Interview by Alexey Miller to Russian TV channels

Verbatim transcript of interview:

Anchorwoman: Due to the discount stipulated by the Kharkov agreements of 2010, Russia’s loss of profit exceeded USD 11 billion, according to Alexey Miller, Gazprom’s CEO. Agreements concluded with former authorities provided that Ukraine would be given the discount for gas as USD 100 per 1,000 cubic meters, extending the Black Sea Fleet residence in Sevastopol by 25 years since 2017 instead. In his live interview, Alexey Miller speaks about the way the economy pays off for politics.

Reporter: Mr. Miller, the existing gas contracts between Russia and Ukraine were signed as long as in 2009, could you tell us in general about these contracts, their provisions and basic terms and conditions?

Alexey Miller: The valid gas supply contracts with Ukraine were signed in January 2009. These are – the contract for gas supply to Ukraine and the contract for gas transit through Ukraine to Europe, which both are the long-term contracts valid for 10 years. And the main thing is that they were drawn up and entered in accordance with the market principles. First, it covers pricing formula, market pricing and the ‘take-or-pay’ principal being general for the whole gas market, including the European one. On the one hand, it considers pricing risks; on the other hand, it considers risks related to gas volumes. So, pricing risks are the risks beard by a purchaser, and gas volume risks – by a supplier.

Reporter: Well, what do you mean by saying “risks”...?

Alexey Miller: The agreement on gas supply to Ukraine stipulates an 80 per cent ‘take-or-pay’ condition out of total 55 billion cubic meters of gas annually. Accordingly, the minimum annual gas volume to be taken by Ukraine as per the agreement amounts to 41.6 billion cubic meters. Thus, Gazprom is liable to arrange respective production and transmission facilities domestically to deliver such volumes to Ukraine. This means that Ukraine is entitled to request up to 55 billion cubic meters of gas as per the valid agreement. According to the same agreement, Gazprom is liable to provide the availability of such facilities. Consequently, the risks of Gazprom – they are, unfortunately, real – are related to availability of production facilities and transmission facilities in Ukraine. We possess and maintain them. On the other side, these facilities are not in demand. Moreover, the Company incurs annual fixed costs to enable Ukraine to buy such volumes. The agreements are entirely market-based, and Ukraine always recognised them and paid their dues, and we haven’t faced any problem until now with regard to payments for Ukrainian gas supplies. We always managed to find some solutions in order to avoid collisions.

Reporter: Mr. Miller, it’s the first 10-year agreement concluded with Ukraine for such a long period. You used to sign shorter agreements before, but this document looks like a real long-term agreement. What’s the reason for this, because any changes may happen…

Alexey Miller: As to the long-term agreements, they are the very basement for the gas market. Because the gas volumes supposed for the Ukrainian market are significant. Therefore, huge investments are channeled to develop production and transmission facilities; financial institutes give us loans and we borrow money being aware that they are secured. A long-term contract acts as a security. It’s a very good guarantee for any financial institute; and if a company enters a long-term contract, it’s granted loans by banks with pleasure. It allows timely construction of facilities and, accordingly, it’s a supplier’s tool to meet his obligations. A purchaser, in its turn, is guaranteed for the availability of these volumes for a long period. The main thing in business, especially in energy sources supplies, is not a price itself, not a nominal value, but predictability and a perception of the fact that tomorrow and further on you will have the respective energy source, gas in particular, and that gas pricing is based on the market principles. And the formula is generally a well-recognized market-based principle of pricing. It’s the one basic principle that underlies agreements on gas supply to Ukraine.

Reporter: Predictability is the main advantage of these agreements, isn’t it?

Alexey Miller: Predictability and a balance of risks, price risks of a purchaser and volume risks of a supplier.

Reporter: Some voices in Ukraine are heard to scream that these agreements are disadvantageous. Who get more profit of them, Ukraine or Russia? Could you specify? Or...

