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Alexander Medvedev’s Defense of Gazprom

Is Gazprom’s strategy political? The answer is a predictable “no,” at least in the eyes of Alexander Medvedev, the company’s deputy chairman. The article (in full after the cut) sets its sights on knocking down the European Commission’s efforts to separate gas supply and distribution companies to enhance competition in the energy market, but may in fact be part of a new series of arguments accompanying the appointment of former Prime Minister Viktor Zubkov to the chairmanship of what many are already calling the world’s largest company. The selection of Zubkov, as opposed to an official with business experience, is seen as a clear expression that the company will continue to be politically influenced – indeed Zubkov said as much during his appointment speech. On the positive side, at least he answered four questions at a news conference, something that Rosneft’s Igor Sechin would never do. Perhaps transparency comes with baby steps. alexandermedvedev062908.jpg

From Europe’s World:

Is Gazprom’s strategy political?by Alexander MedvedevThe widespread view in Europe that Gazprom is a “political weapon of the Kremlin” is wrong, says top Gazprom executive Alexander Medvedev. He argues that it is the European Commission’s energy thinking that is cause for concernMany things have been said or written about Gazprom, and not all of them are wrong. We take fair criticism seriously as it can help us to improve our business.Europe and Russia have been energy partners for several decades now and Gazprom has played a major part in that. This year we celebrate the 40th anniversary since we began uninterrupted gas supplies to Europe. During that time – spanning the Cold War and the very difficult years of Russia’s transition from a planned to a market economy – there were no significant interruptions or shortfalls in supply. Perhaps no other energy company in the world can boast such a record of continuous service. Gazprom has exported 1.9 trillion cubic metres of gas to Europe since the collapse of the Soviet Union (roughly equivalent in energy terms to America’s oil imports from the Middle East since 1992). We now provide a quarter of the EU’s gas consumption, and expect to increase this to 33% by 2015.I and my colleagues are of course familiar with the perception that Gazprom is a “political weapon of the Kremlin” − a so-called instrument of Russian foreign policy. I can well imagine that this perception can influence many of the decisions that politicians, bureaucrats and other energy companies make on strategic questions of energy supplies. Perhaps this is not surprising given the historical standpoints we all inherit, but a better understanding of the facts and of Gazprom’s corporate strategy might help to challenge some of the more widely accepted stereotypes.Some people argue that state participation in the capital of a company hinders sound business decisions. Yet in truth it is quite possible to run a coherent and commercially-driven strategy while being partly state-owned, as the case of Gazprom shows. In most western countries it is not unusual to find the state holding a controlling share in major energy companies, so in this Russia is no different from France, Norway or other countries where the state’s involvement in the energy industry is high. And as the Russian state owns 50.02% of Gazprom Group, it is hardly surprising that the majority shareholder takes an interest in the company’s operations.Gazprom has invested billions in developing new gas fields, improving pipeline infrastructure and in developing its business. Our company is going downstream to move closer to its customers, − entering power generation and the oil sector, and working on developing the entire hydrocarbon processing chain, just like any other international energy company. And we will be further boosting our production capacity, but only as soon as additional gas volumes are contracted, which is standard practice in this industry. State ownership or not, our investors seem to appreciate it.Gazprom owns 60% of Russia’s proven reserves of natural gas, which themselves make up a third of the planet’s known blue fuel reserves. We are responsible for a quarter of the world’s total gas exports, a responsibility we take very seriously. Gazprom’s business model in export markets like Europe is to provide reliable long-term supplies in stable conditions at predictable prices. We believe this is what our customers in the industrial and domestic sectors require. And it provides the best basis for mutually beneficial relationships.It is not economically or commercially possible to generate the investment for such costly infrastructure without robust arrangements for recouping it. These are achieved by long-term supply contracts, typically running up to 25 years, under which the purchasers commit to receiving specific volumes of gas year-on-year, and to pay for it even when they do not require it all (the “take or pay” principle). We do not build a pipeline in the hope that we will at some later date be able to find enough customers for the fuel it will supply; nor does it make sense to extract gas out of the ground without an assured market for it in the long term.So I find puzzling statements that an increase in Gazprom’s gas deliveries constitutes a threat to the EU’s security, and that it is therefore necessary to limit them. The suggestion that Gazprom would invest billions of dollars in expensive gas export pipelines so that we could then disrupt them for political reasons looks absurd, especially in view of the substantial contribution these gas exports make to Russia’s budget and the country’s economy. And it is often forgotten that Russia is currently more dependent on the EU than vice versa. The EU depends for 25% of its gas consumption on Russia, yet Gazprom depends on the EU for over 70% of its export earnings. The bottom line is that Gazprom needs Europe as much as Europe needs our gas.Being a