YURI ëïíáRïV. `Iô`S á LïNG ôIíå SINóå Wå îáVå ÷ååN áNáLYZING IíòLIóáôIïNS ïF GáS íáRëåô LI÷åRáLIZáôIïN IN åURïòå`îÁÚÁÄ
YURI ëïíáRïV. `Iô`S á LïNG ôIíå SINóå Wå îáVå ÷ååN áNáLYZING IíòLIóáôIïNS ïF GáS íáRëåô LI÷åRáLIZáôIïN IN åURïòå`
When the top management reshuffling started following the change of the Head of Gazprom, there was not the slightest doubt about the fate of Yuri Komarov, a member of the Management Committee in charge of gas export operations. He seemed a stranger in the previous managerial corporate staff as well. However, both the former top management and the new one considered Komarov as one of the best professionals in the gas export operations who has never been involved in political games or corporate intrigues. Still more depends on him as a manager today: world gas market developments exposed new challenges to Gapzrom. And though gas export earnings of the Company reached the record-breaking account in the preceding year, it is not going to boost gas supplies to Europe. Gazprom has to retain its positioning on the growing market, and the Company will achieve the aim through developing new businesses - spot and direct gas sales to a consumer. Operational flexibility acquires strategic importance for commercial success. So, it is meaningful that an interview with the Russian gas "exporter chieftain" arranged by our newspaper correspondent was delayed from month to month - one business trip of the high-ranking official came after another in line with his business plan. The Deputy Chairman of the Management Committee of Gazprom Yuri Komarov was available to Alexey Grivach, the Vremya Novostey (News Time) newspaper observer, only in the New Year weekend. That"s why the conversation started with summing up corporate operational highlights of the preceding year.
Vremya Novostey: What did the previous year mean for Gazprom"s gas export business?
Yuri Komarov: If we talk in terms of the quantitative values, they reached a record level in 2003: our gas exports amounted to 140 bcm of natural gas as compared to 132 bcm in 2002. Gas export increased by 8 %, exceeding significantly the rate of gas consumption increase in the world (some 3 % per annum). Still, it should be stressed that the year of 2003 was featured for us with extensive use of natural gas from the so-called third parties, and first of all from the Central Asia sources. Contracted gas supplies originated from the independents (7.4 bcm in 2003) supported export gas deliveries. The latter was connected with the optimization of our natural resource base, and the process will go on in the future as a matter of fact. Currency earnings increased by quarter in 2003, as compared with 2002, and amounted to US$ 16.5 (the highest record for the 30-year long history of our gas export business). West European countries, Turkey inclusive, remain our major objective. The volume of gas supply to the region reached 89.3 bcm. Gas consumption in East and Central Europe is still stagnating. Our deliveries to those markets accounted to mere 43.3 bcm in 2003.
The major events of 2002, in my opinion, are as follows. Long and tedious negotiations between our Company and the Turkish partner concerning the Blue Stream project ended last autumn. A reasonable compromise was reached to mutual satisfaction of both parties. I would like to note the intensification of the process of Gazprom"s comeback to the markets of the CIS countries in terms of both replenishment of the corporate portfolio with the Central-Asian gas (Kazakhstan, Turkmenistan, and Uzbekistan) and cooperation with gas importers (the Ukraine. Moldova, Trans-Caucasus states) development. I believe this is of extreme geopolitical importance for Russia and in the interests of strengthening integration within the former USSR community. There is no doubt that we are still facing a number of challenges, and there are still projects, which have not been implemented to initiators" regret. The dialogue with the European Union goes on with difficulty due to adaptation of the long-term contracts signed earlier to the business realities existing in Europe. However, it was confirmed at the session of the European Council in Brussels that the system of long-term contracts should be maintained as a basis for the safe and secure gas supply as well as the fairness of Gazprom"s claims of elaboration of the mechanism ensuring material compensation of the Company"s losses resulting from changes in the contract terms and conditions.
Vremya Novostey: It was rumored some time ago that the Company developed a new export strategy. Has it been formalized as a document? What are the key elements of the strategy?
