Verbatim report of the meeting of Alexey Miller, Gazprom's management committee Chairman and Alexander Ryazanov, Deputy Chairman of Gazprom's management committee with belarusian reporters, held on 17 may 2004
Alexey Miller: Good afternoon! I'd like to outline a number of crucial things related to cooperation between Russia and Belarus in the gas business. Let me start with a few words on the present-day situation.
Gazprom hasn't been supplying gas to Belarus since 1 January 2004. This is caused by the fact that we failed to conclude a gas marketing contract. Belarusian gas needs have been met by independent gas producers. Besides, we haven't managed to sign a contract on Russian gas transit via the Beltransgaz-controlled gas transmission system. Russian gas is being piped to European countries without any contract whatsoever. Furthermore, Gazprom has not been paying the Belarusian side for the gas transit since there are no contracts concluded and we haven't agreed on a gas transit tariff.
Now, let me address our prospects. Gas deliveries to be effected by Gazprom and independent gas producers are fixed in Russia's gas balance for 2004 at 10.2 and 8.3 bcm, respectively. As of today, independent gas producers have so far supplied 7.9 bcm of gas, which means that they'll soon reach a limit. In this connection, the issue of Gazprom's legal relationship with Belarusian colleagues becomes particularly topical.
And as for the gas pricing, I can tell you that not long ago gas was piped to Belarus at Russia's internal gas prices regulated by the RF Government. These prices are lower than gas production, transmission, storage and marketing values. Russian gas deliveries to Belarus at Russia's 5th price zone prices were closely linked to setting up a joint venture of Gazprom and Beltransgaz, to intensifying integration between the 2 countries.
A different option to promote our relationships in the gas business is to build up cooperation based on the market terms and principles adopted by Gazprom while interacting with other counterparts in the CIS and European countries. The Belarusian side's shifting over to receiving Russian gas at market-based prices was coordinated at a meeting between the two Presidents, held last year in the city of Sochi.
We believe that Belarus is not in a position any longer to defer signing relevant contracts with Gazprom. We wouldn’t like to face again a situation when the Belarusian party starts effecting non-sanctioned gas withdrawals without having any contracts to do so. As you know it very well, the consequences of these actions were extremely negative for Belarus. We hope that a similar situation won't repeat and we're looking forward to a comprehensive dialogue.
Question: I'd like to ask you the following. When you adopted such critical decisions as the one made up back in February, to what extent Gazprom's top management had to coordinate its actions with the authorities?
Alexey Miller: Taking into consideration the fact that Gazprom is a company with the controlling stake owned by the State, we surely coordinated gas supply limitations with the RF Government. And as for the termination of gas deliveries to Belarus in February, I'll repeat it once again that the situation we had stemmed from the absence of a gas marketing contract and non-sanctioned withdrawals by Belarus of Russian gas transited via its territory. This is nonsense. And moreover, it is the end-use consumers located in other countries that suffered most of all. We simply had no other solution to this. I hope that this situation won't ever repeat again.
Question: On Friday, the city of Yalta will host the Russian-EU Summit, where energy-related issues will be addressed, as well. Is the so called "Belarusian issue" on the agenda? I’ am referring to the fact that Belarus is a gas transiting country. And does Russia intend to come to an agreement with the European Union to strip Belarus of the aforementioned status, meaning that gas won't be transited via the Belarusian territory?
And the 2nd question: Gazprom's position on Belarus has recently become quite rigid. Nevertheless, each time the Company makes concessions and each time Mr. Lukashenko manages to haggle over advantageous conditions. From my point of view, Gazprom acts against its own interests and even against Russia's interests. How do you intend to resolve the Lukashenko problem?
Alexander Ryazanov: We don't have any Lukashenko problem as such. But we do have a problem with gas deliveries to and gas transit via Belarus. All other problems should be resolved inside Belarus.
Now, as for the gas transit. Firstly, we've never said that we're going to quit transiting gas through Belarus. There is the Yamal-Europe gas pipeline going via this country. The pipeline is Gazprom's property and we almost completed its construction, with a couple of compressor stations left to be commissioned. The Yamal-Europe gas pipeline is expected to annually transit 30-32 bcm of gas to European countries. These are the plans that we're going to put into practice and everything will remain unchangeable here.
