Message delivered by Alexey Miller at 5th St. Petersburg International Gas Forum
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Esteemed colleagues, dear friends!
Our plenary session is called “Gas Industry as a Driving Force of the Russian and Global Economies”. And we all observe that the hydrocarbons market features diverse trends now. However, one trend is vital for the Russian economy as well as for Gazprom – the trend of the continuously growing demand for Russian gas in foreign markets. And this trend predetermines the fact that Russian gas industry has been and will remain the driving force of our economy.
Indeed, current gas supplies to the foreign markets show a very good dynamics: in the third quarter Gazprom supplied additional 23 per cent of gas beyond the CIS compared to the respective period of the previous year. And in September the growth came to 24 per cent up from the same period of the past year.
At the same time, the absolute record-setting indicators of the German market are especially pleasing, because this market is the first priority for us in Europe. Over the first half-year period Germany purchased 21.5 billion cubic meters of gas – it is an absolute record throughout the whole history of Russian gas supplies to German market. And, certainly, this trend has its roots. It is not all the dead end of “coal renaissance” in power generation, and not all that shale gas revolution went “deep underground”.
The main reason lies in the fact that the volume of domestic production in Europe has been consistently declining. And if we look at the statistics we will see that the rates of such a decline are really high. In 2005 Europe produced 317 billion cubic meters of gas, in 2010 – 305 billion cubic meters of gas, the estimation for 2015 (it is realistic already as only a few months left) – is 267 billion cubic meters. It means that over the recent ten years in Europe the production volume reduced by 50 billion cubic meters. While the rates of such reduction are growing. And we forecast that in ten years – by 2025 – the production volume of domestic gas in Europe will be lower than 200 billion cubic meters.
For sure, gas demand tends to grow as well, and the expected natural gas consumption increase in power generation is worth mentioning. In 2025 we forecast the growth of gas demand in this sector of the European economy by 20 billion cubic meters.
How does Gazprom look, considering its long-term contracts, against the background of the growing demand for Russian gas? Volumes fixed in the contracts signed for the period until 2020 total 199 billion cubic meters of gas. And it is absolutely evident for us that all contracted volumes will be demanded in the European market beyond 2020. It means that in the near future our European consumers will need to conclude new contracts for new volumes. Forecasts show that gas deficit in the German market may come to nearly 30 billion cubic meters of gas per year in the next six-seven years as a maximum.
And here is the answer to a question “why the decision on the construction of the Nord Stream 2 pipeline was required”. The decision was made this early September. Legally binding documents on this project implementation were signed with our European partners. The gas pipeline will be constructed by the end of 2019, and this refers to new supplies of Russian gas to the European market. The advantages of this project are evident for all, and well-known to everyone thanks to the successful, I would say, very successful operation of the Nord Stream I gas pipeline. First of all, reliability and constancy of gas supplies directly from the Russian Federation, without transit countries, to the territory of the European Union. High technical reliability of this gas pipeline is worth mentioning. And, certainly, high environmental standards were implemented during its construction and operation.
Shareholders of the new joint stock company – on the construction and operation of the Nord Stream 2 gas pipeline – have taken the decision not to invent anything new, we will reproduce those well-proved technologies that were implemented as a part of the Nord Stream I project. Therefore, the technical concept of this project coincides with the technical concept of the Nord Stream I gas pipeline. We will not develop a new project – we will take the existing one and deliver it. In fact, there will be a gas pipeline – a brother of the Nord Stream I gas pipeline. At the same time, I would like to point out that the Nord Stream 2 gas pipeline is being implemented within the well-proved effective model of asset swap with our European partners.
We are working based on the old paradigm. And this model envisages that companies participating in the project operate along the whole value chain – from production to end consumption. This model provides for minimizing the risks for gas market participants as the companies partner with different shares while representing each stage of market value creation. And, by all means, such a model considers the interests of all participants. For us, for Gazprom, such a model – is the model of entering the end consumer market.
Such agreements were reached within the asset swap deals. In particular, I would like to mention the asset swap with BASF/Wintershall here. On September 30 this transaction was closed. Gazprom received European assets in gas distribution and storage. And, surely, these companies actively participate in gas sales to end consumers.
The model we have been using for Nord Stream 2 also allows for the maintenance and development of existing gas distribution centers in Europe – gas hubs. In particular, Baumgarten (Austria) is one of the target markets for the Nord Stream 2 project. And one more asset swap deal – between Gazprom and OMV is also foundational in our Nord Stream 2 project. Here I would like to thank Mr. Seele, CEO of OMV who is taking part in our plenary session today for his very practical and effective work. We view a very high potential for developing our cooperation with Austria. Austria has substantial competencies in production and processing. And I will emphasize once more – a largest European gas hub is situated in Baumgarten (Austria).
