated since 1993 have been redeemed at 14.5%, which is a bit less than in 2002. But, in effect, that’s how it should be as the year-on-year suppliers’ indebtedness for gas is repaid in lesser and lesser amounts due to the cessation of existence of most consumers. At the same time we face certain difficulties in recovering a great deal of debts. In 2003 cash payments kept growing and, as compared to 2002, these cash payments boosted more than 5%. Gas debt has been decreasing in the past 5 years from RUR 101 billion to about RUR 35 billion.
Some regions (including the Voronezh, Kaliningrad, Ivanovo. Lipetsk, Omsk and Yaroslavl ones) have shifted over to advance payments. We’re considering this appropriate and endeavor to conclude contracts with consumers with the view of, at least, partial advance gas payments.
At the same time, there are regions where we have gas debt soaring. I’d like to name those: the Kirovsk and Vladimir regions, Republic of Dagestan, Ingushetia, with Dagestan having the lowest level of payments for current gas deliveries (39.6%, last year). Although we were applying gas supply restrictions to Dagestan within some 5-6 months, we have, unfortunately, failed to collect payments for all the gas supplied to the Republic.
As far as the Chechen Republic, gas has not been paid for since 1996 and total debt amounted to RUR 5 billion by the 2003 year-end. Unfortunately, we do not see any way to recover the debt. We suppose, however, that we’ll adopt an agreement with the Chechen Republic here, in Gazprom. Within the frames of the agreement, we’ll try to establish our sales units in the Republic, in order to organize there gas marketing in the way it is done all over Russia.
Speaking of different industries, I can inform you that major gas consumers are power, metallurgical and agrochemical sectors receiving 48-49% of the total Russian gas consumed and being, at the same time, the most solvent. These industries pay for 99-99.5% of the gas supplied.
Now, let’s move on to the CIS and Baltic countries. In 2003 Gazprom delivered there 42.5 bcm of gas worth USD 2.1 billion, including 29 bcm as payment for Russian gas transit to Europe via Ukraine, Belarus, Moldova, Lithuania and Latvia.
Average gas price in the CIS accounted for USD 50 last year, which is a bit less than in 2002. In 2002 gas pricing averaged USD 53 due to gas deliveries to Belarus at domestic prices. If you recall, since 1 May 2002 we’ve been supplying gas to Belarusian consumers at a price of Russia’s 5th price zone, with average price reduced from USD 30 per 1000 cubic meters down to some USD 20.
Gas marketing revenues totaled USD 2,112 million, including 28% in cash and 72% by gas transit services.
In 2003 Russian natural gas deliveries to the CIS were largely settled by transit services and in cash.
In 2003 Gazprom supplied 26 bcm of gas to Ukraine as payment for gas transit. I’d like to remind you that the Company does not sell gas to Ukrainian consumers and only pays for gas transit services rendered by this country. In 2003 we supplied 10.2 bcm of gas to Belarus, worth USD 308 million. As of the 2003 year-end, Belarusian consumers’ debt for the gas delivered in 2003 accounted for USD 27 million and was redeemed in the January - Mid February period of the current year. Under the Agreement on the Belarusian gas debt restructuring, we restructured some USD 78.5 million (excluding penalties and fines averaging another USD 50 million). Based on our Agreement, Beltransgaz has to repay this debt in 2004-2006. Unfortunately, I can say that the present-day debt restructuring terms, which envisage some USD 3 million of monthly payments, are not complied with in full. But as of December, January and February, these payments totaled about USD 5 million, which is twice as less than we agreed with Beltransgaz.
We supplied 1.5 bcm of gas worth USD 115 million to the Republic of Moldova. The proceeds accounted for USD 86 million or 75% of the cost of the gas delivered.
It should also be mentioned that the Republic of Moldova is the only CIS country not paying in full for current gas supplies. The Transdnestr region and Moldova itself pays for some 78-80% of present-day gas deliveries.
Gazprom piped 4.8 bcm of gas to the Baltic States and received full and timely payments envisaged in the Contract.
Finishing my report, I’d like say some words about independent gas suppliers in Russia. In 2003 Gazprom rendered gas transportation and underground gas storage services to 33 independent gas suppliers, in the amount of 96.4 bcm.
Under the direct agreements achieved, Gazprom provided services to 19 independent gas suppliers. At the same time, our subsidiaries rendered services to 14 independent gas suppliers located in the places where gas is not piped through our centrally-controlled gas pipelines but within the frames of an integrated gas transmission system. Out of the total gas volumes provided by independent gas suppliers, about 48 bcm originate from Central Asia and Kazakhstan.
The proceeds for the services rendered to independent suppliers in 2003 accounted for USD 968.4 billion, which is a big amount of funds, we have received from third parties’ gas transit.
In 2003, independent gas suppliers delivered 38 bcm of gas to Russian consumers, the largest of which are the Tomsk, Sverdlovsk, Tyumen, Samara and partially Kemerovo regions, Altai Area and Republics of Bashkortostan and Tataria. According to the licenses granted for accessing gas transmission systems and to the agreements concluded on gas deliveries in 2004, Gazprom plans to supply 47.5 bcm of gas to Russian consumers, including 6.4 bcm to the Sverdlovsk region, based on the agreement concluded between the regional authorities and the Company’s delegation sent for the event. I’d like to remind you that Gazprom does not market gas in the Sverdlovsk region where business is traditionally carried on by ITERA. We simply provide some gas at prices set by the RF Federal Energy Commission, for ITERA to sell it in the region.
As of 1 March 2004, 32 independent gas suppliers have access to the gas transmission system for transporting some 100 bcm in 2004, including 44.5 bcm of gas of the Kazakh and Central Asian origin, being transited via Russia, mainly, to Ukraine.
For the time being, Gazprom is considering 12 applications for gas transit of total 15.1 bcm.
That’s just some brief information on how we worked last and will do this year.
Presentor: Please, Alexander Ivanovich.
A. Medvedev: Good afternoon, dear reporters! I’ am particularly pleased to inform you of gas export results as the past year was a record one for Gazprom and Gazexport, given the gas export volumes and currency proceeds.
As you, probably, already know, Gazprom’s currency proceeds from gas exports totaled USD 16.5 billion arisen not only due to high competitiveness on the gas market but due to large-scale investments, as well.
In 2003 Gazprom exported 133 bcm of gas, with 140 bcm planned for 2004. Gazprom and Gazexport’s gas supply volumes varied in the last 2 years. In 2003 Gazexport sold 140.5 bcm of gas while we marketed 133 bcm. This reflects such a significant factor as Gazprom and Gazexport’s return to the CIS countries not only from the gas marketing point of view, but also in regards to the export portfolio shaping. These 7.5 bcm of gas are of Central Asian origin. Last year it was Kazakh and Uzbek gas, to be accompanied with Turkmen gas this year. And that is why the 13 bcm surplus of Gazexport against Gazprom’s gas arises from Central Asia and is marketed as within the frames of our long-term contracts as by applying new sales methods, which are known as spot trading or short-term contracts. Thus, Gazexport delivers as Gazprom as Central Asia’s gas and has an opportunity to conduct the gas pricing and transportation optimization, which is particularly significant under the present-day market conditions if we touch upon geographical destinations of 133 bcm of gas exported to the main gas-importing countries. The major directions of Gazprom’s gas exports are West European countries, where Gazexport sold 87.9 bcm of gas in 2002 and 94.4 bcm in 2003.
Here is the list of main Russian gas importers starting from major to minor ones: Germany, Italy, Turkey, France, Austria, Finland, Greece and the Netherlands. We’re operating on these markets based on long-term contracts and we’re getting prepared to start up new relationship under the market liberalization. That means that despite long-term contract priorities have been so far acknowledged by Brussels, Gazprom won’t stay on the margin of new trends of activities on the West European market. We’re a maintaining a serious approach to operating in all the countries with relevant environment established.
This is not something new to Gazprom. Long before the concept of liberalization had stirred the minds of the most progressive politicians, Gazprom set up together with Wintershall (a BASF’s affiliate) a Western Germany-based WINGAS joint venture. The latter company controls some 15% of the German gas market and is one of the largest domestic wholesale gas traders. So, once again, this isn’t something new we have come across with and we keep analyzing opportunities to acquire gas assets in Western and Eastern Europe with the view of being capable to do our best under the changed market environment. I’ am specifically referring to new ways of gas transportation and underground storage and, of course, to a different performance strategy depending on this or that market.
Speaking of Russian gas importers in Central and Eastern Europe, I can say that we provided them with 42.8 and 46 bcm of gas in 2002 and 2003, respectively. The list of major Russian gas importers is as follows, starting from the largest ones: Hungary, Slovakia, Czechia, Poland, Romania, Bulgaria and Yugoslavia, followed by countries importing less gas volumes. It’s worth mentioning that Gazprom not only sells gas to its traditional partners but, taking into account potential changes in their asset structure, also enters these countries’ gas distribution systems. We submitted preliminary applications to participate in a tender on the Romanian Distrigaz-North and Distrigaz-South companies. We’re negotiating with the MOL company the possibility of acquiring gas assets in Hungary. At the same time, we’re taking part in a tender (to be prolonged up to 2005) to purchase a stake in SPP, the largest Slovakian gas transportation and sales company. So, “being closer to the consumer” is not just a slogan for us. We’re implementing this strategy on a phase-by-phase basis.
