The speech delivered by Alexey Miller, Chairman of the Gazprom Management Committee, at the plenary meeting of Russian Energy Week International Forum 2022 under the theme of “New Challenges, New Opportunities: What’s in Store for the Oil and Gas Market?”
Shorthand record
Moderator: Mr. Miller, European countries are now continuously saying that they are ready for the upcoming winter, their UGS facilities are practically 90 per cent full, and, all the while, they are importing LNG. How do you personally assess Europe’s ability to smoothly go through the winter?
Alexey Miller: Thank you for the question. However, if we take its urgent and acute nature into account, it should be noted that European consumers and European politicians mostly pose the question as “Will Europe survive the upcoming winter with the gas reserves it has accumulated?”
Indeed, if we talk about the percentage of working gas inventories currently present in Europe’s storages, the figure is not small: 91 per cent. But we have to look at the two separate aspects of this matter. The first one is the overall volume of working gas currently present in Europe’s underground storages taken together, and the second one is the ability of Europe’s underground storages to go through the autumn/winter peak loads. These are two different things. It should be noted immediately that 91 per cent as the level to which underground gas storages are filled up this year is a figure that differs completely from the figure observed last year or several years ago. Why? Because today logistics is completely different, and the European market has completely different sources of gas supply. And this means that Europe’s underground storages are likely to face a burden that will be significantly greater than in previous years.
Speaking about the working gas inventories contained in Europe’s underground storages, Germany is the country to be mentioned first. It is Germany that has the largest underground storage facilities and the biggest capacities in terms of the amount of working gas that can be injected. Still, their working gas inventories are 21.5 billion cubic meters, provided that their storages are 100 per cent full. Germany, apparently, will inject about 20 billion cubic meters of gas. According to estimates that are based on retrospective data, Germany will consume 60 billion cubic meters of gas in the upcoming autumn/winter period, maybe a little more. In the entire autumn/winter period. This means that the gas inventories present in Germany’s underground storage facilities are enough to last for two, maximum two and a half months.
There are different forecasts, of course. And there can be nothing but forecasts now, because we understand that the performance in the autumn/winter period depends also on the temperature outdoors, on whether the winter is cold or abnormally cold... Of course, both optimistic and very pessimistic forecasts are made. According to very pessimistic forecasts, about 5 per cent of gas will remain in Europe’s storages by the end of the withdrawal period in March 2023.
Yes, Europe will survive [the upcoming winter]. But what the situation will be during the injection of gas for the 2023–2024 winter season? And this makes it apparent that the current energy crisis will not be a short one. And the causes behind it are of systemic nature.
Moreover, as we have noted, the working gas inventories, i.e. the volumes of gas injected both in Germany and Europe, are actually only one aspect of the issue. There is a much more acute thing about it, which is called “operation during the peak loads in winter.”
As for the operation during winter periods of peak loads, as you know, a winter can be relatively warm, but one week or even five days of it can turn out to be abnormally cold. And a short spell of cold weather can be enough to freeze entire cities and entire lands, God forbid.
Let us touch upon the figures of gas balance in the periods of peak loads. In previous years, during the winter periods of peak demand, Gazprom’s daily supplies of gas to the European market stood at 600 to 700 million cubic meters, maybe even slightly more, when the cold anticyclone well known as the “Beast from the East” broke down. But, speaking about the peak volumes of gas supplies and what the shortage of gas in Europe’s daily balance will be, European experts predict an exorbitant figure today. A daily shortage of gas in Europe during extreme cold snaps can be 800 million cubic meters, which makes up one third of the total consumption in Europe.
Of course, analysts, experts, relevant ministries, and companies operating in the European market are aware of this situation. And, of course, they are preparing an action plan to address the challenge. Let us touch upon the measures that are recommended and their degree of practicability.
Firstly, it is proposed to introduce a system of quotas. And this is despite the fact that there is no quota formula and there are simply no quota criteria. Also, there is no penal system for non-compliance with quota requirements. It is very doubtful and highly questionable whether this mechanism is going to be relevant during the peak demand in the autumn/winter period.
Another proposal, and Vladimir Putin mentioned it in his speech today, is to introduce ceiling prices. In particular, to introduce ceiling prices for gas. You know, such proposals bring to mind the lyrics of a well-known Russian song that goes “Ice Ceiling, Creaky Door,” and so on. By the way, do not forget our native Russian culture, keep exploring it. One should understand that coercion of gas producers to follow any particular price behavior is absolutely inconceivable today. Therefore, the “ice ceiling” is a vivid description of what these proposed measures represent.
Next, we have to mention very serious and extensive monetary interventions. This is the measure called “gas price subsidies.” The figures mentioned in this connection are just exorbitant. And the problem – or I can even say problems – that it additionally entails are even more systemic. Germany has chosen to follow this path, and now you can hear Germany saying that they have already allocated EUR 200 billion to subsidize gas prices. What does it mean? It means that the injection of gas into underground storage facilities is unlimited and unrestricted, but the gas being injected in them is extremely expensive. The first conclusion to be drawn from the situation is that this is truly a verdict against low inflation.