Secondly, in engineering the Yamal-Europe gas pipeline, we reached an accord to lay another line and we're still in favor of it. We believe that when the European gas needs are on a considerable rise, the 2nd line to be laid near the 1st one will result a great deal cheaper and more efficient.
Thirdly, gas transit via Belarus is the shortest way in this direction. Everybody understands it and we're looking upon this as an economic situation enabling us to save money, meaning that we'll continue to transit gas through Belarus.
As for the upcoming meeting in Yalta, we'd certainly like that the issue you've raised be discussed once again by the two Presidents. Initially, if you recall it, the Presidents reached an accord on gas deliveries to Belarus for 2003 in Sochi and agreed on market-based gas supply terms and conditions, taking as a basis Russian-Ukrainian relationships in this sphere. These are precisely the terms and conditions we're proposing to abide by in concluding a contract, meaning to introduce a gas transit rate being applied today in the Ukraine. Bur there is a single proviso here: the above-mentioned terms need to be adapted to the present-day situation in Belarus. For the time being, Gazprom's gas transit rate is USD 1.09 for transiting via the Ukraine 1,000 cubic meters of gas per 100 km, but gas volumes transited through and gas transmission capacities in the Ukraine are different from those in Belarus. There is an integral scheme of calculations, which finally determines the value of gas transit via the territory of this or that country. The Ukraine purchases our gas for USD 50 per 1,000 cubic meters and Gazprom pays the Ukraine USD 1.09 for transiting 1,000 cubic meters of gas per 100 km. Under an Inter-Governmental Protocol signed between the Ukraine and Russia, in 2004, Gazprom supplies 26 bcm of gas at a USD 50 price as payment for gas transit via the Ukrainian territory.
We showed our calculations to the Belarusian side. They didn't get allergic to these: everybody agreed that the gas transit rate directly depended on the gas price. While 1,000 cubic meters of gas are currently worth USD 46.68 (and, generally, we do not oppose this price), the gas transit rate should be USD 0.46 for transiting 1,000 cubic meters of gas per 100 km. I'd like to emphasize that we've already made certain concessions here to Belarus and proposed a gas transit rate of USD 0.68. But the Belarusians rejected it. On 30 January 2004, Belarus unilaterally adopted a decision that the gas transit rate for Gazprom would equal USD 1.02 for transit of 1,000 cubic meters per 100 km. I personally think that this figure is not quite justified, since we achieved an accord that all decisions related to gas transit would be made up by the Belarusian party jointly with the Russian Federal Energy Commission. Belarus, however, decided to raise the gas transit rate for us without calculating and coordinating it with Russia.
About 2 weeks ago a numerous delegation from Belarus met the RF Prime Minister and Beltransgaz's representatives said that the real gas transit value was worth over US 80 cents. Bur we just don't understand why it has grown that much. Last year the gas transit value was US 46 cents and now it is US 80 cents. What has considerably changed since then? We said in response: show us your calculations proving the justification of the stated gas transit value. Or you're operating at a loss? You are making us offers to buy into Beltransgaz at USD 5 billion, and at the same time operating at a loss? You told us that Beltransgaz was a very profitable company and that was why it was worth that much. Nobody has so far provided Gazprom with substantiations in this respect. Last Thursday we agreed that if Belarus presents respective documents, we'll thoroughly examine those. That's why we're saying it once again that we're set to conclude today a gas contract with Belarus but surely'd like that the 2 countries' leaders talked over the terms and conditions of our relationships since it's been a long time that we delivered gas to Belarus at a loss.
I can tell you that a USD 46.7 gas price per 1,000 cubic meters will suit us fine, taking into account that, pursuant to the RF Government's Resolution, a 30% export duty won't be enforceable in making exports to Belarus. But we need a relevant gas transit rate with the USD 46.7 gas price.
