Igor Yusufov: Shale gas is an unprofitable business and a very harmful thing for environment

April 25, 2013
Interview by Vesti FM

Anchorman: Our guest today is the Russian Energy Minister between 2001 and 2004, currently Member of the Gazprom Board of Directors, founder of the Fund Energy – Igor Yusufov. How do you do, Mr. Yusufov!

Igor Yusufov: Hello!

Anchorwoman: Good morning!

Anchorman: Today we are going to discuss a lot of things, including the really complicated ones. I hope you’ll give us an explanation, because there are a lot of incomprehensible things in your energy sector. Our listeners may also join the discussion. We’ll be receiving calls, probably in the second half of the hour. Our phone number is 232-15-59, and the number for your SMSs is 5533, please start your messages with the word “vesti” and put questions to our guest. I would like to start with the simplest thing which makes a lot of people anxious, namely, the connection to gas networks and the expansion of the said network across settlements and cities of our huge country. Many people want gas, because gas is convenient and efficient, it is probably the best energy source today, as heating the house with electricity is highly expensive. Here some questions arise. Firstly, many people don’t know when gas will appear in their settlements. And secondly, it is way too costly to connect. In this respect, can Gazprom influence the situation somehow? It is strange when in one region or territory the connection is fast and cheap, whereas in another one with seemingly the same conditions it is expensive and time-consuming.

Igor Yusufov: Yes, it is really so, Gazprom considers gasification of regions, districts and rural areas as a major priority. Gazprom pursues a gasification development strategy adopted by the Board of Directors and approved by the Government. And our target is a hundred per cent gasification of all Russian regions, reaching, as you put it, every house and every locality. However, there is a problem which gets in the way of this program or strategy – the problem of financing. Gazprom as a gas producer is ready to supply our citizens with as much gas as needed. The problem lies in the construction of gas networks. Gazprom operates high-pressure transmission networks, whereas all gas branches to regions, settlements and particularly houses as well as projects co-funding should be a concern of regional authorities. But unfortunately – and you have given a bright example – the gasification level in some neighboring regions is 100 per cent, in others – around 60. This is a matter of concern for regional governments which should take part in the projects co-funding. By now, Gazprom has consolidated the majority of regional gas companies focused on gas distribution. The task is not simple. It envisages meticulous routine work. But I would like to inspire those who wait for that gas in their homes – there is such a target in Gazprom. It is in the focus of the Company’s strategic interests. In the course of time it will be implemented. Well, if there are some delays in this area, we should consolidate our efforts, I mean Gazprom and regional authorities – municipal and rural ones. And I think we are nearing the completion of this program in the mid-term perspective.

Anchorwoman: And immediately a question from our listeners. To spice up our discussion this question was the first one to appear at our SMS portal. What is the approximate share of money Gazprom spends on Zenit and how much is allotted to the Government? Our fellow journalists keep repeating it from program to program that this is a reason for the high cost of gas. What can you say to answer the first question from our listeners?

Igor Yusufov: Yes, this is a critical question, it often arises in different types of dialogues. But Gazprom is a global Company. Any company is engaged in sponsorship, assistance to sports, promotion of children’s education and other spheres of life. It is true that Gazprom finances Zenit and makes investments into it. But if we take a look at other global companies, we’ll see that the share of Gazprom’s expenditures on sports sponsorship is fairly proper, reasonable and adequate. There’s nothing outrageous here. And comparing Gazprom’s expenditures on Zenit with other expenditure items is inappropriate and incomparable. They are just minor. As for their influence on gas prices which you’ve mentioned – of course there is none, as Gazprom’s profit last year totaled USD 44 billion – and it is the profit alone, the returns are multiple times higher. And the sums spent on Zenit are just so insignificant that it is impossible and inappropriate to compare these issues. But abandoning sponsorship activities in which all major global companies are engaged, would be wrong, I think. Such activities should proceed, they should be reasonable and balanced; maybe some public consultations should be organized in this regard to clear things up for everyone and explain what Gazprom does in this area, why and how.

Anchorman: Mr. Yusufov, turning back to connection to gas. Please tell us, would it be possible to set some uniform connection rates across the country and maintain them as well as clear up the deadlines and make sure they are not delayed? Because I think we’ll receive a lot of messages regarding this issue, we’ve actually already started receiving them. Well, for instance: Knutovo village, new Moscow – please, help connect the village to gas.

