Interview by Alexey Miller, Gazprom Management Committee Chairman to Reuters News Agency

Reuters: You’ve managed to surprise us all today.

Alexey Miller: Have I?

Reuters: Yes, we were very impressed. We’ve been expecting something from the South, but got it from the North instead.

Alexey Miller: Actually, it’s our job, and then it’s up to you to assess us.

As for signing a Memorandum on Nord Stream 2, this work has been going on in the last few years. In November 2011 the Nord Stream Shareholders Committee made a decision and set a task to investigate the possibility of expanding the Nord Stream gas transmission capacities. During all these years – between 2012 and 2014 – pre-investment and pre-design activities have been underway. Today we signed the documents for actually launching the project.

In addition, it should be pointed out that all the required basic data is prepared for starting this work. Firstly, the design concept and project specifications were determined. It was resolved that the concept of the third and fourth strings would be the same as of the first and second ones, consequently, the specifications will be the same – two strings with the aggregate capacity of 55 billion cubic meters of gas.

The start of the marine section in Russia was predetermined as well as a landfall location in Germany. The entry point to the Baltic Sea will be different from that of Nord Stream-1. As you know, the Nord Stream-1 submerges from the northern cost of the Gulf of Finland near Primorsk. For the third and fourth strings it will be the Kingisepp District of the Leningrad Territory near Ust-Luga. As for the landfall in Germany, it will be located near Greifswald, not far from the first and second string landfall.

Portovaya compressor station
Portovaya compressor station

Portovaya compressor station

The route was specified as well. All along, the possible route options have been reviewed. We selected one option and we will start working with it now. The route length will be 1,225 kilometers. It will cross Russian and German waters, Russian and German economic zones as well as the economic zones of Finland, Denmark and Sweden.

The provisional project budget was drawn up: the third and fourth strings were estimated at EUR 9.9 billion. It cost us EUR 8.5 billion to construct the first and second strings. You know, we optimized the budget for the first and second strings. Here we also expect the budget reduction, but the reality will show the actual project cost. Anyway, certain contingent expenses are included into this budget of EUR 9.9 billion, although they may not occur. Besides, it should be understood that we have a positive experience in constructing a gas pipeline across the Baltic Sea and we will outrun the first and second strings in terms of construction speed.

The preliminary project schedule was defined: the third and fourth strings are to be commissioned before the 2019 year-end.

The preliminary budget of the next FEED stage was also made up, and we are ready to proceed to this stage.

It should also be pointed out that the project shareholders agreed to rely on the documents that had been prepared for the first and second strings. I mean the shareholders’ agreements and transportation agreements. That is why no continuous harmonization procedures or long talks will be required for the paperwork. We expect that by September already the Shareholders Agreement will be signed and a company will be set up to implement the project for the third and fourth strings.

In addition, the project financing concept was outlined. It is the same as for the first and second strings, the project participants agreed on it. 30 and 70 per cent is a formula you clearly understand.

Another important moment is that preliminary bidding documents were prepared for procurement procedures. The pre-qualification of suppliers, inter alia, pipe suppliers, was carried out. That is why the readiness is very high.

It should be noted that in April 2014 the Nord Stream Shareholders Subcommittee resolved to provide high readiness for the pre-design and pre-investment stages in order to promptly move on to project implementation, and that’s what’s been done today.

The main factor underlying the signing of these documents today is the European market environment. First of all, it is a decline in gas production in Europe and, therefore, a growing demand for Russian gas supplies. I will not enumerate the countries now; you can just take a look at the statistics. The decline in production is quite substantial. Recently we’ve been meeting with our European partners. They have been telling us about the drop in volumes of supplies by conventional suppliers – the companies which produce gas in Europe; production there is falling dramatically. They are looking into different options, but they highlight the fact that they won’t make do without new volumes of Russian gas supplies.

Currently we observe an increase in Russian gas demand. We’ve already given you the figure and you know it. The May volume of our gas supply to Germany, our major market, number-one market in Europe (this May versus last May) grew by 68 per cent. As you understand, it is a very substantial growth and here I need to stress that the new capacities for the third and fourth strings are being constructed solely for the new volumes of Russian gas. It is not about any transit volumes or the so-called ‘old’ gas, it is only about new volumes. The Nord Stream 2 project is no rival to the TurkStream project.

As for memorandums and agreements signed today – it was no surprise. During all this time, as you see now, very solid and substantial work has been done – they just weren’t visible from the outside.

Reuters: You succeeded in hiding it from us. We like pleasant surprises. It makes our job interesting.