Even if we calculate our gas export volumes based on the minimum amounts envisaged in the contracts concluded, we’ll get a peak figure of 147 bcm of gas deliveries set for 2008, disregarding the possible prolongation of our present-day contracts. We permanently keep on working in this direction and, for instance, have recently achieved an accord to prolong the validity of the Contract concluded between Gazprom and the Austrian OMV company. In addition, we’re involved in the talks with a string of counter agents, which will allow us to increase, at least, the guaranteed minimum volumes of our gas exports.
I’ve always liked to highlight our operating results during a winter heating season when gas is withdrawn in big quantities. That’s why I suggest examining Gazprom’s operating results on West European export markets in January-February of the current year, as compared to the last year’s same period. As we see here, our gas exports were on the rise while winter in Western Europe was rather warm, which reflects gas demand boost irrespective of weather conditions. This gives us confidence in forecasting that our gas exports will experience a stable and sustained growth. This certainty also derives from ecological factors in Europe and gas competitiveness against other types of fuel, given high oil prices.
And now I’d like to say some words on Gazprom’s gas exports to Eastern Europe. Despite gas export remains at its high, Gazprom’s gas deliveries fell a bit during 1st 2 months of 2004 against the same period in the previous year (8 bcm and 7.1 bcm of gas, respectively). This is largely linked, for instance, to Hungary’s last year’s ability to pump considerable gas volumes into UGS facilities and that’s why 1st months of 2004 indicate a somewhat lower East European gas imports, as compared to the previous year.
That’s just a summary of Gazprom’s gas export volumes and prices. I’d also like to draw your attention to the last year’s key events.
We started implementing the Blue Stream gas pipeline project and not just launched it but also managed to fully settle all our contractual disputes with our Turkish partner, the Botash company. For the time being, all Gazprom’s contracts with Botash are in full compliance with international gas requirements and envisage no pricing divergence. The parties rigorously abide by the Contract terms. The Blue Stream gas pipeline considerably offsets expenditures on the part of Turkey under harsh weather conditions. Not long ago, when weather was pretty bad in Turkey, an accident took place at an LNG terminal. Responding to the Turkish side's request, we significantly boosted gas deliveries via the Blue Stream, in excess of our contractual obligations. This is another confirmation of economic viability and strategic significance of the Project for both Russia and Turkey.
Here’s another Gazprom’s last year’s achievement. We’re fully prepared to operating on one of the most liberalized European markets, I’ am referring to Great Britain, where gas shortage is predicted to emerge within the next few years. By combining gas deliveries carried out to various destinations in Europe, we’re able to provide up to 8-10 bcm of gas to Great Britain, as shortly as possible. Taking into account the forecasts of Britain’s gas imports for the next 5-8 years, Gazprom will be able to satisfy not less than 20-25% of the British gas import demand, which is almost in congruence with the Company’s gas volumes imported by other European countries.
Thank you for your attention! And now I’d be happy to answer your questions if any.
Presentor: OK, let me open the floor to questions. I’d like to ask all of you to introduce yourself first and then to name the person you want your question to be addressed to. The reporters present here in Moscow will be the first in making their questions and then we’ll get in touch with Minsk.
Question from the audience: A question to Mr. Medvedev. Due to suspension of gas deliveries, provoked by the conflict with Belarus, Lithuanian companies suffered losses. Have they made any financial claims in this respect? And how was or will be this situation resolved? And I’ve also got a question to Mr. Ryazanov. It’s been long time since Gazprom started negotiating with Lietuvos Dujos the possibility of becoming one of the latter company’s major shareholders but so far hasn’t achieved any results. How can you explain that? Thank you.
A. Medvedev: I think that you should refer your 1st question to Alexander Nikolaevich, as well, since, for the time being, Gazprom is delivering gas to Lithuania independently, without Gazexport’s involvement.
A. Ryazanov: Firstly, as far as the losses and gas supply termination are concerned. In effect, on 18 February, when gas supplies to and gas transit via Belarus were cut off, Lithuanian consumers received limited gas volumes. However, gas deliveries were not ceased completely, as you know it very well. Lithuania daily consumes some 14 million cubic meters of gas. Gazprom was providing Lithuania with 5 million cubic meters of gas daily from the Latvia-situate Inchukalinskoye UGS facility although there are no gas metering stations there yet. Nevertheless, we managed to organize those gas deliveries due to our being participants in a Latvian joint gas sales venture. And none of the Lithuanian consumers have so far produced any financial claims in this respect. We think that in effect there shouldn’t be any claims since nobody curtailed activities. The largest Lithuanian gas consumers, such as the Achema company, did slim down operations but they fully understand this situation.
Other consumers – primarily, the residential sector – simply shifted over to a reserve fuel and remained invulnerable to gas supply restrictions.
And now as for the 2nd question on Lietuvos Dujos. To tell you the truth, we’ve advanced a long way ahead on this issue despite certain difficulties we had to face. We had been involved in the talks for almost a year and signed a Contract to acquire a 34% stake in the Lithuanian gas company. In addition to other things, we stated that Gazprom would take part in the distribution of a bonus share issue and hopefully would own together with the German E.ON and Ruhrgas companies over 70% of Lietuvos Dujos’ stake. The Agreement has been signed and, as it is to my knowledge, has already been approved by the Lithuanian Government. Some few days ago we obtained a relevant license from the Central Bank of the Russian Federation. Gazprom’s balance sheet so far has these funds reserved for March. All the aforementioned makes me think that we'll be Lietuvos Dujos’ full-right members.
Question: Expanding upon the issue raised, I have a question to Mr. Ryazanov. Firstly, would you comment, please, on the data released today that Poland is claiming reimbursement for losses incurred due to the gas shortage arisen on February 18? And, secondly, there’s been information today that Belarus agrees to sell Beltransgaz to Gazprom on the latter company’s terms. I’d like your comments, please, and could you be more specific as far the progress in the talks with Belarus? Thank you.
A. Ryazanov: I think that it’d be appropriate if the Poland-related question will be answered by Alexander Ivanovich since this country enters the list of the markets Gazexport is selling gas to. I’ am unaware whether there’ve been any claims from Poland. Alexander Ivanovich will hopefully provide you with detailed information on this.
As for the deal on selling Beltransgaz on the Russian terms, we didn’t establish any specific terms, we only strived to find a civilized way of executing this transaction. Gazprom’s intentions envisaged a 50/50% stake ownership although, frankly speaking, back in the summer of 2003 we had insisted on a 51% stake of Beltransgaz, to be owned by Gazprom after an independent auditor’s evaluation of the former company. We’re still insisting on Beltransgaz to be assessed by an independent auditor. Another hurdle in our relationship with Belarus is the Yamal-Europe gas pipeline. Gazprom has repeatedly stressed that this gas pipeline is the Company’s exclusive property and has nothing to do with Beltransgaz. And that’s how things are, in effect. The Yamal-Europe gas pipeline belongs to Gazprom and gas piped through it is not intended for Belarusian consumers. We completed the construction of the Belarus-located section of the pipeline and there are several compressor stations to be constructed for bringing the Yamal-Europe to its design capacity. Next year it’ll be a totally separate gas pipeline. We have never said it is part of the Beltransgaz joint venture.
But, first of all, don’t you forget that we failed to achieve an agreement largely due to the Belarusian side’s announcement that they wouldn’t give us even 25-30% of Beltransgaz’ stake, not mentioning a controlling bloc of shares. And, secondly, we were told that the Belarusian gas transportation system was worth USD 5 billion based on the Belarusian experts’ assessment and no independent auditing was needed. We’re still making wild guesses who and what these experts are.
I won’t expand too much on the USD 2 billion investments made into Beltransgaz with no guarantees received in return, nor will I focus on numerous social privileges Gazprom agreed to provide Beltransgaz with within a 5-year period.
Anyhow, we failed to arrive to a mutually advantageous agreement but, as you know, there is an Inter-Governmental Agreement saying that by July 1, 2003, Belarus and Russia are to set up a joint gas transportation venture. The venture wasn’t promoted by July 1, nor by January 1, 2004. That was why we were certainly forced to repudiate gas deliveries to Belarus at the Russian internal prices. By the way, our initiative was backed by the RF Government’s resolution to cancel recommendations to sell gas to Belarusian consumers at a price of Russia’s 5th price zone.
We maintained that from 1 January 2004 onwards the gas price would be commercial. When we were saying what would be a basis for the price, we were leaning upon the Russian and Belarusian President’s agreement achieved in the city of Sochi in September of 2003. The Presidents agreed to apply in Belarus the gas supply terms identical to those Ukraine was abiding by.
