Keynote address by Alexey Miller at the 22nd World Gas Conference, Tokyo
June 4, 2003
Dear Ladies and Gentlemen!
The new processes and phenomena in the world community, somehow or other, bear an impact on the development of energy systems and the prospects for the gas sector. In the new age, there is an urgent need in essentially novel ideas and initiatives that would provide adequate responses to the challenges mankind has to meet. I am sure this Conference, held under the motto “Catalyzing an Eco-Responsible Future”, will make a worthy contribution. In my presentation, I would like to outline the Russian gas sector potential in resolving the world energy challenges.
World consumption and production of energy resources in the 21st century
In the early 21st century, energy consumption in the world regions shows sustainable growth. The tendency is due to the world economic progress and the ever more essential role of energy resources in the life of humankind. On the whole, energy consumption rose by 11 per cent over the past decade. The world energy balance has shifted towards natural gas.
What are the prospects for the world energy sector? Forecasting the world consumption of energy resources, most experts, including Gazprom specialists, believe that the following basic tendencies will be prevalent in the 21st century:
- Increase in the overall demand for primary energy resources.
- Emergence and evolution of new regional centers of energy consumption. Primarily, these are the Asia-Pacific and Latin American countries that develop economies based on the active use of energy resources.
- Maintenance of the current dissemination between generation and consumption of energy, which will promote intensive development of the world and regional energy markets.
- A shift in the structure of the world energy consumption towards increasing the share of the most environmentally friendly energy and renewable energy sources.
Discoveries and technological improvements over the past decades attest to the fact that the world resource base, even with respect to traditional mineral fuels, is sufficient for humanity not to be afraid of “energy starvation”. According to the last World Oil Congress, mankind is endowed with proven reserves of oil for approximately 40 years, natural gas – for 67 years. For the past 10 years, the world proven gas reserves grew by 25 per cent. That gives a chance to secure sustainable growth in the gas sector.
World energy problems of today are associated both with the economics and the environmental impact of energy resources production and processing.
The future will pose a challenge of transition to such a consumption structure where a noticeable role would be played by non-fuel energy resources and technologies. At the same time, it is essential to retain the investment load of the energy sector on the world at the current level, i.e. no more that 4–6 per cent of the gross domestic product.
What role will natural gas play in the global energy structure? We believe that gas can take a leading position in the world structure of the energy consumption in the coming decades and maintain it till the end of the century. That can be asserted taking into account considerable reserves of gas and its environmental effect. We are sure that Russia will play a leading role in that process.
Russia as a leading gas power of the world
It is common knowledge that Russia is the world leader in proven reserves of natural gas. In Russia, the energy sector is developed on the basis of the State Energy Strategy adopted by the Government of the country. In accordance with the strategy, natural gas in Russia will retain its status as the principal fuel although its share in the overall consumption of energy resources will be slightly reduced. Energy-saving plays an important role in that process. There is a number of state programs to that effect in Russia.
The steps taken by the leadership of Russia for further reforms of the economy, for improving the pricing and taxation policy, setting up a favorable investment climate, and establishing a competitive domestic gas market, give ground to believe that the Russian gas industry will intensely advance in the first quarter of the new century. For the period up to the year of 2020, the main goals of the Russian gas industry are as follows:
- Development of Yamal Peninsula fields;
- Bringing new fields in the Nadym-Pur-Taz region (Western Siberia) into development with that region remaining the principal source of hydrocarbons in the foreseeable future;
- Development of gas resources in the northern seas shelf, primarily the Shtokman field as well as Sakhalin shelf fields;
- Development of reserves in Eastern Siberia and the Far East;
- Further development of the network of gas trunklines and underground gas storage facilities.
Long-term development of the Russian gas sector is a task for both Gazprom and the independent producers; the latter include major Russian oil companies. Their role will be growing along with the establishment of a liberalized domestic gas market.
Gazprom is the largest gas company in both Russia and the world. Gazprom yields 8 per cent of the overall Russian industrial output and provides one fifth of tax proceeds for the state budget. Gazprom’s share in the world gas production is 23 per cent. The Company controls 20 per cent of the world gas reserves.
In 2002, natural gas exports to Europe amounted to 129.5 billion cubic meters. To date, gas supply from Russia covers 26 per cent of overall gas consumption in Europe. The Company holds the world’s largest portfolio of export contracts. The export delivery contracts total over USD 250 billion.
The unique giant fields in Western Siberia (Medvezhye, Urengoy, Yamburg, and Zapolyarnoye) serve as the basis for natural gas production in Russia.