Alexey Miller: This work was done by the so-called small office of Nord Stream AG. The shareholders of the project’s first stage knew about it and, as you see, E.ON is among the project participants. As for the other participants, first of all, I should point out that Shell takes part in it – currently it has acquired BG Group. Shell is an undisputed leader of the global energy market anyway.

Reuters: It will become an absolute leader in terms of LNG.

Alexey Miller: The company is reinforcing its positions in the LNG sector, it also strengthens its presence in the gas sector, inter alia, in the European gas market. That’s why their interest in the Nord Stream 2 project is obvious and they proposed their participation in this project. There is no doubt that Shell is a very significant and strong player with whom we’ve signed a number of documents today; I’ll dwell on it later.

OMV is another project participant. It has done a lot to make Baumgarten a major gas hub in Europe – and that’s what it is. OMV’s participation in the project is not accidental, the role of Baumgarten as of a European gas hub will only be increasing due to the OMV participation in the project.

In the near future we expect one more participant to join us – apparently, it will be BASF/Wintershall.

Reuters: Which is logical.

Alexey Miller: Yes, it’s absolutely logical. The fact that we openly discuss it – that in the near future they might join the project – means a lot, as you see, as this is nonpublic information. We are currently at a very advanced stage of negotiations and we understand that it might happen pretty soon now. BASF/Wintershall is our traditional partner and our relations are close, friendly and warm. Here it should be noted that with German companies we worked according to the principle of building our relationship across the entire value chain. By the way, such an agreement has been reached with OMV as well. This is undoubtedly a new page in our cooperation with Austria. Back in the day it was the first country to be supplied with Soviet gas. It took us a bit less than 50 years to move on from a simple purchase & supply agreement to the sophisticated cooperation across the entire value chain. In the near future we plan to cooperate with OMV according to this scheme.

As for Nord Stream 2, we keep hearing the questions from the participants of another project – TurkStream – whether it is an alternative to it or not. I will say it once again: no, it is not an alternative. We’ve also met with the Greek Minister today. The Forum is not over yet and I think that within the Forum there will be also news about the TurkStream project, our southern direction.

Reuters: Let me congratulate you, it’s a very interesting deal. We have all been surprised today, as I’ve already mentioned. It is clear about BASF and E.ON, it is also clear with OMV, because they are long-standing partners, whereas Shell’s joining the project is very interesting. It is especially interesting because if you take a look at various projects of other companies, starting from 2014 such companies as Shell try to limit their cooperation a bit or at least maintain it at the basic level. And Shell decided to enter an enormous project of Gazprom. What is the meaning of this in terms of how European partners regard Russia as a partner, given the sanctions regime?

Alexey Miller: Concerning the agreements signed with Shell today: there were three of them – a Memorandum on Nord Stream 2, a resolution on implementing the project for constructing the third process train of Sakhalin II and a Strategic Partnership Agreement. It is worth mentioning that even at Gazprom the documents of such a scale are rarely signed. Such important deals are concluded once in five or even ten years. Gazprom is a global Company, we present ourselves as a global player operating in 51 countries; we are active in Europe and Asia. Our traditional partners are powerful energy companies who tend to hold themselves out as regional players in the oil and gas sector, as European market leaders, unlike Shell. Shell is a global company and though it is quite clear for us that there is no global market today, but there are global companies and several megamarkets; it should be understood that a global partnership will be formed in the same way as the European partnership has been. Certainly, the scale of the documents signed with Shell today allows them to serve as a foundation for creating a real global strategic partnership between Gazprom and Shell within certain joint projects. Today we’ve opened up a new page in relations between Gazprom and Shell. I’d like to mention the deal concerning BG once again, which adds even more to the potential of Shell; besides, we’ve already successfully cooperated with Shell and have some positive experience. In the oil sector it is the Salym project, with regard to LNG it is, of course, Sakhalin II. If we take a look at all LNG projects around the world, Sakhalin II is undoubtedly the best and most successful one.

Reuters: Even Shell has mentioned it on many occasions…

Alexey Miller: That is noteworthy. Firstly, we can really point out quite decent DMR technologies and high-quality design concepts. A decision taken on the third process train of Sakhalin II means that we’ll construct the third train faster than the first and the second one. Capital expenditures will certainly be lower, because there is common infrastructure we’ll rely on. We will also use the operating experience we’ve gained at Sakhalin II. Among other things, it is a wonderful project in terms of project financing. Firstly, we have current cash flow in our hands, real cash flow of Sakhalin II; there are existing creditors showing keen interest in the next project phase. In addition, the most important thing is the proximity to very large LNG markets in Asia-Pacific as well as the awareness that we may implement the project in a very short time. I’m talking about the third process train of Sakhalin II now.

