Interview by Alexey Miller with TV Rossiya 24

Verbatim record of interview

Anchorman: So, in this context it is clear why the Americans needed to remote Ukraine from the Eurasian Economic Union before the current events. Now, perhaps, they are trying to drag on the negotiations on gas between Ukraine and Russia, though at the expense of the European Union, which is also quite curious. What can this lead to? Moscow might cut off gas to Kiev, there will be much hate and trouble and only experts will be able to make out the real truth, whereas the general public will be presented with an image of a treacherous neo-imperialist Muscovy that has to be blocked off. Actually this is a well-understood familiar game. The touchstone is what kind of relations, in what way and with whom Gazprom develops. Once again, we have the first-hand information. Once again we’ll go to the uppermost floor of the Russian gas monopoly in all senses. Today we are talking to Alexey Miller.

Mr. Miller, this week European Commissioner Mr. Oettinger told the European Commission that the South Stream construction had to be put on ice in order to preserve Ukraine as a transit country. It’s clear why he proposes this, isn’t it? It’s the political rationale. Now Ukraine is an irritant, and it’s a mechanism of applying pressure on Russia. What will you answer him?

Alexey Miller, Chairman of Gazprom’s Management Committee: Actually, our answer is the construction activity. The European Commission can’t stop it. Nobody can prevent us from constructing. Our answer is very simple: in December 2015, that is, next year in December, the first gas via an offshore gas pipeline under the Black Sea will be delivered to Bulgaria, to the European Union.

Anchorman: Moreover, these days you agreed on a gas pipeline branch to Greece, for all I know.

Alexey Miller: Yes, we did.

Anchorman: Did Greece ask for it at least?

Alexey Miller: Yes.

Anchorman: I saw my Ukrainian colleagues quoting all this quite happily, because naturally Ukraine wants to preserve if not a monopoly, then at least a major share of the Russian transit. But sooner or later this has to be left behind.

Alexey Miller: Certainly. The history of the recent years proves that this has to be done. Ukraine’s transit risks are extremely high. The latest events we are witnessing once again speak for the soundness of the strategic decisions made both in the context of the Nord Stream and South Stream construction.

Anchorman: Well, maybe that’s the reason then why the Ukrainians struck an attitude now? They want to drain Gazprom dry during the years left, don’t they?

Alexey Miller: Well, I suppose that...

Anchorman: Concerning the transit, I mean.

Alexey Miller: We’ve already prepaid for the transit. We’ve paid in advance until September. But in the first place, Ukraine’s problem with gas debt is due to Ukraine being bankrupt. We can say that Ukraine might and it wants to drain us dry in terms of the transit. Surely, there is such a background. But the main reason for the current problems in our gas relations with Ukraine is the economic state of this country. Consumers can’t pay, the payment discipline is low. That is not to mention the general economic problems.

Anchorman: By the middle of this week I noticed another unusual situation. Everyone noticed this situation, but I might have found a peculiar explanation to it. You have already settled everything with the European Commission and you say, “Ukrainian guys, do pay off the two billion,” as Vladimir Putin put it the other day. But all of a sudden they rebelled no only against Russia, which is politically explicable, but against the European Commission as well. I doubt that the Ukrainians could have made such a decision themselves. Maybe it’s the American factor that matters?

Alexey Miller: You know the European Commission really supported our stance that we had represented in the very beginning during our trilateral talks. They need to start paying first and certainly the price of USD 268.5 for a thousand cubic meters is out of the question. But it’s really true that until now Ukraine’s stance has been inconsistent with the proposals made by Russia, Gazprom and the European Commission.

Anchorman: It’s the Euro-choice, but…

Alexey Miller: It is the Euro-choice. But there may be some other consultants, other advisors.

Anchorman: Winding up the European topic, Mr. Oettinger appealed to Gazprom to offer Ukraine a fair price. But what is the fair price for Ukraine?

Alexey Miller: As for the price for Ukraine, it is about the formula-based pricing, the 2009 contract. The formula has been valid for five years and hasn’t caused any doubt. But we need to bear in mind that there were Kharkiv discounts, certain preferences were granted…

Anchorman: In exchange for the residence of the Black Sea Fleet, that is not a part of Ukraine anymore.

Alexey Miller: Yes, that’s right. That is why, speaking of the contribution Russia might make into settling the Ukrainian crisis, the price adjustment mechanism should be the same as it was under the former Ukrainian Government.

Anchorman: Ukraine doesn’t have preferences anymore, what should the discount be given for then?

Alexey Miller: There is no doubt that this is a question of talks – what the discount should be given for. But speaking of the mechanism, it should concern the discount on export duties. But now we see that for more than half a year gas deliveries to Ukraine have been successfully maintained. Moreover, Ukraine forwards maximum requests to us, in compliance with the contract. We’ll have over 3.5 billion cubic meters of gas supplied in May, with not a single dollar paid to us during this time. It is clear that they have an opportunity to pay at least something. That is why when Ukraine assumes such an unconstructive position, I mean not paying for our supply, it is plain that any price adjustments through export duties (again, a question comes up of why we should do it at all) are non-negotiable.