The basic gas price in Ukraine accounts for USD 80 per 1,000 cubic meters, which is a standard price for all the CIS countries. However, Gazprom and Ukraine managed to reach a mutual accord to reduce the cost of the Ukrainian transit service and, thus, that of Russian gas. We finally agreed on a USD 50 price.
We were negotiating the same price with the Belarusian side. But, as you know, we don’t have a contract concluded since Belarus rejected the terms proposed. That’s precisely why gas has been delivered to Belarus only by independent gas suppliers, ITERA and Trans Nafta.
But we’re mostly concerned with not having a contract on gas deliveries via Belarus to third countries, including Lithuania, Poland, partially Germany as well as the Kaliningrad region. We haven’t concluded this contract so far as there’s no agreement as such although we accepted the terms put forward by the Belarusian side (USD 1.02 for the transit of 1,000 bcm of gas per 100 km).
On 30 January, the Belarusian Economics Ministry, unilaterally adopted a decision (without coordinating it with the RF Federal Energy Commission and thus contradicting the Agreement adopted) to raise the gas transit cost through Belarus up to USD 1.02 for the transit of 1,000 bcm of gas per 100 km. I’d like to remind you that the cost was almost twice as less last year, accounting for US 53 cents. We accepted these terms to avoid putting in jeopardy gas deliveries to our consumers and said that the new cost suited us fine. But we still don’t have the contract. So, that’s why our position is like this: no contract for gas transit, no contract for gas deliveries. We’re reiterating our determination to deliver 10.2 bcm of gas at a USD 50 price. As of today, Belarus has contracts with the ITERA and Trans Nafta independent gas suppliers only. That’s how the picture looks like.
A. Medvedev: I think that Alexander Nikolaevich’s comments make it clear that the measures taken were of urgent, extraordinary nature. But, at the same time, there was no catastrophic situation in Poland. Let me acquaint you with the documentary data. On the 1st day when gas supply restrictions were imposed, I’ am referring to 18 February, the contracted gas supply volumes to Poland were cut only by 35%, as compared to Gazprom’s maximum daily contractual obligations. On the 2nd day gas deliveries fell 50%. It should be mentioned here that we supply gas to Poland through 4 distribution centers, including 3 Belarusian and a Ukrainian one. By operating the latter center we distribute about 1/3 of the total gas deliveries. In addition, we terminated gas supply through the Kondratki gas distribution center, which belongs to the Yamal-Europe gas pipeline. That’s why those mass media reports that responded hysterically to the gas tapping off, were surely of political flavor. Gazprom is building up normal dialogue with PGNiG as far as this situation is concerned. We fixed the next meeting for March 9-10 in Warsaw within the frames of the 10th anniversary of EuRoPol Gaz that owns the Yamal-Europe gas transit pipeline. We will calmly discuss all the problems involved. I don’t think that, given all these figures I’ve just spoken of, there’ll be grounds for presenting any serious claims to compensate the damage arisen due to the suspension of gas deliveries. We haven’t so far received any.
Presentor: OK, my colleagues are telling me that we’ve got Minsk on the line and Belarusian reporters have 2 questions.
Question from Minsk: When is Gazprom going to adopt a long-term gas supply contract with Belarus?
A. Ryazanov: I'll repeat one more time. As far as we imagined, the contract should have been adopted last week. But anyhow we managed to reach certain agreements and we are set to sign the document even today. Wishes Belarus an ideal gas transit contract, here you go, we’re ready to abide by the Belarusian side’s terms. Desires Belarus a separate gas sales contract at the market-based prices averaging USD 50, similarly applied to Ukraine, take it, please. Or do they strive for a gas transit and sales contract with the gas price and transit rate agreed? We do not see a problem with that, either!
I think it can be done as shortly as today or as late as tomorrow. If we fail to achieve an accord, Belarus’ only option is to adopt a contract with independent gas suppliers as this is the only way in a situation like this for Belarusian consumers to receive gas. Although, frankly speaking, we don’t see any long-term gas resources stockpiled by independent gas suppliers for meeting, for instance, the Belarusian annual or semi-annual gas needs. Gazprom is still set to deliver 10.2 bcm of gas to Belarus this year despite more than 2 months have already passed since the date we planned to initiate gas deliveries. And I’d like to repeat it once more that Gazprom does have reserves to provide Belarusian consumers with the above-mentioned volumes.
Presentor: Minsk, another question, please.
Question from Minsk: Is Gazprom still interested in setting up a joint gas transportation venture based on Beltransgaz?
A. Ryazanov: We certainly are interested in incorporating a joint with Belarus gas transportation venture. We’re set to accomplish it within the Inter-Governmental Agreement concluded in April 2002 but based on the terms achieved at the start of this year, meaning a 50/50 ownership. At the same time, we insist on having 50% of Beltransgaz’s charter capital although a bloc of shares has already been sold to the company’s team. We think that the Belarusian side is free to make whatsoever decisions but only within its 50% stake. Gazprom must own 50%, not less.
Secondly, we consider it indispensable and urgent to independently audit Beltransgaz. Gazprom forwarded proposals on the auditor to Belarus back in January this year. The list submitted included 3 auditing companies entering the world’s top 5 ones. I can name those: Deloitte & Touche, Ernst & Young and PricewaterhouseCoopers.
So, we set forth these proposals but instead received a counter proposal to resort to the services of a hardly known auditing company. So, as soon as we achieve the aforementioned agreements on the independent auditing and agree as far as Beltransgaz’s price, we’ll be ready to supply gas to Belarus at the price of Russia’s 5th price zone. And believe me, Gazprom does mean it.
Presentor: Thanks, Minsk. Let’s pick just a couple of questions from the Internet.
Question from the Internet: I’ve got a question to Alexander Ivanovich Medvedev. How was gas piped via Czechia to Germany when it wasn’t reaching Europe through Belarus and Poland on 18 February? Did the Czech side cope with such big gas volumes?
A. Medvedev: A very interesting question, I should say, as the European gas transmission system is on its way to comprehensively couple gas transmission routes. In this particular case, we, fortunately, did have an opportunity to use alternative routes of gas deliveries to Europe. And that, for instance, directly refers to Germany. We used the capacities of the largest West European Rehden UGS facility, which is owned by Gazprom through a German joint venture. At the same time, we delivered gas via Ukraine and then via Slovakia and Czechia to Germany. So, we made use of this transportation channel since, fortunately, the European gas transmission system has its reserves, which helped us to overcome the critical situation. As a result, German consumers didn’t even notice any gas shortage.
Question from the Internet: A question to Alexander Nikolaevich Ryazanov. What if on 3 March by 10 am local time Gazprom fails to agree with Belarus or Belarus, in its turn, fails to achieve an accord with independent Russian gas suppliers, can we expect another termination of gas supply to and gas transit via Belarus? Has Gazprom adjusted its relationship with overseas consumers of Russian gas, after suspending gas transit through Belarus on 18 February?
A. Ryazanov: I think, we’ve already replied to the question on our relationship with foreign partners after February 18. We haven’t encountered any serious problems. I don’t see any problem either as far as the Baltic States and the city of Kaliningrad. Speaking of tomorrow’s deadlines, I can inform you that the existing Belarusian Gas Supply Contract with Trans Nafta is, indeed, due somewhere at 10-12 am. However, there is an additional agreement signed between Beltransgaz and Trans Nafta on gas deliveries of some 1 bcm of gas, which are to last Belarus for about 14 days.
But there is one question left here. We’re closely watching today what resources Trans Nafta is going to take this gas from? The thing is that Trans Nafta is not a gas production company and purchases gas on the RF market. When everybody knows the gas pricing set for Belarus, all gas producers endeavor to sell gas at a maximum possible price. Given these conditions, Trans Nafta is certain to gain very small proceeds. It is Gazprom’s present-day objective to simply give a hand in a situation like this, which is to find gas resources. We’ve taken a look already at Trans Nafta’s contracts concluded with Belarus. We think that nothing serious is going to happen tomorrow and gas will be delivered from Trans Nafta and ITERA’s stock as the latter company’s gas extraction sources are rather stable – some 520 million cubic meters of gas targeted for March. If these 2 contracts take effect, gas deliveries to Belarus will be uninterrupted practically till the month end.
We’re concerned about the absence of any legal basis for providing gas transit. And that’s the thing I’d like to stress particularly. There’s no gas transit contract. It doesn’t mean at all that gas is not transited, it, actually, is. But the point is that Gazprom, in its turn, is unable to pay Beltransgaz for the gas transit services. We do realize that Beltransgaz badly needs these payments as any organization owning a gas pipeline system would do to conduct certain activities. But Gazprom does not receive any bills and has no reasons to make payments as the main reason should be a contract. That’s precisely why we insist on a gas transit contract being signed and ask the Belarusian side to sign it as quickly as possible and, thus, tackle, at least, a part of the issues disputed.
