Interview by Alexey Miller with TV Rossiya 24

Moderator: Good afternoon, Mr. Miller. In your speech at the St. Petersburg International Gas Forum you paid special attention to gas auctions. The first one had taken place in St. Petersburg and it had been a success. What is the future of such auctions, in your opinion?

Alexey Miller, Chairman of Gazprom Management Committee: It is certainly a promising business segment, a new kind of activity in the market. This is Gazprom’s response to the current situation in the European gas market. We see that prices under long-term oil-linked contracts are sinking and the downturn is more dramatic than that under contracts based on other formulas and coefficients. We see that prices with a fixed oil link have dropped even lower than the spot ones.

Gazprom made a decision to hold gas auctions. In September St. Petersburg hosted Russia’s first gas auction. It was a success. We sold the additional 1.23 billion cubic meters of gas to be supplied to Europe between October 1, 2015 and March 31, 2016. Moreover, we sold this volume at a price higher than the average contract price of gas export to the European market. The auction results can be regarded as positive.

We are planning to expand this form of trading. I’m stressing it that so far it concerns only additional volumes, though we are also considering the volumes for which the contracts will expire in the near future. The next auction is to be held this December. The supply period following the auction sale will be extended up to one year. That’s the first thing. Secondly, we are planning to considerably boost the volumes – in 2016 the volumes set for an auction will reach up to six billion cubic meters of gas. And, of course, we are going to expand the sales geography.

Moderator: So, in this manner you want to directly access the end buyer, don’t you?

Alexey Miller: First of all, it’s our response to the market changes. It is an opportunity to sell additional gas directly to those consumers in the market who are in need of additional volumes. The market offers this additional demand. It is better for them to purchase these additional volumes from Gazprom than to roam the European market in quest of this additional gas. But I’ll stress it once again, these are the additional volumes, which Gazprom supplies directly to the European market.

Then again, under the current conditions of declining hydrocarbon prices it is very important for us to conduct this form of trade enabling us to set prices higher than the average contract ones.

This form of trade fully corresponds with our strategy of reaching the end consumer. Gazprom continues working in this area. On September 30 we closed an asset swap deal with BASF/Wintershall. We acquired gas distribution and gas storage assets. Therefore, Gazprom keeps on moving towards the end consumer.

Moderator: In addition, in your speech you stated that Gazprom was planning to implement the Amur GPP construction project together with German Linde. Is it the only joint project with this German company or are you going to further develop cooperation with it?

Alexey Miller: As for the decision on cooperation with Linde. That certainly is the largest project ever that any of our partners could join, had they wanted to work with Gazprom. The GPP capacity will amount to 49 billion cubic meters of gas a year. It will be the biggest gas processing plant in Russia and one of the biggest ones in the world. That is why we were very careful choosing a partner for this project. Linde is a reputable company in its sector.

But the most important thing, as you’ve truly stated, is that in case the project is a success – and I am sure it will be – other areas for cooperation will be available, an opportunity for initiating other joint projects will emerge. First and foremost, I mean the LNG projects. When we discussed the outlooks for our cooperation with Linde, in case we chose them as a partner, we strictly pointed out that this cooperation would be based on our requirements on deployment of industrial facilities within the import substitution program being pursued by Gazprom in the recent years.

Moderator: One of the key topics of your speech was the TurkStream gas pipeline. Why have you decided to reduce its capacity to 32 billion cubic meters of gas a year?

Alexey Miller: This decision was made following the agreement with our European partners on constructing the Nord Stream 2 gas pipeline. Early in September we signed the binding documents on this gas pipeline. Its annual capacity will amount to 55 billion cubic meters of gas. Thus, the aggregate design capacity of Nord Stream I and Nord Stream 2 will reach 110 billion cubic meters of gas a year. In this context, we reviewed the aggregate gas demand in the European market, looked at the flow diagrams and we see that there is no need for constructing gas transmission capacities exceeding 32 billion cubic meters of gas a year in the south direction. That’s two strings.

