Interview by Alexey Miller with TV Rossiya 24

Moderator: And now the latest business news from our reporter Maria Bondareva. Hello! So, the South Stream project is becoming a reality. In a few minutes the first joint of the gas pipeline will be welded at the Russkaya compressor station near Anapa. This project as well as the branch is trans-European. South Stream will connect Russian gas fields to European consumers under the Black Sea, bypassing Ukraine. It will run from Anapa via Turkish waters to Bulgaria and further on via Serbia, Hungary and Slovenia to the Italian town of Tarvisio. The majority shareholder of South Stream Transport – operator the South Stream offshore section, is Russian Gazprom. It owns a 50 per cent stake. Italian Eni controls 20 per cent, German Wintershall and French EDF – 15 per cent each. Well, there were many arguments, criticism and speculations around the projects. But the documents were signed after all. The last ones – less than a month ago. Gazprom managed to settle it with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria. These countries will take part in building of the project’s onshore section. Their lands will host the gas pipeline running from Anapa via Turkish waters to Bulgaria and further on via Serbia, Hungary and Slovenia to the Italian town of Tarvisio. Turkey was the first to agree in the framework of gas supplies via the Blue Stream gas pipeline. The others were in talks with the Russian gas company for the whole year. Bulgaria was the last to yield. Taking advantage of its favorable location, the country was trying to receive a discount on the ‘blue fuel’ for the next year already. As a result, Sofia managed to have it its own way. In compliance with the final investment decision on the Bulgarian section, Gazprom will make a 20 per cent discount and offer the possibility of direct gas purchases. And now, my colleague Dmitry Shchugarev with on-the-spot coverage of latest news from Anapa. Dmitry, I know that today you have a chance to directly communicate with the main participants of this crucial event. Over to you!

Correspondent: Hello, Maria! That’s true, there are a lot of guests here today, a lot of high-ranking guests from the countries which take part in this project as partners. Right now we are standing here with Alexey Miller, Gazprom’s CEO, who kindly agreed to answer our questions. Mr. Miller, speaking of the environmental aspect, right now we find ourselves in a really ecologically sound place. If we look that way, we’ll see a plenty of vineyards there. If we look the other way, the view of the sea will greet us directly. But, of course, today’s talk it is not about this. Today we are talking specifically about the money, about the profit Russia may get not only from its European partners, but also from projects like the Southern Corridor, that will be implemented in Russia. Today it is this very pipe. Everything will be quite symbolic here today. It is clear that the work done is tremendous. A great deal of work has been done in terms of concluding a lot of contracts, a lot of agreements. What have you arrived at by now?

Alexey Miller: Now I may say that today we are witnessing a really historical event – the start of the South Stream gas pipeline construction. And we scored this victory together with our partners. In a very short period of time we completed the pre-design and the pre-investment stage. And we start the gas pipeline construction in strict compliance with the schedule. Gazprom already has a vast experience of constructing such facilities. It is Nord Stream with two strings, it is Blue Stream with two strings – an offshore gas pipeline which currently runs under the Black Sea and delivers gas to Turkey. As for the environmental aspects, it should be noted that we are implementing these projects under the highest international environmental standards. And speaking of Nord Stream, I may say that currently the environmental impact on the Baltic Sea is much lower than it was agreed when we were obtaining all the environmental permits. As for South Stream, our main advantage is undoubtedly the additional volumes of Russian gas that will be exported via this pipeline. The problem of transit risks is also being addressed, of course. Basically, what we are saying here is that the launch of South Stream’s four strings will totally eliminate all the transit risks in the Southern Corridor. And the South Stream project fully corresponds with the strategy of both the European Union and Russia to create new gas transmission routes. I also would like to point out that the project is totally marketable. All the volumes to be conveyed within this project, namely 63 billion cubic meters of gas, are already distributed.

Correspondent: When the name ‘South Stream’ appears in the press, certainly a lot of details come to mind and emerge at once about the course of negotiations and what kind of competition there was on that market. For instance, everybody knows about the Nabucco project. Everybody knows about the Ukrainian White Stream project. But we are now going to witness the start of the South Stream construction. Is it really a kind of a victory in the competitive struggle?

Alexey Miller: You know, speaking of timeframes, South Stream is really the only project which will be put into practice. The one we are about to start constructing in strict compliance with the schedule, as we have already mentioned. It is the end of 2012. While working at the project, we by no means were thinking about competing with other projects. First of all, we pursued our own goals. We were attaining our goals on Russian gas supplies. Our competitive advantage is that we have gas. And we have our own consumers unlike many other projects. And what is most important, we have a well-formulated objective. It involved the definite deadlines and the definite volumes. Thus, the objective has been met. And I’ll say it once again – this is the victory we scored together with our partners, together with German companies, with Italian and French companies as well as companies from the countries that South Stream will pass.

Correspondent: Of course, I’d like to ask you about the Southern Corridor, which will be significantly beneficial for Russian citizens as well. At what stage is that project now? And when will it be implemented in a way it should be?

