Pavel Oderov: Global scope

December 5, 2011, the interview was taken by Sergey Pravosudov
Published in corporate Gazprom Magazine Issue 11

Pavel Oderov, Head of the Gazprom International Business Department answers questions posed by the Gazprom Magazine.

Mr. Oderov, this year the Nord Stream gas pipeline was commissioned. When will both of its strings reach the nominal capacity?

Indeed, I’m glad to announce this large-scale project is progressing exactly on schedule. On November 8, 2011 the celebrations took place on the occasion of bringing into operation the first string of the Nord Stream gas pipeline. The second string is to be commissioned in the fourth quarter of 2012 (the bulk of it has already been placed by now).

Are you going to build up gas purchases from Central Asia and Azerbaijan to ensure deliveries into South Stream?

According to plans, the South Stream project will be fed with natural gas delivered into the Russian Unified Gas Supply System mostly from domestic gas fields. At that, as was reiterated by the Gazprom management, two-thirds of the gas intended for South Stream will be supplied under the existing contracts and one-third – under the new ones. We will tackle the issue of gas purchases from other countries taking into account the existing contractual obligations and economic viability as Gazprom has its own resource base sufficient to ensure the South Stream loading.

Europe

The European Commission has lately been trying to assume the function of an international gas supply regulator. What is your attitude towards these efforts?

Gazprom operates in the European market under the long-term gas supply contracts signed with major buyers. In some cases, conclusion of contracts was preceded by signing the relevant intergovernmental agreements.

Taking into account these circumstances as well as the fact that the issue of identifying energy balances falls within the competence of the EU member countries, I would withhold my judgment now on the potential and viability of such schemes of arranging natural gas supplies to Europe. Anyway, we proceed from the idea that international agreements that, inter alia, govern the relations of Russia with other countries in the gas sector should be prioritized over the national legislation and cannot be revised unilaterally. They should be fulfilled in good faith by the signatory parties.

What are the prospects for the Third Energy Package in the EU? Is it possible that Gazprom will lose its European assets (gas pipelines and UGS facilities) as a result of legislative changes?

A set of energy regulatory acts (so called Third Energy Package) adopted by the EU in 2009 stipulates taking of comprehensive measures to upgrade the structure of vertically integrated energy companies with a view to separate natural monopolistic activities (gas transmission) from competitive activities (production and marketing). The upgrading measures haven’t covered the underground storage activities yet. Meanwhile, an extremely tough model – property and legal separation is applied to new transmission systems created after September 3, 2009 on a single bidder basis, unless there is a special exemption.

As for the companies owing transmission systems on the specified date, the Third Energy Package permits the EU member countries to apply less stringent separation alternatives.

As you know, the EU member countries were to introduce most of the Third Energy Package provisions into their legislative systems before this March. Most of them failed to meet the deadline, and the European Commission has recently lodged a claim against 18 countries.

At the same time, we think that the delays in the Third Energy Package implementation in the EU member countries are not incidental at all. The truth is that the Third Energy Package contains a lot of gaps and uncertainties. Besides, the issue of correlation between some of its crucial provisions and the international regulations, first of all, the international investment obligations of the EU member countries, hasn’t been settled yet.

The Russian party including Gazprom’s experts is engaged in consultations with regulating bodies of the EU member countries and the European Commission representatives, regarding the practical aspects of the Third Energy Package implementation. We hope these efforts will facilitate shaping of such an implementation model that would duly regard the interests of Russian investors in the European fuel and energy complex and, as a result, raise the energy security in Europe.

What are the prospects for Russian gas in the European market?

Europe remains a most important strategic market for Gazprom Group due to its great size and geographic proximity. This region is specific for the absence of significant gas reserves that could guarantee the reliability of supplies to the domestic market for many years to come. Moreover, the basic forecast being used by the European Commission stipulates a more than 53 per cent drop (down to 83 billion cubic meters) in the current indigenous gas production in the EU by 2030.

In this context, the role of Russia as the largest European gas supplier with more than a forty-year track record of reliability is becoming more significant. We positively estimate the long-term prospects of the European market and we are going not only to retain, but also to reinforce our position in it.

The Third Energy Package contains a lot of gaps and uncertainties. Besides, the issue of correlation between some of its crucial provisions and the international regulations, first of all, the international investment obligations of the EU member countries, hasn’t been settled yet.

What are Gazprom’s plans regarding the European power market?

In addition to gas sales being one of the top-priority businesses abroad, the Company is penetrating European power markets. Besides, taking into account the EU long-term objectives on reducing the atmospheric emissions of carbon dioxide, Gazprom is striving to develop gas-fired power generation in Europe as natural gas is the least polluting hydrocarbon fuel and therefore, least harmful for the environment. In this context, the interests of the EU meet those of Gazprom.

So far, our Company has firmly established itself in the European power markets: represented by its subsidiary company Gazprom Marketing & Trading Ltd, Gazprom is dealing with power assets at the majority of European trading floors (in 2010 the volume of trade totaled 35 TWh, between January and September of 2011 – 68 TWh). Gazprom Marketing & Trading Ltd provides direct supplies to end users in the UK (in 2010 – 0.4 TWh, between January and September 2011 – 0.9 TWh).

