South Stream to be designed for maximum annual throughput of 63 billion cubic meters

Alexey Miller, Chairman of the Gazprom Management Committee reported today to Russian President Dmitry Medvedev on the progress with the South Stream project.

“It is a very timely project. Besides the evident growth in gas transit reliability, it will considerably enhance our capabilities to flexibly adapt to changes of demand for energy carriers in Europe. It is an important factor of Russian gas competitiveness in European markets,” said Alexey Miller.

So far, the Consolidated Feasibility Study of South Stream has been completed. The Consolidated Feasibility Study integrates the feasibility studies of the gas pipeline offshore section and of the respective national sections in Southern and Central Europe.

Once Turkey granted the permit for South Stream construction and operation in its economic zone, Gazprom updated the project implementation schedule and is ready to start constructing it in December 2012.

According to Alexey Miller, Gazprom took every possible effort to satisfy European consumers' increased demand during the unprecedented cold snaps that had bound the Danube River and the Venetian canals with ice. However, considerable amounts of gas transited via Ukraine didn't reach Europe. “On some days, up to 40 million cubic meters of gas were stuck in Ukraine. No doubt that it inflicted both financial and reputational damage on Gazprom.” Meanwhile, there is no efficient mechanism to control the behavior of Naftogaz Ukrainy in such a situation, emphasized Gazprom CEO.

During the meeting, it was noted that when designing the South Stream gas pipeline its throughput had been dependant on the negotiations with the Ukrainian partners in the gas sector. Considering the current status of gas transit via Ukraine, Dmitry Medvedev ordered Gazprom to be guided by the maximum annual throughput of 63 billion cubic meters when designing and constructing the South Stream gas pipeline.

Gazprom was also tasked to continue negotiating gas issues with Ukraine.

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Transcript of the meeting

Dmitry Medvedev: Good evening, Mr. Miller!

Gazprom is also dealing with the large-scale projects. Some of them, like Nord Stream, are already operational, for instance, and the construction of others is just about to begin (I hope it will start very soon) – I mean South Stream in particular. What is going on there, what is the latest news, what has already been done and what needs to be done?

Alexey Miller: Dear Mr. Medvedev! So far, the Consolidated Feasibility Study of South Stream has been completed; it integrates the feasibility studies of the gas pipeline offshore section and of the respective transit sections in the countries of Southeastern and Central Europe.

Dmitry Medvedev: Please name the countries, as not everyone may recall them.

Alexey Miller: A list of countries includes Bulgaria, Serbia, Hungary, Slovenia, gas laterals to Croatia and the Republika Srpska, and a gas pipeline to Greece. So far, Gazprom has prepared the new schedules amended after Turkey granted the permit for the offshore gas pipeline construction via the Turkish economic zone last December. We have updated the schedules and will be ready to launch the construction this December.

Dmitry Medvedev: Understanding the way of constructing the gas pipeline, as well as its vital and the most important parameters such as its throughput, were dependent on our talks with the partners from Ukraine – where there is a range of options for making the gas pipeline throughput greater, or for setting its throughput somewhere in the middle of the range. How are things going on with our Ukrainian friends, what is the status of talks on cooperation in the gas sector?

Alexey Miller: Mr. Medvedev, the unresolved issue about the design capacity of the South Stream gas pipeline, the issue that has been topical until recently, apparently seems to be of greater importance at the moment than it was some time ago – in the context of the abnormally cold snaps of early February in Europe. When February began, the abnormally low temperatures dominated most of Europe, even the Danube River was frozen, the canals in Venice became stuck with ice, and the European consumers demanded the increased supplies of Russian gas.

Gazprom has done everything that was necessary to completely supply the needs of the European consumers, but the significant volumes of Russian gas, meant to be transited via Ukraine, have not reached Europe.

Dmitry Medvedev: Why did it happen?

Alexey Miller: On some days, up to 40 million cubic meters of gas were stuck in Ukraine. No doubt that it inflicted both financial and reputational damage on Gazprom. In this case, there is no real control over Naftogaz Ukrainy, such a control mechanism is not available.

Dmitry Medvedev: So, to my understanding, our partners had a good time keeping the terms of the existing contract, which means unauthorized siphoning of gas?

Alexey Miller: Our Ukrainian partners took as much export gas as they considered necessary for their own use.

Dmitry Medvedev: In other words, they stepped outside the existing norms and did not adhere to contracts?

Alexey Miller: They took out the gas volume they believed to be enough for meeting their needs, and I mean the gas volume intended for the European customers, and our Ukrainian partners were aware of that fact. They had a clear idea of gas volumes intended for the Ukrainian use according to the existing 10-year contract.

Dmitry Medvedev: Mr. Miller, but they didn’t ask us to increase the gas supplies for this period, did they?

Alexey Miller: Well, Mr. Medvedev, in the beginning of the year our friends from Ukraine actually raised a point of reducing the gas deliveries.

Dmitry Medvedev: Yes, I remember that, from 52 to 27 billion cubic meters, but nevertheless they managed to “sneak gas” during the bitter cold.

Alexey Miller: But during the period of abnormally cold snaps, Ukraine used more than 60 billion cubic meters of gas according to the annual contract amount.

Dmitry Medvedev: I see. I am asking you to look into all these cases – under the corporate procedures and civil agreements that tie you in with Naftogaz Ukrainy.

In my turn, I would like to add that we will have to clarify our position on the final South Stream throughput. I would also like you to take into account what is going on in the beginning of the year when making this decision.

The same events that happened last year are taking place now, and in general this is a good reason for me to ask Gazprom to bear in mind the maximum throughput when designing and constructing the South Stream gas pipeline. What is the maximum throughput?

Alexey Miller: I am talking about 63 million cubic meters of gas.

Dmitry Medvedev: We have to bend our minds to the maximum figures as we have to think about the future. Please give some guidelines to the Gazprom structural units and those involved into the project design development and construction launch. When is construction about to begin?

Alexey Miller: We will start the South Stream construction this December. Mr. Medvedev, all instructions required for designing the gas pipeline, bearing in mind its maximum throughput of 63 billion cubic meters of gas, will be given immediately.

Dmitry Medvedev: As for our Ukrainian friends, please let them know our position as well as the reasons we rely on when making the relevant decisions. I also hope that you will continue the talks about potential cooperation in the gas sector following our discussion with the Ukrainian President that was some time ago.

Alexey Miller: Will do.

Dmitry Medvedev: Agreed.