Presentor: Let’s get back to questions from the audience
Question: I’ve got a couple of questions to Alexander Nikolaevich Ryazanov. First of all I’d like to ask you the following: according to our sources, Gazprom’s leadership will meet tomorrow a new Georgian Fuel and Energy Minister. What’s on the agenda of the meeting and have you encountered any problems on the part of Georgia? And secondly, have you faced any difficulties in your business relations while delivering gas to Georgia? Have you solved all the problems arisen? Thank you.
A. Ryazanov: Responding to your 1st question, I can tell you that I’ am aware of this meeting included in the Management Committee Chairman’s tomorrow’s working agenda. I think that Alexander Ivanovich and I will participate in the meeting as Gazexport is nowadays supplying gas to Georgia. I expect that Alexander Ivanovich will inform you of the Georgian consumers’ payments for the Russian gas supplied. Unfortunately, we by no means can consider these payments as satisfactory for now.
As for ITERA, this company has traditionally sold gas in Georgia and, more than that, partially owns the Georgian gas grids but, unfortunately, lacks resources to carry out uninterrupted gas deliveries. This issue is very important and serious and we’ve been discussing it for a long time here. Frankly speaking, I’d like to ask Gazexport to assist ITERA from its (Gazexport’s) gas resources in resolving this problem. The gas volumes we’re talking about are not that big but necessary, anyway. As far as gas payments, I’d turn to Alexander Ivanovich for this.
A. Medvedev: I’d like to stress it once more that Gazexport started operating in Georgia last year, long prior to the changes in Georgia’s top leadership. Despite all that instability with gas payments, Gazexport completely fulfilled its contractual obligations to Georgia during the latter country’s transitional period and elections, before and after the Georgian President’s inauguration. In addition to it, we found a way, after discussing it with Alexander Nikolaevich, of providing the consumers traditionally supplied with gas by ITERA with gas volumes requested. As of today, the ITERA-Georgia company is purchasing gas from Gazexport. We're involved nowadays in the talks so that ITERA’s gas consumers could have the contracted gas supply volumes not only for the 1st quarter of 2004 (as it is for now) but till the year-end.
The problem of gas payments is very urgent since the level of payments accounts for less than 30% against the contractual terms. We’ll focus on this issue during tomorrow’s meeting.
A. Ryazanov: I’d like to add something. If you recall, Gazprom and Georgia concluded last year the Strategic Cooperation Agreement, which caused plenty of rumors that Gazprom was taking a ‘political’ approach to make friends with Georgia. What happened, in effect, was that we pursued nothing but economic benefits but as you can see it, our business with Georgia has been unprofitable. We’re actually granting gas credits to the Georgian Republic. And this is absolutely not right as we’ve been delivering gas elsewhere with a proviso that gas be paid for, at least, within the next month after the deliveries have been made.
We’re also really concerned with the problem of the Georgian gas mains as we think that nobody monitors, repairs and upgrades those in a proper way. And the point is that Russian gas is transited via Georgia to Armenia where we have a joint venture incorporated. We’re in charge not only for delivering but also for marketing gas in Armenia that’s why we’d like our cooperation with Georgia to be a lot more close and fruitful. This is necessary to ensure gas transit to Armenia and, surely, to sell gas in the Georgian Republic.
Question: Starting tomorrow Chechengazprom is said to terminate gas deliveries to the Caucuses region. Would you comment on this decision? If it does terminate, then why, if it does not, also why?
A. Ryazanov: No, Chechengazprom won’t cease to supply gas to the Caucuses region. As far as the Chechen Republic, I’d like to touch upon a handful of very urgent problems. I’ve already repeatedly stated that the Republic owes us RUR 5 billion for the gas supplied. They did not pay us in the past, nor done it until now. In addition to it, Chechnya has numerously resorted to non-sanctioned withdrawals of gas transited via its territory. Nowadays when we consider the Chechen authorities as “normal” to work with, and look upon the Republic as a Russian region, we have first of all decided to conclude a cooperation agreement with the Chechen Government. I hope that the agreement will be signed here at Gazprom’s Headquarters already in March this year. This is a paramount paper Gazprom has signed with most RF regions. We’ll start by this agreement and then move on to setting up together with the Chechen Government gas sales organizations modeled on Mezhregiongaz. Or Mezhregiongaz will start operating in the region to promote gas marketing, meaning to find a concrete gas consumer, a gas payer to be charged with gas payments. That’s how we envision our task for now.
Now in brief on Chechengazprom. You know that gas is transited via Chehchnya to Azerbaijan, Dagestan, and the Stavropol region. We’re very concerned over the situation as Gazexport has contracts with Azerbaijan and we do with southern Russia and Dagestan. We’re also worried that, at present, Chechengazprom does not, in our viewpoint, have enough resources to normally operate its gas main. Chechengazprom is a 100% state-run company and the RF Government is planning to privatize it and is seeking shareholders. The company used to be part of Gazprom’s system, and, in my opinion, the most justified approach to putting things right in the gas business is to put companies like Chechengazprom under Gazprom’s control. It is, of course, hard to achieve and, besides, not everybody in Gazprom necessary looks at it as something indispensable as there are few people today wishing to work with and in Chechnya. Nevertheless, I consider it a must do thing. I can tell you that yesterday a meeting was held in the RF Energy Ministry, chaired by the First Deputy Energy Minister and attended by Chechengazprom, Chechengaz and Gazprom’s representatives. Generally speaking, we reached an accord as far as the contracts on gas supply to and transit via Chechnya. I think, we’ll achieve a final agreement within a week or so. But, of course, we’ve got a lot of work to do in establishing gas sales companies and in collecting payments for the gas consumed. We realize that we’ll face certain difficulties and, frankly speaking, have numerously turned to the RF Government for assistance and received affirmative responses. But we must make the 1st step ourselves and should do it in the shortest period possible in order not to terminate gas transit.
Question from Warsaw: I’ve got a question as for the 2nd line of the Yamal-Europe gas pipeline. Is Gazprom planning to construct it?
A. Ryazanov: Let me tell you some words about the Yamal-Europe gas pipeline. Gazprom plans to complete the construction of its 1st line by mid-2005. For the time being, we already have the gas pipeline constructed except for several compressor stations needed to be constructed in Poland inclusive for bringing the Yamal-Europe to its design capacity of some 33 bcm of gas per annum. According to Gazexport’s data, these volumes are sufficient for now to fully meet the gas needs of West and East European consumers. As soon as we get additional consumers, we’ll be able to consider the construction of the 2nd line. Once again, everything will depend on new gas consumers. If Gazprom needs more gas, we’ll expand the 1st line as this is rather simple, efficient and swift to accomplish. In our viewpoint, some 5-6 years are to pass before we can make up our minds as far as the construction of the 2nd line. The market is not growing so fast as one may wishe it’d be. For instance, Poland is consuming less gas volumes than stated in the commencement of the 1st line construction.
Question from Warsaw: Is Russia set to pay out possible compensations if requested by Polish companies that suffered losses during the gas cut off?
A. Ryazanov: As I’ve said already, on 9-10 March we’re meeting our Polish colleagues and are, certainly, discussing the situation you’ve just talked about. Besides that, we’ll search for ways to avoid anything similar in the future. The agenda of our meeting also includes possible expansion of the Polish underground storage capacities. As of today, there are 2 UGS facilities functioning in Poland and their capacity is insufficient for ensuring gas supplies in emergencies. Technological and natural catastrophes are, unfortunately, a reality and that’s why almost all countries–gas consumers pay special attention to UGS facilities. This incident with Belarus enables us and our Polish colleagues to jointly consider our future policies in the UGS development, taking into account Gazprom’s extensive experience. All our contractual obligations are fixed in first-class international agreements and therefore we’ll act within the frames of these agreements only. The figures I gave you make me think that the Polish economics is unlikely to have suffered real damage due to the gas suspension. This is, of course, my personal opinion not backed with concrete calculations. At the same time, our Polish colleagues will possibly release some other data. We’re ready to examine this information based on the existing agreements Gazprom has with Poland.
Question: Is Gazprom planning to build a UGS facility in Kaliningrad? And what’s needed to be done, in your opinion, for the Kaliningrad region to receive secure gas deliveries?
A. Ryazanov: As you probably know there’s a state-run program underway aimed to develop the Kaliningrad region. The Program envisages some annual 1,050 million cubic meters of gas to be channeled to the region and partially used at the regional CHP that is undergoing construction. As I see it, we technically do not have any problems to carry out gas deliveries to the region and, more that that, gas is piped to the Kaliningrad region through Lithuania where, as I’ve already said, Gazprom will have shareholdings. And by exercising our rights there, we’ll certainly be contributing to expanding the Lithuanian gas transmission system to ensure gas deliveries to Kaliningrad. Speaking of the Kaliningrad region’s further development and construction of local UGS facilities, inclusive, I can inform you that Gazprom does have all this in mind and funds have been allocated for providing feasibility study in the region. A UGS facility (a small-sized though) is planned to be built in Kaliningrad. We also plan to consider the construction of a branch to the North-European gas pipeline to be laid under the Baltic Sea, which will partially supply Kaliningrad with gas. We’re talking about some reserved gas volumes to be resorted to in emergencies like we recently had with Belarus or in case we face some technical problems while delivering gas to the Kaliningrad region. I can assure you that Kaliningrad is anyhow our big concern. Gazprom is maintaining a serious approach to the region and will never let this territory be deprived of gas. Even if we don’t have gas at all, we’ll deliver there fuel oil in exchange. By the way, we were thinking this through when the problem with Belarus emerged.
