Speech by Alexey Miller, Chairman of Gazprom Management Committee, at annual General Shareholders Meeting
Strategy for excellence
The in-depth materials on Gazprom's performance in 2018, which have been prepared for the annual General Shareholders Meeting, include the Annual Report, the Accounting (Financial) Statements, the Audit Commission's Report, and other documents.
It is proposed that the Shareholders Meeting approve:
- the 2018 Annual Report of Gazprom;
- the 2018 Annual Accounting (Financial) Statements of Gazprom;
- the allocation of profit and the proposals by the Board of Directors on the amount, period and form of the dividend payout based on the results of 2018.
It is also proposed that the Meeting approve the Company's Auditor, the remuneration for the Board of Directors and Audit Commission Members, and the election of the Board of Directors and Audit Commission Members.
The agenda of the annual General Shareholders Meeting includes items on the amendments to Gazprom's Articles of Association and the Company's internal documents regulating the activities of the General Shareholders Meeting, the Board of Directors, and the Management Committee. The changes are aimed at implementing the best corporate practices and recommendations of the Bank of Russia.
Also submitted for consideration by the shareholders is the item on the revocation of the Company's Dividend Payment Procedure due to legislative changes. The current procedure for monetary dividend payouts is exhaustively covered by the Federal Law on Joint Stock Companies.
You can find the draft decisions on these matters in the ballots and the additional information is provided in the materials you have received.
The year 2018 was marked by exceptional achievements for Gazprom. The Company demonstrated record-high financial results. The amounts of gas delivered to Europe and the share of Gazprom in the European gas market were at an all-time high.
We brought a number of projects that are unique in terms of their magnitude and significance to their final stages, and those projects will have a profound influence on the Russian gas sector and on the volumes and dimensions of international gas trading.
In 2018, we boosted our resource base, ramped up our production capacities and sales, and continued our work toward innovations and import substitution.
By pursuing our leadership strategy, we are contributing to the energy security of our country.
Gazprom's exceptional achievements in the field of production and marketing over the course of 2018 are reflected in our financial results.
In 2018, Gazprom's sales revenue hit an all-time record of RUB 8.2 trillion.
Last year, the Company's profit doubled, also breaking a record with RUB 1.456 trillion. Adjusted EBITDA grew by more than 1.5 times.
Gazprom continued to reduce its debt load: the net debt to EBITDA ratio went down from 1.4 in 2017 to 0.8 in 2018.
The Company is at the peak of its investment cycle. Nevertheless, its free cash flow increased by an order of magnitude compared to 2017, reaching RUB 488 billion.
Gazprom's investment program in 2018 was aimed at advancing the strategic projects that help the Company solidify its position as a leader. In the near future, the Nord Stream 2, TurkStream and Power of Siberia projects will become operational, thereby raising the operating cash flow.
In the current year, we have introduced staffing changes and revamped the investment-and-construction unit management system within the framework of streamlining our corporate structure.
The changes that have been implemented are extensive. The work in this area will continue with the aim of overcoming lingering obstacles in the Company's development process and enhancing the overall efficiency of Gazprom as a vertically integrated company.
In the future, we expect a gradual rise of the dividend payout level to 50 per cent of the net earnings under the IFRS.
Based on the results for 2018, the Company's Board of Directors proposes a record-high dividend payout of RUB 16.61 per share using 27 per cent of earnings under the IFRS. In ruble terms, it means a more than twofold dividend increase compared to the preceding year.
The dividends proposed to be paid to the federal budget this year will be the largest among all state-owned companies. The overall dividend amount – RUB 393.2 billion – will be the highest in the history of the Russian stock market.
Our policy on dividends, coupled with the positive results for the first quarter, has been positively assessed by the investment community. The value of Gazprom's shares has grown by over one and a half times.
In 2018, the Gazprom Group's gas reserves replacement ratio was 1.6, which constitutes an outstanding result by global standards. It should be noted that we have been maintaining this ratio above 1 for the last 14 years.
The bulk of growth in gas reserves was ensured by the Leningradskoye and Yuzhno-Kirinskoye fields.
In terms of hydrocarbon reserves, Gazprom firmly holds the leading position among public companies worldwide. The Company is also the global leader in hydrocarbon production and its annual growth, which are more than twice as high as those of Gazprom's closest competitors.