Yuri Komarov: Such a strategy exists. However, it would be a mistake to say that a task was set to elaborate anything cardinally new. Certain moves are required when a strategy has been proved a faulty one. And as soon as we consider the Company"s operational highlights we can"t see any reason for radical change in our export activities. It is quite natural that certain changes take place at the gas market, and respective "fine-tuning" is underway. In particular, we can"t but respond adequately to liberalization processes that take place at our priority gas sales market - the European market. I should stress that Gazprom is one of the few gas-selling companies, which have been adjusting to these European innovations for a long time. Gazprom has developed an extensive infrastructure abroad constructing gas pipelines and underground storage facilities as well as integrating organizationally through formation of joint stock companies. We are ready to work at a liberalized market and to increase the share of spot sales. In particular, we are gradually getting into the British market wherein, as I am deeply convinced, we"ll take a marked place in foreseeable future. However, this does not mean that we should reject our strategic business fundamentals - long-term contracts and a common gas export channel. At the same time, as I"ve already mentioned, we are working on gas export delivery development in the form of short-term contracts and spot-sales. Moreover, we are working on establishing direct links with end consumers. Commercial efficiency and market expediency are the key elements of such projects. This kind of business may be justified when profitability of the deals exceeds profitability of long-term wholesale contracts. The current European gas market is peculiar in what concerns potential competition between gas supplies on short-term or spot sales basis, between gas deliveries by the same seller provided under a long-term contract. That doesn"t mean expansion of the sales market space. Correspondingly, one should very carefully consider the advantages of replacement of a reliable large-scale buyer with a new partner and evaluate the economic efficiency of such restructuring. Until now, the majority of end consumers are not ready to pay a premium for open access to the resources. On the contrary, the customers are more inclined to get discount for preferential gas purchase contracts.
We will use all new opportunities for business development, which result from the gas business liberalization; however, it is obvious that the liberalization process entails significant additional risks both for gas producers and exporters. From my point of view, increasing financial and market risks can not but force natural gas producers to be more accurate and careful about new investment projects connected with further build-up of existing assets, and first of all, gas transmission capacities, and to pay attention to cost reduction at the same time (thanks to the European gas market liberalization for the matter). In our case we should talk of optimization of gas transmission costs (the most burdensome item in our gas delivery chain) through load maximization of the existing gas transmission capacities.
Vremya Novostey: Are gas purchases from Central Asia considered a tool for gas export costs reduction? What other measures do you conceive to undertake?
Yuri Komarov: The United Gas Supply System (UGSS) of the Soviet Union was built taking into consideration two raw mineral resources: gas and condensate fields of West Siberia and Central Asian republics - Turkmenistan, Uzbekistan and Kazakhstan. Last year we completed a relatively complicated initial work on optimization of our export portfolio by means of Central Asian gas involvement; which resulted in a 25-year long agreement signed with Turkmenistan on 70 - 80 bcm of natural gas to be purchased annually. We signed agreements with Uzbekistan and Kazakhstan. And thus, we have obtained mechanisms for loading the Central Asian gas export route.
Besides, we came back to cooperation with the Ukraine in the sphere of underground gas storage facilities employment, which is very important for compensation of seasonal gas consumption fluctuations. Gas injection into underground storage facilities enables to increase the volume of gas exports without large-scale pipeline construction.
The third element: gas trading on a spot and swap basis. Last year we delivered about 2 bcm of gas to Great Britain and we are planning to supply at least 3.5 bcm currently. I believe, by 2010 our contribution to the British energy market will make the range of 8 to 10 bcm of gas per annum. This particular market is fully opened, and it is very important for us to gain operational experience in the area, taking into account liberalization of gas markets of continental Europe. From the professional point of view, it is a very interesting business requiring new approaches. The cost of gas transmission in physical deliveries of Russian gas is so high that it makes the competitiveness of our gas on such a market very problematic. We can be successful only provide for gas transmission cost reduction by swap transactions introduction, routine in relationships with such our partners like WINGAS, Gaz de France, Norsk Hydro, as well as by underground storage capacities in the Ukraine and Germany implementation for gas supply in winter, when the Great Britain gas market suffers high gas demand. With such approaches we increase our export potential without new expenditures in the gas transmission infrastructure expansion. We are planning to go on with such projects. We carry on negotiations with new partners, for example, with the Norwegian Statoil Gas Company. I believe we"ll find a proper solution to the satisfaction of both parties. It is very important for us to form our own position on the British market in context of the North European gas pipeline construction. Making an investment decision concerning this project will be much easier with the sales market got at hand. Correspondingly, we"ll get an opportunity to determine optimum time for the pipeline construction in line with further development of the resource base of the country and the sales markets.
