Vesti-24 TV Channel

The Saint Petersburg Economic Forum was focused on large-scale energy projects. Among them, first of all, Nord Stream and South Stream. Gazprom’s Head Alexey Miller told about it in an interview to our TV Channel. He stated that France had become a participant in two “streams” – South stream and Nord stream. Besides, a technical assessment of Macedonia’s and Romania’s participation in the gas branch construction in Southern Europe will be carried out within 2 or 3 months. Alexey Miller also informed us on the future cooperation with Ukraine and the problems with Belarusian partners. Watch the full interview with Gazprom’s Head on our TV Channel.

Interviewer: Good afternoon, Mr. Miller. Thank you for taking the time to give this interview. The International Economic Forum has adjourned in Saint Petersburg.

A plenty of interesting discussions, business dialogues and presentations are made. What appeared to be the most interesting and important for you and what particular deals and agreements were negotiated and concluded there?

Alexey Miller, Chairman of the Gazprom Management Committee: You know, at the recent Saint Petersburg Economic Forum the priority was given to large-scale energy projects, primarily, Nord Stream and South Stream. We have signed the documents on the Gaz de France Suez joining the Nord Stream project as a new shareholder. The list of the project participants has finally been defined. We are pleased to mention that French business has been taking a proactive role in the implementation of major transmission projects. Following the crucial accords that were reached during the Saint Petersburg Economic Forum in relation to the South Stream project, another French company, Électricité de France, signed the trilateral documents with Gazprom and Italian Eni to enter the South Stream project. South Stream is actually transforming into a Pan-European project, which attracts the continually increasing number of potential member countries.

At the end of the Forum, the French vector is worth mentioning. This involves negotiations between Russian and French Presidents and a panel discussion held in their presence. We may state today that a fundamentally new level has been achieved in the cooperation with our French partners – not only sale and purchase of energy resources but also the implementation of large-scale gas transmission as well as production and liquefaction projects. Therefore, the French vector predetermined the spirit and the atmosphere of the Saint Petersburg International Economic Forum. Certainly, we should also name Total, our partner in the Shtokman development project. We also tend to note that our cooperation with French companies becomes strategic as it envisages many promising fields of cooperation and interaction. The matter concerns power generation, underground gas storage, as well as cooperation on energy saving and innovation issues.

A most important issue, which everyone wants to find out, is the situation with Belarus. You have conducted negotiations with Alexander Ozerets, Energy Minister of Belarus. Have you agreed on anything and does Belarus acknowledge the debt?

The negotiations with our Belarusian counterparts ended in nothing today. Speaking on the matters recognized by Belarus: the mere fact that the Belarusian party made a proposal to redeem the debt for Russian gas supplies in the form of materials and equipment, proves that our Belarusian friends do acknowledge the debt.

How will the situation evolve and what can we expect on Monday?

Russian President Dmitry Medvedev declared everything. If the debt for Russian gas supplies is not settled within five days, than in full compliance with the effective contract Gazprom would be justified to reduce Russian gas supplies to Belarus in proportion with the debt value. The reduction volume may come to 85 per cent of the daily deliveries.

Mr. Miller, what is the Company’s performance in gas production now?

Gazprom operates on a market-based principle with gas production depending on demand in Russian and European markets. Gazprom owns significant production capacities far more exceeding the demand in Russia and Europe. Currently, Gazprom’s capacities amount to some 620 billion cubic meters of gas. This is a significant volume, but demand is much less today. Evidently, there was a dramatic demand slowdown in Europe during the crisis of 2009. We assumed it was quite feasible that the market offsets around two thirds of decline in 2009, and we outlined the annual production target at 519 billion cubic meters of gas. And over the first four months the market grew well, particularly, in the EU. The market grew at a significant rate, and we considerably exceeded our planned annual production to come out with 530 billion cubic meters of gas. However, since the beginning of May, the European market trend has changed and we should say that two trends emerged. It is a continuation of gas demand growth in the northern part of Europe, with a primary role of Germany, which is our largest gas consumer, our largest market, and we are just pleased in this respect. At the same time, since May the slowdown in gas demand was observed in Southern and Southeastern Europe. And as your TV Channel reported, these countries were also in the state debt related and financial crisis. Unfortunately, we faced the influence of this crisis in the real economy. Due to a considerable demand reduction in these one and a half months, we have lost the incremental volume accumulated during the first four months. Today we actually keep up with the planned rates. If the negative gas demand trend in Southern and Southeastern Europe is retained, Gazprom will surely not be able to obtain the planned volumes. Let us hope this will not occur, but on the other hand, we do not see any indications of rapid changes in the market.

What is going on with demand now? At the Global Energy session, within the Forum, you said that in the current market the trend was upward, at least in Europe.

Yes, it’s true. However, considering the volume we lost – it makes up 10 billion cubic meters over 1.5 months. European gas production decreased by  20 billion cubic meters a year in 2008–2009. The gas production decline in Europe, by all means, serves as a major factor for our Company. Russian Gazprom is ready to make up for this decline. We possess abundant gas reserves, and being a reliable and trustworthy supplier, we have no doubt that the decline in indigenous gas production by European companies may be and will be offset by Gazprom.