Igor Yusufov: This is a really sensitive issue for ordinary consumers. A similar problem exists not only in terms of connecting to gas, but in terms of connecting to the power grid as well. And for Gazprom, as it is a commercial Company after all, the matter of economic efficiency is one of the priorities. However, Gazprom doesn’t leave out social aspects. If we consider the price of laying gas branches to houses, small companies and so on, we’ll see that it has multiple vectors and comprises many components. Gazprom includes its production, transmission and connection costs into this price. Well, I suppose, in this respect regional authorities could attract subsidies to cut this price down a bit for ultimate consumers, for citizens, making it passive and attractive. For this purpose a dialogue is required between Gazprom and regional authorities, so that the ultimate consumer could get a comfortable reasonable price, because not all of them are ready to pay and capable of doing it. But I guess we should save our citizens the trouble of burning wood or coal and provide them with the blue fuel which is, as you have justly mentioned, eco-friendly, convenient and handy for domestic use.

Anchorwoman: Not quite affordable, unfortunately. That’s what our listeners are saying, naming specific prices. The gas is 100 meters away from home, the project cost is RUB 550 thousand, Moscow Region, Dmitrovsky District. And there are quite a lot of examples of the kind. Thus, a logical question arises – not all people understand why gas prices for Russian consumers are the same as in Europe. Could you please explain this price formation model to our listeners to make it clear?

Anchorman: Well, and is it actually true that it is the same as in Europe, or not?

Igor Yusufov: Of course, not. We all understand that in Europe the price is EUR 350 to 400 for a thousand cubic meters. And what you mentioned was the price in rubles for our consumers. It is multiple times lower. I’ve already said that Gazprom couldn’t take on all the expenses for the gasification of every house, every settlement and every district. Regional authorities should take care of it, because it requires the construction of a multibranch gas pipeline network to connect to every house. I believe that it is the negotiating issue between Gazprom and regional authorities – who could compensate for which share in order to cut down the prices for citizens. Unfortunately, this is what the present situation is. I think our citizens need to search for possibilities of additional co-financing to mitigate the blow of high costs of connection to gas.

Anchorman: As for the international gas sales, opinions are voiced that in China we often sell gas at lower prices as compared to those set for the population of border areas. Is it really so? And if it is, why?

Igor Yusufov: Unfortunately, I should disillusion those who promote this point of view. We do not sell gas to China at lower prices than we do to Russian citizens. And you know, the new leader of China has paid a visit to Russia recently and met with our President Vladimir Putin as part of this milestone event. And gas was one of the priority items on the agenda. The parties agreed on a strategic partnership in this sector. As you know, one of Gazprom’s main strategic priorities today is the development of Eastern Siberia and the Far East with a focus on gas and oil resources. A large-scale milestone project is currently under construction. I believe it’s the first project of its kind. It is called the Power of Siberia and is aimed at delivering Yakutian gas to the Far East, namely to Vladivostok. The gas pipeline will be constructed to Khabarovsk, its length exceeds 3,000 kilometers. And there is already a 1,000-kilometer gas pipeline from Khabarovsk to Vladivostok. LNG plants will be constructed in Vladivostok in three trains, each with five million tons in capacity. The commissioning of the first train is scheduled for 2018. All the investment decisions have already been adopted. In the framework of the official visit the high contracting parties tasked Gazprom and its Chinese partner to agree on the price of strategic gas supplies and the terms and conditions of supplies by the end of the current year. A pro-active dialogue is currently underway between the Russian and Chinese parties. China is one of Gazprom’s priority markets along with other Asian countries – South Korea, Japan and other Asia-Pacific countries. That’s why gas will be sold here at international prices at which Gazprom sells it today. However, here we should take into account the opinion of the Chinese party which chooses an alternative fuel for itself. We know that China has huge coal resources in areas bordering Russia. These resources are the basis of the Chinese economy. That is why it is an economic choice for China – whether to continue supplying its population and industry with coal or to switch to gas. The environmental protection rules prompt the Chinese to switch to fuel, and today Gazprom and Russia are one of its main sources. I suppose the price will be close to the international one. If the parties fail to come to an agreement which I can’t fancy even in theory, as they certainly will agree, Gazprom will always have other regions to supply gas to. But it is a matter of competitiveness and the timeframes of capacities commissioning.