Vremya Novostey: How do you appreciate Gazprom"s positioning on the European gas market by the end of the decade?
Yuri Komarov: According to the forecasts, the demand for gas will be increasing in Europe by 3% annually. To maintain our share on the market at 25% of the total consumption, our export should reach the 170 - 175 bcm/y level by 2010. The long-term contracts signed on the "take-or-pay" term make the basis for our confidence in the future.
A program of the gas transmission capacities" expansion is carried out to provide the required delivery volumes, including the Yamal - Europe and the Blue Stream pipelines operational at the design capacity. At the same time, we presume local investments to involved in the loosening the bottlenecks.
Taking into account the growth of the demand for gas in Europe, we carry out marketing research to estimate our gas exports prospects in line with creation of additional gas transmission capacities. We are engaged in the study of the North European pipeline project, of the Ukrainian system development within an international consortium. But the capacities should be created keeping in mind concrete markets and on the basis of balanced approach. Excessive gas transport capacities are not in our strategic interests.
At the same time there is a trend to outpacing growth of liquefied gas consumption, and we are planning to occupy a niche in this market. The latter will allow us to diversify both the major product of our exports and sales markets. By combination of pipeline and liquefied gases we may strengthen our market opportunities significantly. And this does not mean development of new sales markets, in the United States, for example, but possibility of price optimization depending on the economic situation on particular markets. However, we are still making the very first steps in this direction and it"s too early to evaluate the process in figures.
Vremya Novostey: Outstanding 25-year long gas purchase contract signed last spring with Turkmenia came into force on January 1, 2004. Has the delivery of Turkmen gas begun?
Yuri Komarov: The first gas is coming already. Our partners delivered 116 million cubic meters as of January 10th, 2004. We don"t have any doubt concerning availability of Turkmen gas in our portfolio.
Vremya Novostey: Creation of an international consortium for management of the Ukrainian gas transmission system, initiated by Leonid Kuchma, Vladimir Putin and Gerhard Shreder, is going on with difficulty. Germany is just playing the role of an observer. How long will it take you to implement the project?
Yuri Komarov: We are in the process of tough negotiations due to significance and delicacy of the issue. We are at the completion stage of pre-investment phase now, and we"ll have to undergo a number of other stages. This is explained by the fact that according to the common view of the parties, the most optimal form of cooperation, within the frames of which the International consortium for management and development of the Ukrainian gas transmission system could function, might be a concession. However, the Ukrainian legislation requires significant modification so that concession model could be implemented in the gas transmission system of the Ukraine. In the course of intensive bilateral contacts with participation of the Russian, Ukrainian and foreign legal advisers it was determined what legal regulations should me modified and what laws should be adopted. Much work has been done on preparation of the draft documents including the draft intergovernmental agreement. We still have to settle another very important problem - development of the feasibility study of the concession. Only when the feasibility study is completed it will become possible to find solution for the problem that, as you should be aware of, bears obvious political color.
In line with the work on global approach in the form of concession we are examining the project of transit gas pipeline construction in the territory of the Ukraine as the first investment stage of further development of the Ukrainian gas transmission system. Feasibility study is prepared for construction of 1420-mm gas pipeline. In February of the current year feasibility study will be completed for construction of the gas pipeline 1200 mm in diameter. Decision on the final version of the project will be made on the basis of the market demand and taking into account economic indices, including the amount of investments. The throughput of the 1420-mm gas pipeline amounts to 30 bcm/y while the throughput of an alternative version is just 19 bcm/y. However, the first scenario will require increasing the investment amount by US$ 0.8 - 1 billion. At the same time I would like to stress that the market demand will have the utmost significance in selection of the version.
As far as the time factor is concerned, completion of the work on preparation of the documents required for decision-making may be ensured in the nearest three - four months. I believe that after that we"ll face a complicated problem of making a political decision, which should be done in combination with adoption by the Ukrainian Supreme Rada of a package of legal documents related to the concession.
Vremya Novostey: Obviously, this problem is highly politized in Kiev, isn"t it? How do you see the future of the project with probable removal one of the initiators of the project - the Ukrainian President Leonid Kuchma - from the political arena?
