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Alexei Miller Interview Transcript

Today the Financial Times has some good articles on Gazprom, and below the cut is the full transcript of the paper’s interview with CEO Alexei Miller. He sticks to his guns on $250 oil, the futility of OPEC, and other scary sounding ideas to divert gas away from Europe unless they shape up. In other words, more of the same.

From the Financial Times:

Transcript: interview with Gazprom chiefCatherine Belton, Moscow correspondent, Carola Hoyos, Chief Energy Correspondent, and Ed Crooks, Energy Editor, emailed written questions to Alexei Miller, the chief executive of Gazprom. He sent his replies to the FT on June 24, 2008FT: Does Gazprom still have appetite for further acquisitions in the Russian oil sector, including TNK-BP? A senior government official has said Gazprom acquiring control over TNK-BP would be the worst possible outcome of the standoff between shareholders, and Mikhail Friedman, one of TNK-BP’s Russian billionaire shareholders has said officials have told him the state should not increase its presence further in the oil and gas sector. What could be a trigger for a deal for Gazprom?Alexei Miller: Like any other company, we are constantly monitoring new growth possibilities that meet our development strategy. Gazprom has not offered and has never received any offer to buy TNK-BP’s shares. The company’s current problems are an entirely internal matter between existing shareholders. Gazprom has nothing to do with them. It is only the media that discuss a possible deal.FT: You were quoted recently as saying that you expected the deal to take control of the Kovykta field from TNK-BP would be agreed ”in the very near future”. Is a deal still close, and is the price still as suggested last year? And will the deal come alongside the setting up of the broader joint venture with BP and TNK-BP?AM: The Kovykta deal is really close. We see no problems with it. It is in no way linked to other deals.FT: Does Gazprom intend to pursue joint development of the Yamal Peninsula with Shell? Shell has said it signed an MOU with Gazprom this month on cooperation in the development of gas reserves at Yamal. What do you think can Shell bring to the table? Can Gazprom begin production on schedule at Yamal by the end of 2011 without a foreign partner?AM: These are different projects. They should not be mixed. The start-up of Yamal production in 2011 refers to Bovanenkovo field, which Gazprom is developing independently. It is a unique and gigantic deposit with prospected reserves of 4.37 trillion cubic meters of natural gas. The work is in full swing. The construction of a railway to deliver cargoes to Bovanenkovo is nearing completion. Preparations are underway to build a very difficult section of the gas transportation system – the underwater crossing of the Baidaratsk Bay. The project is being implemented in strict compliance with the schedule. As far as other new projects are concerned, we are considering a possible LNG plant on Yamal. In case the project is approved, we may draw a short list of potential foreign partners and Shell will be among them. So far it is premature to speak about the final configuration of the project and the contribution of each partner.FT: Anatoly Chubais, the head of Russian electricity monopoly Unified Energy Systems, has said Gazprom is focusing too much on pipeline plans to supply foreign markets and not enough on ensuring production keeps pace with rising domestic demand. He has warned there is a real danger of a deficit of gas for both domestic and export needs. Do you believe Gazprom needs to focus more on production? Will the company ease restrictions to independent gas producer access to the pipeline system so as to ensure gas supply in the next few years?AM: It is true that we have been actively working for several years to expand our export markets. That is a vital issue. However, Europe and Asia encountered a new powerful competitor, which is the Russian domestic market. The economy and energy consumption are growing in our country faster than in Europe. As you know, the government has already adopted decisions, which will level profitability of export and domestic supplies. Therefore, no additional decisions are necessary. For Gazprom, as a Russian company, the domestic market has always been a priority, and now it has also become the most attractive. Gazprom and independent gas producers will satisfy the whole solvent demand in our country. There are no doubts about it. By the way, the problem of access for independent producers to Gazprom’s gas transportation system has been greatly exaggerated. Only last year we transported 120 billion cubic meters of gas of 33 unaffiliated companies. Electronic gas trading floor is operating successfully and is accessible for all producers.FT: Could government backtracking on a full liberalisation of domestic gas prices for industrial consumers put the brakes on the tens of billions of dollars of investment needed to bring fields like Yamal and Shtokman on line? Could it also create problems for independent producers’ investment plans?AM: We have already signed contracts with an absolute majority of Russian customers for 2008–2012 on the basis of a price formula, which takes account of the full liberalisation of gas prices that will correspond to the European level. It is to be noted that liberalization pace is in no way connected with investments into the strategic projects you mentioned. I have already dwelt on Yamal. All our other projects, such as the Nord Stream, the South Stream, the PreCaspian gas pipeline, and the Shtokman field are progressing very quickly. We are keeping with the schedule and are sometimes ahead of it. There are no problems with financing.FT: You said last week you expect the oil price to climb as high as $250 per barrel. How did you come up with the forecast? Do you believe it is better for Russia’s investment climate in the long run or it is pushing up costs too high and holding back development?We are living in the time of a great surge in oil and gas prices – a structural shift in the market, which will end with prices at a radically new level. Fierce competition is unveiling for access to energy resources. We can see that new gas supply contracts signed by consumers (and the talk is not only about Gazprom) fix much