In 2018, Gazprom produced 497.6 billion cubic meters of gas, an increase of 26.6 billion cubic meters against 2017.
The Company's production strategy is particularly focused on ensuring sufficient supplies during peak demand, as we are working to increase the maximum daily production. In the 2018–2019 season, this indicator grew to 1.510 billion cubic meters.
We are developing our gas business by creating new gas production centers on a timely basis. Within the framework of the Eastern Gas Program, we are exploring the Chayandinskoye and Kovyktinskoye fields – the bases for the Yakutia and Irkutsk gas production centers, respectively.
The Chayandinskoye oil, gas and condensate field will come onstream as early as by the end of this year. In 2018, producing gas wells were being drilled and the core process equipment was being installed at the field.
Kovyktinskoye is being prepared to move from pilot operation to commercial development. Geological exploration is in progress, and industrial sites for drilling rigs are being set up along with the required road infrastructure.
We continue to develop the Sakhalin gas production center. Producing wells are being built at the Yuzhno-Kirinskoye field.
The Yakutia, Irkutsk and Sakhalin gas production centers form the resource base for our activities in the Russian Far East and the Asia-Pacific region.
In the Yamal Peninsula, we brought the third gas production facility of the Bovanenkovskoye oil, gas and condensate field into operation in 2018. Thus, the field reached its design production capacity of 115 billion cubic meters of gas per year. To put it into perspective, this equals the amount of gas supplied last year to Germany, Italy, the UK, France and the Czech Republic combined.
Bovanenkovskoye contains 3.7 trillion cubic meters of gas. It will be developed until 2128, i.e., for over 100 years!
The gas extracted from this field goes into the northern gas transmission corridor – a new, essential thoroughfare for gas supplies in Russia and Europe.
Gazprom continues to explore the Yamal Peninsula. After Bovanenkovskoye, we started the full-scaled development of the Kharasaveyskoye field. Its gas reserves amount to 2 trillion cubic meters. The design output of its Cenomanian-Aptian deposits is expected to reach 32 billion cubic meters per year.
Our plans for Yamal have an equally impressive scope, as we are looking forward to exploring gas resources from the Kruzenshternskoye field to the Tambey cluster with its recoverable reserves of 7.7 trillion cubic meters.
Thanks to those enormous reserves, Gazprom's unique expertise in the Arctic, and our technologies for delivering Yamal gas to our markets, Yamal is playing a key role in the 21st-century domestic gas sector and is becoming a strategic gas-producing basin in the region from the Atlantic to the Pacific Ocean.
We are successfully using our hydrocarbon exploration expertise outside of Russia. The Gazprom Group is conducting hydrocarbon production, prospecting and exploration operations, as well as providing services. The largest production projects are taking place in Vietnam, Bolivia, Serbia, and Iraq. Service contracts are being implemented in Bangladesh.
Gazprom's gas transmission system provides for uninterrupted gas supplies during peak loads and any fluctuations in demand. The system's renovation, retrofitting and further development are integral to strengthening national energy security.
In 2018, we continued to develop the northern gas transmission corridor – the key route for supplies to northwestern Russia and for exports to Europe. We brought onstream the linear part of a new high-tech gas pipeline named Ukhta – Torzhok 2. Workshops of four compressor stations were brought into operation within the Bovanenkovo – Ukhta 2 gas pipeline.
By the end of this year, we are going to complete the gas transmission capacities between the town of Gryazovets and the Slavyanskaya compressor station. They will supply gas to consumers in the northwestern region and into Nord Stream 2.
In 2018, we completed most of the construction work for the Power of Siberia gas pipeline, which is unprecedented in terms of its scope. Due to its specifications and importance for the global gas transmission system, the pipeline stands out among all other cross-border gas transmission networks.
The flexibility and reliability of pipeline supplies are ensured by Gazprom's efforts to develop the underground gas storage system. By the 2018–2019 withdrawal season, the Company's working gas inventories in Russia totaled 72.2 billion cubic meters.
The potential maximum daily deliverability of our UGS facilities reached 812.5 million cubic meters. In the last 8 years, the Company has raised this indicator by 31 per cent.