The Nadym-Pur-Taz region will stay as a basis for Gazprom, although the first three aforementioned fields are already at the stage of declining production. The Nadym-Pur-Taz area will annually provide 440–445 billion cubic meters of gas by 2010.
It so happened that the reserves of the region have been oriented towards gas supply to consumers in Russia and Europe. However, time dictates new large-scale objectives.
In 2001, the Company did much to specify the investment strategy in the gas production for the next 20 years. Comparative analysis revealed that most promising is the development of unique gas resources of the Yamal Peninsula with onshore proven reserves exceeding ten trillion cubic meters. Gazprom is interested in wide international cooperation for implementation of development projects associated with that abundant gas province, because it will have to be developed in complicated climatic and geological settings, both onshore and offshore. It is scheduled that by 2020 Yamal annual production may reach 180–190 billion cubic meters.
Another important project may be development of the immense gas condensate Shtokman field in the Barents Sea.
To date, the total proven and estimated reserves in Eastern Siberia and the Far East amount to 6.5 trillion cubic meters. Russian eastern areas are at the stage of large-scale geological exploration, but it is already possible to assume that the existing reserves are sufficient to justify major projects for gas production and use. We discussed that at the 20th World Gas Conference in Copenhagen. The core hydrocarbon resource base includes the fields in the Irkutsk Oblast and Republic of Sakha (Yakutia) where 70 per cent of the proven reserves are located, as well as the fields in Sakhalin and Krasnoyarsk Krai. By 2010, the projected production will possibly reach 16 billion cubic meters at the Kovykta field in the Irkutsk Oblast and 10 billion cubic meters in Sakhalin.
The basic principle of forming the gas market in Eastern Siberia and the Far East will be the competition on the market among alternative fuels, and the price for gas will be shaped by balance between the supply and demand. By 2010, as new fields are brought into operation, natural gas exports from the Russian East regions to the APR may begin.
I would like to dwell specially upon the development of Sakhalin reserves where a number of PSA projects are currently carried out. As to Sakhalin I and Sakhalin II projects, the period of talks and forecasting the development of resources is already over. Gas production has already begun.
On the whole, by 2020 natural gas production in Eastern Siberia and the Far East can reach 110 billion cubic meters, which will make the region actually a new real gas center of the country. Gazprom has been authorized by the Government to coordinate the establishment of a unified system for gas production and transmission.
Projects have been started to develop non-conventional gas sources in eastern regions of Russia. In the Kuzbass Coal Basin, a project for production of methane from coal fields is underway. Research is carried out to set up efficient technologies for gas extraction from gas hydrate fields in permafrost rock areas.
Russia has constructed the world’s largest Unified Gas Supply System. The total length of gas pipelines exceeds 150 thousand kilometers. Gazprom is currently paying efforts to extend and modernize the System. A system for monitoring and managing gas transmission processes has been developed and steadily upgraded; it supports reliable, stable and efficient gas supply both in Russia and abroad.
The existing gas transmission system enables Russia to interact with Central-Asian natural gas producers and promotes gas industry integration among the CIS countries. In June 2002, Russia and Kazakhstan established KazRosGaz, an enterprise for joint operation on the gas markets. In April 2003, Russia and Turkmenistan entered into a long-term agreement on natural gas supply to the Russian market. That will make it possible for Turkmenistan to support sustainable natural gas exports and for Russia to get an additional source of gas supply.
At the beginning of the new millennium, Gazprom continues developing projects for construction of new trunklines in the West of the country. To be able to use more efficiently gas resources of Russian eastern regions, Gazprom develops a model for gas transmission trunklines. We intend to construct a number of gas pipelines from the fields in Eastern Siberia and the Far East to major regional consumption centers. Thus, the Kovykta field can meet the demand for gas in the city of Irkutsk, and Sakhalin fields can cover the need for gas in Khabarovsk and Vladivostok. Within the Sakhalin II project, it is intended to construct oil and gas pipelines to the southern part of Sakhalin, as well as to build an LNG plant yielding 9.6 million cubic tons of liquefied natural gas annually. Putting the plant into operation, Russia will join the community of LNG producing countries.
By 2020 the problem of gasification for Russian territories in Eastern Siberia and the Far East will have been largely resolved. The development of the Unified Gas Supply System in the eastern direction will allow us to combine gas resources of the European and Asian parts of the country and will promote closer integration of the region with the economic space of Russia.