higher initial prices compared with those stipulated by the existing contracts, which were signed before.The oil price that I predicted is not surprising. The global energy consumption has been growing at a breakneck pace and looks almost price-insensitive. The last 10 years (1997-2007) saw the Chinese energy consumption almost double and the Indian one grow over 1.5-fold. It can be contributed not only to their industrial growth, but to a principal shift in the lifestyles of their populations. Asia has replaced bikes with scooters. What about the next step to cars? The emerging economies are striving for energy resources to secure their growth and the developed ones are at least interested in the preservation of the status quo. All this happens against the background of the changes in the global economic setup and serious geopolitical changes. Oil price hikes are linked to a major revision of long-term forecasts. They demonstrate global energy supply-demand imbalance in the coming decades. Due to growing financial transactions on the markets of raw materials we are already facing today the prices of tomorrow. The two factors jointly trigger a “great price leap” on the crude oil market.In general it seems that even OPEC doesn’t have any real influence on the global oil market nowadays. Not a single decision has been passed of late that would really influence the global oil market. Many major oil-producing countries have approached their peak extraction capacities and are limited in their ability to vary the production volumes.As far as Russian investment attractiveness is concerned, not only we, but also most observers view our country as a most attractive market. However, one rule has to be taken into account to ensure successful investments in the energy sphere – it is better to invest jointly with the state. For example, into Gazprom stock.FT: Is there any reshuffling in store for Gazprom’s top management in the coming months? Do you know about the sale of Gazprom stock by such top company managers, as Alexander Ananenkov, which Russian media reported this month? Is it a signal he will quit the company?No, this is out of question. The deals you are talking about are no signal at all and reflect only current financial plans of a concrete manager, but not our common conviction in the bright future of the company. Everyone understands that Gazprom’s stock will only grow. Gazprom management and staff abide by our growth concept, which is to develop an integrated energy company worth one trillion dollars.FT: How long do you plan to head Gazprom? How do you see the company in the coming five years?If I tell you forever, you will not believe me. I think my work to be the most interesting in the world. My contract is valid up to 2011. We have witnessed how Gazprom developed from a Russian company with limited foreign equity into a global transnational corporation with Russian roots. In the coming years Gazprom will be not just a major company in the world, but the most influential in the energy business.FT: Some European politicians consider pegging gas prices to oil disadvantageous for customers as it makes the gas too expensive. What do you think about that?The proponents of gas-oil price decoupling mistakenly assume that free-floating gas prices would be lower than oil-pegged prices. But reality doesn’t substantiate the idea of lowering gas prices by this decoupling in the foreseeable future.When converted to BTU, the pipeline gas supplied from Russia to Europe under various long-term contracts in May was 11% cheaper than fuel oil and much more advantageous in terms of environmental and customer friendliness. If we consider other markets, the picture will be even more illustrative. In the UK the gas price is not pegged to the oil basket and in May was 50% higher than the average price of our supplies to continental Europe. And currently the oil price rose to almost 140 dollars per barrel. So where are the advantages of free-floating gas prices?If the gas price oil peg is replaced by the supply and demand pricing principle, the gas market will lose its immunity to the influence of major suppliers. In the UK the creation of a well-functioning wholesale gas market was possible only due to its gas self-sufficiency and the existence of quite a number of independent national producers. But now the growing dependence of Britain from a single supplier, which is Norway, again raised the issue of the oil-indexing system comeback.At present the BTU-adjusted gas price doesn’t exceed 70% of the current oil price. This is due to greater flexibility and consumer attributes of oil. But the development of liquefied natural gas brings the market qualities of oil and gas ever closer, specifically as gas is capable of becoming a universal motor fuel. All this strengthens the long-term gas/oil link.FT: Do you believe that creating a gas-OPEC organisation is essential in the long term as the gas market moves from a system of long-term contracts to more of a spot-based one as LNG sales rise?The gas market is very different from the oil market and most contracts are and will remain long-term. We cannot fail in supplying gas to our contracted consumers. It is simply impossible. So the OPEC-like production quotas are impossible in the gas market.We plan to continue working within the framework of the Gas Exporting Countries Forum and turn it into a permanently active influential international organization. The challenges we encounter call for coordinated approach. In contrast to OPEC, the principal goal of the forum is not the distribution of current production quotas, but long-term strategy issues and investment plans in the gas industry. We are fully satisfied with the constructive dialogue over the issue with Qatar, as well as with interaction on cooperation issues in the gas sphere in general.FT: Is the deal struck with Eni the way Gazprom intends to do business with IOCs from now on? In other words, will IOCs have to give the company a concrete promise of upstream oil or gas assets abroad and/or midstream assets/access, to get access to Gazprom’s reserves in Russia?Gazprom’s strategy calls for the formation of complete-cycle “production-sales” trans-national chains. Therefore, while discussing the possibility of access for foreign partners to the development of our reserves, we want to understand what the deal will give