Question: How do you intend to build up your relationship with the Lithuanian Dujotekana company? And my 2nd question is: you have repeatedly said that the Lithuanian side has no claims against the gas shortage arisen lately. But I have information dated February 24 that the Achema company you’ve mentioned is about to make those to Gazprom. Does it mean that you are unaware of this information or have managed to settle the problem? Thank you.
A. Ryazanov: I read this news in the press, which was a translation from Lithuanian magazines and papers. But, at present, we’re involved in the talks with Achema’s representatives and are focusing on the terms of gas deliveries to a new plant Achema plans to build and launch in 2006. We haven’t received any single claim yet and it should be mentioned that Achema fully understands the situation we came across. I personally asked them whether they had to terminate operations. I was told that, indeed, they had slimmed down operations but there was no termination as such.
That makes me think that we are unlikely to encounter any problems. As Alexander Ivanovich has said, we have a rather serious agreement adopted and if we’re talking about any claims, they will certainly be presented in court but Gazprom would consider these, anyway. We’re, of course, unwilling to pay fines since these are our losses. But if the claims are objective, we’ll surely acknowledge them. Gazprom is a serious organization and we haven’t so far encountered problems with gas deliveries and this, undoubtedly, refers to Western Europe, as well. So, I don’t see any problems here, either.
Now let’s move on to Dujotekana. We’re purchasing a stake in Lietuvos Dujos and plan to acquire a controlling bloc of shares in Dujotekana. The latter company is nowadays just a gas retailer in the Lithuanian Republic. Generally speaking, we could deliver gas to Lithuania via one company, namely Lietuvos Dujos, but the Lithuanian legislation allows for not more than 40% of gas be traded through one company. That’s what we need, at least, 2 gas suppliers for. I think these will be Dujotekana and Lietuvos Dujos.
In addition, we directly deliver gas to the Achema company. By the way, I can’t but mention another important thing: Gazprom has always sought a compromise with Achema from the gas pricing viewpoint. And if the average cost of gas deliveries to Lithuania is much higher than to Achema, this is directly linked to the value of carbamide and ammonia produced by the company. If we start analyzing the objective value of gas piped to Lithuania, it should be a great deal higher than it is today. But we are seeking (and have always done it this way) a compromise with this particular Lithuanian company and I dare think Achema looks upon it in a due manner.
Gazprom also bought the Lithuania-based Kaunass CHP. We’re permanently developing and upgrading this plant. Summing up all the aforementioned, we’ve got 2 companies that will sell 40% of gas each to Lithuanian consumers and 2 plants we have direct contacts with.
By the way, in my viewpoint, we’re maintaining good business relations with Lithuania. We don’t see big problems in this country. We’ve made a long way to the privatization of our assets. Nevertheless, our relationship is friendly, normal and businesslike since Lithuania welcomes Gazprom including in its energy sector. It certainly makes me feel optimistic.
Question from Vilnius: You’ve just said you have no legal basis to transit gas via Belarus? What guarantees can you give that Lithuania will receive uninterrupted gas deliveries? Should we expect anything similar to the situation happened in February? Are there any alternative routes to deliver gas to Lithuania? How about Latvian gas pipelines?
A. Ryazanov: As far as the guarantees you’ve asked about, I can inform you that, in our viewpoint, the main 100% guarantee here is a gas transit contract concluded with the Lithuanian side. In addition, another guarantee can be the fact that gas is delivered via Lithuania to Kaliningrad. We’ll never leave any Russian territory without gas, trust me on that. So, gas moving to Kaliningrad can be easily consumed by Lithuania as it happened already when we had the gas pipeline temporary shut off. But there are certainly other solutions to the problem. Gaz can be piped from the Latvia-situate Inchukalinskoye UGS facility. In order to achieve it, we must set up gas metering stations between Lithuania and Latvia as fast as possible. The lack of such stations significantly limits the amount of gas deliveries. Secondly, we should, of course, build a UGS facility somewhere in the area as we could face whatsoever technical breakdowns not linked to the political events we recently came across. But I think that the incident that happened between Gazprom and Belarus have duly influenced the Belarusian side. It was a very hard time and it was rather cold, including in Kaliningrad, Lithuania and Belarus. Most Belarusian politicians have already started to adopt weighty decisions, in my opinion. At present, we’re doing our best to decide on the existing gas contracts with independent gas producers and we’re insisting on a contract for gas transit via Belarus.
Question from Vilnius: Is Gazprom set to participate in the construction of a UGS facility in Lithuania as we all know it is very expensive?
A. Ryazanov: I think that I can reply affirmatively as for the construction of a Lithuania-situate UGS facility and expansion of the gas pipeline to Kaliningrad. We discussed these issues with the Lithuanian Government. But since the Lithuanian Government, after selling a stake in Lietuvos Dujos, is discussing the matter with Lietuvos Dujos’ shareholders, we’ll discuss it with our German partners and partially with the Lithuanian Government. I think we should endeavor to come to an accord as it’ll enhance the security of gas deliveries. Besides that, the Inchukalinskoye UGS facility is hardly to solely ensure sufficient gas deliveries to Lithuania, Latvia and Kaliningrad in case there is a durable gas cut off caused by various reasons. We need to construct a UGS facility in Kaliningrad and Lithuania. When we become shareholders, meaning co-owners of the Lithuanian company, we should simply ask ourselves what is faster, more lucrative and cheaper for us: build a UGS facility in Kaliningrad or in Lithuania. But there is one thing clear: we could deliver gas to both places from either territory.
Question from the Internet: There’s been a lot of information lately on the need to reform the gas sector of the economics. The word “reform” in this context is very often interpreted as the restructuring of Gazprom. I assume that after March 14 the backers of this interpretation join their forces and new attempts to divide Gazprom are undertaken. I’d like to know your attitude towards this.
A. Ryazanov: We think that in the situation our country is in (climatic conditions, the existing energy balance etc.) when gas plays a prevailing role and the country’s power generation sector consumes over 50% of gas and in some regions up to 80-90%, we by no means can get to reforming Gazprom by taking a cavalryman’s approach, meaning hurriedly, in a rush. We’re not saying that Gazprom needs not to be reformed; we’ve always said that we should reform and modernize all Gazprom’s system, including the management system upgrading and identification of various activities. We’re spurring such an approach. All this should be done with implication of all possible consequences. That’s our main viewpoint. As far as establishing the gas market and promoting independent gas producers, suppliers, dealers, brokers, stock market or electronic trade, we’re far ahead in this sphere and encourage any innovations. While resenting the figures, I mentioned that Gazprom represented by Mezhregiongaz sells about 80% of gas in the RF. Another 20% are traded by independent gas production organizations. Is it much or little? It is probably little, in effect. We’d like independent gas producers to control, at least, some 40-45% of gas sales. That’s what we strive for although it is hard to achieve because of the historical events that took place when Russia’s United Gas Transmission System was being established. For the time being, Gazprom is the largest Russian gas supplier and, unfortunately, we’re assuming all the responsibility for meeting the whole country’s gas needs at regulated prices. This may be an honorable but in effect an extremely difficult task to fulfill. You are very likely to have overlooked a large-scale accident happened about half a month ago when 6 gas pipelines in the Perm region got damaged. As a result, gas deliveries to Russian consumers fell by 200 million cubic meters per day. You just imagine this figure. But practically nobody noticed the event as Gazprom represents a reliable and integrated system. We do possess very large UGS facilities, which helped us to resolve the situation without damaging our consumers. I’ am telling you once again that if somebody thinks that Gazprom opposes to be reformed, that’s an absolutely wrong viewpoint. We feel capable to compete efficiently enough with other oil and gas companies involved in the gas extraction. The only problem we’re facing is that we’re operating under the rigid regulations imposed by the state, which, in its turn, is not telling us yet when we’ll shift over to a market-based economy. Nevertheless, we are set to carry on business under market conditions with all companies. I’d like to underline it once more that we’re strongly in favor of launching as fast as possible certain reforms in the gas industry, inclusive. The Government plans to consider these issues and Gazprom is preparing for a dialogue and is eager to report on its viewpoint. Well, the thing is that our viewpoint doesn’t always coincide with that of the Economic Development Ministry but that’s just fine as everybody should have one’s own standpoint. The Economic Development Ministry is highly likely to employ a more market-oriented staff targeting at a market economy but Gazprom does also have a working experience showing that one shouldn’t do all things in a rush but deliberately and taking one’s time. That’s what we’re standing for.