The second conclusion is that the mechanisms that have been put into place indicate the absence of any gas market in Europe. This is no longer a market.
And thirdly, the principle termed as European solidarity is actually put at stake, because stronger EU economies have the required opportunities, while other EU economies don’t. It should be noted that in similar situations with other products and other economic conflicts everyone was told that this would not be the right thing to do. But now it turns out that it is quite all right to do so, and on such a great scale, in the situation with gas. But the result is that gas is expensive. What does this lead to? This leads to de-industrialization of Europe. And the methods and steps proposed are also very interesting, namely, nationalization – that is, nationalization of Germany’s gas market and nationalization of gas traders. What is nationalization? This mechanism implies transferring costs to the budget, which means transferring costs to taxpayers.
Moderator: What will all this result in?
Alexey Miller: As for the result, in fact, economic growth means growth in energy consumption. It has already been noted today that the so-called relative well-being of the European Union and, for instance, that of Germany, was for a very long time sustained by cheap energy sources supplied by Russia. This situation has lasted for over 50 years. What will all this result in? The availability of cheap energy from gas gave more than a 100-fold leverage for trouble-free financing of the German industrial sector. In practice, there will be damage to the economic model that has been in place until recently. A very serious damage.
What other proposals are being put forward? “Let us create a cartel of consumers.” The idea is not a new one. But, you know, we play games by the rules that were created by us. And we do not play games by the rules that were created by someone else. We have never had any cartels of consumers in our key markets. By the way, some experts say that just a mere reference to the possibility of creating an equivalent of OPEC in the gas sector makes a very serious investment into gas prices.
Going back to the question of whether Europe will survive [the upcoming winter] with the current volume of gas injection observed at its underground storages, the answer is very simple: no one can give any guarantees.
Moderator: Mr. Miller, in his speech, Vladimir Putin has already called the situation that occurred at Nord Stream 1 and Nord Stream 2 an act of international terrorism. Sweden has already announced officially that is will not admit the Russian party to the examination of all details of the incident. Does Gazprom have the resources today to ensure the required gas supplies, if Europe expresses its willingness to, and makes a request for, pumping of gas through the second string of Nord Stream 2 which has possibly remained intact? How much time will be required to perform all the works necessary for the pumping to start? Is our party ready to take part in the repair works and the launch of the other three strings, if Europe requests us to do so?
Alexey Miller: Thank you for the question. To this date, we have not been allowed to visit the sites of the accidents. This detail is important for seeing the overall picture, I think. This is point one. Indeed, the second string, i.e. string B of Nord Stream 2, is under pressure now. Maybe, it has some damages, but there are definitely no gas leaks there. Answering to your question, it is important to distinguish between the situation at Nord Stream 2 and that at Nord Stream 1.
Let us start with Nord Stream 2, as it still has one functional string left. You know that Gazprom employed absolutely all of its efforts, knowledge, experience, and technological capabilities to create the gas transmission capacities of Nord Stream 2 within the timeframe set. As you understand, we created this new offshore trunkline export route for Europe and Germany as our buyers, our clients. It is not that Gazprom was driven by a self-initiated spontaneous idea of building gas trunklines of this scale across the Baltic Sea.
Moderator: And such expensive ones.
A. Miller: Indeed, such expensive ones. I would like to highlight that not only offshore gas pipelines are expensive. Do not also forget about the gas transmission infrastructure that has been created for these gas pipelines on a considerable territory of the Russian Federation. Europeans are somewhat unwilling to discuss or even recall it. And when everything was built in a timely manner – and I would like to emphasize that the construction was ordered by the European Union and Germany – they said no to us, referring to a) sanctions, b) the Third Energy Package, certification, and so on and so forth. Besides, they referred to the 12-mile zone – the territorial waters of Germany with their special regime, and so on.
The second string is under pressure; therefore, we can definitely say that the ball is now on the side of the European Union, on the side of Germany. If the gas pipeline receives a certificate, we can start gas supplies immediately.
As for the accidents that have occurred at the Nord Stream 2 and Nord Stream 1 gas pipelines.
Speaking about Nord Stream 2, it should first of all be noted that the gas pipeline is under sanctions. Also worth noting is that Nord Stream 2 has not yet been in operation. Accordingly, there can be no quick automatic start of gas supplies to the consumers who were cut off from them because of the accidents. Since the pipeline has not been in operation yet, there was no interruption of gas supplies to Europe and Germany.
The situation is different with Nord Stream 1. Gas supplies via Nord Stream 1 had been performed and then suspended before the acts of international terrorism were committed at its two strings. Therefore, it is important to understand that the restoration of Nord Stream 1 is linked to another major technological problem: Siemens gas turbine engines at the Portovaya compressor station. It is important to understand that today there is no answer to the question of how and why to restore the strings of Nord Stream 1 if the engines at the Portovaya CS are out of service.
Speaking about the acts of international terrorism – and this is exactly how Vladimir Putin referred to these explosions in his speech today – it is important to note how European countries call and assess these events. Interestingly, it turns out that they were an act of sabotage. Not an act of international terrorism, but sabotage.
