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Boosting supplies. Interview with Alexander Medvedev

November 2, 2016

Published in corporate Gazprom Magazine Issue 10, interview conducted by Sergey Pravosudov

Mr. Medvedev, how much gas does Gazprom plan to export in 2016 and at what average price?

I can say with confidence that this year we are going to supply a record amount of natural gas to Europe. The question is whether exports will exceed 170 billion cubic meters. We expect the average price to hover between USD 165 and 170 per 1,000 cubic meters at year-end.

This year we are going to supply a record amount of natural gas to Europe. The question is whether exports will exceed 170 billion cubic meters

What caused exports to grow this year?

First of all, I would like to note that natural gas consumption is growing in Europe. This process is largely influenced by the fact that natural gas is gradually coming back to the power generation mix: with prices falling, gas is getting more competitive against coal. For instance, in April 2016 the share of gas in power generated by fossil fuels in the U.K. exceeded 80 per cent, setting a record high.

As for Gazprom’s exports growing, price is a major factor here. Our gas is unquestionably competitive in the market, and our partners are well aware of that, as they actively offtake gas under long-term contracts.

Another important contributing factor is the ongoing decline in domestic production, mainly in the Netherlands. In the first six months of 2016 alone, Dutch gas production was cut by almost 3 billion cubic meters.

What plans do you have for 2017?

We believe that Gazprom’s gas will remain competitive in the European market throughout next year and beyond. It is too early to discuss specific figures: a lot will depend on the weather. We assume that the share of Russian gas in European consumption will, at the very least, remain at its current level and is likely to demonstrate slow but sustainable growth.

How much liquefied natural gas (LNG) do you plan to sell this year?

We expect this year’s LNG supplies to be at roughly the same level as last year. Let me remind you that in 2015 Gazprom Group exported 3.56 million tons of LNG to international markets. The LNG market is an increasingly competitive environment, and we are ready to work in the new conditions. We are actively furthering our relations both with our traditional partners in Japan, Korea, and Taiwan, and with buyers in the emerging markets of Southeast Asia, the Middle East, and other regions.

Closer to consumers

How well did Gazprom Marketing & Trading (GM&T) fare last year and what are they planning this year?

Gazprom Marketing & Trading Group fared extremely well last year, with the intragroup revenue totaling GBP 251.2 million. Last year, GM&T signed important contracts with the U.K.’s Centrica, Cameroon’s Perenco, and Singapore’s Pavilion Energy. One of the company’s priorities is retail. It is the domain of its subsidiary Gazprom Marketing & Trading Retail based in Manchester, U.K. Today, GM&T Retail supplies gas to major, small and medium-sized industrial consumers, as well as consumers in the commercial sector. Both in 2014 and 2015, the company sold a total of about 2.7 billion cubic meters of natural gas to its end consumers in the U.K. GM&T Retail pursues the strategic goal of becoming one of the largest companies in the sector of gas sales to end consumers.

Gazprom Marketing & Trading Group fared extremely well last year, with the intragroup revenue totaling GBP 251.2 million.

How much gas did you sell last year through WINGAS and WIEH? What are your plans for this year?

Last year, Gazprom Export supplied 10 billion cubic meters of gas to WINGAS and 17 billion to WIEH. These two companies secured a quarter of Germany’s total gas imports (minus re-exports). In 2016, we expect them to procure 28.7 billion cubic meters of gas from Gazprom Export, and, judging by the current dynamics, they will achieve that.

When do you plan to complete the asset swap with Austria’s OMV?

If the deal is completed, OMV will acquire a 24.98 per cent stake in the project for developing Blocks 4A and 5A of the Achimov deposits at the Urengoyskoye field. We have already chosen the assets we would like to get in exchange. I am talking about production assets on the Norwegian shelf. We plan to close the deal in 2017.

How much gas do you plan to supply to Turkey this year and next year? How does Gazprom operate in the Turkish end consumer market?

Gazprom does not operate in the Turkish end consumer market. We deliver gas to the border where it is handled by local companies, including gas distributors, which work with end consumers. At the same time, we are interested in participating in Turkish power generation projects on certain conditions. We would like to explore the opportunities of this business sector. I assume that we may eventually buy some existing projects and build new ones. Turkey is among Gazprom’s largest foreign markets, second only to Germany. In 2015, we exported 27 billion cubic meters of gas to Turkey, and we expect to provide them with 24.5 billion this year. The projected figure for 2017 is 25.1 billion cubic meters.

The first string of TurkStream, which will supply gas to Turkish consumers, may be built to completion by late 2019.

TurkStream

When will the first string of TurkStream enter operation?

First of all, I would like to commend our Turkish partners for being so prompt and cooperative at this stage of the project. By issuing the first permits, including the construction permit for the pipeline’s offshore section, the Turkish Government confirmed its interest in the construction of TurkStream. Judging by the current developments, the first string of TurkStream, which will supply gas to Turkish consumers, may be built to completion by late 2019.

What agreements do you have to sign to build the second string of TurkStream?

In order to start building the second string, which will deliver gas to southeastern Europe, we need to receive guarantees from the European Union and European Commission that there is a need for that infrastructure. We will continue to work on that matter with Turkey and the EU.

