Alexey Miller’s interview with Der Spiegel magazine (Germany)

03.01.2011

Armin Mahler and Matthias Schepp

“Your teachers were not so good”

Alexey Miller, Chairman of the Gazprom Management Committee speaking about the debatable practice of the natural gas price linkage to the price of oil, about the cost effectiveness of the gas pipelines being designed and constructed, and his image of the “Kremlin’s long hand”.

Mr. Miller, it was two years ago when you promised to bring Gazprom's capitalization up to USD 1 trillion and transform it into the world's biggest company. Instead, Gazprom's market value reduced from USD 300 billion to 130 billion. Have the golden age of Gazprom passed away?

This is true indeed. Nowadays, however, even your long-standing German partner E.ON doesn't seem to believe in the future of Gazprom and is going to sell its 3.5 per cent stake in your company.

Why is E.ON selling its shareholding in Gazprom then?

...where problems actually occur each time Gazprom shows interest in any European company.

Is it true that you are going to acquire a 49 per cent stake in Ruhrgas, E.ON's subsidiary?

What is really behind these rumors?

...that could also include Ruhrgas as well.

The market Gazprom is operating in has undergone drastic changes. New field development and gas transmission technologies have contributed to a rapid increase in the company's gas resources. Customers, such as Ruhrgas, could buy the required gas volumes in sport markets at lower prices, but long-term contracts make them pay more to Gazprom. Does it affect your relations?

Occasionally, the price gap amounted to 50 per cent that led to tough talks with your customers demanding price reductions.

Nevertheless, E.ON is losing its consumers displeased with high prices.

Why is the gas price in your supply contracts still pegged to oil?

Still, many experts think that spot gas prices will stay low for a long time due to the increased supply. In this case, will construction of several new gas pipelines to supply gas from the eastern part of the continent to Europe turn into a great investment error?

The initial investment in Nord Stream was at EUR 4 billion, this amount is now equal to EUR 8 billion. Is the gas pipeline still worth constructing?

Does it mean natural gas will become cheaper for Germany?

Consequently, only your profit will rise...

The linkage to oil prices is unrelated to the financial capitalism. If there is more gas than oil the price for it must be lower.

We were taught that the price is determined by the interaction of supply and demand.

Anyway, you have to insist on the oil linkage if you want your investments to pay off. Why are you building the EUR 20 billion South Stream gas pipeline, in parallel with Nord Stream, to supply gas to South Europe across the Black Sea starting from 2015?

We also have this proverb. That's why Europeans support the Nabucco project designed as an alternative to Gazprom's project.

At the same time, you're doing every thing to undermine the project. South Stream and Nabucco are supposed to deliver natural gas from the same region, namely, Turkmenistan and Azerbaijan. It costs Gazprom more to purchase Azerbaijani gas than to produce it in Russia. It looks like you're trying to prevent Nabucco from being filled with gas well in advance.

It won't be easy for the Nabucco consortium to fill its gas pipeline if you buy out all gas for South Stream.

It's good for South Stream and Gazprom, but Nabucco remains empty.

Is it true that you proposed RWE to join your project to make the concern give up the Nabucco consortium?

Maybe it's BASF?

Where are such decisions taken – at Gazprom's headquarters or 6 kilometers away from there, in the Kremlin?

Sometimes, they call you Russia's second Foreign Minister.

This is what they say in Armenia. Anyway, you seem to follow political instructions in your pricing policy. Friendly countries, such as Armenia, receive gas at discounted prices.

It is a matter of politics. Ukraine was penalized during the administration of Viktor Yuschenko, a president hostile to the Kremlin.

You don't like the image of “Kremlin's long hand” and this is easy to understand. Possibly, this image hinders your attempts to supply Russian gas directly to German ultimate consumers through participation in municipal gas distribution networks.

Do you receive a payoff from the EUR 125 million you spent on FC Schalke 04 to improve your company's image in Germany?

Mr. Miller, thank you for the interview.

 

Over the last half a year alone, our shares grew by 35 per cent, which is a lot. The golden age passed away not for Gazprom, but for the financial capitalism based on securities only. We spoke of USD 1 trillion capitalization in spring 2008, before the global financial crisis, within the financial capitalism system. The system has discredited itself.

 

Companies purchase and sell their shareholdings for various reasons. Gazprom is no exception. When doing that, we do not consider these companies' potential.

 

Possibly, there are internal reasons for this decision. E.ON is free to purchase and sell shares of Gazprom, the world's largest gas concern. We possess 580 thousand kilometers of gas pipelines, 33.6 trillion cubic meters of gas reserves and long-term supply contracts for 4.3 trillion cubic meters of gas. The Government is the majority shareholder, but 49 per cent of shares are floating in the market. Anyone has a chance to buy 5, 10 or 20 per cent of these pipelines or reserves. Unfortunately, Gazprom doesn't have such chances in Europe...

 

Some time ago the information sprang up that Gazprom was allegedly going to buy a stake in Centrica. It caused so much turmoil in the UK press and the Parliament! These things happen from time to time.

 

That's another rumor and again they say they will not let the Russians do it. This is what the case is with the market transparency in Russia and in Europe.

 

I would like to talk about our strategy rather than certain companies.

Our asset acquisition principle is very simple: Gazprom presents itself as a global vertically-integrated energy company dealing with a range of operations from exploration and production through transportation, storage, marketing and distribution to the ultimate consumer.