By the upcoming autumn/winter period, we will increase the potential maximum daily deliverability of our UGS facilities to 843.3 million cubic meters. It will thus reach a new all-time high.
Gazprom is actively using its own and rented UGS capacities in European countries: Austria, Germany, Serbia, the Netherlands, and the Czech Republic. By the 2018–2019 withdrawal season, the reserves in UGS facilities totaled 5.8 billion cubic meters. This year, it is planned to stockpile twice as much, i.e., at least 11.4 billion cubic meters.
In 2018, natural gas sales to Russian consumers increased by 4.3 per cent (9.8 billion cubic meters), amounting to 239.7 billion cubic meters.
Gazprom continues to develop the gas market. Gas trading via the St. Petersburg International Mercantile Exchange (SPIMEX) contributes to the formation of a national price indication system for natural gas. In 2018, Gazprom sold 13.6 billion cubic meters of gas via SPIMEX, which comprised 87 per cent of the whole trading volume.
One of the most essential activities of the Company is the execution of the Program for gas supply and gas infrastructure expansion in Russian regions.
Gazprom's investments in the Program hit a record of RUB 36.7 billion in 2018. The average gas penetration level across the country rose to 68.6 per cent. In cities and urban settlements, it reached 71.9 per cent. The Program covered 66 Russian regions: over 2,000 kilometers of gas pipelines were built, and conditions were created for bringing gas to 49,000 households and apartments. Gazprom may consider to provide additional funding for regional gas infrastructure expansion in the future. The required synchronization needs to be achieved jointly with our partners – the constituent entities of the Russian Federation that ensure consumers' readiness for gas supplies.
A strong emphasis is placed on NGV market development. Gazprom is promptly converting its own vehicles to natural gas (more than 52 per cent of Gazprom-owned fleet is already powered by gas), making intense efforts to expand the NGV refueling infrastructure in Russia and abroad, and promoting the EcoGas brand. Sales of natural gas as a vehicle fuel jumped by 14 per cent in 2018.
Meanwhile, small-scale LNG sales grew by 26 per cent. LNG fuel is utilized at Gazprom's industrial facilities. For instance, we are planning to produce small-scale LNG at the Kovyktinskoye field to replace diesel fuel during the development stage.
When pursuing its ambitious projects, Gazprom draws on the domestic sci-tech potential, including its own capabilities, and actively implements innovations and import substitution.
In 2018, the share of domestically-manufactured equipment and materials in Gazprom's overall procurements amounted to 99.7 per cent. We acquire 100 per cent of our pipes from Russian manufacturers.
In 2016–2018, the aggregate economic impact of import substitution activities totaled RUB 20.7 billion.
Last year, 500 types of domestic import-substituting products were accepted for use at Gazprom's facilities.
Import substitution and local manufacturing are finding applications in such projects as the integrated gas processing complex near Ust-Luga, the Amur Gas Processing Plant, and the Power of Siberia and Nord Stream 2 gas pipelines.
The Gazprom Group is successfully implementing the Innovative Development Program until 2025. In 2018 alone, RUB 9 billion was spent on R&D activities, with 279 solutions put into practice. The total economic effect from their utilization is going to exceed RUB 204 billion.
Gazprom is streamlining its corporate system for intellectual property management. In 2018, the Company obtained upward of 300 Russian and foreign patents and applied for more than 260 new ones.
Environmental risk management is a critical activity for Gazprom. The Company has an Environmental Management System that complies with the latest environmental standards. For the first time in Russia, Gazprom created a unified environmental management software system and set up a corporate Environmental Inspectorate.
The Gazprom Group introduced a greenhouse gas accounting and reporting system in all of its subsidiaries and organizations that provide environmental disclosure.
Gazprom is the long-standing leader of the international carbon disclosure rating. The Company's products have the lowest carbon footprint among the world's largest oil and gas companies.
Our oil business subdivision, Gazprom Neft, demonstrates widespread deployment of innovative solutions in its production and environmental activities.
Gazprom Neft is successfully operating the unique Prirazlomnoye project on the Arctic shelf, performing horizontal drilling with hydrofracturing and open-hole sidetracking at the Messoyakhskoye field, and adopting innovative methods to develop the Bazhenov formation.