Question from the Internet: Ukraine’s Energy Minister Yermylov proposes to implement a common policy in transiting Russian gas via Belarus and Ukraine. What’s Gazprom’s attitude towards this? And is there any news on the Russian-Ukrainian Gas Transportation Consortium?
A. Ryazanov: Let’s start first with the International Consortium for Managing Ukraine’s GTS. As you are probably aware of, legally, the Consortium has already come into existence. Practically speaking, we’ve moved really close to implementing the 1st phase of the Project, I’ am referring to the Novopolotsk – Uzhgorod gas pipeline construction, including the Bogorodchany – Uzhgorod section. By laying 1st 200 km of the gas pipeline, Gazprom will meet its needs for the Ukrainian gas transmission capacities within the next 5-7 years. We believe it’s going to be a 1st step forward, enabling Gazprom to become co-owner of the Ukraine-situate section of the gas pipeline. For the time being, we’re resolving the issue of how we could obtain a concession for or control over the whole Ukrainian Gas Transmission System as it all depends on many legislative aspects and even on the alteration of Ukraine’s legislation. My personal opinion is that we’ve succeeded in implementing this Project launched about a year ago and have achieved our 1st objective. Given a final accord reached, Gazprom will be able to expand the gas pipeline and boost annual gas exports by 6 bcm until the year-end, which is very important for Gazexport, as well, since Ukraine is still remaining the main country we’re transiting gas through for exports.
Now, as far as Ukraine and Belarus’ common policy is concerned. If you are talking about some sort of an agreement Ukraine and Belarus might come to and then will move on to setting out some common terms and conditions, come what will. Gazprom also has its own ways of influencing Ukraine and Belarus. Everybody understands that we depend on each other. Supposing that Ukraine and Belarus would be located on separate continents or islands, it might very well put our business in some sort of jeopardy. One shouldn’t forget that Ukraine transits 36 bcm of gas via Russia from Turkmenia. Gazprom provides Ukraine with transit services not only via Russia but through Kazakhstan and Uzbekistan, as well. We’ve so far applied a lot of efforts and technical and financial resources for ensuring this transit. But Ukraine, in its turn, transits plenty of our gas to Europe. We’ve always taken this into account and appreciated it. Thus, we’ve got mutual interests and serious intentions. Whenever Ukraine obtains an opportunity to export part of its gas, we do not oppose it as this is also in line with our mutual interests as Ukraine produces gas itself (some 18 bcm annually). Ukraine purchases 36 bcm of gas in Turkmenistan and takes just 26 bcm from Gazprom as a payment for the gas transit services. So, Ukraine, undoubtedly, has the right to export part of gas and actually does it jointly with Gazexport, which, in its turn, carries on activities based on the schedules previously coordinated to hold gas prices. Thus, we do not obstruct each other in trading gas on the German, Hungarian or other markets.
But when Belarus asks us for a right to be engaged in gas exports, I personally can’t understand what exactly they are going to export. Belarus neither extracts gas nor purchases it in Russia or any other country. In addition, they refuse to transit gas. But, at the same time, they ask us to let them export it. In my opinion, such an approach appears to go beyond any logical ideas of how this country should act economically. That’s why, I’ am not afraid of any potential plot between these 2 countries if Gazprom fails to reach an accord with Belarus. I’ve already mentioned it today that transiting gas via Belarus to Europe is so far the shortest, most profitable but least secure way for Gazprom. We’ll surely endeavor to search for other ways, T’ am referring first of all to the construction of the North-European gas pipeline to be laid under the Baltic Sea. Gas deliveries via this gas pipeline will by no means depend on any gas transiting countries and, what’s also important, we’re talking about a serious alternative to Belarus’ gas transit services. If we fail to come to an accord with the Belarusian Government as far as Beltransgaz’s value, we’ll let the latter company carry on business on its own. Gazprom will operate the Yamal-Europe gas pipeline with the capacities ensuring the required gas transit volumes. Yes, that’s right, we’ll pay for land, we’ll pay all the taxes involved but we’ll enjoy our own system, which starts shaping today. Given this turn of events, we won’t need Beltransgaz anymore, letting it develop independently but with very few gas transit opportunities. Frankly speaking, I foresee much more ways to reach an agreement based on mutual interests than to confront poking each other with sticks or to terminate gas transit via Belarus, the way it happened on February 18. And therefore I still trust in reasonable people put in charge of the Belarusian economics.
Question: You have mentioned Gazprom’s record high proceeds realized last year? What’s your forecast for this year? And could you expand on Gazprom’s talks with the MOL company? Have you received a concrete proposal to participate in the tender?
A. Medvedev: We’re tracking down the current gas pricing and based on the gas pricing forecast for this year, we believe that Gazprom’s currency proceeds won’t be less than in 2003, meaning some USD 16.5 billion. Speaking of MOL, I can tell you that this company announced that it was canceling the initial scheme for divesting its gas assets. At first, MOL planned to dispose of a company engaged in gas trade and launched a process to accomplish it. But on obtaining a proposal from its members MOL decided to combine certain assets, namely to integrate gas wholesale trade and storage and single out gas transmission. With this in mind, MOL proposed the tender participants to re-submit their applications. We’re awaiting for the announcement of official terms allowing to take part in a new round but our interests remain unchanged. We’re interested in participating in all sectors of the Hungarian company. Speaking of gas marketing and storage, we don’t feel the need to partner with anybody but if gas transmission implies, we may be ready to join the forces with somebody, just like, for instance, it happened in Slovakia where Gazprom partnered with Gaz de France and Ruhrgas.
Question: Can you give 100% guarantees today that gas deliveries to Europe won’t be ceased irrespective of the outcomes of the talks between Russia and Belarus? We, of course, exclude technical accidents, which can not be controlled by gas suppliers.
A. Medvedev: Since you’ve raised this issue once again, I’d like to give you a sharp reply that the measures, we resorted to, were aimed (no matter how strange it may seem to you) to ensure secure gas deliveries as to Belarus as to Poland, Germany and other Gazprom’s West European gas consumers, as well. Strange or not, but bringing the situation to such an incandescence allowed the participants in the process, Belarus, in the first place, to get to analyzing what was going on. That’s precisely why, despite the Contract expiration date is tomorrow, Alexander Ivanovich has said that he sees no risk for the situation to repeat. There’s a Contract on gas deliveries to Belarus and therefore gas deliveries will go on with Gazprom’s involvement, inclusive.
Touching upon the situation with Poland, I’d like to get back for an instant into the past given the unfavorable campaign in the Polish press that converted the case into hysterics.
Some time ago we re-considered gas deliveries to Poland within the Agreement valid through the past year. The reason for re-considering the terms was that the Polish side turned to Gazprom with a request to take into account their position given the changed estimates for natural gas demand. Another factor was a deferral in commissioning the 2nd line of the Yamal-Europe gas pipeline.
The long-lasted negotiations ended with a decision to specify the scope of Russian gas deliveries to Poland, on the one hand, and to prolong the validity of our Contract, on the other hand. Generally speaking, Gazprom could insist on rigorously abiding by the initial Contract but we made a concession to Poland.
And what happened a couple of months later? The Polish side announced a tender on additional gas procurement for 2003-2004. But Gazprom neither turned to reporters although we have some reporters with a tongue as razor-sharp as the Polish reporters’ one. Anyhow, we didn’t do it since we believe that gas business is not an arena to compete in smartness. That is why, I’d like to stress it once more, we’re building up a normal business conversation with our Polish colleagues with all the contractual obligations fulfilled.
We’re meeting on March 9-10 and discussing how to avoid critical situations in the future.
Question from Kaliningrad: If you face a situation when terminating gas transit via Belarus will be a necessity, what extraordinary measures is Gazprom ready to resort to in order to provide the Kaliningrad region with fuel?
A. Ryazanov: We actually believe that this situation will never happen again. But speaking of our strategic measures for the future, I should certainly mention the construction of a UGS facility in the Kaliningrad region or of a local gas branch to be laid under the Baltic Sea.
The paramount measure we would resort to if the situation evolves the same way, would be alternative fuel deliveries to the Kaliningrad region, fuel oil in the first place, from the resources accumulated. Gazprom annually withdraws and refines some 10 million tons of oil, which enables us to supply the Kaliningrad region with fuel. We considered this opportunity, discussed it with the regional and municipal authorities and came to a conclusion that, at present, Kaliningrad was having enough fuel reserves. We so far don’t see any problem for Kaliningrad to be deprived of heat, hot water and power in all possibly imaginable situations. I’ am going to say it once more that the situation we had with Belarus, was left in the past.
Question from Kaliningrad: What are the deadlines for commissioning the gas pipeline under the Baltic Sea? Do you think it is realistic to lay a gas branch to the Kaliningrad region? And could you state the amount of investments made in this Project?
A. Ryazanov: The timing of the gas pipeline construction is a couple of years. But this year Gazprom has so far earmarked USD 50 million in investments to provide feasibility study and prospecting. The gas pipeline value averages USD 4 billion.
To implement this Project Gazprom set up a special Directing Board located in S. Petersburg and dealing with this issue only.