Question: Is there any progress in the talks on setting up a Beltransgaz-based joint venture? An independent auditor is reported to have been found for assessing the value of Beltransgaz. Have the parties thoroughly coordinated this candidacy? And how long may it take to settle all the formalities?
Alexander Ryazanov: We could’ve agreed on an independent auditor long time ago. I'd like to remind you that we planned to set up a joint venture before 1 July 2003. Let me provide you with some basic data. Without auditing Beltransgaz, the Belarusian side told us that the company was worth USD 5 billion. Generally speaking, the proposed price is not backed by any economic calculations. Buying into Beltransgaz at this price means suffering losses. In addition, Belarus offered Gazprom a non-controlling stake, although the Inter-Governmental Agreement stipulates the establishment of a joint venture on a par.
Setting up a joint venture on a par implies, at least, a 50/50% ownership, not to mention that we've got used to the fact that Gazprom holds a controlling stake in all the gas transmission companies, the corporate funds are invested in. But we were only offered 25% of the stake, with part of shares already sold to Beltransgaz's team. This is an insignificant amount and we still foresee an opportunity to set up a joint venture on a par but provided the sold shares are included in the Belarusian side-controlled part of the charter capital.
Finally, we were told that we'd have to invest USD 1.7 billion in Beltransgaz's gas grids. But this issue falls under the shareholders' authority. The above-mentioned networks ate in good condition, so what one needs to invest in these for?
As a result, Gazprom drew a conclusion that the terms and conditions proposed by Belarus were unacceptable. We brought forward an initiative to contract an independent auditor entering the top five world-class auditing companies. Belarus rejected last year our proposal, reiterating that USD 5 billion were a reasonable value of Beltransgaz. We were told: you are unwilling to buy the company - just don't, we'll sell it to foreign investors. But, within the previous year and a half, Gazprom has been accurately supplying gas to Belarus at a price of the RF 5th price zone, for USD 29 per 1,000 cubic meters, in the beginning and then the gas price rose a little. Thus, Gazprom has been rigorously complying with the regulations set in the Inter-Governmental Agreement.
After all, we turned to the Russian Government for assistance in finding a solution to the problem. The RF Government issued an order to cancel recommendations to sell gas to Belarus at the price of Russia's 5th price zone.
That's when the talks went under way and continued until 31 December. We were really close to reaching an agreement but finally failed to do it. That's how the present-day situation looks like. We're still willing to incorporate a joint venture. At the same time, we do believe that Beltransgaz should be evaluated by an independent auditor. In January 2004, we forwarded our proposals to Beltransgaz, enclosing a list of companies to be potentially appointed as Beltransgaz's auditor. The submitted list included Ernst&Young, PricewaterhouseCoopers and Delloite&Touche. But the Belarusian side counterattacked with a different company and Gazprom's lawyers rejected it. After that, Belarus decided to accept the Delloite&Touche candidacy but only its Minsk branch. We insisted on resorting to the services of the parent company based in London.
During the last negotiations between Gazprom and the Belarusian Government we achieved an accord that the contract would be signed with the London-based headquarters of Delloite&Touche. At present, we’re working on the contract formalities, meaning we're really close to appoint an auditor. In my opinion, this is an important step forward. The audit will probably last for some 3-4 months, plus we'll need some time to examine the audit results and adopt a decision - thus, we are likely to finalize the process by 1 October 2004 but not earlier.
In the meantime, we'll need to adopt regulations, under which we'll be building up our relationships. Gazprom's position is as follows: it is indispensable to conclude a gas transit contract as faster as possible. Gas is exported to third countries via Belarus without any legal basis, meaning with violations of Russian legislation and, thus, Gazprom is facing serious penalties. The RF Government has fortunately understood the situation so far, since it is clear that gas transit is a necessity for Russia. Besides, we haven't been paying Belarus for transiting gas via its territory. Belarus could've received some USD 35 million already or withdrawn our gas as payment for gas transit services rendered.
Gazprom's European gas customers certainly do suffer from the absence of a gas transit contract and the current situation does not suit them at all, as there is no certainty with gas deliveries to the West.
