March, 09, 2004
ALEXEY MILLER: “IT’S BEEN THE BEST YEAR IN GAZPROM’S HISTORY”
The gas theme has lately topped again the newspaper front pages. And whatsoever internal Russian developments have absolutely nothing to do with it as everything is safe and sound within the domestic gas industry. But a serious “battle” is under way at the international energy front. Firstly, this relates to the gas conflict between Russia and Belarus and, secondly, to the controversy between our country and the European Union as for the equal energy carrier pricing. Despite plenty publications, certain key questions still rermain unanswered. For instance, as for the gas prices: will Russia have the European and, thus, higher “blue fuel” pricing or not? Are we still going to bestow gas on our friends and brothers, if certainly these can be called this way? The Itogi magazine decided to turn to the primary source for answers. Alexey Miller, Gazprom’s Management Committee Chairman, is taking these and other questions in an exclusive interview.
- Alexey Borisovich, I’d like to address, first of all, one of the burning topics of the day. Are you acquainted with Mikhail Fradkov?
- I actually am. Before joining Gazprom, I served as Deputy Energy Minister and worked with Mikhail Yefimovich in my tenure.
- What steps should we expect from the new Government in reforming Gazprom and the gas industry as a whole?
- As far is Gazprom is concerned, I can only assure you of one thing here: the state will play an increasingly important role in our company. We’ll sortly get back to the issue of increasing the state ratio in Gazprom’s share capital. It is so far too early to speak of any concrete decisions but the need to make this step is being regarded upon as an integral part of our strategy. As for the gas industry, Gazprom has prepared certain proposals on the domestic gas market development and we’re set to submit those for the new Government’s consideration. In particular, I’ am referring to the General Scheme of the Russian gas industry development, meaning, where, when and what type of projects should be implemented in the gas production, transmission and export sectors. It is extremely important to have all these issues well coordinated, certainly taking into account the gas consumers’ needs.
- The Shareholders’ Meeting to be held in June is going to be your third one in this capacity. What “luggage” will you bring over to the Meeting?
- I think that you should differentiate between 2 things here. Firstly, what has the company achieved since the last Shareholders’ Meeting and, secondly, how do I personally look upon Gazprom’s main results over the past 3 years. We already have some preliminary operating results for 2003 and these are definitely impressive. We fully met on our gas production challenges – over 540 bcm of gas and have passed over from stabilization to growth. Gazprom has the best financial indices since its foundation: net profits are expected to exceed RUR 200 billion. The company is financially stable, we have the balance structure significantly improved and the capital value is decreasing for us. Gazprom’s standing allows us to tackle the most ambitious tasks. But we’ll be taking market-based actions, directing our attention towards the real demand. This refers as to the gas production volumes as to new gas transmission facilities. That’s what we’ll talk about at the upcoming Meeting.
And now I’d certainly like to tell you a few words about the team I’ am working with. Within the past 3 years we have built up a team of single-minded people, including representatives from the previous team and new appointees who joined Gazprom after the company’s leadership had been replaced. So that you could get my point, I’ll just list a handful of last names: Podyuk, Budzulyak, Ananenkov, Yurlov, Ryazanov... All of them are so different and, at the same time, each of them is a personality, a professional. While addressing key issues, we’re keeping up a straightforward, broad, well argumented and, mainly, open discussion during the Management Committee meetings. I consider it as our common achievement spurring a new corporate spirit. In building up the team, I, in my tenure of Gazprom’s Management Committee Chairman, was certainly maintaining a personal approach to the requirements my potential companions, colleagues should comply with. And I’d like to emphasize a number of their most important traits of character. First of all, these people can sometimes say “no” although it is not always obvious but they surely mean it. Secondly, these people do not abuse the “ego” word, unless it is self-criticism but, nevertheless, are managers with extensive ambitions.
Speaking of our interim results, I personally would point out the short period, during which we managed to build up such a hard-working, harmonious and orderly team. I joined Gazprom with its multy-thousand personnel and entered this gigantic building, scarcely knowing a person. By the way, I had to produce certain documentation by myself at first as the Management Committee Chairman’s decisions touched upon the issues of structural changes. Otherwise, we could’ve come across the risk of slowing down the pace, losing a lot of time and even may be of facing certain hurdles in adopting these or those decisions. Sometimes I hear people say that Gazprom was in crisis 3 years ago. No, I don’t think so. As it is well-known the crisis only crosses the minds. Generally speaking, if we return back there... You know, just like during a conversation, sometimes it is better to make a pause that would mean a lot more than any words. And that’s the case for me now, I prefer to abstain from comments.
- I wonder, how is Gazprom’s current standing being evaluated by the people who used to contribute to the company’s development in the past?