Alexey Miller: You know, when an agreement is signed, it means the parties agreed on the matter and believed it to be mutually beneficial.

Reporter: Who participated in 2009 talks? Are these persons currently represented in Ukrainian politics?

Alexey Miller: It’s most interesting to see those persons who participated in drawing up and signing the valid agreements coming to power. In particular, I mean Yuriy Prodan, Ukrainian Minister of Fuel and Energy. He was among the delegates headed by Yulia Timoshenko, and he participated in the talks. We have a photo of that remarkable event made during the signing, after the talks were over. I talked to Mr. Prodan just two days ago; we recalled our past meeting and discussions related to our cooperation in the gas sector – it was just before the valid agreements were drawn up. Besides, he is a new CEO of Naftogaz of Ukraine appointed just a few days ago. He occupied a lower position in Naftogaz of Ukraine back in 2009, but also took part in signing those valid agreements. In the course of our recent meeting, we also remembered that we had met before, and that the subject and provisions of those agreements were not something new for the current CEO of Naftogaz of Ukraine. In fact, he is well aware of the valid contract provisions, he understands them, and he is the man who sank into the essence of the agreements reached in January 2009. One may mention Arseniy Yatsenyuk, today’s Prime Minister of Ukraine, who was a Supreme Rada deputy in the past, and was well informed of the actions of the Government headed by Yulia Timoshenko.

Reporter: I wonder why did Mr. Prodan say later that he considered USD 286 per 1,000 cubic meters to be the reasonable price, if he was aware of those agreements?

Alexey Miller: The agreements were signed in Mr. Prodan’s presence and he knows well their conditions and pricing principles. I’d like to stress once again, he was the immediate participant of the Moscow talks in its final stage when the signatures were put under the valid supply and transit agreements.

Reporter: These agreements were entered in 2009, and how have they been performed during all this time? Today we face the year of 2014. Were there any delays in payments, did Ukraine agree with the agreements, and in which way did Ukraine perform the agreements when Timoshenko and then Yanukovich were in power?

Alexey Miller: It was precisely five years in January 2014 as the agreements were valid. We’ve been getting payments for gas, and Ukraine has never been questioning the valid agreements. It should be mentioned that, as part of the Russia-Ukraine agreements on cooperation, the Russian Government made a decision with regard to the Kharkov agreements on export customs revocation, and the respective addendum was signed in 2010. Gas exported to Ukraine has not been imposed with customs in amount of USD 100 per 1,000 cubic meters since April, 2010.

Reporter: You mean the price was the same? If the price changed...

Alexey Miller: I’d like to really stress here that it’s not about Gazprom’s income, it’s about Russia’s budget loss of profit in amount of USD 100 per each 1,000 cubic meters of gas. The total discount for the whole duration of the Kharkov agreements reached USD 11 billion 400 million. That’s the loss of profit for the Russian budget. The Kharkov agreements denouncing resulted in vanishing the subject of agreement, because Russia paid for the Black Sea Fleet residence in Sevastopol (Ukraine) against the future agreement, i.e. the agreement extension since May, 2017. That means that Russia made advance payments. Due to that fact, USD 11 billion 400 million is the debt of Ukraine to Russia’s budget. The Russian government has already raised a question on a need to introduce the debt redemption tool.

Reporter: Does it mean that Gazprom hasn’t been suffering any losses during all that time, and the Company was selling gas at a market price?

Alexey Miller: Yes, indeed. It didn’t affect Gazprom’s income.

Reporter: Did the price for Ukraine correspond to the pan-European level? Did I understand it right?

Alexey Miller: The price was based on the market pricing.

Reporter: Ukraine used to pay over that time posing no problem. However, Ukraine repeatedly said to pay a higher price for gas versus European states, particularly Germany. Germany is allegedly supplied with underrated gas, i.e. at the much lower price than that for Ukraine. Reverse supplies have recently been addressed rather frequently. For Ukraine, it’s allegedly much cheaper to buy Russian gas from Europe than the same from Russia. Did Ukraine really get overrated gas versus Germany? And what about reverse supplies?