By now, an intergovernmental agreement has been prepared for our Turkish partners, stipulating the construction of one string as well as further talks on the second string. We hope that in the near future the talks on the intergovernmental agreement to construct TurkStream across the Black Sea will become more businesslike.

Moderator: You’ve already touched upon the Nord Stream 2 construction and in your report you’ve noted that the Nord Stream I and Nord Stream 2 projects would be identical. Then, what will be similar and different about them?

Alexey Miller: Nord Stream 2 will be implemented according to the same design. The shareholders decided to let well enough alone. Nord Stream I proved itself as a reliable project executed in line with the most stringent environmental requirements, and all experts agree on that. Environmental monitoring is carried out on a regular basis during the operation: a vast amount of installed sensors are transmitting online information. The Nord Stream I construction was subject to tight environmental control.

But the most important thing is that a reliable project simply saves time if it is replicated. That’s why no additional time will be spent on design, and all technical and process solutions applied at Nord Stream I will be reapplied in Nord Stream 2. There will be the same two strings with the aggregate annual capacity of 55 billion cubic meters of gas, like in Nord Stream I.

The only slight difference will concern the locations of the gas pipeline’s entry to/exit from the Baltic Sea. The Nord Stream I entry point is the Portovaya compressor station located on the north shore of the Gulf of Finland near Vyborg. The Nord Stream 2 entry point will be situated near Ust-Luga, which is the south shore of the Gulf of Finland.

Such a decision was made because this way we are also resolving the issue of gas supply to and gasification of Russia’s constituents, particularly, the Leningrad Region. The gas main will stretch from the Volkhovskaya compressor station in the Leningrad Region across the southern areas of the Leningrad Region and further to Ust-Luga. It will provide additional opportunities for establishing gas-consuming manufacturing facilities. We know that there is such a demand on the part of businessmen as well as enterprises dealing with gas chemistry and mineral fertilizers. Then, of course, it concerns rural gasification. That is, a decision on the location of the entry point to the Baltic Sea was made with regard to the needs of the Russian economy and socioeconomic development of Russian regions.

Also, additional capacities will be constructed with a starting point in Bovanenkovo – the Bovanenkovo – Ukhta 2, Ukhta – Torzhok 2 and Pochinki – Gryazovets gas pipelines. Thus, the northern part of the Unified Gas Supply System will be extended. But just as the Nord Stream 2 gas pipeline, these new gas transmission capacities in Russia will be constructed in due time – before late 2019.

Moderator: Mr. Miller, I can’t but ask you about Russian gas supplies to Ukraine. When will these supplies be paid for and will Russia supply the requested gas volumes if the payment is not transferred?

Alexey Miller: Gas will be supplied to Ukraine only subject to the advance payment. Right now USD 500 million has been accumulated on a special escrow account for purchasing gas from Gazprom, from Russia in the fourth quarter.

Unfortunately, we haven’t received the advance payment for gas supplies, though on our part we have prepared and signed all the complete legal documents. We gave up the take-or-pay demand up to March 31, 2016. We let Ukraine withdraw gas in case of subnormal temperatures and cold snaps in the amount of up to 114 million cubic meters a day. It corresponds to the maximum annual contract quantity of 52 billion cubic meters, outlined in our contract.

Therefore, on the one hand, we have given up the take-or-pay demand, and on the other hand, we reserved a possibility for them to demand the maximum daily volumes stemming from the maximum annual contract quantity. For Ukraine it is an additional opportunity for passing the autumn/winter peak period and cold snaps, but I’ll stress it once again, only in case Ukraine pays for our gas in advance.

A trilateral agreement signed in Brussels in late September does not give a comprehensive answer as to how Ukraine is going to pay for gas supplies in winter, because this agreement involves only USD 500 million which is enough for purchasing about two billion cubic meters of gas, considering the current price levels. In addition, these two billion cubic meters will have to be promptly injected into the UGS facilities. The document does not provide a response to how Ukraine is going to pay for direct gas supplies to cover its winter demand. Thus, the issue of Ukraine’s gas purchases on the advance-payment basis remains open, though it is clear that the protocol outlines the parties’ intents and aspirations. Moderator: Mr. Miller, thank you very much for getting around to talk with us.