Gazprom Neft uses an innovative zero-discharge technology at the Arctic Gate terminal in order to prevent the contamination of the Ob Bay waters. The manufacturing of import-substituting catalysts is based on innovative solutions.
Gazprom Neft ended 2018 with strong results: its net profit went up by 40 per cent and adjusted EBITDA grew by 35 per cent.
The company's hydrocarbon output soared to a record high of 93 million tons of oil equivalent, approaching the target volume of 100 million tons of oil equivalent per year.
Gazprom Neft is increasing the efficiency of its hydrocarbon processing, expanding its geographic reach, and broadening the range of its premium oil products.
Gazprom accounts for half of the overall volume of gas processing in Russia. In 2018, 31 billion cubic meters of natural and associated gas, excluding tolling arrangements, were processed at the Company's facilities. The volume of oil, gas condensate and fuel oil processing grew to 67.4 million tons.
The flagship project in the area of gas processing is the Amur Gas Processing Plant. It will have the largest helium output worldwide – 60 million cubic meters per year. The first two trains of the GPP will be put onstream in 2021.
Sales contracts have been signed for the GPP's helium. An agreement has been concluded for the supplies of ethane fraction from the Amur GPP to SIBUR.
The project is currently in its main phase, as the construction of the core production infrastructure is underway. The work is about 43 per cent complete by now. The equipment for cryogenic gas separation and helium liquefaction is now fully installed at the first two production trains of the GPP.
Gazprom ranks number one among Russian heat generating companies in terms of installed capacity and production of electricity. It is also the domestic leader in the field of thermal power generation. In order to develop its power business, the Company created the largest vertically integrated power holding in Russia.
Gazprom Energoholding is completing a large-scale investment program for the construction and upgrading of generating facilities in Russia with the aggregate capacity of some 9 GW. Today, we are commissioning the second power unit of the Grozny TPP, thereby fulfilling all of the investment obligations of the Gazprom Group under the capacity supply agreements program.
Alexey Miller (left) at teleconference with Denis Fyodorov, Director General of Gazprom Energoholding, and Ramzan Kadyrov, Head of Chechen Republic
In 2018, Gazprom demonstrated the high efficiency of its export strategy by setting an all-time record for gas supplies to Europe and Turkey at 201.9 billion cubic meters. The share of our gas in the European market rose to the unprecedented level of 36.8 per cent in 2018.
In Germany alone, Russian gas supplies set a record of 58.5 billion cubic meters. In 2018, they exceeded the nominal capacity of the Nord Stream pipeline. Last year, gas exports to Germany grew by 9.6 per cent, to France by 5 per cent, and to Austria by 35 per cent.
As of now, indigenous gas production in Europe covers less than 50 per cent of its domestic consumption. The demand for imported gas in Europe is going up. During the last six years, average gas imports were growing by almost 4 per cent each year. In 2018, European countries imported 326 billion cubic meters, a 4.8 per cent rise from 2017.
Three years ago, we noted at the annual Shareholders Meeting that Europe's need for additional gas imports might reach 150 billion cubic meters by 2035. As we see now, gas imports to Europe added as much as 67 billion cubic meters in the last three years, and we expect this trend to persist and surpass the forecasts. The main factors pushing up European gas demand will be the declining indigenous production, the curtailment of nuclear generation, and a smaller role of coal in the power sector.
In 2018, natural gas outstripped both coal and renewables in terms of consumption growth in the power generation segment in OECD countries.
In the last three years, natural gas took the leading position among all energy sources in terms of absolute growth in consumption within the power generation sectors across the European Union.
Russian gas retains its competitive position in Europe. The existing gas transmission infrastructure enables the EU to promptly reduce greenhouse gas emissions by 8 per cent without significant costs through replacing coal and fuel oil. In addition, Gazprom is developing hydrogen-based technologies, which, if widely applied, may help reduce emissions.
It should be noted that the carbon footprint of the entire gas value chain is smaller than that of other types of fuel resources. It is 1.5 times lower than the carbon footprint from the production and utilization of solar batteries imported by EU countries.
According to research, our gas deliveries to Europe cause the least damage to the environment. The carbon footprint from gas production and supplies via Nord Stream is twice smaller than the impact of Qatar's and Algeria's LNG shipments, four times smaller compared to Australian LNG, and 3.7 times smaller versus U.S. LNG.
