Alexey Miller speaks at Geo-Economics of Large-Scale Infrastructure Projects panel session at St. Petersburg International Economic Forum

Dear colleagues,

My speech today is meant to show that Nord Stream 2 is a highly efficient commercial project. To achieve that, I will use seven simple and clear-cut arguments.

As a rule, those who discuss and analyze the economic efficiency of the Nord Stream project only address its offshore part – the subsea gas pipeline running from Russia to Germany. They compare the economic indicators of that section to those of other routes for Russian gas supplies to Europe. However, our project needs a broader perspective: one should analyze the way the resource base and gas transmission routes change in Russia, as well as take into account the evolving European market.

My first argument is that Gazprom's resource base is currently shifting from the Nadym-Pur-Taz region to Yamal. Gazprom has created a new resource center – the Yamal gas production center. We see the Company's resource base shifting further and further north. At the same time, Gazprom is creating a gas trunkline system comprised of the Bovanenkovo – Ukhta, Bovanenkovo – Ukhta 2, Ukhta – Torzhok, and Ukhta – Torzhok 2 pipelines, which allows us to deliver Yamal gas to consumers in Russia and abroad. We understand that, over the next 25 years, the ratio between the production volumes at our top two resource platforms will be diametrically opposite. This trend significantly affects gas flows, both export and domestic ones.

My second argument is that, in addition to Gazprom's resource base shifting from Nadym-Pur-Taz to Yamal, export flows in Europe are also moving. There is a steep decline in domestic gas production across the European Union. Most importantly, it has an impact on gas consumption in those northwestern European countries that are major consumers. This is evident from the trends in Russian gas supplies, as the demand for our gas is primarily growing in northwestern Europe. I'd like to stress two points here: those countries are traditionally known as major gas consumers and they are oriented toward the European resource base, which shows a fall in domestic production. As a result, export flows are shifting from the center to the north.

If you look at our existing and potential gas transmission routes as they are seen from space instead of on the political map, you'll see that one could draw a direct line between our new resource base – Yamal – and our main consumption center – northwestern Europe. And the Nord Stream 2 pipeline is effectively a direct continuation of the Bovanenkovo – Ukhta and Ukhta – Torzhok gas trunkline system.

My third argument for the economic efficiency of Nord Stream 2 is that this pipeline is the shortest export route from our resource base in Russia's Yamal to our consumer markets. As you see, there is a direct line between Yamal and Greifswald. If you look at the current route of gas deliveries to Germany via Ukraine, you'll see a curve which is almost 2,000 kilometers longer than the northern corridor. This gas export route is nearly 1.5 times longer than the northern corridor that includes the Nord Stream 2 pipeline. So the northern route from Yamal to Greifswald is the shortest one, without any detours or transit sections.

My fourth argument is as follows. The gas trunkline network that Gazprom is currently constructing and that runs from the Yamal gas production center is the most cutting-edge gas transmission system in the world. Thanks to our close cooperation with Russian pipe manufacturers, these trunklines operate at a pressure of 120 atm, which makes a big difference for gas transmission efficiency. It is very different from the central corridor that currently conveys gas to Europe via a transit route across Ukraine. That gas trunkline system is hardly new, although it used to be state-of-the-art at some point. The trunklines in that corridor operate at a pressure of 55–75 atm.

Alexey Miller speaks at Geo-Economics of Large-Scale Infrastructure Projects panel session at St. Petersburg International Economic Forum
Alexey Miller speaks at Geo-Economics of Large-Scale Infrastructure Projects panel session at St. Petersburg International Economic Forum

Alexey Miller speaks at panel session

I would like to stress here that, owing to low specific operating costs, including gas consumption for own needs, the new northern corridor is immensely more efficient in terms of gas transmission compared to the existing Uzhgorod corridor or the central corridor running across Russia. The northern corridor's pipelines are 6 times more efficient than 55 atm trunklines and 3 times more efficient than 75 atm trunklines.

My fifth argument is that, when you take into account the resource base shifting from Nadym-Pur-Taz to Yamal and gas flows moving across Russia, you get a fundamentally different configuration of gas flows in Russia, within the Unified Gas Supply System of the Russian Federation. This is crucially important to us. I would like to emphasize that this a crucial development that has already prompted Gazprom to launch a cost optimization program for the central corridor.

What do I mean by that? I mean that, due to the expansion of the northern corridor and the changes in the configuration of gas supplies to consumers within Russia, some facilities in the central corridor are no longer needed. Meanwhile, Gazprom incurs semi-fixed operating costs for the maintenance of those facilities. The Company has now launched an optimization program for gas transmission capacities in the central corridor, which provides for the decommissioning of almost 4,300 kilometers of single-string trunklines and 62 compressor shops with a total installed capacity of over 3 GW by 2020. As for the gas transit capacities that we will have in the central corridor toward Ukraine by 2020, they will amount to 10–15 billion cubic meters per year after the optimization program is completed. In the period up to 2020 alone, Gazprom will save USD 1.6 billion on operating costs.

