Channel One Russia
Full version of OAO Gazprom CEO Alexey Miller's interview to Channel One Russia, “Vremya” news program.
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Russia, Iran and Qatar have taken the decision to form a “big gas troika”. This decision has been driven by the logic of the gas market development. The gas market is becoming ever more global. This is due to the advancement of liquefied natural gas production technologies and an increasingly bigger role of LNG worldwide. LNG allows delivering it to markets located at very remote distances from production sites – these are tens of thousands of kilometers. And, of course, all globalization related developments are naturally reflected in the dialogue between the major producing countries. The decision to set up the troika is absolutely logical given that Russia, Iran and Qatar own altogether some 60 per cent of the global gas reserves. It should also be noted that this tripartite dialogue is primarily based on joint three-way projects. The idea is that the three countries will work on joint projects across the entire gas chain from geological exploration and production to distribution and marketing of gas.
There has been a lot of talking lately that this is a step towards creating a “gas OPEC”. This is not true. The decision to form the big gas troika is the decision taken by the three countries to conduct regular consultations. The accord has been reached that we will meet three-four times a year and, I would like to emphasize it first and foremost, the agenda of our meetings will focus on practical issues of joint three-way projects with account of the scale of our gas reserves. However, the entire gas business agenda, including the gas market situation, will also be discussed in the tripartite regime. We believe that the big gas troika will be some sort of a driving force for the Gas Exporting Countries Forum.
The Gas Exporting Countries Forum is the structure to become a permanent organization, and the decision to institutionalize it will be adopted as early as at a proximate GECF meeting in Moscow. The Gas Exporting Countries Forum is the very platform to be used for discussions of the entire set of questions and problems related to the gas industry development. It will bring together all the gas producing and exporting countries.
But if speaking of the Gas Exporting Countries Forum – it is not a gas OPEC either. As there principally can?t be a gas OPEC identical to the oil OPEC. In contrast to oil, gas is not a conventional stock market commodity. Therefore, producers concentrate, first of all, on general analysis of the supply and demand balance and, correspondingly, of investment programs and large investment projects. The primary task of the Forum is to jointly analyze and form the global gas balance, as well as consider the issues with regard to production volumes so as to avoid oversupply of gas to the market. This is a highly important issue for both producers and consumers as the gas business is the most capital intensive sector worldwide and large investment projects implemented in the gas industry require tens of billions of dollars, with the investment cycle of 5–7 years. This is why the congruence of supply and demand will be the most crucial issue to be addressed by the Gas Exporting Countries Forum as a platform where the voice of all producers will be heard.
Why is the oil OPEC's influence on prices incomparable to that of a similar gas structure?
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The price formula is the main aspect in identifying gas prices. Nowadays, the bulk of supplies, particularly gas supplies to Europe, are based on long-term contracts. A long-term contract envisages a price formula. This price formula is actually the backbone of a gas contract as it facilitates equal sharing of risks by a producer and a consumer. The price formula is based on petroleum product prices for nine months. In this context, the gas market is secondary in relation to the oil market and that is its logic. It has its own benefits and shortcomings. As to the benefits, the gas market is more predictable given that it is based on the basket of petroleum product prices for nine months, with no volatility, upswings and downswings, of prices.
On the other hand, gas producers have to face certain shortcomings existing in the current pricing mechanism. In particular, speaking of pipeline gas, we may see that its average prices, if compared to LNG or oil and its products in terms of tons of fuel equivalent, are far below the prices of oil and its products. But gas is also a hydrocarbon, which is very valuable in terms of its environmental properties. The nearest future of the power sector is gas-fired power generation. Therefore, since the gas market is secondary in relation to the oil market, given that gas is not quoted on the market, there arises an absolutely objective situation whereby gas producing countries will give the highest priority to the supply and demand balance, practically the global gas balance, when addressing these or those issues.
Speaking of the present-day situation and of the global financial crisis, we see strong determination of hydrocarbon producers to protect their own interests with clear understanding that prices should always be fair for both producers and consumers. At the same time, we see that a number of the OPEC member countries with quite big presence in the oil market have recently proposed to further reduce oil output and supply to the market. In particular, oil output is proposed to be potentially cut by 10 per cent, and this is quite a considerable figure. We see how the OPEC member countries are resolute in this respect. Evidently, this approach is well grounded as, given the situation currently developing at the stock exchanges when the feedstock, oil and share prices do not reflect their fundamental value, consumers are also free to think of resolute actions aimed at bringing commodity and share prices in line with their fundamental value.
