Speech by Alexey Miller, Chairman of the Gazprom Management Committee, at the annual General Shareholders Meeting
Foundation for Further Growth
The materials prepared for the annual General Shareholders Meeting on Gazprom’s performance in 2016 include the Annual Report, the Accounting (Financial) Statements, the Audit Commission’s Report, and other documents.
It is proposed that the Shareholders Meeting approve:
- the 2016 Annual Report of Gazprom;
- the 2016 Annual Accounting (Financial) Statements of Gazprom;
- the allocation of profit and the proposals by the Board of Directors on the amount, period and form of the dividend payout based on the results of 2016.
It is also proposed that the Meeting approve the Company’s Auditor, the remuneration for the Board of Directors and Audit Commission Members, and the election of the Board of Directors and the Audit Commission Members.
You can find the draft decisions on these matters in the ballots and the additional information in the materials you received.
2016 saw Gazprom reinforce its leading status in terms of key industry indicators and lay the groundwork for new growth:
- we ramped up our reserves, reversed the downward trend in gas production, and extracted a record amount of oil;
- in the reporting year, we brought onstream a number of essential facilities opening up development prospects for decades to come;
- in the European market, Gazprom raised the bar for supply reliability extremely high, demonstrating that we can provide the required amounts of gas at competitive prices amid growing demand.
In 2016, the Gazprom Group’s revenue from sales increased by RUB 38 billion against the previous year, exceeding RUB 6 trillion.
The profit attributable to Gazprom’s shareholders added 21 per cent, reaching RUB 952 billion.
Over the past 11 years, Gazprom has steadily generated a free cash flow, which was yet again positive in 2016. Our cash flow was RUB 202 billion.
Every year, Gazprom develops and implements a cost optimization (reduction) program. Our persistent efforts for improving the efficiency of investment and operating expenses and strengthening the financial discipline have proven fruitful. Even despite the complicated market environment, the Gazprom Group’s operating cash flow has been sufficient to cover our capital investments.
The Gazprom Board of Directors recommended that we approve the proposal to pay out RUB 8.04 per share in annual dividends based on Gazprom's operating results in 2016. This figure is 2 per cent higher than last year’s. For that purpose, we will allocate RUB 190 billion, which is 20 per cent of the Group’s profit under International Financial Reporting Standards.
To pay out the dividends, Gazprom will use nearly the whole amount of the free cash flow generated in 2016.
Gazprom’s dividends attributable to the Russian Government will make up RUB 95 billion. In absolute terms, just like last year, it is the largest such amount among public Russian companies.
Gazprom is one of Russia’s key taxpayers. In 2016, tax and other budget payments made by the Gazprom Group totaled RUB 1,966 billion, exceeding the 2015 amount by RUB 20 billion.
Faced with the challenges of the modern world, Gazprom makes every effort to create competitive advantages and spur the Company’s development. We introduce innovations, run import substitution programs, enter new markets, and explore new production regions.
Gazprom is among Russia’s leading investors in innovations. In 2016, we spent as much as RUB 11.1 billion on R&D and high-tech efforts.
Within the innovative development program, over 440 innovative developments were adopted at the Group’s facilities in 2016. The total effect from their utilization is expected to exceed RUB 279 billion.
Innovations buoyed by the sheer scale of our activities give an impetus to the oil and gas sector, the Russian energy industry, and the national economy at large. Gazprom stimulates scientific progress in Russia and employs the services of domestic high-tech businesses.
Today, Gazprom purchases 95 per cent of its materials in Russia. Please note that we buy 100 per cent of pipes for our gas trunklines from domestic manufacturers.
Gazprom is the world leader in terms of reserves. For 12 consecutive years, our reserve replacement ratio has been greater than unity.
As of the end of 2016, Gazprom’s explored reserves in Russia totaled 36.4 trillion cubic meters of natural gas, 1.5 billion tons of gas condensate, and over 2 billion tons of oil.
Gazprom is the national leader in geological exploration. In the aggregate amount of gas added to Russia’s gas reserves, 65 per cent was added thanks to the Gazprom Group’s exploration efforts.