The sixth argument is that Nord Stream 2 is a highly profitable project. First of all, we are well aware that Gazprom, as a shareholder in the Nord Stream 2 project, will pay the transportation tariff to itself. It should be noted that the transportation tariff for Nord Stream 2 is USD 2.1 for 1,000 cubic meters per 100 kilometers. The current rate for gas transit via Ukraine is USD 2.5 for 1,000 cubic meters per 100 kilometers. That is, it is 20 per cent more costly to deliver gas via Ukraine than via Nord Stream 2. Over the next 25 years, the volumes embedded in the Nord Stream 2 project, at the tariff of USD 2.1 for 1,000 cubic meters per 100 kilometers, will provide Gazprom with almost USD 7 billion of dividend yield after tax. And our shareholders – the European companies participating in this project – will gain USD 7.3 billion.

We have mentioned the USD 2.1 tariff for Nord Stream 2. We have also pointed out that the operating costs for the northern corridor, i.e., the Bovanenkovo – Ukhta and Ukhta – Torzhok gas transmission system, are much lower than for the central corridor. This leads us to the idea that, with the existing transit tariff, the cost of gas supply from Russia to Germany via Nord Stream 2 is 1.6 times lower than via the transit route across Ukraine. We also used in our analysis the so-called specified tariff, which has been announced already – it stands at USD 4.6 for 1,000 cubic meters per 100 kilometers. The specified tariff enables Ukraine to upgrade and retrofit its gas transmission system. Let's suppose that Ukraine will find a way to obtain the necessary financing and retrofit the system. In that case, the tariff rate will be USD 4.6. Then, the cost of gas delivery from our gas production centers in Russia to Germany via the northern corridor – via Nord Stream 2 – will be twice as low.

Similarly, by taking the transportation tariff and low operating costs into account, we could compare Nord Stream 2 with other alternative routes of gas supply to the European market. The assessment of the Shah-Deniz 2 project in Azerbaijan, LNG supplies from the US, and a new Norwegian gas pipeline called Polarled shows that the cost of supplying our gas via Nord Stream 2 is two or three times lower than via alternative routes.

Special attention should be paid to the seventh argument: the northern corridor, Nord Stream, can provide for a significant environmental improvement. The fact is that the cutting-edge trunkline system produces considerably fewer harmful emissions: we see that 120 atm gas trunklines, and particularly our Nord Stream 2 gas pipeline with the pressure of 220 atm, demonstrate much lower emission rates in CO2 equivalent.

As a point of comparison, the carbon footprint of the gas supply route via Ukraine, expressed in terms of harmful emissions like CO2, is larger by almost 9 million tons, which is enormous. That means 223 million tons of CO2 in 25 years – an amount commensurate with the annual emissions of the Netherlands. The most important thing is that, in order to mitigate those additional annual emissions, we would have to, say, increase the acreage of German forests by 15 per cent.

Let's consider how much alternative energy is equivalent to 55 billion cubic meters of gas supplied to the European market by Nord Stream 2. This amount translates into 140 trips of oil tankers, 645 trips of LNG carriers, 68 new NPP units, 250 units of 400 MW capacity at coal-fired CHPPs, 220,000 wind turbines, and 90,000 square kilometers of corn fields used for bioethanol production.

I would also like to note that, considering the carbon footprint of coal-fired power plants – as coal is (or was) seen as a competitor of natural gas lately – the construction of 250 units of coal-fired power plants, proposed as an alternative to Nord Stream 2, could lead to 77 million tons of additional emissions in CO2 equivalent per year.

Taken as a whole, these seven arguments prove that Gazprom could reap a much bigger economic benefit from exporting gas through Nord Stream 2 than via the central corridor with transit across Ukraine. And the economic efficiency would be 2–2.7 times higher depending on Ukraine's transit tariff. Over the course of 25 years, Gazprom could gain USD 45–78 billion from the project. As you can imagine, this is a very respectable sum. The numbers are very impressive. We're not talking about several per cent or even tens of per cent – the route is vastly more economically efficient.

We sometimes hear that it is necessary to continue transiting gas via Ukraine in the amount of about 30 billion cubic meters per year. Let's look at the additional costs that Gazprom would incur as a result. To transport gas through Ukraine, the Company would have to sign a new contract for the transit of 30 billion cubic meters per year, which would lead to additional operating costs of USD 25–43 billion in 25 years. So those who promote such a transit agreement should answer the question: “Who will repay those additional operating costs to Gazprom and in what way?” There is another question: “Do you have no problem with the fact that transiting 30 billion cubic meters of gas across Ukraine means 112 million tons of additional CO2 emissions over the course of 25 years, which is equal to the annual CO2 emissions of Belgium with its capital in Brussels?” Without a doubt, we will need answers to these questions if, upon the expiration of our transit agreement on December 31, 2019, we discuss this option for gas transit to Europe.

Nord Stream 2 is currently running on schedule, with tendering procedures underway. For instance, a pipe supply tender for the offshore section has already taken place. Just a few weeks ago, Gazprom had an offsite meeting with Russian pipe manufacturers. As you know, Russian manufacturers were awarded contracts for 60 per cent of pipe supplies within the Nord Stream 2 project. So the venue for our traditional offsite meeting was chosen for a reason, as Chelyabinsk Pipe-Rolling Plant is one of the tender winners. The pipe is already being manufactured and all is going according to the plan.

In the near future, we will select the companies for pipe laying operations. The pipe laying will start in early 2018. The Nord Stream 2 project is on track. We have no doubt that additional export capacities will be created within the preset time limits, that is before the end of 2019, for 55 billion cubic meters of gas to be supplied directly, avoiding transit, from Russia to Germany across the Baltic Sea.

Thank you for your attention.