Speech by Alexey Miller at the European Business Congress Annual General Meeting and Conference “Energy Security and New Capabilities of Natural Gas”
15th EBC Annual General Meeting and Conference “Energy Security and New Capabilities of Natural Gas”, May 31, 2012, Portorose, Slovenia
Our forum is taking place amid the drawn-out economic crisis in the majority of European countries, volatility of financial markets, decline of employment and, in some places, recession. Along with playing the role of a life-giving force for the economy, global energy began to face dramatic challenges, some of which go beyond today’s comprehension. However, it is now obvious that the primary challenge is the depletion of oil fields featuring easy access and low cost development.
The previous cycle of impressive economic development in many countries was considerably supported by the cheapness and accessibility of oil and oil derivatives. The situation changed drastically not only due to the constantly rising production costs but also due to an unappeasable hunger for the “black gold”, which is felt by the major developing states – China, India and Brazil. The consumption of fuel oil and other oil derivatives by industrially developed countries, particularly by their power plants, has been decreasing, while the car fleet has been growing and requires more and more petrol and diesel fuel. What could be the way out in the long term when oil becomes truly “golden”?
We are convinced that such a way out may be found only through the wide use of natural gas. Only gas is capable to be a successful substitution for oil that once pushed out firewood and coal, accelerating industrialization and urbanization.
We are convinced that such a way out may be found only through the wide use of natural gas.
Why is it gas?
Natural gas has been more and more successfully used by the mankind in industrial and household applications. Now gas drives turbines of power plants, serves as a valuable chemical feedstock, a cheap and clean fuel for cars. It is used for heating enterprises, offices and residential spaces, for cooking at home and in restaurants. The accumulated experience allows both specialists and non-specialists to impartially assess many advantages of this hydrocarbon fuel.
Obviously, in the energy sector the 21st century is bound to become the age of gas, as the 20th century was the age of oil and the 19th – firewood and coal. Real opportunities are available for it: huge reserves of the “blue fuel” (according to the most recent estimates they reach 190 trillion cubic meters with more than 33 trillion owned by Gazprom), state-of-the-art technologies enabling gas production not only onshore, but also offshore, a relatively low price and high environmental friendliness, valuable experience in transmission, including deep-sea vessels. Therefore, it is not coincidental that in the new century natural gas moved to the center of discussion regarding the ways of improving energy security, the environment protection and the global climate change control. It makes gas a really versatile and global fuel nowadays as well as in the foreseeable future.
It makes gas a really versatile and global fuel nowadays as well as in the foreseeable future.
Barriers on way of “blue fuel” in Europe
We live in a strange time. On the one hand, respected experts speak a lot about the irreplaceability of natural gas for the global energy development, about its environmental properties highly valuable today, inexhaustible reserves, particularly those in non-conventional fields, even about its cheapness in comparison with other energy carriers in terms of heating value costs. The International Energy Agency announced the beginning of the “Golden Age of Gas”, even though energy suppliers are not among the Agency’s favorites. This is exactly what we have been reiterating for years: natural gas is the “fuel for the 21st century”. Taking into account that the gas industry does not require the subsidies amounting to dozens of billions of euros every year and invested by the EU in renewable energy sources, the picture seems almost idyllic.
On the other hand, this picture is distorted by the fact that on the way to consumers, primarily in Europe, natural gas faces the barriers that are ever more difficult to overcome. Reflecting political and ideological aims, legislation and regulation are far from economic rationalism, they hamper inter-fuel competition in the market and disadvantage natural gas.
What is the main contradiction? I would summarize it in the following way: “Certainly, natural gas is an abundant and environmentally friendly fuel, continuously supplied to consumers by competing suppliers; however, this fuel has to be pushed out of the European energy mix as soon as possible, like any other hydrocarbon fuel.”
According to the EU Roadmap, by 2050 these energy carriers should be substituted with generously subsidized renewables. How realistic this goal is, time will tell. So far, it is quite doubtful. I would not like to criticize the document, just give a remark: it proclaims the need to ensure energy security at low and efficient costs, but tells you nothing about how to do it.
“Certainly, natural gas is an abundant and environmentally friendly fuel, continuously supplied to consumers by competing suppliers; however, this fuel has to be pushed out of the European energy mix as soon as possible, like any other hydrocarbon fuel.”
In general, the EU declares an important goal of reducing greenhouse gas emissions into the atmosphere. For that, it is proposed to rapidly build up power generation from renewables with massive subsidies from taxpayers.
Exact figures are not published, but the analysis of indirect data shows that in 2010 the amount reached 50 billion euros! Meanwhile, a much more financially and economically feasible gas scenario of achieving the same goal is not considered. It should rely on gas generation reasonably combined with renewable sources of energy. However, the realities are that investments in gas generation are currently non-profitable.
In Germany, for example, the discussions are underway concerning the future of power generation due to the phasing out of nuclear power plants. The most exotic ideas are being put forward, including new subsidies, auction systems for brining in generation capacities with the use of fossil fuels in order to overcome predicted downtime of capacities, which makes European gas generation unattractive for investors. Again, subsidies and methods of non-market enforcement are proposed. Eventually, they will become a burden on consumers and undermine the market.
It is enough to remove artificial obstacles, and the market will put everything in the right places.
It would be more logical to follow common sense. Do we need to reduce emissions? Let us count, what way is most cost effective. The answer is obvious – natural gas in a reasonable combination with other energy carriers, in particular, renewables. It is enough to remove artificial obstacles, and the market will put everything in the right places.