Importantly, substantial amounts of gas are discovered in the strategic gas production centers we are developing, namely:
- at the Yuzhno-Kirinskoye field within the Sakhalin center, where we added 188 billion cubic meters to our gas reserves;
- at the Kovyktinskoye field within the Irkutsk center, with 138.2 billion cubic meters;
- at the Chayandinskoye field within the Yakutia center, with 86.6 billion cubic meters.
At the Kovyktinskoye field, we are testing a pilot membrane unit, which has no equivalents in Russia, for extracting helium from high-pressure natural gas. At the Chayandinskoye field, exploration has been completed and development gas wells are being built. On the continental shelf of the Sea of Okhotsk, the Kirinskoye field is under exploration with the use of state-of-the-art offshore production technologies.
Gazprom continues to explore the Yamal Peninsula. As a result, the resource potential of the Tambey group of fields has been significantly increased. The group’s fields are estimated to contain 6.7 trillion cubic meters of gas, 600 million tons of gas condensate, and 38.4 million tons of oil. In order to optimize capital expenses in relation to these fields, we plan to employ our Russian partners in the corresponding projects.
Gazprom’s natural gas production resumed growth in 2016, totaling 419.1 billion cubic meters (including 9.4 billion cubic meters of associated petroleum gas). In view of the actual production over the first six months of 2017, by the year's end our annual gas production is expected to exceed 450 billion cubic meters, which is higher than the annual figures for the past three years.
Gazprom's main resource base is shifting northward to the Arctic, which holds about a quarter of the world's unexplored hydrocarbon reserves. Gas production in the Yamal Peninsula will play a key role here. In the Arctic, we have created a powerful production complex with a transportation infrastructure and a full-fledged utility system.
We are constantly ramping up our production capacities at Bovanenkovskoye, Yamal’s largest field. With new production facilities completed in 2016 and brought online in January 2017, Bovanenkovskoye reached a new peak in its output, producing up to 264 million cubic meters of gas per day. It is planned to reach 115 billion cubic meters of gas per year by 2022. With that, the output of just one of our fields will be comparable to the aggregate amount of gas delivered to the European market in 2016 by the UK, the Netherlands, and Qatar.
Gazprom is a pioneer of northern latitudes. We have already opened the Arctic Gate. It is symbolic that this name was given to an offshore oil export terminal for year-round shipments put onstream in 2016. With the capacity of 8.5 million tons per year, the terminal is designed to ensure oil deliveries from the Novoportovskoye field.
We employ state-of-the-art Russian equipment at the Novoportovskoye field, which is successfully developed by Gazprom Neft, our oil wing. Gazprom Neft also acts as the operator of Vostochno-Messoyakhskoye, the northernmost of the oil fields developed in Russia. The field entered commercial production in 2016.
Gazprom expands its oil business using advanced work management practices. A modernized drilling services center started operating in 2016, ensuring round-the-clock monitoring of production processes in horizontal wells. At the Yuzhno-Priobskoye field, a 30-stage hydraulic fracturing procedure was carried out for the first time in the Russian oil and gas industry.
The Gazprom Group’s oil production hit a record of 39.3 million tons in the reporting year, including 37.7 million tons extracted by the Gazprom Neft Group. Production of gas condensate was also above the previous year’s level. Once again, Gazprom Neft was the leader among Russian oil companies in terms of the oil production growth rate.
The Gazprom Group is engaged in exploration and production outside the Russian Federation, participating in a whole array of projects with a broad geographical reach: Bolivia, Iraq, Uzbekistan, Venezuela, the North Sea, and the South China Sea.
In 2016, foreign projects with our participation produced almost 4 billion cubic meters of gas, upward of 500,000 tons of gas condensate, and 3.6 million tons of oil.
Also last year, Gazprom stepped up the sales of crude oil and stable gas condensate by 45.3 per cent. The net revenue from selling liquid hydrocarbons grew considerably as well, totaling RUB 412 billion.
In order to boost hydrocarbon processing, we plan to carry out the expansion and modernization of the Urengoy Condensate Treatment Plant, as well as the renovation and re-equipment of the Surgut Condensate Stabilization Plant. A new petrochemical complex is being built near Novy Urengoy. This August, we will start laying the foundation for the Amur Gas Processing Plant. The plant’s core infrastructure is already under construction. We have selected the supplier for the core process equipment for cryogenic recovery of helium and valuable petrochemical substances from gas at the Amur GPP.