Yuri Komarov: Timely decision-making is very important in business especially when mega projects are concerned such as formation of an international consortium. Decision on such projects is made on the basis of economic, market and strategic expediency. I believe that personalities play an important role in making decisions on such projects; however, no decision will be possible if within the framework of a project the balance of the parties" interests is not provided for and a project itself does not ensure competitive power in comparison with alternative versions. And there are alternative versions of the gas transmission system development intended to expand our exports to the European markets - such projects as construction of the North European gas pipeline and further development of the Yamal - Europe gas pipeline route. Making an investment decision on any of the projects will delay significantly, at the minimum, implementation of other projects. This is an objective factor that impacts the decision-making process concerning the consortium project as soon as the necessity exists to minimize the risk of untimely decision. That means that the deficit of time exists due to objective conditions.
Vremya Novostey: You mentioned competitive projects. Do they really need a consortium to govern the Ukrainian gas transmission system?
Yuri Komarov: The resource base and the gas transmission system for gas delivery to consumers are integral elements for the success on the market. Gas transmission system of the former USSR was built as the United Gas Supply System and its separation, to my mind, deprives the system of a number of significant advantages. From this point of view the consortium may become an important element creating additional opportunities both for strengthening the Russian gas position at the market and additional economic benefits for the Ukraine. Increased volumes of gas transportation on economically attractive competitive conditions (increased proceeds for the Ukrainian budget, correspondingly) with minimum new investments are the key principles ensuring success in setting up the international consortium.
At present we may ascertain that the Ukrainian party fulfills its obligations on the transit of Russian gas. The problem of unauthorized gas withdrawals has remained in the past. However, the system requires significant investments for its maintenance and development. And it seems to me that cooperation in the form of a consortium might be an optimal solution providing ensuring the balance of the parties" interests. Gas business is characterized by extremely heavy investments and high risks. Fruitful cooperation improves the confidence and serves a stable foundation for business development for many years ahead.
Vremya Novostey: Gazprom jointly with Ruhrgas and Gaz de France won the bid for privatization of 49% of the stock of the Slovakian gas transmission company SPP. However, you have still not exercised your option. Why?
Yuri Komarov: The term of the option exercising will expire in the middle of the next year. The major problem of the deal is significant rise of the Euro rate in relation to US dollar, which worsens the profitability of the deal; though if we speak of the total influence of the Euro rate increase, it serves the interests of our company. Our portfolio of export contracts is a balanced one in terms of currency of payments, and the rise in the Euro rate brings us additional economic profit. In any case we are on the way to completion of the project dealing with the arrangement of financing with international crediting. The most important thing is to determine the proper time to complete the deal.
Vremya Novostey: You have succeeded in settling the problem of misunderstanding concerning gas delivery to Turkey through the Blue Stream pipeline. Do you believe the situation of the last year may recur, when the Turkish party refused to withdraw gas and initiated a law suit?
Yuri Komarov: I hope the situation will not recur. We have managed to find a balanced approach to solving the problem. Initial difficulties with gas deliveries through the Blue Stream pipeline do not put under the slightest doubt the strategic advantages, which Russia gains in terms of the country"s interests provision on the European gas market and the benefits which Turkey gains from the point of view of long-term, safe and secure supply of Russian gas. I hope the Turkish party has already got satisfied with the Blue Stream project. As far as I remember, the current winter was the first time when the Turkish party did not bring the question of additional gas supplies of Russian gas to attention of the top political level bodies. All the problems were settled at the level of dispatching bodies of Gazprom and the Turkish company Botas. Today the Turkish party completely fulfills its gas withdrawal obligations. Last year Turkey already withdrew more gas than was stipulated by the minimum gas withdrawal obligations. Instead of 900 million cubic meters we supplied 1.2 bcm. The misprint in the price formula has been removed and a new, single formula is applied for all three existing contracts. And the price for gas in Turkey is maintained at the level of prices for our gas sales to other European countries. However, Ankara was granted more favorable conditions under the "take-or-pay" contract obligations.
Vremya Novostey: In other words, Gazprom lowered the gas withdrawal level, beneath of which this commitment comes into force?
Yuri Komarov: It is correct, but it is lowered to the level adopted in Europe. Initially the threshold was set at a higher level.
Vremya Novostey: How long will Turkey enjoy the privilege?