- To tell you the truth, all of a sudden we found a common language with these people. In December we had a meeting with the gas industry veterans, organized on the occasion of the New Year’s holidays. We were supposed to drink a cup of tea, make a congratulatory speech, hand over some gifts and go away. But what happened was much more interesting. The meeting lasted for about 2 hours and we had a very cordial and straightforward conversation about the present-day situation in the gas industry, Gazprom, inclusive. Questions were piling up as the Socialist Labor Heroes and the former USSR Gas Industry Ministry workers were asking us about some concrete projects, certain figures, situation on the gas market etc. It looked like some sort of a CEO’s report on the work done. I was very pleased when those gas specialists of the 60-70s when the gas industry backbone was shaped, told us that they were closely watching Gazprom’s performance and highly evaluated the company’s achievements. The meeting came to an end but the veterans kept shaking hands with us and I had a feeling that it all came from the heart. A veteran told me: “Alexey Borisovich! You know that you are our 6th Minister!” Being the subordinates of the previous gas industry Ministers, these people were personally acquainted with them. And that’s why that appraisal meant a lot for me. Since we’re talking about the gas industry strategy, prospects and long-term challenges, we’re, as a matter of fact, talking about the responsibilities a Minister is usually in charge of.
- The latest events in Belarus showed that gas was gradually becoming not only a political but economic factor, as well. Do you intend to keep implementing the same rigid and pragmatic policy? And can you give me your forecast of further developments in the situation with Belarus?
- Let me start with the 1st question. One of my forecasts as for Belarus has been a failure already. In August last year I told my colleagues that judging by the interim results of the talks we’re likely to sign gas transit and gas sales contracts with Belarus on 31 December 2003, right on the New Year’s eve, with the chimes of the tower clock. But on 31 December at 6:00 pm our negotiations with Vladimir Semashko, Belarus’ First Deputy Premier, ended in a dead end: we signed nothing. But a totally different forecast came true, though: our Belarusian colleagues were stirring up an international scandal. That is why I can only tell you one thing so far: sooner or later but we definitely will carry on business with Belarus under the regulations of a civilized market. Now let’s move on to the politics and economics question. Last year we built up gas production by 20 bcm. Gazprom’s multy-thousand team endeavored day and night to cope with the task set. We spent huge resources. So, finally, half of those 20 bcm were delivered to Belarusian consumers. Economically speaking, our operations could be considered not only as zero-rated but merely unprofitable. You are asking me a question here: for how long this situation can go on? Having delivered gas to Belarus at Russia’s internal prices within the past year and a half, Gazprom made a generous advance payment into the future privatization of the Beltransgaz company. We can’t go on anymore without taking certain steps towards the joint venture incorporation. As soon as Gazprom has this joint venture, we’ll continue to deliver gas to Belarus at Russia’s internal pricing. What do you call a policy like this? Pragmatic? It looks like it is. Rigid? I don’t know. I consider it to be quite realistic.
- Today Russia has complicated relationship with the European Union. Strictly speaking, we’re talking about some sort of a blackmail: either Russia makes certain concessions, or the EU applies certain sanctions against our country. With this in mind, I’d like to ask you the following: is the EU able to carry on without Russian gas?
- The gas business basis are long-term contracts. Gazprom sold its commodity for many years onwards and some contracts have a validity beyond 2020. We delivered 133 bcm of gas to European consumers over the past year and Gazprom’s gas volumes sold to Europe already today, will account for 180 bcm.
- What is Russia’s present-day ratio on the EU gas market?
- For the time being, our gas ratio in the European consumption accounts for over a quarter and this proportion will remain unchangeable and is likely to be on a slight rise. But, generally speaking, as I’ve said already, gas deliveries to Europe will experience a considerable boost.
- Let’s imagine an absolutely hypophetical situation: suppose due to some extraordinary circumstances Russia has nothing to do with, Russian pipelines stop delivering gas to Europe. What is going to happen with their energy sector?
- Nothing is going to happen within a certain period since, first of all, don’t you forget about UGS facilities. And, secondly, the end-use consumer will receive gas from a “gas cylinder”. The gas pipeline contains gas, which is under pressure, and these remaining gas volumes can be used for some time, meaning, that the end-use consumer will stay unvulnerable to gas shortages within a very short-term period. But this is an absolutely right attitude to the problem. Today (March 2 – Itogi) I discussed this issue with one of our partners, the German Verbundnetz Gas company. The EU and Gazprom strategy in this respect aim to meet a common challenge: ensure energy security. At the same time, we pursue an identical objective, which is diversification of gas transmission routes. And absolutely everybody agrees to it as this is the only way of minimizing the impact of any unforseen circumstances whatsoever.
- Russia’s foreign gas partners require equal gas prices for major energy carriers, gas, in the first place. I’d like to hear your forecast of when Russia will have commonly established worldwide pricing for energy carriers and what type of economic environment do we need for this?
- We’ll never have common worldwide energy prices. And this is certainly a good thing to realize. Russia must enjoy certain advantages since it possesses the world-largest gas reserves. Similarly, if a certain country has a warmer climate than Russia does...