A focus should also be put here on the resource base issue. We say that Qatar, Russia and Iran own abundant gas reserves – some 60 per cent of the global total. On the other hand, it should be noted that supplies from Russia and Qatar are effectuated to definite regions. We may state that the market is segmented by large regions. North America is worthy mentioning in this regard. It is a large consumer of gas and hydrocarbons. And we see that the deficit, i.e. a gap between current hydrocarbon supply and demand in the market, will be growing during the next three-four years (this primarily refers to the oil market). By 2012 this gap between annual global supply and demand will be quite noticeable.
We should take into account that new oil provinces will be brought onstream. And, given that the market is regional, North America should evidently come to the realization that the time has come to develop Alaska. We see that U.S. oil and gas companies have not been developing Alaska for forty years now. There is actually a number of reasons for this. In particular, U.S. companies lack the experience of work in the latitudes and conditions of Alaska. These are the polar conditions.
On the other hand, there are companies, specifically Gazprom, that have such an experience. Therefore, the Alaska development issue is becoming crucially important nowadays. And apparently we may state here that a comprehensive program for developing Alaska needs to be worked out, including with the participation of companies having the respective experience and knowledge, in particular Gazprom. We are ready to offer our services in this area given that Gazprom is now carrying out gas transportation projects in Russia, which undoubtedly fall under the category of new-generation gas trunklines. These trunklines are designed and built in compliance with the existing requirements for the implementation of projects under harsh natural and climatic conditions.
Getting back to the big troika. Russia has always staked on pipeline gas and gas liquefaction is undeveloped yet in the country. Is it a new stage in gas transportation or a certain niche? In other words, is it going to be a joint gas liquefaction and transportation project?
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As far as Russia's experience is concerned, Gazprom is currently entering the LNG market, in particular the Sakhalin II project, with first deliveries to be launched at the beginning of next year. In addition we have a large-scale international Shtokman project. We have commenced its implementation. This project will allow Gazprom to firmly establish itself in the LNG business. Speaking of remote markets we plan to supply gas to, North America is one of those.
On the other hand, the market globalization permits to effectuate physical gas deliveries from other, much more proximate fields and to execute the so-called swap operations. One can supply more pipeline gas to a market, take respective LNG volumes from this market and deliver this LNG under own contracts to North America, for instance. Gazprom is now following this scheme. While we don?t have our own LNG production, we supply it to the markets of the USA, Japan, the UK and South Korea under our contracts, but from a third-party producer. In our turn, we deliver extra volumes of pipeline gas to European markets.
Once again about projects. Is there anything concrete so far?
I would tell you but I am not sure whether it is the right thing to do in terms of the trilateral dialogue. Of course, we are discussing an absolutely concrete project and it is clear in what region this project will be implemented.
Will there be a time when such a gas organization, if not a gas OPEC but the big troika or the Gas Exporting Countries Forum, will be able to somehow influence prices?
Speaking of the big troika, the very essence of the trilateral dialogue and the range of issues and projects to be discussed don?t imply expanding the big gas troika. The big gas troika is a self-sustained thing. Now, as far as the Gas Exporting Countries Forum is concerned. Of course, all producers are interested in ensuring fair prices for both a producer and a consumer. This is a direction this organization is going to follow in its work. However, the mechanisms and approaches to be applied will certainly differ from those used by the oil OPEC. But the Forum pursues a noble goal. We are talking about predictable, absolutely transparent prices for consumers and, I will emphasize that, fair prices.
What is Russia's role in creating the big troika?
There are comparisons being voiced now that the big gas troika is something reminding of our Russian troika. I think this is a right comparison. If we come to speak of the big gas troika and associate it with a Russian troika, Russia is a wheeler in it.
How do you evaluate the reaction to the troika in Europe?
The reaction to the troika we evaluate as satisfactory. I think that the real practical work, this trilateral dialogue will show that there is nothing to fear. Recently the West have tried to demonize hydrocarbon producing countries, particularly gas producing countries. That's what we see and hear in respect of Gazprom. I think, one need not be afraid of a man with a gas gun. The “gas gun” is only at an NGV refueling station.
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