So, for the time being, Gazprom neither has a gas marketing contract, nor a gas transit one. Gas is being piped to Belarus by independent gas producers. The last contract was concluded for only 3 days, with the validity expiring tomorrow. We're endeavoring today to find some unused gas resources distributed by independent producers throughout Russia, with the view of channeling those to Belarus. It is possible to locate insignificant unused gas resources during a summer period, but the closer the winter, the harder it'll be to accomplish it.
I'll stress it once again: the Russian gas balance for 2004 envisages 16.5 bcm of gas to be delivered to Belarus, with another 2 bcm to be channeled, provided we have technical capacities. We'll find a way out and, thus, Belarus may receive some 18.5 bcm of gas in 2004, including 10.2 bcm to be supplied by Gazprom and 8.3 bcm, by independent gas producers. A week, may be a week and a half is left until independent gas producers exhaust their gas resources. They could very well continue to provide Belarus with gas, provided Gazprom's quota is reduced, but their gas quotas have been already distributed all over Russia. Independent gas producers have gas marketing contracts concluded with a range of gas customers, including Unified Energy System of Russia, metallurgical complexes, nitric plants and other gas consumers. The existing contracts will have to be cancelled and this is a practically impossible thing to do.
Question: There've already been reports in Moscow media that somewhere in between May 24-25 independent gas producers will run out of their quotas on gas deliveries to Belarus. Besides, you've said that a gas marketing contract with Belarus will be concluded at best by 1 June. Is there any peril that gas supply to Belarus may be cut off again?
Alexander Ryazanov: One might fear problems related to searching for the independent gas producers' unused gas resources allocated throughout Russia, to be re-channeled to Belarus. One might fear a possibility that independent producers' gas marketing contracts with Russian customers will have to be postponed. This will certainly result in arbitration proceedings and independent gas producers might turn to Gazprom with requests to assume the legal risks involved. We're treating Belarus well but do not intend to pay out third parties' fines because of this.
Question: Don't you believe that the Belarusian side, understanding that Gazprom is unlikely to step up radical measures again, meaning to tap off gas transit via its territory, will take advantage of this situation?
Alexander Ryazanov: That's actually the way it is right now. What's happening is that Gazprom but not Belarus is preoccupied that this country has gas. I personally gave them a call and warned that they were running out of gas. You were absolutely right when saying that Belarus might take advantage of the situation with gas transit but only while the weather is warm. However, as soon as autumn sets in and gas networks are heavily loaded, we'll insist on concluding a binding gas marketing contract. We expect that Belarus will take a reasonable approach to all this.
Question: You've mentioned that independent gas producers' gas resources being piped to Belarus are exhausted. Won't this leave Belarus without gas?
Alexander Ryazanov: The Sibur company will supply another 350 million cubic meters of gas. Respective documentation has already been produced and, thus, Belarus will be receiving gas until May 24-25. I'll remind you that independent gas producers' quotas on gas deliveries to Belarus are reaching a limit and it'll be harder to find additional gas volumes. At present, Belarus daily consumes some 40 million cubic meters of gas. This is a big amount and it is difficult to find it.
Question: While recently addressing the Belarusian Parliament, Alexander Lukashenko stated that "one shouldn't look upon Belarus through the scope of a gas pipe". Virtually, Belarusian President raised the issue of gas deliveries from Russia to Belarus in terms of national security. Could you comment on this statement?