Anchorwoman: A question from our listeners. What is the reason for a negative attitude to Gazprom in the media and what can you say about shale gas? Two questions at once which are in many respects interrelated though.

Igor Yusufov: As for the negative attitude to Gazprom. I pay very little attention to the situation and I think that the media and our society can be unfriendly towards everybody and everything.

Anchorwoman: A normal factor.

Igor Yusufov: And this is a normal factor. We live under the conditions of the market economy. Everyone wants to get access to all products, to all things and get all these services and goods at the lowest price possible. But the producers have to manage their economy. This is when the clash of interests arises, and the parties need to make concessions. As for the shale gas, it is probably the most fashionable, hit topic among experts today. I would like people to reason upon it in a professional way, not on the basis of sources which give fragmentary information. It’s important to mention that the gas industry comprises three segments. It is natural gas which serves as a base for Gazprom. It is LNG and, finally, shale gas. Speaking of shale gas, Gazprom in its development strategy and positioning takes into consideration the existence of shale gas. Its largest reserves are located in the USA. European countries also possess shale gas reserves, namely, Poland, Romania and Ukraine – our allied country; shale gas is also found in China. It is a matter of economy. Is it necessary to develop shale formations? We in Gazprom don’t need it, because 28 trillion cubic meters of gas owned by Gazprom will be sufficient for decades to satisfy the needs of the domestic economy and fulfill our obligations to our partners in the CIS and abroad. As shale gas is a very complicated and costly product, Gazprom has elaborated its own technologies of shale gas development. Gazprom takes into account the fact of shale gas appearance in the competitive markets. But this in no way challenges our leading position in the gas market. As for the USA, there have been many arguments and discussions on this matter recently. It’s necessary to say that this hot topic, this shale gas boom has broken out during the recent 4 or 5 years. And the USA has actively allotted its financial and industrial resources to its development. The advantage for the American economy is that during these years it has raised dozens of billions of dollars for the shale industry development. For the most part, it is the money from foreign funds, sources, companies, or, maybe someone has mobilized its own funds in the domestic market. Unfortunately, the economic feasibility of the development is negative. If we look at the last year’s figures, we’ll see that American companies invested USD 42 billion into drilling seven thousand wells to produce shale gas in the USA. The shale gas sales revenues totaled USD 32.5 billion. Thus, the economic loss amounted to USD 9.5 billion. Shale gas export from the USA is out of the question, because shale gas has its own specific features. The average lifecycle of a shale gas well is only 8 to 10 years, compared to the lifecycle of a natural gas well which is 40 to 50 years. The development costs are immense. Shale gas production is associated with grave environmental concerns. In case our listeners are interested in the production technology, it involves heavy expenses, as well as large amounts of water, sand and chemicals. Some kind of hydraulic fracturing is conducted, then gas is easily brought to the surface under a very low pressure. It can’t be exported or transported. All this is very complicated. The consumers should be located right near the shale gas field development site. That’s why speaking of shale gas export from the USA, we mean to say that America, being the major global producer of natural gas along with Gazprom, also produces shale gas. Consuming more shale gas domestically, they release their natural gas for further export through the terminals constructed for natural gas import to the USA. But it will become possible only in the mid-term and long-term perspective. According to the data provided by the US Department of Energy, the export of natural gas which is currently being replaced by shale gas inside the country will be possible no earlier than 2020.

Anchorman: Igor Yusufov, Member of the Gazprom Board of Directors, founder of the Fund Energy is our guest today. Let us pause for the news, we’ll go on later.

Anchorman: 10.35 a.m. in Moscow, Olga Arslanova, Alexander Andreev. Our guest today is the Russian Minister of Energy between 2001 and 2004, currently Member of the Gazprom Board of Directors, founder of the Fund Energy – Igor Yusufov. Mr. Yusufov, is it true after all that shale gas is a soap bubble, as Alexey Miller put it?

