Medvedev: Gazprom a "reliable partner"

11/01/2010

The era of cheap energy is over, but massive new pipeline projects will help Gazprom ensure a steady supply to Europe, says Gazprom export CEO Alexander Medvedev in an interview with Southeast European Times.

By Marko Biocina for Southeast European Times in Moscow -- 11/01/2010

Alexander Medvedev. [Photo by Marko Biocina]

With the global economy suffering its worst downturn since WWII, industrial production figures have plummeted since the second quarter of 2008, and the demand for energy has followed the downward trend.

Big players on the global energy market suffered losses and Russia's gas production giant Gazprom was no exception. The company anticipates massive revenue losses -- from about €111.5 billion to €72.5 billion -- as a result of falling demand for natural gas, its prime export commodity. Profits in 2010 could halve to approximately €11.6 billion from last year's €21.5 billion.

Problems for Gazprom mean problems for the entire Russian economy. The gas giant accounts for 10% of Russia's GDP, employs around 380,000 people and pays approximately €12.5 billion in taxes directly into the federal budget. Gazprom has been a catalyst for Russia's strong economic growth over the past five years and a long-term increase in revenues -- especially from exports -- is key to sustaining the momentum.

Indeed, Gazprom has had a successful year when it comes to exports, despite the recession. During 2009, the company completed negotiations on the construction of two huge undersea pipelines directly linking Russia and Europe, as well as a pipeline connecting production fields in South Siberia with China. It continued to invest heavily in the exploration of massive new gas deposits on the Yamal Peninsula and the construction of liquification plants on Sakhalin Island.

These projects should ensure a bright revenue picture over the long term. They will also strengthen Russia's role as Europe's largest gas supplier, much to the consternation of European leaders who have been pushing for diversification.

The man behind Gazprom's ambitious projects is Alexander Medvedev, 53, deputy chairman of the executive board as well as head of the company's export branch. In 2009, Time magazine named him 36 on its list of the world's 100 most influential people. He sat down with SETimes to discuss Gazprom projects in Europe.

SETimes: Gazprom experienced a substantial drop in revenues during 2009, but still managed to go ahead with some very important projects. Do you consider 2009 a successful business year?

Gazprom's plant at Orenburg, Russia. [Marko Biocina]

Alexander Medvedev: Although 2009 was not an easy year for Gazprom, there is no doubt we made great progress on some key long-term projects. Despite lower revenues, we maintaned a high capital investment. In fact, last year we invested more than the average of the last three years which were, regarding revenues, much more successful. Obviously, we are delighted to have started construction of the North Stream pipeline and entered the final phase of preparations and negotiations for the construction of the South Stream pipeline. North Stream will connect Russia with Germany, with special branches for Finland, Denmark, Sweden and the Netherlands. South Stream should connect Russia with one of the Black Sea European countries, probably Bulgaria, and then Italy, via Hungary, Romania, Serbia, Greece, Croatia, Slovenia and maybe other countries. These pipelines will enable us to deliver additional 115 billion cubic metres of gas yearly to Europe directly.

SETimes: Croatia has been negotiating entry into the South Stream project for over a year now? Will it be a part of the main pipeline route, or will it be supplied by one of the branch pipelines?

Medvedev: We are glad that Croatia recognised the importance of South Stream project. If everything goes well, the final agreement between Croatia and Gazprom could be signed during the first quarter of 2010. Although the main pipeline route has not been defined yet, and will not be until we complete the feasibility study, it is more likely that Croatia will be connected to a branch pipeline. This, of course, means less transit profits, but when it comes to safe supply, there is no difference between the main and the branch pipeline.

SETimes: What about Romania and Austria, which have declared interest in joining South Stream?

Medvedev: Negotiations with Austria are at an advanced stage and I expect the contract to be signed very soon. As for Romania, I can only say that no country that is serious about joining South Stream will be left behind. Romania has a great strategic postion on the Black Sea coast and it could have been the starting point for the European part of the pipeline route, like Bulgaria. It can be connected from that country, but we also have to see what will happen with the project in Bulgaria now that the government has changed. Negotiations with Bulgaria are still under way and this is the right time for Romania to make its intentions clear about the project.

SETimes: For almost a decade, Croatia and Russia have been negotiating over the Družba Adria project, which entails the construction of an oil pipeline from Russia to the Croatian port of Omišalj. Is Gazprom involved in this project?

Medvedev: Yes, this project is run by our subsidiary Gazpromneft. Although I am not personally involved in the negotiations, I believe the project has a good chance for success. As you know, Gazproneft last year aquired NIS in Serbia and is very much interested in further strenghtening its presence in the region. If Croatia is sincerely interested there is no reason for Družba Adria to fail. Obviously, Gazprom is interested in coming to the Adriatic coast, we just have to negotiate the capacity and the financial conditions.

SETimes: Is Gazprom also interested in building Liquified Natural Gas (LNG) terminals on the Adriatic coast, as reported in the Croatian media?

Inside the control room at the Orenburg plant.

Medvedev: We are looking to begin exporting LNG to the European market. At the moment our entire Sakhalin Island production is delivered to the South Asian market, but we are enlarging production and the European market is interesting in that sense. On the other hand, we will not build LNG terminals in countries where there may be a pipeline supply since we would be competing with ourselves. Gazprom will build LNG terminals in countries where there is no connection via pipeline and since Croatia, Montenegro, Albania, Greece and Italy are all expected to be part of South Stream, there is no logic to building a terminal on the Adriatic coast.

SETimes: What does the construction of North and South Stream mean for the future of the Nabucco pipeline, a rival project which was supposed to transport Asian gas to Europe and reduce Europe's dependancy on gas from Russia?

Medvedev: I don't consider these as rival projects. Gas consumption in Europe is set to increase by 80% to 100% by 2025, so all the pipelines together will not be enough to meet the rising demand. That's why Gazprom would welcome the construction of Nabucco, but, at the moment there is no gas for transport. Almost the entire future production in Kazakhstan, Uzbekistan and Azerbaijan is already bought by Gazprom, and capacities from Turkmenistan have recently been aquired by the Chinese, so there is only Iran, which is at the moment politically unacceptable. Having that in mind, the construction of Nabucco at this moment just does not seem plausible.

SETimes: Many Europeans fear that Gazprom could in the future use its dominant position in Europe's gas supply to dictate higher prices. Are these fears justified?

Medvedev: I don't think that is a realistic way to look at the problem. Prices of gas are determined by a clear formula based on oil prices, which I think is good. I do believe that the prices of gas will rise in the future, but that is just the natural consequence of the demand increase by a bigger margin over production. The era of cheap energy is definitely over and the world economy will have to adapt. After all, at the climate summit in Copenhagen, held a few weeks ago, many nice dreams about the global reduction of greenhouse gas emissions were mentioned, but without natural gas these dreams will remain just that.

SETimes: Is Gazprom willing to co-operate with foreign partners in the future development of Russian gas deposits?

Medvedev: Absolutely. Our new enourmous deposits on the Yamal Peninsula are very complex, their development requires most modern technology and huge investments. Gazprom will find partners for this project and that is why our prime minister, Vladimir Putin, held a meeting with the representatives of big European gas comapanies a few months ago. I think Europeans have to realise that Gazprom wants to be their reliable business partner, as it has been for the last 30 years. Even in the tense times of the Cold War, deliveries of Russian gas to Europe never stopped, which is a proof of Gazprom's commitment to ensure long term steady supply of European customers -- a relationship which we hope to strenghten in the future.