Energy for the Planet. Speech by Alexey Miller at the 23rd World Gas Conference

Ladies and Gentlemen

Statement by Alexey Miller, Chief Executive of Gazprom, at the 23rd World Gas Conference, Amsterdam, 6th June 2006

Alexey Miller, the Chairman of the Management committee

Alexey Miller, the Chairman of the Management committee

I am delighted to have an opportunity to greet the delegates of this representative forum. By tradition the World Gas Conference is a meeting point to discuss the most important issues of the gas industry development. I am confident that the XXIII World Gas Conference will be no exception in this respect.

How to furnish the energy to fuel sustainable economic growth on the planet? How to attain regional and global energy security? How to manage the available energy resources most effectively? These are the key issues on the agenda for the natural gas buyers and sellers today.

Gazprom makes good progress, developing as a global vertically integrated energy company. Our primary activities secure robust solutions for the energy problems of the day.

Gazprom today

Today, Gazprom is flourishing and developing in a very dynamic way. This holds true for all aspects of the company activities.

In 2005, Gazprom broke all records for reserves growth since 1993, with an increment of more than 583.4 billion cubic meters. Reserves increase over the annual production by more than 35 billion cubic meters. This means that out of 2005 reserves growth alone, Gazprom could supply a country like Germany with gas for 15 years.

Gazprom resource base today exceeds 29 trillion cubic meters of proven natural gas reserves, and more than 1.2 billion tonnes of gas condensate. Acquisition of Sibneft increased our oil reserves to 1.3 billion tonnes – a tangible resource upon which to build Gazprom development strategy.

The further development of this mineral resource base remains one of the highest priorities in Gazprom's activity. Under the Programme for the Development of the Mineral Resource Base in the Gas Industry to 2030, the annual average inventory of gas reserves should be between 700 and 800 billion tonnes per annum. Implementing the Programme will provide for a growth in gas reserves of 23.5 trillion cubic meters and in liquid hydrocarbons of 3.4 billion tonnes.

This puts Gazprom in a very advantageous position compared with other companies that do not have the capability to increase their physical reserves in this way. The problem of dwindling reserves – a problem facing the gas business almost everywhere in the world – simply does not exist for Gazprom. While so many other companies have to face the issue of “Where are we to get our gas?”, for Gazprom the question has always been “When is it best to get our gas?”

The other problem that worries those who buy gas is the issue of the speed at which producers can step up their output. Gazprom has found the answer. In 2005 we produced 548 billion cubic meters, which is once again an increase in production as compared with the figures for the year before, and 37 billion cubic meters more than we produced in 2001. Over five years we have increased our annual gas output by an amount that is comparable to the overall consumption of a country like Argentina.

The main increase comes from expanding gas production at the Yen-Yakhinskoye, Vyngakhinsy, Yety-Purovskoye and Pestsovoye fields, and the Aneryakhinskoye zone in the Yamburg field as well as bringing output from the Zapolyarnoye field up to full capacity.

As things stand today, our production capacity is far greater than the output of gas we actually achieve. The latter figure relates to how much the transport networks can carry, how much gas is taken from underground storage facilities, and the vagaries of the weather. Our point of departure is the requirements of the market, and we produce however much gas the market requires of us. If there are any limitations on the amount produced, they are to do with the capacity of the market and the amount of demand from customers who can afford to pay a realistic price, rather than with our production capacity. Even today, Gazprom has a significant untapped gas production potential, and we shall exploit that potential in line with our business interests and with the way relations develop with our partners and our customers.

In line with its development strategy Gazprom has decided upon the order in which it intends to develop its deposits and a timetable in which to do it. Any contracts which have already been signed will be honoured 100%, using the gas to be produced under this timetable, and we already know exactly in which order, when and which fields we intend to develop right up to 2015 and beyond.

The levels of output planned between now and the year 2010 will be achieved at existing and newly-developed fields in the Nadym-Pur-Taz region: the Yuzhno-Russkoye field, the Lower Cretaceous deposits in the Zapolyarnoye and Pestsovoye fields, and the Achimov deposits in the Urengoy field. The economic sense of tackling the fields in this particular region is because of their proximity to the existing gas transport infrastructure.

After 2010, our forecast volumes of gas production will be achieved through offshore development in the Arctic seas, in the estuaries of the Ob and the Taz in the Kara Sea, in Eastern Siberia, in the Far East of Russia and at the Yamal Peninsula.