Increasing the degree of processing in our marketed products is a priority for Gazprom.
Gazprom Neft is currently at the 2nd stage of the modernization program aimed at increasing refinery yield. In 2016, the Group stepped up its light oil production efforts. All motor fuels produced by the Gazprom Neft Group correspond to the 5th emission class.
In Russia, Gazprom unfailingly delivers on its mission as a provider of uninterrupted gas supplies.
In our country, 58 per cent of natural gas supplies go to the thermal and power generating companies, the population, and the utilities sector, all of which are highly dependent on stable gas deliveries.
Gazprom’s net revenue from gas sales within Russia grew by over RUB 14 billion in 2016, reaching RUB 820 billion.
As far as domestic marketing prospects go, the potential lies in the wider use of natural gas and the promotion of gas trading. Gazprom contributes to the latter via St. Petersburg-based exchange trade platforms, where we sell more gas than independent producers do.
The gasification of Russian regions is an ambitious and socially significant project for Gazprom. It makes the “blue fuel” more accessible for the public and helps the domestic market grow. In 2016, RUB 25 billion was invested in the gasification of Russian regions.
In the framework of the Gasification Program, the Company built gas pipelines for 254 population centers in 2016, providing gas to over 25,000 households and 175 boiler houses. By late 2016, Russia’s gas penetration level reached 67.2 per cent, including 70.9 per cent in urban areas and 57.1 per cent in rural areas.
Natural gas is the “destination fuel of the future.” Gazprom makes large-scale efforts to promote and use natural gas as a vehicle fuel. The program covers dozens of regions in Russia, as well as such countries as Germany, Poland, Serbia, Czech Republic, Armenia, Belarus, Kyrgyzstan, and Vietnam.
Our single operator for NGV market development is Gazprom Gazomotornoye Toplivo. Promotion of natural gas as a vehicle fuel is carried out under the EcoGas brand name. We engage local and regional authorities, manufacturers of vehicles and specialized equipment, and transportation companies in the process.
In 2016, the amount of compressed gas sold via the Gazprom Group’s and Gazprom Gazomotornoye Toplivo’s filling stations added 10 per cent, amounting to 480 million cubic meters.
By promoting the wider use of natural gas, Gazprom consistently works to mitigate its negative environmental impacts. It is part of our strategy. Thanks to the implementation of a number of corporate programs between 2012 and 2016, Gazprom’s carbon footprint decreased by more than 20 per cent.
Ten years ago, Gazprom made a strategic decision to enter the power generation sector. Today, Gazprom Energoholding, in which our core generating assets are consolidated, is Russia’s largest thermal energy producer and the leader in power output by thermal companies.
Since 2007, the Gazprom Group has brought into operation some 8.5 GW of new generating capacities, with around 1 GW brought onstream in 2016 alone. Gazprom remains Russia’s leading company in terms of installed power generating and thermal capacity.
Gazprom Energoholding achieved excellent results in 2016. Its core companies boosted their overall power and thermal energy output by 6 and 6.5 per cent, respectively.
The aggregate revenue climbed by more than 17 per cent, exceeding RUB 500 billion, with the net profit adding 65.5 per cent and skyrocketing to over RUB 19 billion.
At the moment, we are switching consumers in the central part of St. Petersburg to the new equipment of the Central CHPP operated by TGC-1.
Teleconference with St. Petersburg’s Central CHPP
Alexey Miller: Greetings, colleagues. Please update us on your status.
Denis Fyodorov: Good afternoon, Mr. Miller and dear shareholders. We have completed the construction of a 100 MW power plant in the center of St. Petersburg. It is the final project of TGC-1 with regard to building power stations under capacity supply agreements. The plant’s equipment is ready for switching consumers over permanently to a new power scheme. Mr. Miller, allow me to start the switchover to a new switchgear station.
Alexey Miller: Please begin.
Denis Fyodorov: We are switching power consumers over from the old substation, RP-9, to a new 100 kV switchgear station; now electricity goes to the Yusupovskaya substation and then to consumers.