We believe the gas pipeline to be a very promising business requiring a more detailed examination and feasibility study to be provided for the construction. We should build this gas pipeline targeting at certain sales markets set to trade in gas. If we don’t have this gas marketing infrastructure, we should, of course, make sure that Gazprom wouldn’t compete with its own gas on the German, British and other markets. But we do believe that the Project is promising, indeed. It was approved by the Government and considered by the Board of Directors. In addition, a company has been established to particularly deal with the Project implementation. Summing the whole thing up, we’ll need 4-5 years to construct this gas pipeline, provided we enjoy the economic environment favoring gas marketing.
A. Medvedev: Let me add a word here. A well-known phrase can be applied to this Project: what is late to be done today, may be too late to be done tomorrow. This relates to the fact that the gas offer and demand balance will gain pace in Germany and Great Britain with implication for the changes in offer and demand within the next 5-10 years. For the time being, the gas offer is excessive but given the investment processes taking place within the last decade the situation starts changing in a reverse angle. I don’t exclude that in 6-7 years we’ll witness the gas seller’s but not gas buyer’s market and with the targeted big gas transmission capacities the North-European gas pipeline may turn out to be viable.
In the meantime, we’re getting ready to enter the British market. As I’ve already said, we’ll be set to annually sell up to 10 bcm of gas on the British market in the next 7-8 years without creating new transportation capacities or by slightly extending the existing gas transmission schemes.
One of the projects we’re working on, envisages construction of a gas branch to Kaliningrad. But the decision on funding this project is targeted for the year-end and all the variants, the gas branch to Kaliningrad, inclusive, will be considered somewhere in this period, as well.
Question: I’d like you to clarify something for me. Leonid Mikhelson, NOVATEK’s CEO, has recently said that he is discussing with Gazprom the possibility of being empowered to export gas starting 2005. Can you say whether that is possible and if “yes”, what terms will apply? And my 2nd question: Is Gazprom retaining interest in the West-East Project in China?
A. Ryazanov: As for NOVATEK, this is one of the largest Russian independent companies. It should be said that we vested authority in NOVATEK to deliver gas to the Tyumen and Kurgan regions and to partially deliver gas (some 2 bcm) to Tatarstan and other large power consumers. I think we have all matters properly settled and NOVATEK has gained access to gas marketing and Gazprom’s gas transmission system. And as for gas exports, I can tell you that given the export rate imposed on January, gas trade in Russia, carried out at free-market pricing, keeps up the pace of gas sales in Western Europe or the CIS countries.
Responding to your question on the opportunity for NOVATEK to carry on gas sales business, I can tell you that we haven’t discussed this issue yet. Although we believe that if everybody is equally engaged in selling gas at regulated prices within the Russian Federation, a definite amount of gas is very likely to be exported by various companies but through a an integrated export channel, namely Gazexport since this will ensure incompetitiveness on the market and the highest possible gas price. That is an approach we’re maintaining and consider it well-grounded and fair.
A. Medvedev: I want to make an official statement and say that the united export channel we’re talking about is a “golden cow” of Gazprom’s export strategy. And this is so neither because we are the gardener’s dog nor because gas exports are so economically lucrative in the short run. Alexander Nikolaevich was right when saying that given the implementation of Russia’s pricing and energy strategy, gas marketing within Russia will soon become as profitable as gas sales abroad, taking into consideration the existing fiscal regime. Gazprom’s leadership, however, has focused on discussing potential interaction with oil companies and independent gas producers in purchasing their gas, including gas exports. We are likely to negotiate this issue with our counter agents.
You’ve already got to know that Gazprom achieved an accord with LUKOIL to purchase gas withdrawn at the Nakhodkinskoye field. Although the synthetic gas price set there does not have anything to do with exports, we manage to establish a common language with independent oil companies. As a result, they receive an opportunity to plan their investments into the gas industry development while we can diversify our portfolio.
The West-East Project is, at present, at its most successful implementation phase. This is due to the following reasons. As you are aware of, we’re not the only ones in implementing this Project but doing it with the Shell and Exxon companies. The PetroChina company is acting as our counter agent on behalf of the Chinese side. 3 companies in gas marketing, production and transmission were supposed to be incorporated. None of these have been set up yet and Gazprom is not to blame here. The Chinese side is naturally not a partner to easily reach an agreement with. At the same time, the Chinese side is rapidly funding gas production and trade in the part of China we’re interested in. And this can’t but influence the Project implementation. That’s why I believe that this issue will be negotiated by Russia and China during a summit to be, reportedly, held in the nearest future. Gazprom hasn’t rejected the Project and I hope we’ll manage to find an economic compromise with our Chinese partners and Consortium members.
Question: You mentioned the British market and said Gazprom could annually deliver there up to 8 bcm of gas. Have there been any changes within the past year in the gas volumes reserved by Gazprom to provide Interconnector with, as compared to the previous year? If “yes”, how much have these volumes grown? And when European gas could reach the Islands?
A. Medvedev: We received a message yesterday that Gazprom would receive 2.7 bcm of gas in the reverse flow in Interconnector. This means that when these 2.7 bcm are delivered, Gazprom will be able to annually provide Great Britain through Interconnector with practically 5 bcm of gas (4.8 bcm if you want a precise figure) being the Company’s present-day capacities. We’re planning phase-by-phase injections.
As far as swaps (provisional purchase secured with further sales) are concerned, I can tell you that swaps mean a lot for the European market development as these transactions, by optimizing transmission capacities and due to the absence of the gas competitiveness, will ensure gas deliveries to different parts of Europe. That’s why the objective to physically deliver gas to the consumer located in this or that place, is absolutely wrong. The consumer should receive gas irrespective of the physical origin of the latter. The most important question here, what is the contractual party receiving gas.
Question: What’s Gazprom’s top priority project today? You’ve repeatedly mentioned the Yamal-Europe and North European gas pipelines, but, to my knowledge, there are also projects you negotiated last year. I’ am referring to the Shtokmanovskoye field with gas liquefied in the outskirts of the city of Murmansk or to the Yamal Peninsula with LNG exports to the USA. What’s with these Projects at present? Or is Gazprom going to target at attracting foreign investments and based on these will determine the project priority?
A. Ryazanov: As for the gas extraction within Russia and gas transmission through gas transportation systems, I think that Gazprom could do fine on its own, without attracting any overseas investors, as the Company has gained extensive working experience and technical resources. We’re doing fine in these sectors. Gas production is gathering good pace but gas transmission needs to be worked on. And one of the core tasks set out by Gazprom’s Management Committee aims to create additional gas transportation capacities.
I’ am first of all referring to the Northern Corridor. If we manage to pipe gas to the town of Torzhok, we’ll ensure sufficient gas supply to north-eastern Russia and will obtain additional ways of boosting gas volumes going to the Baltic States and of creating additional capacities that may be launched after the commissioning of the Yamal-Europe gas pipeline. Gazprom has already adopted and is financing this program for synchronizing the construction of transmission capacities.
In addition to it, independent gas producers (oil companies, inclusive) have started to withdraw rather large gas volumes. We’ve already mentioned LUKOIL. TNK-BP, Surgutgazprom and a string of other companies have the same plans, as well, wishing either to sell gas to Gazprom before gas enters the pipe or to participate in gas marketing, including in the Russian Federation.
Gazprom has several options here.
The 1st option is the easiest one. We purchase gas at the entrance of the United Gas Transmission System, on the terms the investor perceives as economically substantiated and expedient.
The 2nd alternative suggests that the aforementioned companies should get involved in developing gas transportation capacities. Both variants are worth considering and, in general, are most welcome. And, of course, natural gas liquefaction is a very promising challenge to Gazprom, arisen only about half a year ago. We’ve so far made a few steps forward in this direction and believe that LNG is a very prospective market enabling us, primarily, to deliver gas not to Europe but to the United States, which experience today gas deficit and, according to expert estimates, this deficit will grow bolstering attractive gas prices. The Shtokmanovskoye field should be mentioned here, in the 1st place. This is a large field located in a normal non-icy area and mostly set for development and we’re considering a possibility of constructing a gas liquefaction plant there. The field has been explored and its gas reserves ensure annual production of 90 bcm. The layer depths of 300-350 meters are technically not a problem. A large plant can be built somewhere near the city of Murmansk. We’re undoubtedly talking about the shortest way of delivering liquefied gas to the USA.
Gazprom is involved today in consultations on this issue with the largest US companies, certainly, including Shell, BP, Connoco Philips, all of them interested in implementing this Project.
This is a rather large-scale and expensive Project but, in our opinion, is very prospective. In addition, the Project won’t compete with gas deliveries to the European market as we don’t want any competition in this respect. We expect the Project to obtain serious political support. It has already received it, generally speaking. As it is to our knowledge, the USA and Russia added the Project into the list of top priority energy projects targeted for joint implementation.