The tremendous growth in renewables popularity observed lately in Europe as well as the effect of the disaster at the Fukushima Nuclear Power Plant in Japan will probably cause significant structural changes in European power markets. In this situation, Gazprom Group is currently analyzing the European power markets and identifying the potentially viable projects according to the assignment by the Company’s Board of Directors. The provisional results are to be obtained by late 2011.

Africa and America

Has Gazprom changed its plans for North African countries?

In 2008 Gazprom obtained the right to develop El Assel area in the Algerian Sahara. The project is being implemented by Gazprom International in partnership with the Algerian State Oil and Gas Corporation Sonatrach. Gazprom (project operator) holds a 49 per cent stake in the project, Sonatrach – a 51 per cent stake. The Zemlet Er Rakeb oil field was discovered within the area.

As a result of the tenders for the right to explore and produce hydrocarbons in Blocks 19 and 64 in Libya, Gazprom and the Libyan National Oil Corporation (NOC) entered into the agreement on exploration, development and product sharing for Block 19 (ratified in 2007), as well as for Block 64 (came into force in 2008). The blocks are operated by Gazprom Libya – a subsidiary of Gazprom International.

The Company’s plans for North Africa have remained unchanged. In any circumstances, Gazprom will comply with its obligations to partners and consumers according to the agreements signed.

In 2007 as a result of the asset swap deal with BASF, Gazprom acquired a 49 per cent stake in oil concessions C 96 and C 97. Hydrocarbons production that had been halted in the country over the period of armed hostilities was resumed in the concessions on October 18, 2011. Political unrest in a number of African countries, namely in Libya, have once again confirmed the need to secure reliable and uninterrupted hydrocarbon supplies to the global market.

The Company’s plans for North Africa have remained unchanged. In any circumstances Gazprom will comply with its obligations to partners and consumers according to the agreements signed.

What are your plans for Latin America and the USA?

In 2010 Gazprom made the decision to join geological exploration projects in Bolivia. In September 2010 Gazprom International and Total signed the Farmout Agreement in relation to a 20 per cent stake in Bolivia’s Ipati and Aquio projects. Signing of a servicing contract for the Azero Block development is being negotiated.

Gazprom Group’s companies also participate in geological projects offshore Venezuela. As part of the Rafael Urdaneta project, geological exploration has been underway at the offshore Urumaco-1 and Urumaco-2 Blocks since 2005. On October 7, 2011 Gazprom and the Venezuelan state-owned petroleum company Petroleos de Venezuela signed the Memorandum of Understanding stipulating development of the gas-bearing Robalo Block in the Gulf of Venezuela. Besides, within the Servicios Venrus joint venture set up with the Venezuelan party, Gazprom Group is rendering services on engineering, installation and repair of compressor stations, cleansing of oil sludge pits, capital overhaul of wells, etc.

In the long term, the cooperation with Latin American partners will be focused on Gazprom Group’s participation in integrated liquefied natural gas (LNG) projects in the region as well as on LNG supplies to Brazil and Argentina. In early November 2011 Gazprom’s representative office was opened in Rio de Janeiro, Brazil. We expect that our permanent presence in the region will promote mutually beneficial cooperation with local companies (in the hydrocarbons development sector inclusive) and, therefore, reinforce the Company’ stance in Latin America.

Being one of the LNG market players, Gazprom Group is carefully monitoring the behavior of the US gas market, the world’s largest one, with a view to further develop its LNG business. In 2006 the Company set up Gazprom Marketing & Trading USA and initiated efforts on establishing its positions in the North American market.

As a result of swap transactions with pipeline gas between Gazprom and its foreign counteragents, the Company started selling the purchased gas in the US market. In 2009 Gazprom also completed the transaction entitling it to use the Shell-owned regasification capacities at the Baja California terminal in Mexico as well as gas pipelines to convey gas to liquidity markets in southern California, USA. The contracts were signed within the deal on purchasing long-term LNG supplies from Shell under the Sakhalin II project.

Asia

What are the prospects for building up supplies to Asia-Pacific countries?

Gazprom continues the negotiations on natural gas supplies in the amount of 30 billion cubic meters per year to China via the western route. Upon signing the relevant contract, the Company will launch construction of the Altai gas pipeline. The Roadmap signed with China National Petroleum Corporation also stipulates the project for gas supplies in the amount of up to 38 billion cubic meters per year via the eastern route.

China is not the only Asian partner engaged in the negotiations on pipeline gas supplies with Gazprom. At present, the Company is intensely developing cooperation with the Korea Gas Corporation (Kogas). In parallel with the existing agreements on LNG supplies as part of the Sakhalin II project, commercial negotiations have started regarding pipeline gas supplies in the amount of up to 12 billion cubic meters from Russia’s Far East via North Korea to South Korea starting from 2017. This September the first startup complex of the Sakhalin – Khabarovsk – Vladivostok gas trunkline has been commissioned. The Company is rapidly developing the resource base in eastern Russia. This creates a solid foundation for arranging gas supplies to the Korean Peninsula. On September 15, 2011 Gazprom signed the relevant Roadmap with Kogas. On the same day Gazprom and North Korea’s Ministry of Oil Industry signed the relevant Memorandum of Understanding. The North Korean party also confirmed its interest in the project.