The Yamal Peninsula is a strategic region for the company, in terms of gas production. We have discovered 26 fields within the peninsula itself, with explored reserves of 10.4 trillioin cubic meters of gas, and if the offshore resources are taken into account the figure is a gigantic 50 billion cubic meters.

Gazprom makes full use of all advantages of the vertical integration. We implement a unified development strategy across the whole range of gas business activities, from exploration and production, through distribution, to marketing the gas. Existing single central decision-making structure allows Gazprom to manage its financial, material and technical reseources flexibly, and enables the company to implement projects on a very large scale. Thanks to the company's vertical integration, it can balance the development of its production and transport capabilities depending on the priorities dictated by the needs of the business.

Over the last few years Gazprom has tripled its capital investments, with an overall yearly figure of more than 10 – 11 billiion US dollars. Today, it is transport that takes precedence in our investment programme. Getting the gas to the consumers is the first priority, and apart from everything else, transportation is a much more capital-intensive process that actual production. For this reason Gazprom current investments in the transport sector is approximately twice as large as those we allocate to the gas production.

High on the priority list in the development strategy of our company are further extention and enhanced reliability of its gas transportation system. The Unified System for Gas Supply in Russia (USGS) is owned and operated by Gazprom. The Russian gas transportation system is distinguished by the centralised control, well-developed networking and availability of alternate routes for the gas transmission. The USGS provides for a uniquely flexibility in gas supply with a sound reliability margin, and it can ensure a stable supply of gas from the well to the end-user, including the periods of seasonal peak consumption.

Another important task facing Gazprom is the further development of the underground gas storage facilities at the territory of Russia and abroad, located in the immediate vicinity to the export markets.

The point of this development is to provide a reliable supply of gas to the consumer.

The final link in the Gazprom vertical integration chain is the gas marketing system. At the moment, there are three main components of it: gas marketing and sales in Europe, in the former Soviet Union countries, and in Russia proper.

Russian gas has been piped into Europe for over thirty years now. Gazprom export strategy is based on a single integrated export channel and a system of long-term contracts. The gas goes to 21 countries of Central and West Europe, mostly under long-term contracts of up to 25 years. In most cases, the export is governed by intergovernmental agreements.

Export volumes are growing steadily. In 2005, Gazprom sold 156 billion cubic meters of gas to the countries of Europe, which accounted for about a quarter of all imports there. Under the contracts already signed, Gazprom will export more than 2.5 trillion cubic meters of gas over the next 15 years.

The commercial sales and supply laws are valid not only for the European consumers; they become mandatory for the former Soviet Union countries as well. Gazprom respects their strive for the economic independence. We adapt to the principles of cooperation that correspond to the new status of those countries.

Transition to the market-based pricing remains a challenging task indeed. Until very recent time, Gazprom in fact subsidized the economies of several FSU countries. Note that we do not always see their readiness to react appropriately when unavoidable difficulties arise.

A vivid example of this is the relationship of Gazprom and our partners in the Ukraine. We supply gas to Ukraine, and at the same time our gas supplies to the West Europe are transiting that country. In late 2005 we had quite a challenging situation in the negotiations on gas prices for the Ukraine. In the end we managed to overcome those difficulties. But the non-authorised siphoning of the gas – intended for the Europeans – by the Ukraine was the fact that led to emergence of the conflict situation.

The most important outcome of the Ukrainian debacle for the European energy security was that we separated the contracts for gas supply to the Ukraine and those for the Russian gas supply to Europe with its transit via the Ukrainian territory. Earlier, there was a single contract which covered both gas transit to Europe and gas deliveries to the Ukraine, while in practice it enabled the latter to dictate conditions to both Russia and Europe in this matter. Now the terms of gas supply and delivery for Europe are totally uncoupled from those for the Ukraine.

Gazprom sells the major part of the produced gas (about two thirds) in the Russian domestic market. Today we maintain a stable gas supply to the Russian consumers; favourable conditions were created for tackling the long-overdue problems in developing of our domestic market.

Gazprom continues to prepare solutions for the liberalisation of the gas market for commercial customers. Use of the stock exchange trading technologies and the long-term gas supply contracts for the industrial users will enable us to remove current disproportions between the price of gas and that of alternative fuels.