Actually, sabotage is a word that comes from French and originally means “to make noise with a shoe.”
It seems that someone really likes the political lexicon from the early 1960s. It looks like they are going to recall the “Kuzma’s mother” phrase as well.
However, let us think about how long it will take to restore the damaged strings. It should be stressed in this connection that the problem is not a technological one in essence, although it is a very challenging one from the technological point of view as well.
First of all, there is a political aspect to this issue. A clear and explicit political answer is required from both the EU and Germany, confirming that they are interested in restoring the damaged strings and want them to be restored. Guarantees of further secure operation of these strings are also required. In addition, there are also issues related to sanctions, economy, and legal matters. It is only after all of these issues are resolved that we will be able to start the technological restoration, i.e. the restoration of integrity of the blown-up gas pipelines. In terms of timeframes, it will take several years. It is going to be quite a long process.
Today, Vladimir Putin mentioned TurkStream in his speech. Indeed, even from the point of view of restoring the strings of the blown-up Nord Stream 1 and Nord Stream 2 pipelines, we can create capacities in the Black Sea instead of the gas transmission capacities lost offshore in the North. As everyone is well aware, TurkStream runs through only two economic zones – that of Russia and Turkey – and, accordingly, through the territorial waters of Russia and Turkey. And the depth of those waters is 2.15 km, which is certainly different from the depth of the Baltic Sea. Without any doubt, TurkStream has already proven to be a reliable route for gas supplies to Turkey, which is our reliable partner, and to the European market. Apparently, it is relevant and timely now to consider the transfer of the capacities that were lost in the North, i.e. in the Baltic Sea, into the Black Sea.
Moderator: Does this mean that, from the technical point of view, we are ready to create in the Black Sea the hub mentioned by the Russian President?
Alexey Miller: From the technical point of view, we are ready to build gas transmission assets. As for the hub, undoubtedly, the issue of creating a trading platform on the border of the European Union and Turkey can be considered.
Moderator: Mr. Miller, redistribution and redirection of, inter alia, export capacities have been mentioned by you in your speech, and were also touched upon by Vladimir Putin and Alexander Novak. How does Gazprom see the implementation of the projects we have already spoken about?
Alexey Miller: Gazprom has been implementing the Eastern Gas Program for several years, and, of course, the backbone projects are the Power of Siberia gas pipeline and the development of the Chayandinskoye and Kovyktinskoye fields. And we are currently setting records in terms of daily gas deliveries to China above the contractual volumes that we have.
The Asian market, including, in particular, the Chinese market, is the most dynamic in the world. And, of course, Gazprom, with its strategic focus on entering this market, takes all this into account. Most importantly, we have the resource base ready both in Eastern Siberia and, I would like to stress it, Western Siberia. And we can increase the volume of supplies to the Asian market in the shortest possible time.
In addition to the already functioning Power of Siberia pipeline which delivers gas from the Chayandinskoye field, we will put the Kovyktinskoye field into operation by the end of the year, and it will serve to supply gas to, inter alia, the Chinese market. We have signed a contract for gas supplies to China from the Far East; this is our Far Eastern project. At present, we are already developing the design and estimate documentation for the construction of a gas pipeline that will run from Russia to China through the territory of Mongolia, i.e. the Power of Siberia 2 gas pipeline. This, of course, will simply multiply our potential of exports towards Asia.
Another task that was set by the Russian President is to connect the Unified Gas Supply System, which is present in the European part of the country, with the gas infrastructure that has already been created in the Far East and Eastern Siberia. Accordingly, we are starting to build a connecting gas pipeline that will link the eastern and western parts of the country. And this, of course, will primarily be an opportunity both to increase the volume of gas consumption by industrial consumers in the east of Russia and to accelerate the gas infrastructure expansion in these regions.
The program for gas supply and gas infrastructure expansion and the work on social gas infrastructure expansion are among Gazprom’s top priorities. The Russian President has set clear priorities in this regard. And I can assure you that absolutely all of the goals and objectives set for Gazprom within the framework of gas supply and gas infrastructure expansion programs will be met strictly on time.
It is necessary to mention additional gas infrastructure expansion, of course. Today, this work is being carried out in very close cooperation with the Government of the Russian Federation, in particular, Alexander Novak, who heads the Federal Headquarters [of Gas Infrastructure Expansion]. I am talking about bringing gas to houses and households in the settlements which already have gas networks laid in their territory.
And, without a doubt, we address issues related to gas equipment, which were mentioned by Vladimir Putin in his speech today. The possibility of purchasing such gas equipment is one of the issues that are currently being addressed, and it will definitely be resolved. I am talking about comprehensible financial mechanisms that involve, inter alia, the participation of the regions. Although, as Mr. Putin noted, Russian regions have different financial possibilities. Nevertheless, in the end, our program for social gas infrastructure expansion will be implemented across the entire country. We will implement it within the timeframe that the state sets for us.
Moderator: Thank you, Mr. Miller.