Principal vectors of the Russian gas industry
Traditionally, Russian domestic market has always been of primary importance for Gazprom. Currently, the market is undergoing a process of evolution, and the basic trend is liberalization. Comprehensive measures targeted at the market liberalization are to bring about enhanced efficiency of gas use in Russia and make the domestic market more lucrative for Russian gas producers.
So far, Russia has only two traditional export markets: the market of the Commonwealth of Independent States and the European market.
For a number of CIS countries, such as Ukraine, Belarus, and Moldova, as well as for the Baltic countries, gas supplied from Russia is practically the only source. In the CIS, the largest importers of Russian gas include Ukraine and Belarus. Being a reliable supplier, Russia can meet their demand for natural gas.
The European direction remains as the most important one for us from the viewpoint of business prospects. We have been supplying gas to Europe since 1973, and we already consider our cooperation to be a good tradition. Russian gas was first delivered there during the oil crisis, and that provided Europe with an opportunity of an alternative supply from a highly efficient and environmentally more attractive energy source. One can safely assume that the European gas market has been established largely under the influence of long-standing cooperation with Russia.
To date, Russia is the principal natural gas supplier to the European market. During the past several years the Russian gas share in the all-European consumption amounted to 25–28 per cent.
Russia is interested in strengthening international cooperation in the energy sector upheld by constructive partnership of our country with leading energy establishments, such as the International Energy Agency.
We regard the Asia-Pacific vector as an opportunity for real diversification of Russian export gas supply, in as much as the Eastern direction is becoming a priority for the Russian gas sector. At the APEC summit, Russian President Vladimir Putin pointed out the following: “The Asia Pacific Region is a traditional area of activities for us as a Eurasian country bordering on many other states in the region. In Russia immense resources are concentrated in its Asian part, in Siberia and the Far East, and the APEC countries need those resources, primarily the energy ones.”
Now I would like to come to the analysis of the possibilities of Russian producers in the development of the APR gas market. Evidently, there is a dynamically evolving market here, and the demand for gas is forecast to grow. For the development of the Asian economy, it is essential to have a sufficient amount of energy, and gas is able to help resolve the problem. It appears that for our closest neighbors, i.e. countries of the North-East Asia, especially China, Republic of Korea, and Japan, Russian gas may be of great interest in the foreseeable future.
Taking into account the existing energy situation in the APR, we believe that the countries of the region are attractive for Russia both as export markets and as partners for joint development of the available regional gas resources and implementation of gas transmission projects. An example of this approach is participation of Gazprom in the Trans-Chinese West-East Pipeline construction project.
The USA may become an important partner for Russia in the energy sector. The energy dialogue between the two countries brought about the start of deliveries of Russian oil to the American market. As to the gas sector, the prospects are similar. Under the current settings, Russia may consider supply of LNG to the American market in the future. Nevertheless, taking the issue into the area of practical solutions will to a large degree depend on the demand and supply on the global energy resources market. In principle, the unique fields of Yamal and northern seas shelf provide a basis for implementation of LNG production and processing into liquid motor fuel for export.
No further improvement of Russian gas positions on the export markets is possible without diversification of routes and methods of gas transmission. It should be remarked that new transmission projects in the Western direction carried out or scheduled for implementation by Gazprom do take this factor into account.
In 2003, a gas pipeline from Russia to Turkey across the Black Sea was put into operation. The Blue Stream project covered the South-East segment of the European gas market, thus creating prerequisites for further expansion of the Russian exports in that particular direction. Many experts had doubted the very possibility of constructing a gas pipeline on depths of up to 2,150 meters in an aggressive hydrogen sulfide environment of the Black Sea. Nevertheless, the challenge was met without any negative consequences for the environment of the Black Sea basin.
Currently, construction of the Yamal – Europe gas pipeline is at its completion stage; the route is oriented towards the Central European countries.
The North European Gas Pipeline will be another major project that Gazprom intends to implement in the second half of this decade. For Russian gas, it is going to be a radically new export route to Europe directly connecting gas transmission networks of Russia with the all-European network. The project implementation will promote further integration of Russia into the European economic space. The project includes construction of offshore branch pipelines for gas supply to Finland, Sweden, and other countries.
Owing to construction of new gas export pipelines complementing harmoniously the Unified Gas Supply System in the West, Russia extends its potential of supply to the entire European market. As a consequence, the resources of Western Siberia and northern seas shelf are oriented towards the markets of the European part of Russia, CIS, Europe and, further on, following construction of LNG plants, to the US East coast.