What will happen to the gas price in the global and European markets in a year, for instance? At the same Global Energy session, a voting procedure was conducted, and you denied the amount of USD 200–300. Why?

First of all, the actual price is higher so far. We have no reasons to think that any downward trend will appear all the more gas prices follow the lead of oil prices. Therefore, I have voted for the price exceeding USD 400 per 1,000 cubic meters. By the way, President of Total, a friend and a good partner of ours, voted for the same price, and he advised it at the Global Energy session. When the voting results were announced and I was given the floor to comment on them, I said that it couldn’t be like that, because it could never be like that, as Anton Chekhov wrote. In fact, I am practically convinced at this point. As for the upward trend, oil prices will amount to USD 100 per barrel in the short term. Accordingly, the gas price will soar, though with a certain time lag, because it is based on prices for oil and oil derivatives, and we will observe such an increase. While for European end consumers, and that was discussed at the Forum, Gazprom’s selling price is not so crucial and significant compared to various taxes and respective margins in favor of companies dealing with Russian gas. The margins are rather high and make up tens of percents. Therefore, our European partners have a space for saving and optimizing.

What will happen to the domestic gas price for both household and industrial sectors during this and next year?

Above all, regarding households: Russian people, our consumers, need not worry because the price for households will be fixed by the Government as before. Gas prices for households will remain state-regulated. The policy being implemented by the Russian Federation Government is oriented at linking the price growth to the inflation rates. Therefore, one shouldn’t expect any changes in this area. As for the Russian industrial sector, gas prices will certainly grow. The Government adopted the decision that by January 1, 2014 the gas price for domestic industrial consumers should provide for the level of profitability equal to the supplies of Russian gas abroad. What does it mean? It means the export price minus 30 per cent of export duty and minus costs associated with conveying gas from production areas in Russia to European markets. This makes up a substantial amount, and domestic industrial consumers will enjoy much lower gas prices then their foreign competitors. And competitive advantages of Russian industrial consumers based on cheap Russian gas will retain forever. Therefore, we consider it to be an absolutely right decision. First, the gas price increase will create the real competition among primary energy resources considering that coal, oil and oil derivatives are traded at market prices, while natural gas has still been state-regulated. These primary energy resources are interchangeable. And it is evident that the issue of energy consumption is of utter importance for Russia. Our economy is highly energy intensive and, of course, great volumes of natural gas are consumed by the industrial sector. The desired result can only be achieved through economic leverages and market-based prices. Besides, these outcomes will also influence innovation processes because our Russian producers will face the necessity to adopt new technologies. This is undoubtedly a strong incentive for innovations.

Mr. Miller, the modernization issue and the need to develop innovation projects in Russia were widely discussed at the Forum. Does Gazprom have any innovation program? If it does, what projects does it include?

Regarding our innovation program, primarily, I should highlight that annually we earmark circa four per cent of the total investment amount for R&D. Such an investment volume is absolutely commensurate with the volume allocated by leading global petroleum companies for this sector. Surely, we have a clear and precise understanding of our priorities in this area. These priorities are determined by the fact that the gas market is becoming global. And we pay great attention to the objectives related to diversifying the final products of our business, in particular, the matter concerns liquefied natural gas and gas-to-liquid fuels that can be produced from natural gas. In addition, it is the diversification of transmission routes and understanding that much greater economic efficiency should be attained in this area through R&D advancements in piping products and gas compressor units. We are aware of our priorities and we have the necessary funds. Nevertheless, the R&D and cooperation activities should be attractive for our Russian producers. Furthermore, technologies and equipment ought to be widely marketed. To achieve the return on R&D investment in this field, Gazprom should not be the unique consumer of these products. This is the reason why we decided to set up an Innovation Venture Foundation. Relevant incorporation documents have already been prepared. We see Gazprombank as our partner, but we are also open to other financial institutions and companies. Also, we forwarded our proposals to the Russian Federation Government and we expect the Foundation to start operating in the nearest future.

Here is the last question for you. What is the status of negotiations on the merger of Gazprom and Naftogaz Ukrainy?

We have come to an agreement with our Ukrainian friends and colleagues to hold the merger negotiations in a stagewise manner. At the first stage, a joint venture is projected between NAK Naftogaz Ukrainy and Gazprom, where the Ukrainian party would contribute its gas transmission system and gas production assets in Ukraine, and Gazprom would contribute the equivalent production assets in Russia. However, this joint venture could be possibly established if the parties coordinate the second stage – the complete merger of Gazprom and NAK Naftogaz Ukrainy. The economic issue is straightforward, because the economic benefits of this merger are evident, and during the negotiation process our Ukrainian colleagues admit that this transaction is absolutely profitable for Ukraine. Nevertheless, the issue has been politically loaded in Ukraine. Let us hope that we will manage to get the final agreement. At the same time, speaking on the proposed production assets that we could contribute into the joint venture, we have definite ideas, we possess the fields that could be contributed to the joint business with our Ukrainian partner, NAK Naftogaz Ukrainy.

Thank you very much for the interview.