Interview by Alexey Miller with TV Rossiya 24

Presenter: My colleague Maria Bondareva witnessed the solemn ceremony, she’s live from Belgrade. Good evening, Masha. Over to you.

Reporter: Good evening, Katya. Gazprom’s Head Alexey Miller is now standing next to me and we are going to talk about what has happened today in Serbia, the gas pipeline commissioning, the gas pipeline outlook and Gazprom’s expectations with regard to this pipeline. Good evening, Mr. Miller.

Alexey Miller, Chairman of the Gazprom Management Committee: Good evening.

Reporter: Mr. Miller, Russia came to the Balkans. Today it has officially come to Serbia, and what does the project mean for Russia and for Gazprom in particular?

Alexey Miller: It’s the epoch-making project enabling direct gas supplies to Southern Europe via the Black Sea. South Stream’s annual capacity comes to 63 billion cubic meters of gas. There is no doubt that the project eliminates transit risks completely and provides for direct reliable and continuous supplies of Russian gas to European and Serbian consumers. Evidently, the project kick-started the economic growth not just in Serbia, but within the whole region, ‘cause it means massive investments. Over EUR 1.5 billion will be invested in the Serbian section. 422 kilometers of main pipelines will be laid along with compressor stations and branch pipelines to adjacent countries. Serbia will become the European center of gas transit, storage and distribution. This will result in the absolutely different geo-political status of the region.

Reporter: So, this means that Gazprom diversifies its supplies to Southern and Central Europe.

Alexey Miller: Surely, similar to the Nord Stream gas pipeline, South Stream is a part of our strategy for diversifying transmission routes and export supplies of Russian gas.

Reporter: You mentioned 63 billion cubic meters to be the pipeline’s annual capacity. Will this capacity be used in full? Are there any gas supply agreements with European countries?

Alexey Miller: Yes, of course, all volumes have already been contracted. And these volumes were subject to preferential contracting among the project member countries. I would say that besides transiting countries there are companies from major European countries sharing in the offshore section of the pipeline, including our partners from Italy, Germany and France. Moreover, Italy should be noted as the largest target market for this project. The major volume of gas will be supplied to Tarvisio, Italy. As to the whole 63 billion cubic meters – it is completely contracted, and, currently, if certain agreements are not signed yet, the basic terms have already been agreed.

Reporter: What can you say about the construction of the branch pipeline to Italy? I’ve heard there were some issues.

Alexey Miller: No, everything is in due course. It should be noted that we signed the intergovernmental agreements, which regulate our relations with every member country. The project is progressing according to schedule. From its very beginning, we’ve been facing no backlog of the schedule even for a month. The gas supply commencement is scheduled for December 2015. As to the Serbian section, I’d like to thank all Serbian colleagues for smooth and timely solving all the issues and getting all the approvals. And the most important thing is that we’ve already had the solid team, the team that will surely build the gas pipeline in due time.

Reporter: You anticipated my next question. I wonder how did you find the negotiations? The construction of Bulgarian and Serbian sections has already started. What about negotiations with other countries? What is the next country to start the pipeline construction? Vladimir Putin has recently met Erdogan and confirmed the intents on construction across the Turkish economic zone. It would be very interesting to know more detail.

Alexey Miller: The negotiations with all our partners are running smoothly, because everybody welcomes the large transit volumes across their territory. Moreover, it really means extra proceeds to their budgets. Indeed, large projects require all the issues, including investments, to be considered very carefully. Documents related to credit allocation by Russia to Serbia were signed today as part of the solemn ceremony dedicated to the commencement of the Serbian pipeline construction. Since all onshore sections of the pipeline have been covered by our joint stock companies established on the basis of such agreements that we had reached at the negotiations held during the preliminary stage, each party is obliged to finance the project in equal shares. As to Bulgaria and Serbia, we agreed that we would pay out our partners’ share and they would repay a credit through the future transit payments. We allotted them very soft credits. Our terms are much better than the market ones. As to the offshore section of the pipeline, it was confirmed once again at the Putin and Erdogan’s meeting that all the essential investigations had been done. We will be ready to start the construction of South Stream’s offshore section in the second quarter next year.