Igor Yusufov: I think that shale gas is a very difficult business, an unprofitable business for the lack of necessary technologies; moreover, it is a very harmful thing for the environment. We know that in February Angela Merkel said that they would pay great attention to the consequences of shale gas development in Europe and in Germany, in particular. An Order was given to the German Environment Ministry and the Ministry of Economics to elaborate a law on shale gas in respect to the environmental consequences of its development. The chemicals used in hydraulic fracturing lead to harmful consequences for the environment and aquifers. That’s why shale gas perspectives are very vague. They are insensitive and can’t influence the global gas balance. Gazprom has its own technologies. Gazprom conducts experimental studies of similar technologies in Kuzbass, as Mr. Miller said, and in its strategy it takes into account the existence of such gas as well as takes pro-active efforts in the LNG sector. After all, Gazprom’s main priority is natural gas – the Company’s core business that satisfies both the national and the international demand. LNG is in the second place: it rapidly gathers pace and makes it possible to enter new markets, inter alia, for independent companies jointly with Gazprom. I mean the Yamal LNG project of NOVATEK.

Anchorman: But then a question arises why the Americans invest in shale gas. After all, America has built the image of a country that makes money on everything and never invests in a poor business.

Igor Yusufov: It is certainly so. The Americans always carefully plan the financial aspects of a project. Let me reiterate that the USA remains a net gas importer, it receives up to 48 billion cubic meters of gas from Canada as well as 4 to 6 billion cubic meters of LNG from other countries. And, as I have already mentioned, after 2020 the growth of shale gas extraction in America may balance out production and consumption. At the same time, a potential shale gas export from America is a myth. This will never happen. They may start exporting natural gas if the domestic consumption drops. I’d like to emphasize it once again that shale gas is an extremely unprofitable business. But for the USA the attractiveness of shale gas development consists in the fact that in the midst of the boom caused by the so-called shale revolution they could engage foreign investors in their projects. Five major American companies are dealing with shale gas development. All of them have stated losses following the results of the recent 2 or 3 years. But it is good for the American economy, because the Americans curtail their energy dependence on external sources, at first place from the countries of the Persian Gulf. It is good for the American economy, because the growing metallurgical industry is manufacturing more pipes for well drilling and field pre-development. It is good for the American economy, because the shale boom created 200 to 300 thousand jobs, and, therefore, increased the tax base. Right now the Americans are looking into the gas chemical sector. But it was bad for the investors who had believed the myth of shale boom efficiency and had invested their money without making estimates themselves. It is the market. When a new trend or a new economic sector emerges, they start proclaiming the profits and preferences it may yield – well, I have already told you about the situation in the USA – but in the end, the investors are the ones who suffer. I can give you a few examples when global majors sustained enormous multi-billion losses. Rex Tillerson, Head of Exxon Mobil, a major global company said recently that such gas prices with the account of additional shale gas supplies to the American market would leave them penniless. He meant that they bought STO Corporation, a huge company for dozens of billions of dollars, namely, 39 billion and every year they incur losses from its activity. British Petroleum allotted USD 4.8 billion to its shale assets. British Gas which operates in the American market sustains total losses of over a billion dollars, as well as Canadian Encana – USD 1.7 billion. These are the losses incurred by operating companies. The investors who believed this investment idea, who gave their money, were the ones who suffered. And of course, as you have justly mentioned, it was the tight-knit American economic strategy that came out victorious.

Anchorman: 2321559 is our studio phone number. Please, call and ask our guest a question. Once again: 2321559. And finally, the last question about the shale issue. Gazprom is not interested in shale gas, but takes interest in shale oil. Please explain why. And what interests me most is the environmental aspect. Shale gas production is unclean and harmful to the environment, but shale oil production is different.

Igor Yusufov: That’s right, the situation is a bit different. For us, for the Russian economy, for the fuel and energy complex, shale is a very sensitive and important issue. The bulk of oil reserves explored by the Soviet Union and developed by Russia in the last twenty years is located in Western Siberia. Our main oil reserves are depleting. That’s why the Government is focused on a large-scale development program for Eastern Siberia which, according to geologists’ assumptions, contains similar reserves just like in Western Siberia. Several days ago Mr. Medvedev chaired a visiting Government meeting in Yakutsk, where large-scale infrastructure projects were announced, and the Government will invest in them to ensure the economic progress in the region. As for the shale oil, it lies lower than the strata we’re currently developing. It is a very difficult and costly business. But Gazprom, particularly Gazprom Neft, the Company’s structural unit focused on oil, together with Shell has already drilled an exploratory well. And leaping ahead, I’ll tell you that in the nearest future during Vladimir Putin’s visit to the Netherlands they will sign a strategic cooperation agreement in this area, I mean shale oil development. We are experiencing a slow insignificant decline in oil production. In order to restrain and control this process we should seriously consider shale oil development. We’ll be working on it, we’ll create conditions for private businesses, for small- and medium-size companies. Rosneft also announced they had a development strategy. I think, these projects are significant for the economy and we understand what to do and how to do it, and it will be a priority in the oil sector both for Gazprom and Rosneft.