While developing the Eastern regions of the country, diversification of routes should be within a set of priorities in the export policy. Thus, supply of Eastern-Siberian gas for export can be oriented towards the People’s Republic of China and the Republic of Korea. In future, gas supply routes from Sakhalin via trunklines can be of interest for Japan and South Korea. Gas reserves of the northern part of the Far East may become of interest for consumers on the West coast of North America.
For Russia and for Gazprom in particular, advanced technologies open up new vistas for use of hydrocarbon raw materials. That concerns the development of the Russian petrochemical and gas-chemical industry, as well as some sectors that are new for Russia, such as implementation of projects for synthetic liquid fuel production. Production of diesel fuel and naphtha that are more environmentally friendly than oil products can promote efficient development of gas fields in the coming years, opening up for Gazprom new niches on the domestic and export markets.
Prospects for development of Gazprom as an international, socio- and eco-responsible company
One of the overall objectives of the economic strategy for Gazprom is to increase its capitalization and investment attraction. The strategy is implemented through liberalizing Gazprom’s stock market, leveling of its stock prices in Russia and abroad, rendering a possibility to raise foreign participation in the Gazprom authorized capital up to 20 per cent, facilitating the procedure of its share purchase and sale, and publishing reports according to international standards. This is facilitated by approval of the Company’s Corporate Governance Code, which is targeted at efficient protection of the rights and interests of investors, transparency in decision-making, professional and ethical responsibility of Gazprom officials with respect to the shareholders, extension of information transparency, and development of business ethical standards.
In 2002, the Company succeeded in meeting its investment program targets. The overall amount of investments in 2002 reached USD 5 billion. As far as Gazprom-issued securities are concerned, the recent successful bond issue in Europe showed a considerable demand for them.
While elaborating its investment programs, Gazprom is guided by the following principles:
- Guaranteed gas supply to consumers in Russia and elsewhere;
- Development of top-priority core business activities;
- Further cost-reduction;
- Improvement of the system of investment project management and increasing project efficiency;
- Protection of the environment.
As far as long-term objectives of Gazprom’s investment policy are concerned, top-priority strategic investment objectives should include the Yamal Peninsula and the Nadym-Pur-Taz region in Western Siberia, as well as Russian East gas provinces and the Barents Sea offshore.
New gas transmission projects set forth by the Company draw attention of potential foreign partners.
While developing the reserves in Eastern Siberia and the Far East, we would like to welcome APR countries and their companies among our partners. To date, Mitsui, Mitsubishi, and Sodeco (Japanese companies) and ONGC (an Indian company) are working in Sakhalin; however, more intense participation of businesses from APR countries in the establishment of the gas complex in the Russian East is bound to bring about still greater end results.
Being the world’s largest gas company and a leading Russian corporation, Gazprom fully recognizes its responsibility in terms of meeting the environmental problem as one of the global problems confronting mankind.
During the past three years, the amount of polluting emission into the air and water has been dramatically cut, and efforts are made at reclamation of the lands disturbed as a result of the gas industry activities. Gazprom has been dealing with the problem of utilizing industrial and domestic waste both in remote gas producing settlements and in major cities of the Russian North.
To date, Gazprom has posed a strategic goal for itself: rendering environmentally friendly all the production stages, including field exploration and development, hydrocarbon raw materials transmission, storage, processing and distribution.
The Company has set up and is executing a special ecological strategy, the basic content of which includes reduction of the direct impact of production on the environment, rational use of natural resources, and improvement of the social and environmental situation.
For that purpose, Gazprom has already developed and is implementing a geo-ecological monitoring system for the principal technological processes.
A considerable amount of data is gathered using aerospace subsystems.
Within the concept of Gazprom, being an eco-responsible company, intense work is done on the use of natural gas as motor fuel. Jointly with major foreign firms and organizations, Gazprom takes part in R&D projects for implementation of environmentally clean technologies.
The Company’s further strategic plans in Yamal and Eastern regions of the country have a strong ecological component aiming at preservation of unique natural systems in those areas.
In conclusion, let us emphasize once again the role of Gazprom for the Russian society and the world gas industry. Our world’s largest resource base, Eurasia’s largest trunkline network, the balanced development strategy, our abilities in negotiating with investors, and compliance with the accepted standards in environmental and labor protection areas give grounds to regard Gazprom as a national asset and an eco- and socio-responsible company. Gazprom intends to remain the leader of the Russian fuel and energy sector and the Eurasian gas market.