Besides, it also means that this project fits well into the framework of the agreements outlined in our document on strategic partnership. The point is that together with Shell we are starting to arrange our activities across the entire value chain in the gas industry. Not only in the gas industry, actually, but in the hydrocarbon sector in general – you understand that exchange and swap deals may be conducted with regard to a wide range of marketable products. That’s the first thing. Secondly, our work with Shell will be based on asset swap deals, including – let me draw your attention here – the production assets. The deal we are planning will require some time; Shell should fully enter into its rights regarding BG. We believe that in a year, at the next St. Petersburg Economic Forum, we’ll be able to conclude this deal.

Reuters: They will have to sell something in Australia. That’s for sure – they have a very large share there. They’ll need to resolve the matter with the Chinese – their share in supplies is too high. Besides, they own too much in Brazil. That is what analysts say in general.

Alexey Miller: We know about Australia, Brazil and the Asian market. But, you see, that is what allows us to talk about global cooperation. They also operate in dozens of countries across the globe and have assets in many continents. On top of everything else, we have a clear understanding of the possibilities for swapping pipeline gas for LNG. The fact that Shell is entering a pipeline gas project means that such exchange deals become possible. They may be mutually beneficial for the market players. It concerns additional pipeline gas supplies to the markets where liquefied natural gas is supplied to. We are well aware that a consumer may be supplied with additional volumes of pipeline gas, while another consumer may be supplied with LNG under the existing contract. That is about flexibility and a top-up margin. That is why we have a very broad view on the documents signed with Shell. That is certainly a way towards the global partnership. But I’d like to stress it – the global partnership is not just the signatures of the companies’ executives. That’s very important. Only long years of joint activities bring you to such a level, to the real partnership. But the ground has been broken. We know Shell quite well, we have a positive experience with them. Previously we’ve applied the principle of work within the entire value chain only to the European market. From now on, there will be global projects as well.

Reuters: Does this mean that economy and common sense win over politics?

Alexey Miller: As for Nord Stream 2, there is no politics in it at all. I’d like to draw your attention to the fact that the decision was made back in November 2011 and all the work we’ve discussed has been done in compliance with the decisions made three years ago.

Reuters: There is a common stereotype concerning the gas market development within ten years to come. The Americans become formidable LNG exporters, their economy develops due to low prices of energy resources, Australia and East Africa enter the arena… The market is congested, the Russian share decreases and becomes insignificant by 2025. Could you give your view on what the gas market will look like in 2025?

Alexey Miller: Let us talk about the European market in the first place because if we speak about the Asian market, it has a huge potential for growth, a very huge one… As for the European market, according to our forecasts, everything is very simple there. It doesn’t matter whether the European market shrinks or declines, whether it remains at the same level or grows – the absolute volume of Russian gas export to Europe as well as the share of Russian gas in the European market will only be going up in any event. It is clear that, depending on a scenario, this absolute build-up and this share might vary, but it doesn’t matter, whether the market shrinks, remains at the same level or grows – our absolute volumes will be rising as well as our market share.

Reuters: What do you think about American gas? Many people say that it will be brought to Europe and will flood it… What do you think about these predictions?

Alexey Miller: We are familiar with the American market, the natural gas and shale gas reserves, and we know the current market trends. Nowadays, the USA is mostly a net gas importer to a large extent. We believe that it is crucially important for them to establish a price indicator for the gas market. That is, perhaps, their primary objective and task.

Reuters: Bearing in mind rather low export volumes…

Alexey Miller: Anyway, we do not see any risks for Russian gas supplies.

Reuters: If you ask any oilman who he is afraid of, remembering last year’s November, you’ll get the only answer – Ali Al-Naimi. The decision was unpredictable and the prices collapsed. Who do you regard as your main competitor? Who is Gazprom’s main competitor in the gas market for decades to come? Everyone will say that it is the USA – but maybe that’s wrong?

Alexey Miller: As for Gazprom and Russia, you should understand that we can supply as much gas to foreign markets as we are asked to. Right now we are able to boost the volumes of gas supply to Europe more than twice. Here is the answer to your question about whom we fear.

Reuters: My last question is about Ukraine. What will your relations be in five years, regarding gas supplies?

Alexey Miller: That is totally unpredictable. What I can tell you for sure is that the contract signed in 2009 is rock-solid. It will definitely remain in effect for another five years and no amendments will be made to it.

Reuters: Thank you for the time you devoted to me.

Alexey Miller: Thank you for your questions.

Gazprom exhibition stand at St. Petersburg International Economic Forum 2015
Gazprom exhibition stand at St. Petersburg International Economic Forum 2015

Gazprom exhibition stand at St. Petersburg International Economic Forum 2015

The interview was taken by Dmitry Zhdannikov, Reuters news editor for energy sector in Europe, Middle East and Africa.