Gazprom from the point of view of the development of our production chain abroad. We do not need assets as such, we need a synergy with existing business and enhanced positions of a global player on the energy market.FT: In acquiring production and sales assets, such as power plants in Western Europe, Gazprom likely paid most attention to investing into new construction rather than to buying existing capacities. Is it a model for the future or is there a chance that Gazprom will buy operating power plants?Power generation is becoming a more important part of our portfolio both within the country and at the international level. So far we are focusing on the construction of new power plants in partnership with European companies, however we are open to consider the possibility of acquiring a stake in operating power plants if such investments are strategically appropriate.FT: Do you think the world is investing enough in oil and gas infrastructure to meet the demand of the future? If not why?If we speak about Gazprom, the very organization of our business rules out any insufficient investments. Gazprom invests exactly the amount, which is necessary to fulfil the existing commitments. Our traditional partners in Europe have resolved the issues of resource provision in advance and signed contracts with us that go far beyond 2030. We exactly know how much gas has to be delivered where and at what time. Our investment program is organized correspondingly. Long-term contracts are the basis for our conviction that all the necessary investments will be made.FT: Will the future map of who controls pipelines bringing gas to Europe depend on how quickly the different parties are able to get them built? Will the winner be the one who is fastest? Do you think that Nabucco will ever get built?Europe’s ever-increasing demand for gas means that new capacities and new delivery routes are necessary. I can definitely say that South Stream will be built, and it will provide Europe with reliable gas supplies, just as Gazprom has done for four decades. If the Nabucco gas pipeline project is one day erected, it will not affect the economic viability of the South Stream.FT: Discussions over the sale of the gas from the Exxon-led Sakhalin 1 project have been going on for a long time now: are they close to being resolved? Sergei Bogdanchikov, the CEO of Rosneft which is one of Exxon’s partners in the project, said recently that the gas must be sold for the best possible price, whether to Gazprom or another buyer. Do you agree?People in the vast Russian region need access to the gas from Sakhalin-1, at least until other planned projects in the region start up. In compliance with its role of coordinator of the Government’s East Siberia and Far East programme, Gazprom has to ensure stable gas supplies to consumers in the region.FT: What are Gazprom plans for the UK market?We are very satisfied with the situation emerging on the British market for us, where Gazprom has been present since 1999. We are currently operating in the country through our Gazprom Marketing and Trading (GMT) subsidiary.Besides retail and wholesale gas sales, GMT also operates with end consumers among small and medium-sized companies. The company supplies gas to some ten thousand commercial and industrial customers. An office has been opened in Manchester to deal with retail trade.GMT is successfully dealing with LNG and electricity sales and trades in CO2 emission certificates. Our subsidiary also buys North Sea gas and operates on the spot market.In 2007 total GMT gas sales at trading floors of Great Britain and continental Europe upped nearly two-fold against the previous year and comprised close to 16 billion cubic meters, of which 4.5 billion cubic meters were Russian gas. The growth will continue.At present Gazprom Group accounts for some 6% of the British market. We plan to reach 10% by 2011 and the target for the coming years can be 15% without any acquisitions of local companies.FT: How close is the agreement in Africa? Gazprom representatives held talks in Nigeria on several projects, including LNG. How close are the agreements?We believe agreements are quite close. Early this month we met representatives of the state oil company and the government of Nigeria to discuss joint venture in production, associated gas utilization and electricity generation. We hope for joint work in the construction of a gas pipeline system from Nigeria.In general, “pipelines are our profession”. We are the best in design, construction and operation of gas transportation systems. Therefore, Gazprom’s experience will be very profitable and extremely valuable for any major project in long distance gas transportation, no matter in which part of the world it is accomplished. Besides the mentioned gas pipeline in Africa, there are projects in North America, as well as in Asia and South America.FT: What are your ambitions in North America? Will you be entering discussions with BP, ConocoPhillips or TransCanada about Alaska gas pipelines? It has been reported that you are interested in further LNG regasification capacity in the US, to add to your investment in the Rabaska terminal in Canada, possibly in co-operation with Exxon. Is that true?We see North America as a region of our strategic interests. The work in the region is important for long-term success of our LNG business and we are mounting our presence on the North American continent. The talk is not only about supplies of Russian LNG, but also about large-scale “liquefied gas for pipeline gas” swap deals.We have recently signed an agreement to become an equity partner in Canada’s Rabaska LNG project and to contract 100% of the capacity of the LNG terminal there. We are currently assessing several options of accessing the North American market, by organic growth, partnerships or acquisitions. We have noticed a growing interest of Canadian companies in cooperation with Gazprom of late. We have received many interesting proposals based on objective competing advantages of Canadian companies in gas supplies to the US market.Naturally, Gazprom is interested in the proposed gas pipeline construction project from Alaska. We have unique experience, know-how and modern technologies, which allow to add considerable value to such projects. In general, one can say that we are creating a new configuration of gas supplies to North America.