Alexey Miller: The Southern Corridor project will be implemented within the same timeframe as the South Stream project, as we are going to approach these issues in a comprehensive way, understanding that gas consumption is going to increase in Southern Russia. This applies to the Krasnodar Territory. This applies to Anapa, for instance. The requested gas amounts from our Russian consumers are very significant. That is why reconstruction and retrofitting of the Russian gas transmission system will be performed for the needs of Russian consumers at first place, and for the South Stream needs to increase our export supplies.

Correspondent: Mr. Miller, thank you for answering our questions! We wish you good luck at this ceremony today and in future cooperation with your partners in Europe. Thank you!

Alexey Miller: Thank you!

Correspondent: Thank you, Maria! Well, the ceremony is about to start here. I think we should turn our attention to it!

Moderator: Yes, thank you, Dmitry! That was Dmitry Shchugarev, our man with on-the-spot news from Anapa. He talked to Alexey Miller, Chairman of Gazprom. Well, now some more details about the South Stream gas pipeline. It is planned to lay a total of four strings with the capacity of almost 16 billion cubic meters of gas each. First supplies are scheduled for 2015, and the design capacity of 63 billion cubic meters of gas per year is to be reached in 2018. Here’s an interesting fact – straight from the beginning, when the concept of South Stream had just appeared, Gazprom was menaced by alternative projects. Like, the competition in the region would be extreme. But none of these gas pipeline projects moved past their project stages. Moreover, the Nabucco gas pipeline which the European press used to call grand, is currently in decline. It should be reminded that the pipe running over three thousand kilometers was to be laid from the Caspian region to Europe bypassing Russia. The ‘blue fuel’ was to be produced from the Shah Deniz field in Azerbaijan. In addition, it was also planned to purchase gas from Iraq, Turkmenistan and even Iran. But the project participants, including such notable representatives of the energy business as British BP, German RWE, Austrian OMV and Hungarian MOL were alienated from the project. BP withdrew from the project. RWE is currently considering such an option. Due to this, Nabucco’s reputation is slowly going down making it more inexecutable every day. Another competing project – the Trans Adriatic Pipeline abbreviated as TAP. Its construction is supposed to start in 2015. The pipeline to cross Azerbaijan, Georgia, Turkey, Greece and Albania to Italy is being constructed by German E.ON, Swiss EGL and Norwegian Statoil. And though the project members vigorously declare that they in no way depend on South Stream, they were not the first to start the construction. Neither did they sign any fundamental gas supply contracts. Therefore, South Stream has certainly won this race. Of course, like any project it has its own challenges, of which the major one is the growing project cost. Just like Nord Stream, South Stream is an expensive project. And while a month ago Gazprom estimated the project’s costs at EUR 15.5 billion, now, after specifying the route configuration the costs increased by half a billion, of which 6 billion is to be allotted to the onshore section, and the rest – to a more costly offshore section. After completing all the bidding procedures with suppliers and contractors in 2013, according to some estimates, the project cost may rise to EUR 20 billion. Another problem is the European Third Energy Package. Relying on its letter, Europeans require that access to the pipe should be given to third parties. By now, Gazprom hasn’t succeeded to exempt South Stream from the document’s jurisdiction. For this purpose it needs to acquire the Trans-European Network status. Such projects as Nord Stream, Yamal – Europe and Nabucco, the main competitor of South Stream, have this status. In order for the project to be implemented transiting countries should grant South Stream the national status. Bulgaria, Bosnia and Herzegovina have already given their consent. Serbia is next in turn. Another requirement of the Third Energy Package is the following: a single supplier can’t use more than a half of pipeline capacities. But Gazprom insists on recognition of the onshore gas pipeline sections as the continuation of the export gas pipeline under the Baltic and Black Seas. The Russian party and the European Commission will discuss this issue as soon as the next week. The South Stream project is not only economically, but also politically significant. It will help us confirm our leadership in the European gas market. Recently Alexander Medvedev, Deputy Chairman of the Company’s Management Committee admitted in an interview to German Handelsblatt that Gazprom wanted to expand its share in the German market. By the way, Gazprom will acquire the total ownership of German Wingas by the end of the next year: it is engaged in trading activities and controls up to 20 per cent of the German market. The transaction will be implemented through assets swap with BASF. Currently, together with Gazprom they run the company on a par. Gazprom, in its turn, will acquire a 50 per cent stake in Wintershall Noordzee. The latter owns a field in the North Sea. Consequently, Gazprom will gain access to it. By 2015 Gazprom is planning to double its reserves stored in Europe to 5 billion cubic meters of gas. It is also important for Gazprom to retain its exclusive right to re-export Central Asian gas and not to lose export revenues in future. Finally, our country has to decrease its dependence on transiting countries. The main obstacle here is, of course, Ukraine. First results in this respect have already been yielded by Nord Stream. Due to the supply distribution, in the first eight months of 2012 gas transit via Kiev has decreased by almost a quarter.