We believe that parties will significantly advance in opening the way to the Project implementation. I’ am primarily referring to setting up a special company that will deal with this business. We should achieve an accord with this company’s potential shareholders and reach an agreement with the Government as this process should go on based on the sharing production principles. So, I consider the gas liquefaction and transmission system development to be Gazprom’s top priority projects.
Now let’s shift over to gas extraction. We still see prospects in withdrawing gas at the Yamal Peninsula containing huge reserves. We’re very likely to do it but, in my opinion, the local gas production and marketing home and abroad are not that interesting for us, at present. We’ve endeavored so far to operate on the traditional extraction sites, developing there the existing fields. And some 5, 6, may be 8 years later we’ll move on to the Yamal Peninsula.
In addition to it, we’re implementing very significant projects in Central Asia, linked, primarily, to gas transit and development of the Central Asian gas transmission system covering Uzbekistan, Kazakhstan and partially Turkmenistan. As you know, an international contract has taken effect and under this document Gazprom must annually acquire and transit up to 70 bcm of gas in 2007. For this purpose, we should surely create gas transportation capacities.
At the same time, Gazprom is actively interacting with Uzbekistan in order to participate in gas extraction based on the production sharing principles. Gazprom is set and able to develop Uzbekistan’s existing and new promising fields. We’re talking about the 2nd gas source to be equally used for exports and domestically since its price makes it competitive on the internal market, as well. These are, in my viewpoint, our 3 main core tasks and we’re doing our best to fulfill those.
Question: Alexander Ivanovich, as I got your point right, gas deliveries to the Kaliningrad region are Gazprom’s top priority tasks. But, as of today, gas is delivered to only 25% of the regional territories. Could you tell us whether the incident you had with Belarus has somewhat changed Gazprom’s plans to supply the Kaliningrad region with sufficient gas volumes? Have you had these plans, actually?
A. Ryazanov: No, the conflict with Belarus is not in the least affecting our plans to deliver gas to the region since we consider that situation to be a single case unable to affect further gas supplies. Gazprom and the Kaliningrad region have certainly built up gas supply plans and schedules, under which Gazprom is constructing a gas main, conducting design and exploration activities to construct UGS facilities and gas pipelines in the Kaliningrad region. As you probably are aware of, Gazprom laid in the region enough quantity of pipes last year, delivered gas to the town of Svetlogorsk and some other areas. We’re operating pursuant to the plan devised. The Kaliningrad region is a part of Russia and a special Federal Program elaborated clearly commissions Gazprom to be one of the core participants. We do some things with our own money and other things with federal funds. We intend to accomplish all we’re planning to do. A totally different thing is, for instance, that today the Kaliningrad region’s authorities say that they need not 1.05 bcm but 1.5 or 1.4 bcm of gas per annum. But when such statements are made, we simply ask for substantiations. Who is to consume these gas volumes? We may certainly create capacities and they will remain unused. You understand very well that this is frozen money that will never yield profits. That’s precisely why we will, in my viewpoint, accomplish everything envisaged in the Governmental Program.
As for some additional development of the Kaliningrad region, the expediency of measures we plan to undertake there, should be affirmed and economically substantiated. Then Gazprom will take all the challenges involved. As you know it very well, for the time being, Gazprom is suffering losses while selling gas in the Kaliningrad region and even may be while operating in the Leningrad and partially Pskov and Moscow regions. That’s happening this way as the current regulated prices do not cover our expenditures. The greater is the distance to a field, the farther we have to transit gas and, as a result, our expenditures grow. At the same time, Russia’s energy strategy envisages gas pricing boost and the prices have indeed started to annually go up by some 20% within the past 2-3 years. We hope to receive certain profits this year already from gas marketing within Russia. And our proceeds will finally cover our expenditures and will receive an opportunity to invest in the development of new fields. That’s why I’d like to tell you once again that we’ll fulfill all the tasks targeted for the Kaliningrad region. As for the situation we’re facing, we’re set to render additional assistance to the region by delivering there fuel oil and liquefied gas by rail. It is very likely that there is someone in the region stating that the region is on the verge of a catastrophe, meaning it’ll lack energy resources. I can assure you that the Kaliningrad region won’t have any problems whatsoever with energy carriers.
We purchased the Kaunass CHP in Lithuania. As a result, we can supply power to the Kaliningrad region, inclusive. And our Lithuanian colleagues agree that it was the right thing to do because of the short distance.
We may’ve not, of course, started the construction of the Kaliningrad-situate power plant. But since we’ve already launched it, we should bring it to the very end. We should also carefully analyze all other possible alternatives, as well. Anyhow, Kaliningrad will definitely have electricity, gas and other types of fuel. And given the future gas pipeline, the problem will cease to exist as such.
Question: Alexander Ivanovich, could you tell me, please, whether gas export prices are good today?
A. Medvedev: Yes, they are very good, indeed.
Question: And what should be the gas export price for Gazprom and Gazexport’s deliveries to Europe to become most lucrative? And I’d like to address my 2nd question to Alexander Nikolaevich. You’ve said that Gazprom proposes independent gas producers either to take part in upgrading the GTS or to sell gas at the pipe entrance. Provided they give their consent, do you have any guarantees that these capacities will be used in 5 years when Gazprom’s gas production experiences a decline due to the lack of such big-sized fields as the Zapolyarnoye one?
A. Medvedev: As I understand, by making this question you wish to look into the profitability of Gazprom’s operations. But I’ll disappoint you by saying this is so far our corporate secret. At the same time, the only thing I can inform you of is that if we take a recent 10-year period with both high and low oil prices, Gazprom’s gas export deliveries have been lucrative.
A. Ryazanov: I’d like to draw once again your attention to independent gas producers. Here are the conditions we’re proposing them to abide by: you may sell gas before it enters the UGTS and may not take part in developing it or you may invest in the UGTS development and sell gas on your own. And many independent gas producers have gained access to the UGTS and keep piping gas into it and sell gas on their own without making investments in the sections Gazprom gas its own capacities at.
As for the capacities, you are absolutely right here, that the real life service of a compressor station or a gas pipeline is not less than 30 years. We should certainly endeavor to load the capacities created within the mentioned life span. And that’s what we actually do as Gazprom’s Long-Term Development Department, while devising gas transit plans, takes into account the fields located along the route of this or that gas pipeline or compressor station. The license validity granted for this or that field is revised, as well. We are not afraid yet of our capacities to remain insufficiently used. For the time being, we’re unfortunately forced to expand more and more the UGTS. For instance, we’re tackling the task in the moment to develop our capacities up to the town of Urengoi as we have the Zapolyarnoye, Yuzhno-Russkoye, Nakhodkinskoye and Yamburgskoye fields en route. There are also a handful of fields in the region, developed by oil companies, including Yukos, which has sought out our assistance but we’ve been forced to refuse them into the UGTS. At the same time, we see that there’s lack of capacities from Urengoi to the town of Nadym where we’ll have to build a pipe, as well. Gazprom plans to do it on its own but if there’s somebody wishing to finalize the construction faster, investments are welcome.
As for the insufficient usage of the capacities, you probably know that LUKOIL is laying a pipe from the town of Nakhodka to Yamburg and has set a task to offset the pipe-related expenditures within a 10-year period, in contrast to 30 years Gazprom would target. Yukos’ intentions have already been included in the company’s business-plan, so we consider it a normal thing to do. Although we think that the pipe should certainly be operated within some 20 years, not leaving us with unused capacities. In addition, when we consider possibilities of gas extraction at the Yamal Peninsula, we have in mind several options for laying a gas pipeline there. One of the options is to lay through the Northern Corridor a separate gas pipeline going towards the Leningrad region. Our 2nd option is to pipe gas towards Nadym, Yamburg and Urengoi and to load these capacities if remain unused. I’ am going to repeat it once again that we’ll experience serious problems with the existing capacities that will hardly last us for the next decade. I can scarcely predict what’s going to happen afterwards. Russia may not need these gas volumes given the free-market gas sales pricing we might shift over to, at least in the manufacturing sector. In this case, the USD 50 gas price will, in our viewpoint, provide us with the opportunity to save power. Then everybody will get interested in economizing gas and introducing energy saving technologies. That’s when we’ll probably have competition to attract consumers and to enter a gas sales market. At the same time, we’re taking a look at Europe where, despite numerous energy saving technologies are being applied, gas consumption is experiencing a boost. This is not only linked to the fact that there are no other types of fuel in Europe but also to the ecological problems arisen and laws adopted in the EU. So, if Russia doesn’t consume a lot of gas, we’ll be able to export bigger volumes. Although the present-day situation with soaring gas consumption rates in Russia shows that the country will need more and more gas in the short run. As you see, annual gas consumption grew 3-4 bcm in the residential sector only. 3-4 bcm of gas, that’s a new field, not a very large one, but new, meaning we should actively build up gas production. We don’t have enough capacities and must make investments to carry on successful business.
Presentor: OK, folks, the Press Conference is finished. Thanks a lot to everyone in Moscow, Vilnius, Warsaw, Kaliningrad and Minsk and all other cities we received questions over the Internet from.