Alexey Miller: Firstly, one should mention that Gazprom currently interacts immediately with end consumers of gas in many European states. As to Germany, it’s worth mentioning that we cooperate with our German partners within the whole gas value chain, i.e. from upstream to downstream operations. Besides, Gazprom sells tremendous gas volumes on the German market to immediate consumers. Thus, we get an additional margin, and, consequently, it’s incorrect to compare German prices to those fixed for Ukraine. Moreover, one should remember that our German partners extensively invested into the Russian gas production and are the shareholders of gas production projects in Russia. Addressing the reverse supplies, one may put several questions. First, it’s the matter of feasibility of physical reverse from Europe to Ukraine. You know, the physical reverse, for example, from Slovakia to Donetsk, Kharkov or Kiev looks rather doubtful. And if it’s not, then comes another issue – what if it’s not a physical, but some virtual reverse outlined on the paper, so how in this case Ukraine may dispose of the Gazprom’s gas in its pipe, bearing in mind that our terminal points located in Europe? Moreover, we should carefully study if such deals are legal. Due to that fact, I believe this issue requires painstaking investigation. The European companies, which are going to supply gas to Ukraine in a reverse mode, should as well take a thorough look at the legality of such actions.

Reporter: As far as I understood, it’s impossible to transport gas in both directions within a single pipe, isn’t it?

Alexey Miller: Of course not. A pipe is not capable for forward and reverse modes simultaneously. And if we talk about exchange deals, some virtual swaps or reverse, it should be clear that gas left in Ukraine belongs to Gazprom. And nobody, except Gazprom, can dispose of it at his own discretion.

Reporter: Mr. Miller, I’d like to raise once again the issue of a gas price difference for Germany and Ukraine. You said that Germany shared transmission and production of the Russian gas, and what about Ukraine?

Alexey Miller: As to the Ukrainian market, we have no opportunity to supply gas to end consumers. We have just a single bulk buyer – it is Naftogaz of Ukraine, which purchases the entire volume. Supplying all types of consumers with gas by Naftogaz of Ukraine currently represents certain risks for our Company. I mean the industry, population and utilities. Thus, payments for gas supplies in a current month depend on how much money Naftogaz of Ukraine is capable to collect from Ukrainian consumers. The situation is just getting worse. Recently, just a few months ago, it’s become known to us that payments received for gas supplies to the Ukrainian market came to just 50 per cent. Currently, the fiscal discipline has gone from bad to worse with collected payments reaching just 20 per cent. What does it mean? It means that debts or non-payments are now turning into a systematic problem due to Ukraine’s economic crisis, bad solvency and fiscal discipline, which proceeds propagating worse. And the situation repeats itself every month. We can see the debt extending. And if by the end of the previous month it came to USD 1 billion 711 million, by the end of the previous year – USD 1 billion 451 million, now the Ukraine’s debt to us exceeds USD 2.2 billion. Ukraine and our partner Naftogaz of Ukraine have so far paid us not a single dollar for the March gas deliveries. What does it mean? It means that non-payments, being the systematic problem, cannot be solved through any lump-sum financial aid to Ukraine irrespectively of one, two or five billion dollars are granted to Ukraine to redeem gas debts. Due to the current market situation, the problem repeats itself every month resulting in a monthly increase of the gas supply debt. If, according to Mr. Prodan, Ukraine needs 30 billion cubic meters of the Russian gas, it means that 15 billion cubic meters of gas won’t be paid for, taking into account the collection of only 50 per cent of payments. Does it mean that Ukraine’s debt to Russia is to grow higher by USD 5–6 billion by the year end? It’s a vast sum of money, it’s a grave negative outcome, because we count this money in our investment program and budget. Gazprom is a joint stock company with nearly 50 per cent of shares belonging to private investors, including the international ones. Therefore, it’s going to affect the value of dividends we pay to our shareholders.