- The gas ratio in Russia’s energy balance accounts for 51% and this index keeps growing. In your viewpoint, is it a normal factor as far as the country’s energy security is concerned, or should there be an extensive fuel diversification?
As of today, gas as a primary energy source is becoming increasingly important for major consumption centers, due to its natural and commercial properties. While the past century was surely an “oil era”, the current century will become a “gas era”. Gas is a fossil fuel of easy and convenient use. It goes beyond any doubt that gas will go on playing an increasingly important role but we need interfuel competition. For instance, Russia possesses huge coal reserves but this type of fuel is absolutely inadequately represented in the country’s energy balance. At present, there exist quite efficient coal-burning technologies, which make the latter almost as high efficient as gas.
However, we can’t but mention here the remaining disproportions in fuel pricing. As a result, the gas ratio against other energy resources is hypertrophiedly high.
- In other words saying, we need strong competition between different types of fuel. How can we achive it? Through higher gas pricing?
- Yes, undoubtedly, including by implementing the Program on higher gas prices. The Program was prepared by Gazprom’s experts and was included into Russia’s Energy Strategy. We need to conquer new horizons in the short run and gas pricing must grow up to USD 40-41 per 1,000 cubic meters by 2006. This refers to the state regulatory procedures. At the same time, we’re set to present proposals to gradually introduce 100% market-based mechanisms: stock market trade for Gazprom’s certain gas production amount. For instance, 5-10% of the total gas extraction could be put up for an open tender and then the highest bidders go on stage.
- Do you plan to raise gas prices on the domestic market up to the profit level or beyond this notch?
- Somewhere beyond this range. We’ve got an intra-corporate profitability rate approved while adopting investment decisions: 12% as a minimum. We must gain proceeds from gas marketing on the internal market. We can’t just be 100% dependant on the situation on external markets.
- Apart from Gazprom, which produces 90% of the total Russian gas, gas business is also carried on by the so-called independent gas producers. Can you give your forecast of whether these companies are to jostle Gazprom on the Russian gas market?
- The independent gas producers’ gas extraction volumes will grow but their ratio on the gas market won’t change significantly. There’s a simple explanation to it: gas production, unlike oil recovery, is extremely localized geographically. There are large and super-large fields that pre-determine gas production volumes in the gas industry as a whole. Everybody has heard about the Medvezhye, Urengoiskoye, Yamburgskoye and Zapolyarnoye fields but only Gazprom has all the necessary resources to develop these largest hydrocarbon reserves. Even the biggest Russian oil companies are unable to do it, not to mention independent gas producers... Gazprom’s Investment Program financially exceeds the combined investment amount earmarked by all the Russian oil companies. I’am referring to gigantic projects, some of which are worth dozens of billions of dollars. Speaking of anybody able to implement these projects, fingers of both hands will be too many to count the world-largest oil and gas companies eligible to cope with this task. That’s why Russia’s gas market was, is and will be based on the largest fields, where only Gazprom is capable to operate at. That’s why I’am drawing a conclusion that Gazprom’s ratio (I’d like to stress it, Gazprom’s ratio) won’t considerably change on the domestic market.
- What plans Gazprom has in respect to the market expansion? Are you searching for new markets?
- Europe is still our major export market. Gas deliveries to European consumers have risen from zero to 133 bcm over the past 30 years. I can tell you that Russian gas deliveries have been playing a significant role since the 70s in developing the Federative Republic of Germany and have finally spurred economic growth in this country. And if Europe needs additional 130 bcm of gas over the next 30 years, Gazprom will supply these gas volumes, as well. As for the new markets, Gazprom’s strategy targets at gas marketing diversification. That’s why Asia Pacific is of so much interest for us. First of all, I’ am referring to China, Korea and Japan. Taking into account these countries, inclusive, we’re building up our gas transmission and production strategy.
According to most experts, we’re somewhere in the beginning of the gas market globalization. Gazprom takes this into consideration, as well. The global gas market starts shaping. And Gazprom has set the task to diversify its business activities. In particular, we should focus on producing liquefied and compressed gas, thus, gaining access to new markets and, primarily, that of the USA. The LNG transmission and production technology development makes our business economically viable on these remote markets. For the time being, we’re involved in the talks with our potential US parners on cooperation in energy issues at the pre-investment study phase.
But I want to stress it once again: Europe was, is and will be a number 1 market for Gazprom. Germany, Italy, France and Turkey will still be the largest consumers of Gazprom’s gas. Great Britain is very likely to join this list in the nearest future. By 2005 the British gas production is expected to be on a decline and this country will become a 100% gas importer. We forecast a more than 40 bcm amount of gas deliveries going to England by 2010. So, summing the whole thing up, Gazprom will still enjoy its strong standing on the European market from now and onwards.