Yuri Komarov: Until the year of 2010. The pace of the Blue Stream load increment is maintained. This year up to 4 bcm of natural gas may be delivered to Turkey when the "take-or-pay" threshold is set at the level of 3 bcm.
Vremya Novostey: Do you not expect another tensions rise in the relation between two countries due to the first gas deliveries from the Azerbaijan Shakh-Deniz field?
Yuri Komarov: Any competition is always connected with additional tensions. However, we don"t have any legal problems today. There are no doubts concerning the fulfillment by the Turkish party of the obligations on gas withdrawal on the "take-or-pay" conditions. The level of these obligations is so that it may be difficult for the Turkish market to absorb additional gas volumes. As far as the possibility of Azerbaijan gas transit to the countries of South Europe through Turkey is concerned, from my point of view it is rather risky and not entirely economically obvious project.
Nevertheless, our strategy should be based not on rejection of possibility of gas deliveries to Turkey from Azerbaijan Shakh-Deniz field but on strengthening our position at the Turkish market. The Blue Stream gas pipeline ensures achievement of the latter goal.
Vremya Novostey: Much of your hope was connected with acquiring from Ruhrgas AG a 32,1% interest in gas distributing company Verbundnetzgas (VNG), which controls some 90% of the gas market in Eastern Germany. However, your partner gave preference to another purchaser - EWE company. Why did it happen? Does it not mean a certain cooling in your relations with Ruhrgas after it was merged by E.on concern?
Yuri Komarov: The results of the tender were rather disappointing - from the point of view of strengthening our position in Europe, and I believe it would be interesting for us to increase our interest in VNG. Still, the realities are such that a competition exists between priority projects both within Gazprom and at the international level. The makeup of the tender participants was very representative. And one cannot disregard the fact that WINGAS, which is a joint venture between Gazprom and Wintershall, is a direct competitor of Ruhrgas on the German market. Strengthening of a competitor"s position hardly meets the strategic interests of Ruhrgas and E.on, which implement a deal on sale of interests in VNG. I believe that that this particular circumstance was considered when examining an offer from Gaz de France, which also failed to win the bid.
Vremya Novostey: The preceding year was marked with a precedent - it was the first time when Gazprom revised the long-term contract for gas delivery to Poland. What forced the Company to make concessions to Warsaw?
Yuri Komarov: While signing the intergovernmental agreement on cooperation in construction of the Yamal - Europe gas pipeline system and the long-term contract for gas supply to Poland, the Polish gas market capacity was obviously overestimated. Gas consumption has actually not increased in the country during the period. Significant changes took place in terms of implementation of the Yamal - Europe pipeline project. In particular, it had been planned before that meaningful volumes of gas would be delivered through the second line of the system for internal consumption in Poland. All above said required amendments both in the intergovernmental agreement and the long-term contract. The said amendments allowed us to implement more pragmatic approaches in our relations, though a number of major problems still remain unsettled.
Vremya Novostey: For example?
Yuri Komarov: For example, terms and conditions of the contracts for gas delivery from the Ukraine to Poland. Last summer the Polish party invited tenderers for short-term gas purchase contracts. A company that offered dumping terms won the tender; however, it failed to meet its obligations and the tender was cancelled. Still, last November the Polish party signed a contract with Eural Trans Gas basing on competitive price. Deliveries under this contract are carried out. Gas is supplied within the frames of coordinated volumes of the Ukrainian export but in the form of spot deliveries, and the cost of such deliveries should be higher in winter period than that of deliveries under long-term contracts. I"m afraid that the seller did not use marketing opportunities in the deal in full measure.
Vremya Novostey: Forecasting of the export prices for gas is conventionally one of the most critical discussion points in approval of the corporate budget. What export prices do you personally expect in this year?
Yuri Komarov: Price forecasting is a thankless matter. We prefer to talk of the things confirmed by actual developments. Viewing specific character of price formation on the European gas market in the first half of the year we may expect that the price will be close to that in the end of 2003, i.e. US$ 120 - 130, depending on market and delivery point. The forecast for the second half of the year is based on prices for oil integrated by the Russian Government in the budget for 2004, i.e. a certain decrease of prices is expected.
January 20 2004 Vremya Novostey
http://www.gazprom.com/eng/articles/article9509.shtml