However, it seems that there is another target – decarbonization of the economy. Sometimes, it can be heard in statements by senior officials. Then, it is a purely political target, also directed against gas companies. If it is true, one should be completely honest, and, for example, inform their citizens on the price of achieving such a goal, tell them how many hundreds of billions of euros they will have to pay for the attacks on gas companies, primarily Gazprom, the attacks having as much sense as Don Quixote’s attacks on windmills.
We are sure that the European gas industry should take a non-confrontational, non-political approach based on the mutual benefit and mutual dependence. Slogans like “Down with dependence on Russian gas and Gazprom!” put us in a puzzle. For the start, I have some doubts that supplies of a quarter of consumed gas give grounds to speak about a sort of dependence. More likely, we depend on our gas purchases by European countries that provide for a half of our receipts. In addition, it is impossible to mention the dependence on an exporter if supplies are economically sound. Shouldn’t it serve as a criterion? We reckon yes, it should.
Slogans like “Down with dependence on Russian gas and Gazprom!” put us in a puzzle.
I would like to be abundantly clear. We are not going to interfere with the rules of play in the European energy market. It is a prerogative of the EU authorities and governments of member countries. We have always been working in foreign markets according to the regulations set up there, and we will follow this policy in future.
This approach relates to the EU’s Third Energy Package. At the same time, we conduct a dialogue with European authorities regarding the ways of its provisions implementation; fortunately, this document leaves enough room for maneuver and various interpretations. We believe multilateral talks should result in decisions based on reasonable economic, but not ideological considerations.
We have always been working in foreign markets according to the regulations set up there, and we will follow this policy in future.
Gazprom prioritizes reliability of supplies
In given conditions, Gazprom Group pays special attention to ensuring the reliability of export supplies to Europe. This is the only main point of the ongoing large-scale infrastructure projects – Nord Stream and South Stream gas pipelines.
They are supposed to eliminate the really dangerous dependence on the monopoly transit country – Ukraine, which blocked gas export deliveries from Russia to European markets in 2006 and 2009. Upon commissioning of the new gas pipelines, our export will gain more reliable delivery routes and additional flexibility, which is also important. The security of natural gas supplies to European consumers will considerably be increased, which is a top-priority factor for our company. Finally, a motive will be eliminated to groundlessly make Gazprom responsible for the outcomes of someone else’s decisions blocking our gas export.
The security of natural gas supplies to European consumers will considerably be increased, which is a top-priority factor for our company.
Unfortunately, our new infrastructure projects in Europe hit a bureaucratic wall. Conveying the natural gas volumes demanded by the market to the EU borders, we cannot count anymore on using the adequate transmission capacities to deliver these volumes to receiving points, where gas changes the owner and flows into the European gas distribution network. The matter is that corresponding regulatory authorities provide us with only a half of receiving capacities, though we have taken a direct part in the construction of them, by the way. It becomes a reality for Nord Stream: the “blue fuel” is being already supplied via it to European consumers, but in fact the discrimination measure prevents effective operation of the OPAL and NEL gas pipelines, being part of Nord Stream. The following question is logical: who should be responsible for the loss of investments and possible slow delivery of gas to the buyers in the EU?
The same challenge is faced by South Stream. In brief, referring to the implementation of the Third Energy Package provisions and blaming each other, European and national authorities do not let us use all of the receiving capacities, even in the absence of other claimants! There is no and could not be economic sense here.
The following question is logical: who should be responsible for the loss of investments and possible slow delivery of gas to the buyers in the EU?
Following the logic of European officials, are we obliged to build the receiving pipeline system twice more powerful, than it is required now? This is the only way to transmit the volumes of natural gas projected for Nord Stream (55 billion cubic meters per year) and South Stream (63 billion). Meanwhile, for the benefit of ideological integrity of the experiment with the Third Energy Package another half of pipelines will appear empty, because no gas from third parties could get there.
To prevent an absurd situation, we suggest considering these onshore sections of gas mains to be integral parts of gas export pipelines running under the Baltic and Black Seas. When Russian gas is transferred to a European customer and fed to the European gas transmission system, it is quite logical that it shall fully comply with the regulations applicable to the EU market. However, before this very point, the infrastructure, even if it runs across an EU country, is to be considered part of the export pipe, this would not contravene the Third Energy Package.
Signing of an agreement between Russia and the EU on the cross border infrastructure projects is necessary for both parties, it could guarantee investments by energy suppliers in the infrastructure construction.
However, before this very point, the infrastructure, even if it runs across an EU country, is to be considered part of the export pipe, this would not contravene the Third Energy Package.
We have not heard convincing arguments from those who object – purely formal references to the Third Energy Package only. We are optimistic and confident that dialogue will let the economic considerations, business logic and common sense triumph. We are not afraid of competition, we welcome and support it, but the competition should de fair, rational, free of discrimination, distortion as well as of political, bureaucratic and ideological barriers. We are always ready to make competitive proposals in the market. However, we object to using regulation and legislation as a political weapon against Gazprom Group.
Gazprom got used to thinking realistically and positively, running business pragmatically for the benefit of its shareholders. We are expecting the same attitude to ourselves. Furthermore, we have new market niches for natural gas in sight.
The gas revolution in transport is a real challenge of the time for our industry.
Today, we consider the wider use of natural gas as a motor fuel to be one of the most promising business areas. Liquefied natural gas powered heavy duty trucks and buses seem to be particularly promising. Compressed natural gas powered light duty trucks, sea vessels, trains and airplanes make the air cleaner, and the transport – more eco-friendly. Huge opportunities will open up for the gas industry and oil based motor fuels will be contested. Moreover, oil and gas will directly compete in the market and the assumptions of supposed divergence between the oil and gas price trends will become meaningless.
The gas revolution in transport is a real challenge of the time for our industry. Here is an area of cooperative activities for the welfare of all!
Thank you for your attention.