Reporter: What about your talks with Hungary, bearing in mind that the Hungarian Government decided to grant a special investment status to the South Stream section laid across its territory? Does it mean that we would soon evidence a speedup in the construction of South Stream’s Hungarian section?

Alexey Miller: Such a decision by the Hungarian Government will surely allow us to accelerate solving lots of technical issues related to the Hungarian section of South Stream. It supposes getting all essential approvals from the core ministries and authorities on a shorter notice. The Hungarian section is scheduled next for construction the following year. It’s a long section as well, but we are confident we will show the same level of cooperation as we do in Bulgaria and Serbia.

Reporter: You’ve just mentioned the South Stream offshore section. It’s really unprecedented scope ‘cause the pipe is laid, as far as I know, at a 2,000-meter depth.

Alexey Miller: It’s above 2 kilometers.

Reporter: And, as far as I know, nobody laid pipes at such a depth, so it’s quite an investment-consuming project. Tell us, please, what a payback period do you expect?

Alexey Miller: As to the offshore section, I’d like to note that the pipeline will indeed be laid at the depth exceeding 2 kilometers. On the other hand, Gazprom has already gained the experience of laying a submerged pipeline, particularly, in the Black Sea. I mean the Blue Stream project, i.e. two branches of the offshore pipeline from Russia to Turkey. As to these projects’ payback, each company has its specific internal rate of return, which companies refer to while making such a decisions. I may say the project for the offshore gas pipeline across the Black Sea to Europe fully complies with all our in-house requirements.

Reporter: Again, the South Stream pipeline may be treated as a strategic Europe-oriented project, and what about the Third Energy Package of Europe?

Alexey Miller: As to the Third Energy Package, there are different ways to settle the matter; one of those is surely the common for all member countries, namely entering the agreements on export infrastructure between the EU and Russia. The Third Energy Package issues related to major infrastructure projects are then to be solved at the EU-Russia agreement. The Russian Federation has submitted the draft agreement in Brussels. We hope that negotiations will be held in an efficient and productive manner and both parties will sign it. There are local ways of settling these issues; in particular, the agreement on imposing the public service liabilities on our joint venture between the Serbian Government and our Russian-Serbian joint venture was signed today as part of the ceremony marking the startup of the Serbian section. It’s the decision by the Serbian Government, which enacted the corresponding decree in October this year. Thus, our joint venture, being imposed with the liabilities within the scope of this agreement, de facto settles all the collisions related to the Third Energy Package. Moreover, the agreement is drafted in strict accordance with the European legislation, the notorious Third Gas Directive and the intergovernmental agreement signed by Russia and Serbia.

Reporter: And the last question, Mr. Miller. What is the outlook for pricing policy? Is Gazprom going to adjust its pricing policy for European consumers by pushing prices closer to the market ones due to the LNG emergence in the market?

Alexey Miller: As for the market situation, it is very favourable for Gazprom and Russia in the European market; we can see that the large volumes of LNG came to the Asian market this year, and the reasons for this are absolutely clear, which resulted from higher prices in the Asian market nowadays. Besides, a number of countries show a shift to natural gas within their fuel and energy balance. And here we should mention Japan. Hence, the larger volumes of LNG are in demand in the Asia-Pacific market. So, LNG leaves the spot market for the Asian market. We feel that, because Gazprom’s supplies of Russian gas to Europe this year exceeded those of the last year significantly, and keep on growing. Such a rise was above 30 per cent in some months. Therefore, we see Russian gas being in demand in Europe, and the demand keeps growing and this trend will continue. As to the prices, one should note that the LNG shift from the European market to the Asian one resulted in spot prices approaching our long-term contract prices, which are linked to the oil ones. And, as to our pricing policy – it’s well-balanced and allows our consumers to increase the extraction of Russian gas.

Reporter: Thank you very much for the interview, Mr. Miller.

Alexey Miller: Thank you.