September 13, 2005
ALEXEY MILLER: GAS PRICES TO GROW
Der Spiegel
Frank Domen and Walter Mayr
Gazprom’s Chief Executive Alexey Miller on the importance of the future North European Gas Pipeline, plans of developing Russian deposits in cooperation with German partners and his company's reinvention as a global power player
SPIEGEL: Mr. Miller, when did you know that you were traveling to Germany six weeks earlier to meet Federal Chancellor Gerhard Schrоеder?
Miller: What do you mean?
SPIEGEL: The signing of the pivotal agreement on building the Baltic pipeline was specially shifted to an earlier date due to Germany’s election campaign.
Miller: The signing date depended on negotiations with our German partners E.on and BASF. We have been negotiating with both companies after we made the deal in April at the Hannover Fair, now we have got the results. I know nothing of any deadline in October.
SPIEGEL: Another German-Russian summit has been scheduled for October. How important is the pipeline project for Gazprom and its German partners?
Miller: We have an agreement to complete the pipeline by 2010. Considering the huge time scale we apply to the extraction of natural gas and lay into the foundation of our plans, this is very soon. The pipeline is valuable for both us and our German partners because it will make power supplies safer and more reliable.
SPIEGEL: Negotiations have been taking place for over a year resuming for a few times. Is the arrangement final?
Miller: The agreement for the first time includes legally binding provisions and describes technological and financial aspects of the project.
SPIEGEL: Does it mean that no other partners can join the project?
Miller: No, it does not. We have a clause to the effect that the joint venture may be open to other power companies.
SPIEGEL: Do you mean such transnational giants as Shell or British Petroleum (BP)?
Miller: I would not like to mention any specific companies. It is obvious that our German partners should be consulted first, because any other company’s participation would mean their shares in the project are reduced. However the project will be implemented even if no other partners turn up. This is stipulated by our arrangements.
SPIEGEL: Construction of the giant gas pipeline about 1,200 km long will cost EUR 2 to 4 bln. What benefits will the German companies get?
Miller: Russian gas fields and gas transportation system will be for the first time connected to the German and consequently EU gas grid. This is the logical continuation of our long-term cooperation, its brand new phase. Speaking of this pipeline we mean the first step in the implementation of Russia’s and Germany’s common energy strategy. It includes all stages, from gas extraction and carriage to sales. That will be beneficial for everyone…
SPIEGEL: …except countries like Ukraine or Poland via whose territory gas has been transported so far. Many politicians in Poland are very irritated about the project.
Miller: There are absolutely objective reasons to build the North European Gas Pipeline. We need new transportation facilities to meet the growing fuel demand in the European Union. Our strategy does not differ from the ideas prevalent within the EU. And we are not going to wind up our facilities in the countries you mentioned.
SPIEGEL: However, leading Polish politicians expect that Angela Merkel, who may become German Chancellor, will consider their interests.
Miller: I have already met Mrs. Merkel to discuss the project’s importance. Gas to be transported through the Baltic Sea will mean additional volumes produced specially for the German market.
SPIEGEL: German companies would like to participate in the development of new gas fields like Yuzhno-Russkoye in Siberia. How far have negotiations progressed so far?
Miller: We have been publishing this information.
SPIEGEL: But there is so much information. First you intended to produce gas together with E.ON, in a few months, with BASF. What is your final decision?
Miller: It is set forth in the documents we have signed.
SPIEGEL: But there are so many documents you have signed. First, the agreement of intentions with your biggest international shareholder E.on, then another protocol of intentions with BASF. It has stirred agitation which you may not have ignored.
Miller: Everything we have signed will be implemented. German companies are now the only partners we are ready to cooperate with to develop gas fields, in exchange for sizable shares in their capital. We are especially interested in access to end consumers in the European market.
SPIEGEL: Would you like to sell gas to end users in Europe under the Gazprom trademark?
Miller: Yes, among other things. But we could also create joint ventures. We will develop a specific strategy for every country, to be as efficient as possible.
SPIEGEL: When E.ON’s CEO Wulf Bernotat fearing Gazprom’s competition in the domestic market refused giving you access to end consumers, you merely made a new contract with BASF’s CEO Juergen Hambrecht.
Miller: (smiling) However, we continue to negotiate with E.ON. Those who make the best offer are preferred. That’s quite natural.
SPIEGEL: Your partners do not like your style of negotiating too much. In private they say there is much confusion in your affairs.
Miller: Our position is very straightforward. Everybody including E.ON know what we are about.
SPIEGEL: Is that the reason why E.ON recently started negotiations with Iran to build a pipeline and produce gas? Their answer to your negotiating strategy could hardly be less ambiguous.
Miller: We too keep contacts with many countries and discuss many projects. That is not necessarily our reaction to the progress of negotiations with our traditional partners. Anyway, we have the largest and from the German viewpoint the closest reserves of natural gas.