Alexander Ryazanov: Gazprom's actions are in no way politicized. I'd like to remind you of the developments that took place back in the autumn of 2002. We started imposing restrictions on gas deliveries to Belarus. This move kicked up a racket: this is all about politics, Moscow's intrigues and etc. But Gazprom imposed gas limitations only guiding by the economic situation since Belarus wasn't paying for Russian gas at all back then. The former Belarusian Premier Novitsky arrived in Gazprom and was really bewildered when found out that Belarus wasn't paying for Russian gas. Shortly afterwards, we started receiving gas payments and Belarus timely paid up gas deliveries effected in 2003. Furthermore, Gazprom and Belarus adopted an Agreement to restructure Belarus' gas debt to Gazprom for 1999, 2001 and 2002. This Agreement is being abided by in full. In addition, Belarus is accurately paying for the gas supplied by independent gas producers. In other words saying, we've always acted based on the economic expediency of this or that project. As it happened historically, gas share in the Belarusian energy balance is extremely high and it even exceeds the same parameter in Russia. Gas plays a significant role on the Belarusian energy market and we are perfectly aware of it. But, at the same time, gas costs a lot for us, as well, primarily, due to the critical changes in the Russian tax legislation, resulting in higher gas taxes. For example, Gazprom paid RUR 70 billion in taxes under the 2004 Mineral Production Tax and, thus, we are in no position any longer to deliver gas to Belarus for USD 29.3 per 1,000 cubic meters: gas value has changed.
We do understand that the Belarusian economy is undergoing development and is keeping up a great deal slower pace against Europe, where gas is expensive. That’s why we're offering them a reasonable gas price, which is somewhat lower than it is in the Ukraine.
Another thing is that gas is sold in Belarus at much higher prices than those it is acquired at from Russia. Some Belarusian industrial sectors purchase gas for USD 70 per 1,000 cubic meters. And the initial idea was, if you remember, to establish equal environment for Russian and Belarusian entities. We are proposing the Belarusian party to hand us over its gas marketing networks so that we could organize gas sales to end-use consumers. Russian Mezhregiongaz sells gas at wholesale prices set by the RF Federal Energy Commission. Belarusian Beltransgaz acquires gas from Mezhregiongaz and then, in our viewpoint, the gas price is increased too much, as the value of gas transmission to end customers is not that big in Belarus. We believe that this is a situation when the initial idea of establishing equal market-based environment for Russian and Belarusian companies hasn't been implemented.
Question: Is Gazprom looking upon Beltransgaz as a company, by having shareholdings in which, one can solidify one's standing?
Alexander Ryazanov: Frankly speaking, with the Yamal-Europe gas pipeline reaching its full capacities, the need to pipe gas via Beltransgaz-run gas grids will swiftly decline. That's a fact and we don't conceal it. Nevertheless, Beltransgaz operates the Yamal-Europe gas pipeline and we wouldn't like to set up any additional company to be in charge of it, as the Belarusian company has already gained extensive experience as the pipeline operator.
We realize that gas can be easily supplied through the Beltransgaz-controlled gas networks to the Kaliningrad region, Lithuania and Poland. For the time being, Gazprom is raising the amount of gas to be piped via Belarus to the Ukraine. So, we believe that there'll be enough work left for Beltransgaz, as well.
But in 2004 already, Gazprom plans to transit 10 cubic billion meters of gas more via the Yamal-Europe gas pipeline than via Beltransgaz's gas networks. Beltransgaz is worth something only due to the transit of Russian gas through it. Without gas it is just iron that costs little.
As you know, we intend to build the North-European gas pipeline, which will enable us to drastically minimize problems arising in our relationships with gas transiting countries.
Question: If we recall the incident with Poland, this country declared in February a possible change of its gas supplier, referring, mainly, to Norway. For a third party, it all looked like a well staged performance, as if the parties had come to an agreement beforehand. Was it really that way?
Alexander Ryazanov: Not in the least. We didn't achieve an agreement on anything with anybody. We simply warned all our customers of possible drastic gas supply restrictions and did our best, where possible, to find alternative ways of delivering gas: for instance, Germany and Poland received gas via the Ukraine. Certain difficulties arose in Lithuania as gas inflow from Latvia only partially covered the former country's gas needs. The Kaliningrad region didn't avoided gas shortages, as well.
Question: In case there is still no contract concluded, Gazprom taps off gas going to Belarus and the Belarusians start non-sanctioned withdrawals of Russian gas, is Gazprom ready to suffer another image blow?
Alexander Ryazanov: If this happens again, it is Belarus that will have to suffer another image blow. Everybody in the world will get to know that Belarus is a country capable to withdraw someone else's gas. I hope, we won't come across this situation again.