Anchorman: What about China, Mr. Miller, what price did you settle with the Chinese? Please, do lift the veil a little bit concerning…

Alexey Miller: You know, the historic contract was signed within Vladimir Putin’s visit to China. It is historic because it actually turns a new page in our cooperation with China in pipeline gas supply. It should also be mentioned that it’s not just a historic contract. It is also the contract unparalleled in the global gas industry. There was no such a large-scale contract in the gas history – 38 billion cubic meters of gas a year during 30 years.

Anchorman: You didn’t supply so much even to Western Germany even back then, at the height of the Soviet-German…

Alexey Miller: Presently we supply over 40 billion cubic meters to Western Germany, but it should be understood that these supplies are not under a single contract, but under many different contracts.

Anchorman: Aha, and here everything is...

Alexey Miller: With absolutely different companies. Here it is a single contract, a very large-scale one, and you should understand that it took Germany over 40 years to reach that 40 billion cubic meters of annual gas supply, whereas China became level with Germany literally in one day.

Anchorman: Could you please touch on it a bit more? I haven’t forgotten my question, I’m getting back to it. It is really very interesting. There is this new pipe called Power of Siberia.

Alexey Miller: Right, the Power of Siberia gas pipeline.

Anchorman: What effect will this gas pipeline have on people living in Siberia? What facilities are you going to construct in addition to it?

Alexey Miller: The gas pipeline route was planned in such a way that is allowed us to draw on the ESPO project of Transneft in the first place, the infrastructure that has already been created. Thus, the pipeline will cross Chayanda, via Lensk to Aldan, Skovordino, Blagoveshchensk, Belogorsk.

Anchorman: Doubling Baikal in the north...

Alexey Miller: Certainly, certainly. So, but what does this mean? First of all, it will boost the development of localities and cities in Eastern Siberia, Yakutia, the Irkutsk Region. New jobs will be created, huge investments will be made. Of course, it concerns the social infrastructure which is primarily aimed at our employees, but it is also open to the rural and urban population.

Anyway, we’ll wait and see and feel the significance of this contract. In particular, there is no doubt that this contract will affect gas prices in Europe. Actually, this contract opens up a new page in the competition for our gas resources among the major markets. First of all, it concerns the Asian and the European markets. This contract will influence very costly projects for LNG plants construction in Australia, Western Canada, East Africa.

Anchorman: Are they becoming pointless, in your opinion?

Alexey Miller: No, but it should be understood that pipeline supply to China is more economically expedient and there is no doubt that it will affect the projects’ efficiency. The most important thing is that the talks which had been underway for a very long period of time were brought to a successful conclusion. Both parties accommodated on another. You were asking about the price.

Anchorman: I didn’t expect you to get back to it yourself.

Alexey Miller: But I did.

Anchorman: Because this way…

Alexey Miller: Of course, the price is commercially confidential. But I’d like to mention that this agreement was achieved only because both parties – Russia and China – made concessions. The talks were quite difficult. Of course, for all this time we’d been in direct touch with Russian President Vladimir Putin, reporting to him on the progress of the talks. I’ll stress it once again, this contract could be signed under such conditions only within a visit. The contract volume: we’ll earn USD 400 billion in 30 years, having spent only USD 55 billion. That is about how profitable this contract is, how attractive the price is for us.

Anchorman: Well, give at least a slightest hint please. Is it higher than USD 350?

Alexey Miller: The price is mutually satisfactory.

Anchorman: Is it between USD 350 and 400?

Alexey Miller: Actually it was agreed with our Chinese partners that we wouldn’t discuss the price. You know there is a deep meaning in it. The main thing for now is to understand and get a feel of the contract itself, not to discuss the price level or who has won or lost more. But for Russia and Gazprom we’ve definitely achieved the result that ensures the internal rate of return which is expedient for the Company. The internal rate of return which we stick to in our production and transmission projects.

Anchorman: This is very important. There is actually the rate of return and you don’t break even with this price.

Alexey Miller: No, we don’t, and I can say that the rate of return is such as we have for making investment decisions on all our production and transmission projects. Actually, the price talks were not so smooth because one should understand that this contract will draw upon the new infrastructure yet to be constructed. Maybe the talks with our Chinese partners on the western route will progress much easier. First of all, Gazprom owns excessive production capacities in Western Siberia and we can start supplying gas to China via the western route full soon; we can use a certain part of the Power of Siberia gas transmission system which can be rerouted for gas supply to China via the western route and it certainly requires less investments than creating new infrastructure in Eastern Siberia. Moreover, Eastern Siberian gas is rich, new gas processing and gas chemistry plants need to be constructed. That’s why the project economics is quite favorable. China and Russia took steps to accommodate one another, and the Company will be granted tax benefits. As for the economic issue, it is standard for Gazprom, the same as for all other production and transmission projects.

Anchorman: Then the last thing. Who will manufacture pipes for the new Power of Siberia gas pipeline?

Alexey Miller: Of course, our pipe manufacturers will.

Anchorman: Here in Russia.

Alexey Miller: Yes, here in Russia. What pleases me most is when the contract was signed, there were many warm congratulations and I can say I was very pleased to hear them from pipe manufacturers. Next week on June 3 we’re having our traditional meeting among Gazprom’s executives and the Russian pipe manufacturers. When they were congratulating us on the contract signed with China they said, “Mr. Miller, we’d like to raise our glasses of champagne to this deal.” Of course…

Anchorman: So these are dozens of jobs at once…

Alexey Miller: By all means. It’s a major impact on Russia’s economy.

Anchorman: Thank you, Mr. Miller.