SPIEGEL: That means that German fuel suppliers can not avoid Gazprom. Those who are not polite enough shall be punished.
Miller: Nonsense. Actually, this year we supplied over 40 bcm of gas to Germany. In 30 years our supplies to Europe have grown from zero to 149 bcm. In the event by 2030 the demand doubles, as some experts predict, we can meet it.
SPIEGEL: That means that Germany’s dependence on Russian supplies will grow.
Miller: Supply volumes are set to grow. But you should be aware of the difference from the previous situation. All projects we are starting now will be mutually advantageous. If German suppliers want to get fuel from us, we would like at least to have a presence in their market. Isn’t that logical?
SPIEGEL: Consumers are going to get nothing from all this. Gas prices keep on growing, because they are tied to oil prices. That can not be explained reasonably.
Miller: You are not quite right, because unlike oil natural gas does not have a market price which could be determined in commodity exchange. That’s why gas price is tied to prices of other fuels like oil. Fuels compete among each other. This fuel competition is reflected in the gas price formula. And gas production is a capital-consuming enterprise, repaid decades later.
SPIEGEL: Deposits which will require truly huge investment have not yet been put into operation.
Miller: You are right. Requisite loans can be extended by banks, when contracts are signed. Gas price is to be predictable in the long term.
SPIEGEL: In other words, nothing will change. Gas prices will grow along with oil prices?
Miller: Yes, gas prices will probably grow as oil prices grow. But you should not forget that consumers find long-term planning important. The possibility to plan is often more important than the absolute price.
SPIEGEL: Using billions from your business with the EU you would like to get a foothold among transnational power companies. When will you be on an equal standing with Exxon or BP?
Miller: Much is to be done yet. BP’s market capitalization, for example, is $250 bln. Our present capitalization is about $100 bln. We would like to cut the distance, and that will take us three to five years.
SPIEGEL: Could these goals be realistic? Gazprom has EUR 23 bln. of debts.
Miller: Speaking of BP they have about $22 bln. of debts. But mind our exports. This month we will probably supply up to 149 bcm of gas to Europe. The long-term contracts we signed with the EU recently provide for the supply of 2.5 tcm of gas. We have a huge potential for growth.
SPIEGEL: But you are suffering losses in your own country due to subsidized gas prices and due to your company’s non-core businesses like hotels, newspapers or fur farms. Are you going to change anything?
Miller: We are in for a large-scale restructuring. We will spin off all non-core businesses.
SPIEGEL: Including the former governmental newspaper Izvestiya you purchased recently?
Miller: All media businesses are owned by Gazprom Bank.
SPIEGEL: …where you company holds the controlling stake.
Miller: We will have to think whether we need to keep it some time later.
SPIEGEL: Your concentration on the core business will certainly attract foreign investors who have since long been promised direct access to Gazprom’s shares. When will it happen?
Miller: We have done half of what is to be done for this. The state has got a controlling stake exceeding 50 percent in Gazprom. Possibly, in two or three years we will be listed at New York Exchange and find there first rate investors, while now mostly stock gamblers are interested in our shares.
SPIEGEL: Will the actual restrictions which do not allow foreign creditors to hold more than 20 percent of Gazprom’s shares be lifted before or after that?
Miller: They will be lifted. We want to lift all restrictions for market capital, as soon as possible.
SPIEGEL: Your stock plans probably include more active engagement in electricity and oil business. They say you are going to buy from Roman Abramovich and his partners 72 percent in Russia’s fifth largest oil company Sibneft. Is that true?
Miller: There is this Russian saying, No smoke without fire. Sibneft along with other oil assets has been recommended to us by our finance adviser Deutsche Bank.
SPIEGEL: How specific are your negotiations? Who are you dealing with?
Miller: (smiling) The buyer is talking with the seller. We have always had ambitious aspirations. They include a large-scale oil project.
SPIEGEL: To get a controlling stock in Sibneft you will need three percent of shares from the free market in addition to Abramovich’s interest. Has Deutsche Bank explained to you how that can be done or has it bought shares for Gazprom in advance?
Miller: In the event authoritative advisers are engaged, they do their job professionally.
SPIEGEL: When will the deal be announced?
Miller: I would not like to go into further detail.
SPIEGEL: In your transnational operations worth billions of dollars you are assisted by the fact that your company development strategy is supported in the Kremlin by your long-term comrade-at-arms Vladimir Putin. Will the course be changed if Putin leaves the presidential office in two years as the country’s constitution requires?
Miller: The role of the state in Gazprom’s management will remain the same for years to come. We are the country’s biggest company generating a lion’s share of national revenues and supplying the entire country with power. The strategy of Gazprom is determined by objective market conditions rather than any subjective factors. In other words, there are no reasons why anything should be changed.
SPIEGEL: Thank you for your interview, Mr. Miller.