Anchorwoman: Right. Once again, our on-air studio phone number is 2321559. Up to the end of the hour you have a chance to call us and ask our guest a question. A number for your SMSs is 5553, start them with the word “Vesti”. You may also write to our website Radiovesti.ru, “Morning Speeding” section.

Anchorman: And now Sergey is on the phone. Probably, it would make sense to ask a question now and answer it after the news block. Hello, Sergey.

Anchorwoman: Yes, briefly if possible, please… Sergey!

Listener 1: Hallo!

Anchorwoman: Yes, we are listening to you.

Listener 1: Gazprom has recently acquired some power capacities. In this context, could you please explain why you started constructing foreign power stations? For example, CHPP-26 in Moscow was constructed by French Alstom, and all the equipment at CHPP-16 is also French. I mean, why is the domestic power equipment being replaced by the imported equipment? We own immense capacities, don’t we?

Anchorman: OK. Your question is clear, Sergey. Wait for the answer after the news block.

Anchorman: 10.47 a.m. in Moscow, Olga Arslanova, Alexander Andreev. Our guest today is Igor Yusufov, Member of the Gazprom Board of Directors. Mr. Yusufov, Sergey asked why you purchase foreign equipment instead of the Russian one.

Igor Yusufov: What Alexey Miller came into at Gazprom were former collective farms in pledge and things like that. After 12 years of his and his team’s management Gazprom turned into a totally different Company with a different structure, a global one. Apart from the gas priority, there is an oil priority in the Company. And thirdly, due to his investment far-sightedness, Mr. Miller saw the possibility of entering the power generating business. Thus, the third priority has been recently set out. Gazprom has expanded its presence in the power industry and holds the leading position there through its subsidiary company Gazprom Energoholding. What Sergey gave as an example is really taking place. This is a matter of international cooperation. Power equipment produced by Russian manufactures today is less efficient than that offered by Siemens, Alstom or General Electric. But taking into consideration the interests of Russian manufacturers, Gazprom and other Russian energy companies, I think, make deals with those international companies. And it is not just a single delivery for money, it’s the commitment a foreign partner undertakes to set up the production of high-tech efficient equipment at Russian factories and bring the production of these units, turbines, generators, drivers to the level that would meet the demand of the Russian economy. One-time projects enable Gazprom and its partners in power industry to manufacture these high-tech products in the Russian machine-building industry. For us it is a significant issue, a promising one, because it must be admitted that in the recent years foreign engineering developments and experimental prototypes have far outstripped Russian machine builders. We’ll be using and engaging their experience.

Anchorwoman: Let us listen to Vladimir. A quick reminder – 2321559 is the phone number of our studio. Hello, Vladimir!

Listener 2: Good morning!

Anchorwoman: Your question, please.

Listener 2: I’m from Krasnodar. My question to Mr. Yusufov is the following. Here, in the Krasnodar Territory, we have Gazprom branded CNG filling stations and Gazprom Neft branded ones. It would seem the brand is the same, the filling stations are neat, and all that, but consumers are confused – Gazprom cards are not accepted by Gazprom Neft, and Gazprom Neft cards are not accepted at Gazprom branded filling stations. Let Mr. Yusufov explain it to us then, considering he is the Board of Directors Member, what is going on in the Krasnodar Territory. Why are two different… I don’t know, firms or two enterprises operating under the same brand of Gazprom, a single Company? People are confused and don’t understand. There is no understanding of what this is. Let him explain please, why Gazprom cards are not accepted at Gazprom Neft and vice versa.

Anchorwoman: Can you explain it?