It should be noted that Gazprom has already become a major multi-product energy company. By acquisition of Sibneft assets we doubled our oil reserves and tripled out potential output of liquid hydrocarbons. Gazprom is continuing to develop into petrochemicals, including production of synthetic liquid fuels. Transfer of high value-added production facilities closer to the resource base represents an objective tendency in modern industry, and it is a new way to increase the economic efficiency of our operations. Gazprom included this task into our strategic development plans.

We have acquired assets in the electric power industry – over 10% of RAO UES as well as a blocking share in Mosenergo, the most important subsidiary of RAO UES. We are receiving already the dividends from these investments, and plan to increase our presence in this sector of the energy business. Electricity is a part of Gazprom core business, permitting us to achieve a tangible degree of synergy. It should be noted that Gazprom is considering participating not only in the gas-fuelled generation projects. Thus we can re-allocate significant volumes of gas which are used inefficiently for electricity generation in Russia at the moment. It makes Gazprom the most efficient investor in the development of the electricity sector.

Our assets structure, integrated organisation of business and the list of shareholders enable Gazprom to combine already now the advantages of transnational energy majors with the positive features of national, state-owned companies. Gazprom can establish fully functional gas cycle chains – from production to sales, using a large variety of types of partnerships and ways of financing projects.

Confidence of investors in Gazprom prospects, strengthened by the long-awaited decisions on liberalisation of the company shares market paved the way to a boost in its capitalisation. Gazprom market value has increased by more than 25 times over the last few years! Now we occupy reliably the top lines in respective world-wide ratings.

Industry trends and the role of Gazprom

The world economy requires ever more energy. New economic power-houses are emerging, with fast rates of industrial growth and increased demand for both oil and gas. We are seeing both growth in energy prices and increased competition for the resources that produce that energy, with ever more active participation of companies from the states without enough domestic hydrocarbon resources to fuel their own economic development.

The competition for access to energy resources between the three largest gas markets – Europe, Asia-Pacific and North America – will continue to intensify.

This is good news for Gazprom. Our main product – the natural gas – is in high demand both in the East and in the West, while modern technologies made it possible to enter the North America market as well.


At the moment, natural gas accounts for only 10% of the energy balance in the countries of the Asia-Pacific region. It is, however, here that the highest growth rates for gas demand are forecasted over the next 15 years. The projected growth rate in this region is twice as high as in Europe.

Our counterparts in Asia are making great efforts to develop their business ties with Gazprom, and they show willingness to build their plans on gas supplies from Russia. As for supplying what is potentially the largest Asian market of all, China, we are already at the stage of commercial negotiations with the Chinese.

Two routes to supply gas to China have been mapped out, the Western and the Eastern. Deliveries are to start in 2011, with annual volumes of 68 billion cubic meters. Gazprom is already engaged in the feasibility study for investment in this project. The resource base for gas supply via the Western route will be the Western Siberian fields, which are close to the existing gas infrastructure, a factor that will allow us to start deliveries fast. The issue of primary importance for us is the fact, that China is ready to buy Russian gas at the JCC based price.


While the dynamic market of Asia is of interest to Gazprom, that of the North America is somewhat different. Firstly, it is the largest world market, and secondly, the prices there are the highest. Just a single glance on the map makes it evident that the location of Russian resource base of LNG export projects for the USA and Canada is more favourable compared to the Middle East deposits.

At the first stage of Gazprom activities in the American market, we plan spot sales of non-Russian LNG, where swapping of our pipe gas will be involved. The business is under way. In September 2005 we shipped our first LNG cargo to the US market. The second stage will involve sales of Russia produced LNG at the world market, which in reality can happen after 2010.

Today, Gazprom is negotiating with the leading players of the world LNG market possible conclusion of agreements to achieve more close cooperation in production and marketing of this product.

Gazprom employs in full all modern technologies so that to increase efficiency of operation and to enter new markets, which earlier were inaccessible due to technological reasons. In our LNG decision-making we take into account not only optimistic assumptions, but grim realities as well.

Experience gained from implementation of LNG projects shows that one must be ready for any contingency, when dealing with this promising product. Today, we are much more aware of the technical and engineering risks inherent to LNG projects. Many of them surpassed initial budgets many times over. We observe significant delays in commencing production and transportation facilities. Expert assessments show that technologies available are not reliable enough. Anyway, LNG-related engineering and technological risks are an order of magnitude higher than those of the pipeline gas.