At the same time, if we are speaking about Nord Stream 2, of course, for Gazprom it is a project aimed at implementing a key part of our company development strategy. This strategical element is the diversification of our transportation routes. Besides, one should mention that the strategy on the diversification of Gazprom’s transportation routes virtually coincides with the same strategy area of the European Union. The strategy of the European Union also envisages the diversification of transportation routes. Thus, undoubtedly we have common interests here.
However, the strategy of the European Union includes such a work stream as the diversification of gas supply sources. Currently, one can confirm that actually the diversification of transportation routes compared to the diversification of gas supply sources is more significant and more realistic for the European Union.
All of us are familiar with a demonstrative example of the project related to the diversification of gas supply sources – the Nabucco project. This “opera” was performed on every European stage for twelve years, and it was completely removed “from the repertoire” two years ago. You know, there is a nice Russian saying that no matter how many times you repeat the word "halva" you will not feel sweetness in your mouth. The reason as a matter of fact is quite simple: plainly there is no substitution for Russian gas reserves. We are a reliable supplier. We are a supplier having enough resources to double the volumes of gas delivered to Europe. And in general, we are able to supply as much gas as the European Union consumers may require.
It should be mentioned that Russia and Gazprom have been developing an intensive cooperation with the Caspian Region in the area of hydrocarbons. In this context, I would like to indicate one trend, which is currently underway. For the countries simultaneously producing oil and gas, the production of oil is a higher priority, by all means. It is an objective fact. If we calculate using specific indices, we will see that it is far more profitable and far more efficient to export oil than gas. On the other hand, such technologies as gas lifting and gas re-injection provide for increasing the oil recovery and, as a result, for maintaining oil production. Therefore, the countries possessing gas and oil resources in a large extent apply their gas resources not for exporting, but for maintaining the level of oil production and, consequently, the level of export.
In the context of deepening our cooperation with the Caspian Basin countries, the deal with Azerbaijan should be noted. In September we signed a mid-term agreement to deliver two billion cubic meters of gas per year to the country. The cooperation with Azerbaijan will be developed.
At the same time, certainly, we place a high emphasis southward within our strategy of diversifying transportation routes. Here, in the south, on the Black Sea, our priority project is TurkStream – direct, non-transit supplies from the Russian Federation to Turkey. Now, speaking about the designed capacity of gas pipelines that could run on the Black Sea bottom, one can mean the volumes reaching 32 billion cubic meters of gas. In compliance with the decisions we have taken in relation to north, we consider it the realistic bargaining point to follow in the near future.
The strategy of Gazprom is not only to diversify transport routes, but also, as you are aware, to diversify our markets and end products. As regards the markets diversification, we have successfully entered the Asia-Pacific market, the Chinese market. After we signed the contract on gas supply to China in the amount of 38 billion cubic meters and on the construction of the Power of Siberia gas pipeline last year, we have advanced considerably in our negotiations on gas supply to China from gas reserves of Western Siberia via the western route. Comparing the schedule of negotiations on the eastern route and the schedule of negotiations on the western route, it is expected that the contract on the western route will be signed in the spring of 2016.
In September we reached an agreement with China to establish another gas corridor from the Russian Far East. This project has been defined as a priority one, as a key project of our five-year plan of strategic cooperation. These gas corridors rank as follows: the eastern route, the Power of Siberia ranks top; the western route, the Power of Siberia-2 ranks second; a gas pipeline from the Russian Far East ranks third.
Much has been written about China’s slowing economic growth and slowing gas market growth. In fact, if we compare the Chinese gas market with the European or even the global gas market, we’ll see that until very recently the Chinese gas market had very high growth rates, and currently it keeps growing at a medium-high pace. So, this growth remains the world’s fastest.
Moreover, the Asia-Pacific markets, in particular the market of our friends and partners, i.e. the Chinese market, are characterized by the highest growth of demand for eco-friendly energy. Speaking about gas, we observe large-scale gasification programs under implementation in large cities of China. If gas replaces just 15 per cent out of 75 million tons of power coal consumed by the Chinese industry, the size of the Chinese gas market would grow due to this fact by 70 billion cubic meters of gas per annum.
Continuing cooperation with our eastern partners offers very good prospects to our European partners as well. The Amur Gas Processing Plant – the largest GPP in Russia and one of the largest GPP in the world – is one of the key projects forming part of the Power of Siberia project. The capacity of the Amur GPP is 49 billion cubic meters. Today Gazprom has made a decision to implement this project together with Germany’s Linde.
Of course, we implement not only the Amur GPP project together with our German colleagues, but also other projects in the gas industry, including gas liquefaction projects and projects, I would call them a priority, within an import substitution program currently implemented by Gazprom. We see excellent opportunities and prospects to enhance cooperation with European companies.