Dear Mr. Miller and esteemed shareholders, the historic center of St. Petersburg is now supplied with power on a permanent basis from the new equipment of the Central CHPP. Let us have a look at one of the consumers of the Central CHPP: the State Hermitage Museum. The new hall lighting system is the result of cooperation between TGC-1 and the Museum.
What is most important here is that St. Petersburg’s consumers will now have more reliable power supplies, which will come from a new and reliable power plant.
Alexey Miller: Congratulations, dear colleagues. Thank you for a job well done. We will now resume the Shareholders Meeting.
We ensure the high reliability and flexibility of our main product, i.e. natural gas, supplies through the efficient operation and systematic development of the world’s largest gas transmission system and the underground gas storage network. This is a competitive advantage of Gazprom and we are consistent in building it up.
Last year saw the commissioning of 770.6 kilometers of gas trunklines and branches, a compressor station and 488 MW of additional capacities in Russia.
The potential maximum daily deliverability of Russian UGS facilities increased to a record high level, reaching 801.3 million cubic meters of gas by the start of the 2016–2017 withdrawal season, which is 11.4 million cubic meters more against the previous year’s indicator. The working gas inventories in domestic UGS facilities also grew by 80 million cubic meters.
In 2016, we made a crucial step forward in the development of Gazprom’s gas transmission system. Along with the launch of new production capacities at the Bovanenkovskoye field, we brought onstream Bovanenkovo – Ukhta 2, a new high-tech gas trunkline designed for the operating pressure of 120 atm. There are only two onshore gas pipelines in the world that can transmit gas at such high pressure: Bovanenkovo – Ukhta and Bovanenkovo – Ukhta 2.
These gas pipelines form an essential part of the northern gas transmission corridor, which delivers gas from the Yamal gas production center, the main resource base for Gazprom in the future, to Russian and European consumers. The northern corridor is made up of new-generation gas pipelines that are gradually replacing those of the central corridor, which conveys gas from the Nadym-Pur-Taz region. Having been in operation for many decades already, the central corridor and the Nadym-Pur-Taz region are inevitably outliving their usefulness. The northern corridor is becoming the major transmission thoroughfare for gas supplied to European Russia.
Natural gas is gaining increasingly wider recognition as a means of meeting the global energy challenges: cutting down pollutant emissions, satisfying the global energy needs and securing the reliability of operations during peak demand.
The demand for Russian gas in Europe is rising. The Nord Stream export gas pipeline is operating at full capacity and the need for it is still growing. On some days in the past autumn-winter season, we utilized 111 per cent of the pipeline’s design capacity!
The historic record for daily gas supplies to Europe was set at 636.4 million cubic meters. In energy equivalent terms, that amount is higher than the daily power needs of all European households combined.
In 2016, we raised gas exports to Europe to the record level of 179.3 billion cubic meters. The share of Russian gas in gas consumption by these countries reached the unprecedented high of 33.1 per cent.
In the same year, gas supplies to some European countries were as high as ever. For instance, a new record was set for gas deliveries to Germany, Gazprom’s largest European market. This country was supplied with 49.8 billion cubic meters of gas, a 10 per cent rise from the year before.
Our strategy in the European market proves that Gazprom is a reliable partner and supplier. We managed to ramp up supplies to our consumers when there was an acute demand and we did it in the required amounts and at the most competitive prices.
The demand for Russian gas continues to grow in 2017 as well. Over the six months, gas exports went up by 12.4 per cent, or by 10.5 billion cubic meters compared with the same period of 2016.
Consequently, Gazprom’s gas supplies to the European market surged by 30.4 billion cubic meters in just one year and a half. This is commensurate with the full capacity of TurkStream or more than a half of Nord Stream 2’s capacity. And this growth has been achieved just in the last year and a half!
Europe needs imported gas, as demand is rising and production is declining there. The forecasts that LNG will replace natural gas piped to Europe didn’t come true. LNG loses out in a real market environment. In 2016, its supplies to the European market dropped by nearly 2 per cent or by more than 1 billion cubic meters. Therefore, European businesses are eager to get involved in pipeline gas imports from Russia jointly with Gazprom.