There is one point of extreme concern here. We observe that the LNG issue is used in a non-professional manner, as pretext for abandoning the well-tried approaches and technologies of gas transmission. We are quite sceptical to any attempt to position LNG as a universal solution for the gas supply security.

Maritime transportation of LNG becomes cost-effective against the pipeline gas only at extended routes. This point must be taken into consideration when we solve the gas supply problem for Europe.

What's more, LNG is much more costly, so it can boost the price levels at the traditional pipeline gas markets as well.

Finally, LNG production and degasification projects depend heavily on availability of pre-contracted amounts of the natural gas.

We are confident that the best positions will be occupied – now and in future – by the companies that can combine flexibly the traditional transportation and storage technologies with the novel ones.

Long-term pipeline delivery contracts will remain the centrepiece of the gas business. Now and in future they will play a decisive role in the gas market. One of the unique features of gas business is as follows: no upstream – no sale. What's more: no contracted volumes – no upstream. Thus only long-term contracts can guarantee obtaining finance for the capital intensive and time-consuming natural gas production and transportation projects.


In planning our activities in Europe, we take into account the forecasts by which the gas demand will grow in the European countries during the next two decades. For Gazprom, Europe is a mature market with well-forecasted demand, featuring an established infrastructure and solid partnerships. We committed our prime gas transmission capacities to Europe. Gazprom participates in European markets liberalisation, and takes part in new ways of gas trading. But we are quite confident that the long-term contracts will not be substituted either by LNG or by growing spot trading. Long-term contracts provide for an indispensable comfort in the gas trading: constant gas supplies and predictable prices.

Proximity of Russian suppliers and European consumers is a fact of life. And there is no cheaper and economically efficient way of gas transportation than pipeline systems.

As to the energy security issue, it should be stressed that there can be no security for gas consumers without security for gas producers. No formula of the energy security can be viable unless it provides an incentive for gas production. Not only consumer, but gas producer as well needs badly a stable and predictable future, in particular when making long-term E&P plans.

We believe that cooperation and international integration, and not protectionist barriers will be the best defence for national and European interests when it comes to gas supply. Gazprom has chosen to develop projects structured on an exchange of assets, like the project to develop the Yuzhno-Russkoye field with German companies. The project covers the whole cycle from production to end-user and is becoming a joint business, more far-reaching that the usual relationship between buyer and seller. This is a qualitatively new level of cooperation with our European partners.

Much has been said of late about the need to diversify supplies of gas to Europe. Europe is the major consumer of Gazprom's product. We too consider that diversification is the way to guarantee energy security – but what kind of diversification?

For Gazprom, diversification means being free of the risk of instability in transit regions and the ability to choose the most attractive markets and ways of supplying them. We also see a broadening of the range of products we supply to our consumers as a part of this same picture.

2005 will go down in history of gas industry cooperation as the year which saw the start of construction of the Northern European Gas Pipeline. This project is a step towards a qualitatively new approach to export policy, marked by a crucial decrease in the transit risks involved in transporting gas from Russia to Europe.

The gas pipeline across the Baltic Sea will provide a direct connection for Gazprom transport system and European transport network, as our tangible and significant contribution to safeguarding the energy security for the countries of Europe.

A further way of enhancing the reliability of supply to Europe is by another route, the Blue Stream gas pipeline via Turkey. In its export planning, Gazprom regards transit of Russian gas to the countries of South Europe and East Mediterranean as a promising development which will be based on new contracts and new volumes of gas.

We have everything we need to fulfil completely all our commitments in Europe, remaining the main gas supplier to the European consumers, and to develop in parallel our promising relationships with companies of the Asia-Pacific region. Layout of the emerging world energy market will be fixed within a few months, rather than years. Backed by the Gazprom resource base, we can state with absolute confidence that our company can play the role of the energy cornerstone needed for development of Europe and the world.

In conclusion I should point out that Gazprom is a company with the will to allocate its resources to reliable solution of the international energy problems. Gazprom is a company with the structure and the production capacities necessary to ensure success, whatever changes may occur in the world economy or the political situation.

Gazprom is prepared to discuss in a positive key any issues of the Russian gas supply. We are determined to employ our colossal potential to the benefit our partners and shareholders, among which Russia holds the controlling stake.

June 6, 2006