Reporter: Is it correct that the current gas price for Ukraine accounts for risks related to transmission and Ukraine domestic sales of gas. I mean USD 486.

Alexey Miller: It’s USD 485.

Reporter: Right, USD 485.

Alexey Miller: We didn’t account for any risks related to the default in payments while setting the price. As to gas transit, I have to say that the transit agreement was signed at the same time and is a market-based one as well, and the transit tariff formula accounts for a gas price for Ukraine. As to mutually beneficial agreements reached in January 2009, one should understand that Ukraine entered the 10-year contract for the Russian gas transit through its territory as well. Market-based pricing means purely market-based tariff that is one of the highest in Europe. The formula-based pricing is mirror-like both for the tariff and the gas price. Besides, the transit tariff formula accounts for the gas price. Therefore, a rise of the gas price for Ukraine results in a rise of transit tariffs as well as Gazprom’s costs for transit gas supplies to Europe through Ukraine. Due to the discount cancelling, the transit tariff has risen as well and Ukraine is going to get more profit from our gas transit to European states.

Reporter: Does it mean you are going to pay more? An advance payment for transit until the year end is said to have been already made. Is it enough due to the gas price rise?

Alexey Miller: A rise of the tariff certainly results in a reduction of this sum. Indeed, we have advanced to Ukraine against our gas transit to Europe some time ago. The advance payment was huge and helped Ukraine to pay for the Russian gas supplies. As to a new transit tariff and its increase, it’s clear that this sum has lately been enough until the end of 2014, but now this period is shortened, and Ukraine will soon get real money for the Russian gas transit to Europe.

Reporter: Isn’t it too much for advances? You make advance payments for gas transit. Did the Black Sea agreements stay unchanged?

Alexey Miller: You know, a sum of the advance payment is really impressive. As to the Kharkov agreements, it indeed amounts to USD 11 billion 400 million. This is the loss of profit for the Russian budget. It means pensions, public sector workers’ salaries and social expenditures in Russia. It’s a monstrous sum.

Reporter: Mr. Miller, the heads of Russia and Ukraine agreed upon an additional discount for gas in late December last year. Could you specify the discount itself, when and why it disappeared?

Alexey Miller: We agreed upon discounted gas supplies to Ukraine in December last year. The price was reduced to USD 268.5 per 1,000 cubic meters. The discount was granted provided that Ukraine would redeem its debts completely and pay in full for current gas supplies. Besides, it was clearly stipulated that in case Ukraine doesn’t meet its obligations the discount for the second quarter will no longer be valid. Currently, the debt is not redeemed, actual supplies are not paid, we haven’t got a dollar for March yet and it’s unclear when the payment for March supplies is to be made. Accordingly, the discount was not extended for the second quarter as stipulated by the agreement. It’s true that our Ukrainian partners have never disputed the issue, they clearly understand why the discount was discontinued, and that the Ukraine party is the one to blame for the discount termination. It was precisely the Ukrainian party that didn’t meet its obligations, and there was no dispute with regard to the discount. Everything was done in strict accordance with the agreement.

Reporter: You’ve mentioned a poor collection of gas payment within Ukraine nowadays and who’s going to pay for it? Even if Ukraine gets a credit and repays the debt, what’s going to happen next?

Alexey Miller: First, the debt issue cannot last forever. It’s absolutely true. And we cannot supply gas for free. Therefore, the debt should be redeemed through 100 per cent payment for the current supplies.

Reporter: Does Ukraine’s budget really provide for the gas price fixed yesterday?

Alexey Miller: Yes, indeed. Ukraine’s budget provides for gas to cost USD 485. It proves once again that Ukraine recognises the price to be absolutely market-based, recognises the valid agreement and is ready to pay such a price for our gas.