Igor Yusufov: Yes, I promise to help you and figure this out. But everyone should understand that within Gazprom the key company which is focused on oil derivative supplies and oil production is Gazprom Neft. A misunderstanding with cards and brands must be some sort of a specific regional situation which needs to be resolved. I’d like to use the opportunity and tell our listener that Gazprom branded CNG filling stations selling NGV fuel will soon appear in Russia. NGV fuel is one of Gazprom’s main priorities now. Our citizens will get new cheaper eco-friendly fuel. It is of national significance for us. This will result in an increase in oil and refined products for export and the Government will get more proceeds from taxes and duties, and the citizens will have access to more eco-friendly products in the form of this fuel. And Gazprom considers this as a priority today and works on it. I think you’ll soon see these CNG filling stations as well as the brands that will be useful and cost-efficient for ordinary consumers, for Russian citizens.

Anchorman: Now, here we have a listener who literally has taken over our SMS portal; he is very eager to learn about the progress with the Altai project.

Igor Yusufov: Yes, such a project really exists. It is aimed at supplying West Siberian and Yamal gas to the Chinese market from the Western borders of China where the large-scale Tarim gas pipeline is laid. And this gas pipeline which is several thousand kilometers long, runs through the main gas consumption regions of China. It is the East Coast, Shanghai and others. Gazprom has this project in store, but it is the second in priority after the project I told you about in detail – from Eastern Siberia to the Far East. When we come to understand how much gas our partners are ready to consume, the Chinese partners, I mean, and how much gas we’ll be able to supply to other Asia-Pacific countries to balance these needs and add more gas, then Gazprom will start implementing the Altai gas pipeline project if it finds its place in the consumer balance.

Anchorman: Well, let us listen to Mikhail from Moscow. We have a call. Hello, Mikhail!

Anchorwoman: Good morning!

Listener 3: Hello! Am I on air?

Anchorman: Yes, you are, your question, please.

Listener 3: My question is the following. There was a radiobroadcast on Echo Strany recently on account of the demise of Hugo Chavez, President of Venezuela, and gasoline prices were discussed among other topics, namely, if they would increase or decrease. And they said that the domestic gasoline cost was currently one and a half cent, while we pay one dollar for it. Why is there such a difference?

Anchorwoman: Thank you.

Igor Yusufov: I don’t think that such a low price is economically feasible for this product in the market. We have established large-scale cooperation with Venezuela, and Igor Sechin, Head of Rosneft is the one who brilliantly maintains it in a worthy and highly efficient way. We have set up a lot of projects in oil, gas and other economic sectors jointly with Venezuela. And when we give our attention to the economic situation in Venezuela, we should bear in mind that with Hugo Chavez’s arrival the major American and other oil companies were nationalized and transferred to… their management was transferred to the state-owned company PDVSA. It is true that the Government of Venezuela provides large-scale financing of petroleum derivatives consumption. But I have no substantiated data that we have such a considerable price variation. The current situation in the Russian market is economically feasible as well as the cost of these resources and our citizens can afford it. We see our citizens’ incomes and see the prices of these products.

Anchorman: Probably we also should bear in mind that though gasoline prices in Venezuela are really low, not every Venezuelan has a car. Maybe it is better to own a car and buy expensive gasoline than not to own one, though having a possibility to buy gasoline for one and a half cent, having nothing to fill. And you know we only have about a minute left. If you could, please, answer in short. Ukraine is accused of actually using fraudulent schemes when purchasing gas in Europe. Is it really so? And what is the scheme? Only if a minute will be enough for you to answer.

Igor Yusufov: I do not have such information. But these facts are constantly voiced. Gazprom and Ukraine carry on an extensive dialogue both on the Russian gas transit via Ukraine and Ukraine’s need to buy the gas the country’s economy demands. Even if Gazprom is aware of such data, it is taken from a dispatch control system which has existed since the Soviet times on the Russian-Ukrainian border and on the border between Ukraine and European countries. Therefore, if Gazprom voices these figures somewhere, it means it has some evidential… some strong evidence of it. But this is a matter of discussion for two working groups between Gazprom and Ukraine.

Anchorman: Thank you! Our time is up.

Anchorwoman: Thank you!

Anchorman: Igor Yusufov, Member of the Gazprom Board of Directors was our guest today.