In 2018, a record-high amount of nearly 60 billion cubic meters of gas was delivered via Nord Stream. It should be noted that, compared to the old Uzhgorod corridor, Nord Stream helps reduce auxiliary gas consumption by three times, which allows us to cut down the transmission costs. The carbon footprint of the Nord Stream gas pipeline is six times smaller than that of the Uzhgorod corridor.
Nord Stream 2, our new gas pipeline, is a cost-effective project that carries benefits for both construction partners and gas consumers.
Most of the work on the project is already completed. Together with our European partners, we are confident that the project will be successfully brought to fruition.
The submerged part of TurkStream, another offshore pipeline meant for gas exports, was fully completed in 2018. Construction operations were carried out at a record pace – within a year and a half. The entire scope of work for the creation of a gas pipeline system connecting the two coasts of the Black Sea, from the Russkaya compressor station near Anapa to the receiving terminal near the Turkish settlement of Kiyikoy, has been fulfilled.
Construction of the pipelines that are meant to deliver gas from TurkStream outside of Turkey is progressing at a quick pace. The project will significantly improve the reliability of gas supplies in southern and southeastern Europe.
With a view to diversifying routes and expanding the geographic reach of its gas supplies, Gazprom is enhancing its activities in the LNG market.
The sales of large-scale LNG from the Gazprom Group's trading portfolio in 2018 climbed by 16 per cent, exceeding 5 billion cubic meters.
Most of supplies went to Asia-Pacific, with India being the largest importer. In 2018, the Gazprom Group also supplied LNG to China, Japan, Kuwait, the Republic of Korea, and Spain.
This year, we have launched an extensive project – an integrated complex for processing ethane-containing gas and LNG production near Ust-Luga.
This project is unparalleled in Russia. It will have the annual capacity of 45 billion cubic meters of gas. Every year, it will produce 13 million tons of LNG, about 4 million tons of ethane, and over 2 million tons of liquefied petroleum gases. Around 20 billion cubic meters of processed gas will be pumped into the gas transmission system of Gazprom. The project is based on a new integrated model for the monetization of hydrocarbon resources that will have a strong beneficial effect on the economics of production and will mitigate the resource and price risks.
We introduced a new model for ensuring the security of gas supplies in the Kaliningrad Region, Russia's westernmost region. In 2018, an offshore LNG receiving terminal and the Marshal Vasilevskiy floating storage and regasification unit were brought into operation there. Thus, an alternative gas supply route was created to, if necessary, satisfy both current and future needs of the region.
Our plans for expanding the LNG production infrastructure in eastern Russia are opening up new prospects for Gazprom's exports, primarily to Asia-Pacific countries.
China is the most promising gas market in Asia-Pacific. In 2018, China's natural gas consumption grew by 18 per cent, reaching 280 billion cubic meters.
According to China's gas industry development plan for the 13th five-year period, national gas consumption will increase to 360 billion cubic meters in 2020, and to 620 billion cubic meters by 2035.
In 2018, China became the biggest gas importer in the world. Judging by all projections, Chinese gas imports will continue to grow. CNPC estimates that by 2035 more than half of national gas consumption will be secured by imports, of which Russian gas will make up a significant share.
In December 2019, we will start supplying gas from Russia to China via the Power of Siberia gas pipeline. This is a historic event: we are opening a new gas route connecting the world's largest exporter and the world's largest importer of natural gas. We are taking a crucial step towards the formation of a single Eurasian gas space and a new architecture of the global gas market.
It's all set now. The pipeline's linear part from the Chayandinskoye field to the border with China has been built. Installation operations are nearly complete at the Atamanskaya compressor station adjacent to the border.
Pursuant to the contract, more than 1 trillion cubic meters of gas will be supplied to China via Power of Siberia over 30 years. However, China's demand for Russian gas surpasses the initial estimates. This is why we are discussing with our Chinese partners the possibility of supplies via other pipeline routes.
We also note the great potential for cooperating in such areas as power generation, underground gas storage, and NGV market development.
Gazprom is well-equipped to carry out the most cutting-edge projects of any scale. And the expertise we have gained in implementing our leadership strategy is key to our success and excellence.