In 2017, we signed the financing agreements for the Nord Stream 2 project with Engie, OMV, Shell, Uniper, and Wintershall. Our foreign partners are providing financing for 50 per cent of the total project’s cost. Each company will contribute up to EUR 950 million.
By delivering the Nord Stream 2 project, we will finally shape the northern gas corridor abroad. It will be the most effective route for Russian gas deliveries to Europe from the technical and economic standpoints.
We apply advanced technologies in the northern corridor’s gas trunklines, thereby reducing auxiliary gas consumption three- to six-fold, depending on the operating pressure of pipelines. The estimated costs of gas supplies via the northern corridor through Nord Stream 2 are twice as low as via the central corridor across Ukraine.
We progressed even further in the direction of southern Europe in 2016. TurkStream’s construction is in full swing.
The first string of the gas pipeline is intended for the Turkish market, while the second is meant for gas supplies to other European countries. The annual capacity of each string is 15.75 billion cubic meters.
TurkStream will contribute to stronger energy security of European countries by helping redress the regional imbalances of the EU gas market. Gazprom, by implementing the project, will accomplish its strategy for diversified export routes and increased reliability of supplies.
We also ensure the reliability of exports through our involvement in underground gas storage projects in Europe. Gas stocks in European UGS facilities were at an all-time low last winter, which compels us to pay even greater attention to this issue. Gazprom uses UGS facilities in Austria, Germany, Serbia, the Netherlands, the Czech Republic, and the UK.
In 2016, Gazprom owned around 5 billion cubic meters of gas storage capacities in European countries, with daily deliverability totaling 83.4 million cubic meters.
Our efforts to diversify the export routes entail the expansion of our operations in the LNG market as well.
In 2016, the Gazprom Group boosted its LNG sales to almost 5 billion cubic meters. LNG from the Group’s trading portfolio was supplied to Japan, India, Taiwan, Mexico, the UAE, South Korea, and other countries.
We signed the Heads of Agreement with Shell at the St. Petersburg Economic Forum 2017 to set up a joint venture. The JV will be responsible for attracting financing for and designing, building and operating Baltic LNG, an LNG plant in the Leningrad Region. The project envisages the construction of a gas liquefaction plant with an annual capacity of 10 million tons near the port of Ust-Luga. This plant will increase the flexibility of our exports in the western direction.
In eastern Russia, we are developing the Sakhalin II project. In cooperation with Shell, we are drafting design documentation for the construction of a third production train, which will add up to 5.4 million tons of LNG to the annual output of the project’s LNG plant. The train will allow Gazprom to expand its presence in the Asia-Pacific markets of India, Japan and Korea, as well as other countries and regions.
Our strategy in eastern Russia and the Asia-Pacific region hinges on the Power of Siberia gas trunkline. It is a major investment project in the global gas industry. The project is meant to accelerate the social and economic development of the Far East and Eastern Siberia. It will also pave the way for us to enter the Chinese gas market, the most promising foreign market for Russia.
By now, over 800 kilometers of the trunkline have been constructed, with over 1,050 kilometers of its linear part welded.
At present, we are closing the discussion on when to start supplies via the eastern route of the Power of Siberia gas pipeline according to the contract. The relevant document is planned to be signed with our Chinese partners any time soon.
Until the end of 2017, we intend to begin negotiating the terms and conditions of gas supplies to China via another route, from the Russian Far East.
Our cooperation with the Chinese partners is not confined to buying and selling gas. We promote joint activities in a variety of areas. Specifically, we entered into pre-FEED contracts for building UGS facilities in China.
We also inked a memorandum to cooperate in power generation. The efforts in this area can advance our contractual relations to a new level involving the possibility of setting up a joint business in China.
Together with the Chinese partners, we will promote the use of LNG as a vehicle fuel, including along the Europe – Western China international transport corridor. Part of the Silk Road, the corridor will stretch for about 2,300 kilometers in Russia alone.
Chinese companies are involved in the construction projects for the Amur Gas Processing Plant and the submerged crossing under the Amur River within the trans-border section of the Power of Siberia gas pipeline.
We have gone a long way with our Chinese partners within a very short span of time and now we are bound by the genuine relations of a long-term strategic partnership.
Natural gas is becoming a driver of enhanced international cooperation and Gazprom is a valuable contributor to this process.