Question: You've spoken of Beltransgaz's assets and mentioned that pipes are valueless without gas. As it is known, pipes eventually come into decay. Will Beltransgaz be worth a different price some time later? Is there any critical level when due to the aged service life of gas transmission capacities, an asset ceases to be regarded as such?
Alexander Ryazanov: Yes, there is. But Beltransgaz can still count on a quite large depreciation life span of its pipelines. According to our estimates, the Belarusian gas networks are, indeed, worn out but not to an extent to be preoccupied with. That's precisely why we were surprised to hear from Belarus that its gas transmission system needed to be upgraded for USD 1.7 billion. Everything is in acceptable order, taking into account that the Yamal-Europe gas pipeline commissioning led to the unloading of Beltransgaz's gas grids. We think that Beltransgaz will be able to normally operate without significant problems for another 10-15 years.
Question: Are USD 5 billion a total value of Beltransgaz? If the company was evaluated at this price, you'd have to pay, at least, USD 2.5 billion for the controlling stake. At the same time, there've been different figures in the press, amounting to USD 1 billion for Beltransgaz's controlling stake. In case the company is evaluated by an independent auditor at USD 3 billion, Gazprom will have to hand in USD 1.5 billion. Reveal us a secret: what is the amount that will suit Gazprom?
Alexander Ryazanov: We are ready to acquire Beltransgaz's controlling stake at a balance value, which averages USD 500 million.
And now let me tell you a few words about the independent assessment of the Belarusian company. Any assessment is just a subject for further negotiations. If Beltransgaz's value under an independent auditor's evaluations is too big, suppose, it'll be USD 1, 2 or 3 billion, we simply won't buy into this company. We've figured out that given this value, our investments will pay off too late or we'll never receive any return. The decision to buy into Beltransgaz at a high price will be blocked by the Board of Directors since Gazprom's projects must have a profitability of, at least, 15% and 12%, for projects on gas capacities. In addition, we'll need a permission from the RF Central Bank and Economics Ministry to invest such a big amount. And they are unlikely, as well, to allow us to invest these funds in a project that will pay off within decades.
Question: Does it mean that Gazprom is simply unable to pay more than you've stated because of the rigid economic environment the Company is in at present?
Alexander Ryazanov: Yes, that's right. Foreign companies are free to make portfolio and other investments because they have relevant funds at hand. But out investment program is scheduled for 3 years onwards and basically envisages funding of gas production and gas transmission infrastructure development in Russia.
I'd like to stress it once again that Gazprom sees no acute and strategic necessity to buy into Beltransgaz. The Yamal-Europe gas pipeline will soon reach a design capacity. We're setting up a gas transmission Consortium in the Ukraine. We're expanding our gas transmission capacities. Nevertheless, Beltransgaz's assets are certainly worth buying, since it is the shortest way gas can be delivered to Europe.
Question: Is there a precise agreement with Belarus that Beltransgaz's value will be estimated by the Delloite&Touche parent company?
Alexander Ryazanov: Gazprom, Beltransgaz and the Belarusian Economics Ministry's lawyers will soon start discussing this option. In case Delloite&Touche is approved as auditor, the parties will need to sign a contract with this company, agree on the auditor's fees to be paid out on a par. And things are currently being settled this way.
Question: Will the talks with Belarus be resumed after the Presidents' meeting?
Alexander Ryazanov: We last met the Belarusian side on 13-14 May, at Gazprom's Headquarters. Technically speaking, we worked through all the formalities and the only things missing in the contract are a gas marketing price and gas transit value. Or we may divide this contract in two. We'll even agree to a USD 1.02 gas transit rate, although this will cause problems with gas deliveries to Belarus, since independent gas producers have already exhausted their resources.
Besides, we could participate in the privatization of the Belarusian petrochemical companies.
Question: What Belarusian petrochemical companies is Gazprom interested in?
Alexander Ryazanov: We are interested, primarily, in the Grodnya Azot and Polimer companies
Question: You haven't so far negotiated this issue with Belarus, have you?
Alexander Ryazanov: Not yet, but the Belarusian side has already made certain proposals. We sent over our experts to inspect the technical condition of the companies involved.