Our goal is to create similar chains on various continents. E.ON, Ruhrgas, BASF and our Italian partners, such as Eni, are involved in these chains. Asset acquisition is not simply a financial operation to us, but a part of our strategy.

 

No one proposed that to us.

 

Firstly, the spot gas prices reached USD 350, while the average price of Russian gas stood at USD 308 for Germany in 2010. Secondly, we are talking here about two different products when it comes to spot markets on one hand and long-term contracts on the other. One can't buy a three-year contract in the spot market. The stability and security of gas supplies in the long run is more important for the consumers than the absolute price value.

 

Anyway, this year the spot gas price grew almost twofold between April and November. In December it exceeded Gazprom's long-term gas prices pegged to the oil prices and being absolutely predictable.

And we fulfilled our contractual obligations even when the spot prices were much higher.

 

We love and respect our clients. But what the operators are really worried about is their own margin rather than the price for the ultimate consumer. Indeed, nobody wants to have his margin reduced. Consumer prices are determined by the market. Gazprom's share never exceeds 50 per cent in them. The remaining part is the profit of local partners, costs of gas transportation within Germany and taxes.

 

It is explained by the fact that natural gas is not a classical commodity unlike oil, for instance. In future, natural gas will be wider used as a GTL fuel. Two research centers of Gazprom are developing the relevant technology. If we compare the calorific value of oil and gas, we may find that gas is much cheaper than oil.

Not only Gazprom but all major gas producers say that the gas price should take the calorific value into account.

 

We are guided by a simple principle. We first sell gas and then produce and supply it. All natural gas for the Nord Stream gas pipeline has been sold out under long-term contracts.

This gas pipeline is 100 per cent loaded and will convey 55 billion cubic meters of gas per year.

 

The overall costs have not been increased since March 2008 and still stand at EUR 7.4 billion. These are efficient investments. One half of the gas pipeline is owned by Gazprom and the other – by our European partners. This is our joint pipeline and it doesn't cross transiting countries. That means we won't have to pay any transit fees. Our 50 per cent share of costs is approximately commensurate with the amount we lost over a few days of the gas crisis in Ukraine.

 

You already know that it's not the gas pipeline construction that determines the gas price.

 

...and the profit of our partners as well. Neither Gazprom nor European companies determine the price, it's determined by oil prices. Gas and oil prices are as fair as the financial capitalism system is.

 

False. Gas should replace oil.

 

The crisis taught us the things we had never learned before. The world and Europe, in particular, are still unable to recover from the shock they received then. Your teachers were not so good.

 

Both pipelines are fully in line with our strategy of gas supply routes diversification, which corresponds with the European Union strategy, by the way.

Nord Stream and South Stream are oriented at creating additional gas transmission corridors to Europe. By now, 80 per cent of Russian gas is transited through Ukraine. There is a good Russian proverb that says, “Don't put all eggs in one basket”.

 

We have absolutely nothing against Nabucco.

 

No, we're doing this to secure gas supplies to Russia's southern regions adjacent to Azerbaijan. It is more profitable to convey gas from the Yamal Peninsula and northern Russia to Europe rather than to southern Russia.

 

Just like in the case with Nord Stream we first sell gas and then produce and supply it. With these 63 billion cubic meters for South Stream we don't compete with anyone. We only meet our consumers' demand for Russian gas. First, we will think of what to do with the gas and then we will construct the pipeline.

 

Let Europeans build Nabucco if they want to. We don't mind. It is their business.

Our business is to supply gas to our consumers under the contracts made.

 

I have never negotiated that. If we assume that a participant of Nabucco wishes to join the South Stream project, it's fine with us. Austrian OMV takes part in construction of both pipelines. Some German companies also show interest in South Stream.

 

No comments. There are not so many players in the German energy market.

 

It's nice – a good stereotype for western readers. That's right, Gazprom is a state-owned company and the Government holds over 50 per cent of its shares.

Being the majority shareholder, the Government defines our strategic goals, we have only three of those: diversification of our markets, transportation routes and final products.

No other tasks are given by it. At our level we make managerial decisions and we do it in a timely manner! We consider it a great competitive advantage.

 

I haven't heard that before.

 

That's not right. We have agreed with Armenia to move over to gas supplies at market prices. So far, Yerevan pays for the supplied gas with assets in its gas and energy companies. Nowadays, we own over 80 per cent of Armenia's gas infrastructure: distribution networks, underground storages, gas trunklines, a CHPS unit. There is a similar situation in Belarus. Moreover, Belarus is an allied state and doesn't have to pay customs duties, which make up to 30 percent of the gas export price. The state takes a decision whether to receive this money into the budget or not.

Even if it is a matter of politics, Gazprom has nothing to do with it.

 

Today Gazprom supplies gas to Ukraine under the same price formula as was applied in the times of Viktor Yuschenko. Russia, however, is not charging Ukraine with customs duties. We believe gas supplies to Ukraine remain as effective for Gazprom as it was in the times of Viktor Yuschenko.

Ukraine is a premium market for us.

 

If we could supply gas directly to the ultimate consumers, the Germans would pay less for the supplies. This is for sure.

 

We are the general sponsor of this team. Of course, we have ambiguous impressions of the team this season. The club is a success in the Champions League and it is not doing well in the Bundesliga.

However, we believe Schalke will soon be on top of the standing again.

In German football, Schalke is a well-recognized brand, just like Gazprom in Russia. Sports and culture unite peoples. They promote respect and trust.