commercially-driven company, Gazprom aims at getting the market price for its products. Pricing is at the root of the controversy between us and the Ukraine and Belarus. For many years western governments advocated the transition of former Soviet republics to market prices for the energy they import from Russia. This is even a condition for Russia’s entry into the WTO. Agreements to introduce market prices were thus reached gradually. Yet some of our partners did not live up to their obligations and accumulated massive debt. What would any other commercially-driven company do when its customers refused to pay its invoices? After months of negotiation and many letters, what option was left other than to indicate to our business partners that deliveries might have to be reduced? This is exactly what Gazprom did.We are very much aware that disputes involving transit countries for energy to Europe raise concerns among EU governments. We therefore make sure that we inform the European Commission about our measures in advance, and reassure them about the security of supplies to our European partners.Some commentators seem convinced that major Gazprom pipeline projects, like Nord Stream and South Stream disguise some sinister purpose. In fact they have a sound commercial rationale, which will contribute significantly to Europe’s goal of greater energy supply security − as the European Commission was no doubt aware when it awarded Nord Stream priority status as a Trans-European Network (TEN) project. The aim is to provide a direct and secure connection to our customers in the EU, avoiding intermediate and volatile transit states which, as experience shows, may not always be able to provide a reliable transit environment.Secure supply routes are very much in the commercial interest both of Gazprom and of our customers, and the proof of it is the participation of German companies like E.ON and Winstershall in Nord Stream, along with Gasunie of the Netherlands; and of Italy’s ENI in South Stream. Despite the additional costs and technical challenges involved, under-sea pipelines of this kind minimise transit risks at a reasonable cost. Our own export security is also enhanced by diversifying the routes by which gas reaches the EU. It should be noted that the development of Nord Stream in no way alters Gazprom’s contractual obligations to consumers in Poland and the Baltic States, and in fact Nord Stream may even improve the provision of gas to them.The European Commission’s proposals for the integration of the EU energy market, as set out in their Third Energy Package of last September should be a matter of concern to everyone in the EU with an interest in stable and secure energy supplies. They seek to alter quite radically the current gas market structures in ways that could adversely affect the investment climate. The concept of requiring ownership of supply networks to be completely separated from the business of supplying gas is seriously flawed, quite apart from the questions it raises of a violation of property rights.Under the Commission’s proposals, entirely separate – and separately-owned – undertakings would have to be established to transport gas from the supplier to the customer (whether a large industrial user or a retail distribution network), in a highly regulated environment. At the same time, the Commission is calling for a substantial increase in investment in cross-border transmission systems, so as to ensure security of supply. It is hard to see how these two demands can be reconciled: How would companies whose sole function would be to operate pipelines have the commercial interest or the financial muscle to mobilise the capital needed for major infrastructure projects if they are prohibited from having any interest in extracting and selling natural gas? Unlike the suppliers and distributors, they would have no access to the revenue generated from gas sales – the essential underpinning for financing new gas infrastructures.Gazprom is in no way opposed to an integrated EU energy market in which gas can be freely traded across member states’ borders. The reality at present, though, is that market conditions in Europe fall far short of this goal, witness the EU’s limited interconnection capacity and the noticeable differences in the degree of development of national systems, not to mention the significant variations in the tax systems and tax rates applied to gas. But the priority should be to work with proven market structures. The Commission’s current approach seems to favour secondary traders and speculators over the market players who actually have access to gas resources. Gazprom follows with interest the vigorous debate inside the EU, and we have established a close dialogue with European Commission to discuss all of these questions.There is a protectionist rhetoric that now seems fashionable in some political circles in Europe. European citizens are understandably worried about job cuts and the erosion of the welfare state in the face of globalisation, with the result that there has been much talk of restricting foreign investment. Even the European Union, hitherto been a beacon of free trade and open markets, seems in danger of succumbing to the temptation to keep “third country companies” out. This is dangerous. A Europe and a Russia open for business and investments make up a two-way street of mutual benefit.A number of important facts should help put the investment debate in perspective:- European investment in Russia is 7-8 times higher than Russian investment in EU.- Several EU companies have important stakes in the Russian energy sector, including Germany’s BASF and Italy’s ENI.- In the Russian crude oil sector, more than 50% of production is in the hands of private and foreign companies.Russia and Europe share a long history. Sometimes turbulent to be sure, but more often than not – and this often tends to be overlooked – fruitful and mutually beneficial. If we focus our attention and energy on this latter aspect, we will be looking at promising future.