Therefore, if we say that Gazprom and the Russian gas industry have always been and will remain a driving force of the national economy, then our cooperation within the Eastern Gas Program will surely create an identical opportunity for our European partners to continue to be a driving force of their national economies.
Moreover, the positive experience with such large-scale projects as the Amur GPP project surely bodes well for future cooperation with Gazprom. At this point, let me give you an example of another vector of our development strategy – diversification of end products. I am referring to our cooperation with Shell. Everyone knows that the Sakhalin II project is the most successful project on natural gas liquefaction in the world. This is recognized by all experts. Undoubtedly, such positive experience has ultimately brought us to a new level of cooperation with Shell. Primarily, it is, of course, this year’s decision about the implementation of the third phase of the Sakhalin II project. But most importantly, it is, without any exaggeration, a historic agreement on strategic partnership, asset swap and implementation of numerous projects across the value chain together with Shell. One of such projects currently on the table is the Baltic LNG project with a capacity of 10 million tons, where we have invited Shell as our key partner.
So, Gazprom successfully implements its development strategy. As for our market strategy, our Company’s position is to adjust to changes in the market and in our activities we consistently respond to what happens in the oil and gas markets. It is necessary to highlight at this point the main trend we have witnessed during 2015. This trend is that contracts with strictly oil-pegged prices have a much sharper, steeper, and more unidirectional tendency. Already today contracts with strictly oil-pegged prices show lower formula-based figures than any other contracts. As a result, those who criticized contracts with oil-pegged prices have gone quiet and some companies which recently raised the question to reconsider the existing formula are now much quieter as well. Why is it so? Just because they see the trends in the market. Our 9-month oil basket is becoming cheaper and cheaper. We see that prices in the fourth quarter are lower than prices in the third quarter. It is absolutely clear that prices in the first quarter will be lower than prices in the fourth quarter. Moreover, current prices under contracts with oil-pegged prices are lower than prices in the spot markets. Of course, we have responded to it and launched gas auctions as a new approach to operating in the market.
The first gas auction has taken place in St. Petersburg this September. It resulted in selling additional – I want to stress it – additional 1.23 billion cubic meters of gas. Of course, we will continue to organize such gas auctions. We will develop this new approach. As, having sold additionally such a big amount of gas, it was sold at prices above average under our export contracts.
How will we develop the auction market? First of all, we will extend delivery periods. At one of the previous auctions the delivery time was until March 31, 2016, starting from October 1, 2015, i.e. for the autumn and winter period 2015/2016. Next auctions will include lots with a delivery period of one year. In 2016 we will increase gas offers at auctions. For instance, we are planning to increase gas offers up to 6 billion cubic meters. Undoubtedly, we will broaden the supply geography for gas sold through auctions. We expect to hold next auction through the end of 2015. The related information will be posted on our official website. So, look through the ads attentively.
Of course, when we speak about the gas industry, about our work in external markets, it is important to mention the current situation with gas supplies to Ukraine. No doubts that Ukraine won’t be able to inject the required volumes of active gas by the heating season. As you know, the heating season in Ukraine started on October 17 last year when the country stockpiled 16.7 billion cubic meters of active gas. Today Ukraine has a bit more than 15.7 billion cubic meters. However, in recent days we have witnessed that the gas inflow to underground storage facilities of Ukraine is decreasing and that reverse gas supply from Europe is decreasing as well. The daily volumes of reverse gas reduced almost fourfold as compared to the September volumes. I think it is mainly the market issue. The discount and the conditions stipulated by our contract with Ukraine – I’d like to note that the Ukrainian contract is a contract with strictly oil-pegged prices – are much more favorable than European spot gas supplies.
Apparently, the main issue is related to financing gas purchases and whether Ukraine has finance to purchase Russian gas in the near future. If winter happens to be abnormally cold, and it happens every decade…By the way, the winter of 2005/2006 was abnormally cold, and average temperatures in the area of the Unified Gas Supply System fell below 28oC throughout Russia. It was cold in all consumption centers and, of course, in our neighboring country, Ukraine. Should the upcoming winter be so abnormally cold, we may not exclude problems with gas supply. But we hope there is some time left before the abnormal cold and Ukraine will be able to inject additional gas, and what is most important, Ukraine will have financial resources to pay for Russian gas supplied directly from Russia. For passing winter and autumn peaks successfully Ukraine has insufficient own production, insufficient daily take-offs from UGS facilities, insufficient reverse supply, and it needs direct gas purchases from Russia.
Dear colleagues, we say it in Gazprom that the 21st century is a century of gas. And I think that the discussions and the exchange of opinions at this forum will support this statement and our vision.
Thank you for your attention.