The Turkish authorities, in their turn, have confirmed their readiness to contribute, if necessary, to the construction of the transit string in the Turkish territory. The Greek side has expressed full support for the project, saying it is practicable and Russian gas supplies are needed there. With TurkStream progressing further, we are going to be even more proactive in our cooperation with our Greek partners, including the project for transit across Greece to Italy. This is why, in line with the memorandum signed by Gazprom, DEPA, and Edison, we have a permanent working group that discusses concrete steps in our future joint efforts.

Could you, instead of building the second string of TurkStream, construct a string to Bulgaria along the route of South Stream?

We took note of Bulgaria’s willingness to go back to the South Stream project. In the past, we incurred major losses after our partners had refused to execute the project. Since then, many issues related to South Stream have remained unresolved. In view of the fact that Bulgaria has adopted a broad interpretation of the EU’s Third Energy Package, we no longer consider the project to be relevant, especially in its initial form. The Russian party is currently focused on the TurkStream project.

Is the line-up of the Nord Stream 2 project subject to change? What companies will take part in creating the gas transmission infrastructure in Germany?

All of the five European companies that, together with Gazprom, were part of the Nord Stream 2 project from the very beginning have confirmed their support and intention to execute the project. The companies are BASF/Wintershall, ENGIE, Uniper, OMV, and Shell.

The onshore gas transmission infrastructure for Nord Stream 2 will be built by European companies in full compliance with the requirements of the energy, competition and environmental law of the EU. In this connection, German transmission operators are coordinating their efforts with the relevant regulatory body, the Federal Network Agency.

Gas in vehicles

What are the plans for the development of the foreign NGV network?

Gazprom Group is a quite experienced player in the European NGV market. Gazprom NGV Europe, the company established in 2016 with the purpose of consolidating the Group’s NGV assets, operates 61 functioning natural gas and cryogenic fueling stations in Germany, the Czech Republic, and Poland. Given the importance of this sector in Gazprom’s business, we are planning to expand our network of natural gas fueling stations. As of today, Gazprom has signed memorandums of understanding regarding NGV (CNG and LNG) market development with partners from Serbia, Belgium, Holland, and other European countries.

It is gratifying that European authorities are just as confident about the potential of this market in Europe as we are. At present, the European Union actively promotes TEN-T, the multi-modal program for the development of the European transport sector, providing, inter alia, for a wide introduction of alternative fuels, including LNG. That multi-billion program helps market participants substantially reduce capital investments in infrastructure construction. Gazprom Group intends to actively participate in this and other European initiatives aimed at promoting NGV market development.

How do you assess the results of Gazprom’s gas auctions? What are your plans for the next gas auctions?

We are completely satisfied with the results of the auctions, which naturally complement our system of long-term contracts and offer another good opportunity for gas marketing in Europe. Last September, Gazprom held its first auction for gas supplies via Nord Stream. As a result, the Company made over 40 transactions for a total volume of about 1.2 billion cubic meters of gas with 15 counterparties, including both our old partners and new customers, from various European countries. This spring, we held an auction for the Baltic states and sold over 420 million cubic meters. The latest auction ended September 2, 2016, the third one, brought us contracts with 11 counterparties for a total volume of about 2 billion cubic meters of gas to be delivered during the 2016–2017 winter period. Quite possibly, we might hold our next auction in the spring of 2017.

In the latest auction, we once again managed to sell additional gas to the countries the first auction was targeted at last year, which gave us another proof that such a model could be applied on a regular basis. In addition to the Greifswald delivery point that attracted great interest earlier, around a quarter of the total gas amount was sold for delivery to Austria’s Baumgarten. We offered that option for the first time. In this regard, let me note the importance of Nord Stream 2, which is expected to deliver gas to that Austrian gas hub as well. Interestingly, no lots were sold for delivery via OPAL, which means that Gazprom remains the only company requesting these capacities. We are therefore committed to further dialogue with European regulators concerning the exemption of the OPAL transmission capacities.

Will Gazprom increase gas volumes to be sold at European stock exchanges?

The constantly evolving European gas hubs represent an important constituent of the continental market. Our subsidiaries efficiently use those platforms. The contracts between Gazprom Export and its foreign partners are already linked to price indexes of trading platforms in one way or another.

However, I would like to stress that one should not overestimate the role of the spot market in continental Europe, particularly in the countries of Central and Southern Europe that essentially have no access to physical gas, not that virtual gas traded on the hubs.

UGS facilities

What are your plans regarding the expansion of your underground gas storage (UGS) capacities in Europe? Will you expand your UGS capacities in Serbia?

Gazprom participates in UGS projects in the countries through which pass most of Russian exports. At present, the capacities of the European UGS facilities used by Gazprom stand at 5 billion cubic meters. Our goal is to increase those capacities to 5 per cent of our exports. Our principal objective therefore is to create storage facilities with high flexibility and daily deliverability in order to respond effectively and quickly to natural gas consumption fluctuations in European countries and to ensure reliable gas supplies to customers.

These criteria are met by the Damborice UGS facility put onstream on July 1, 2016, in the Czech Republic. Upon reaching its full design deliverability by 2021, this UGS facility will have a working gas capacity of 456 million cubic meters, a daily withdrawal capacity of 7.6 million cubic meters, and a daily injection capacity of 4.6 million cubic meters. As part of the Katharina UGS project, Gazprom continues building its own overground infrastructure and has completed the construction of an interconnector to the JAGAL gas pipeline in Germany.

As for the Banatski Dvor UGS facility, it should be noted that several successful well repairs were carried out with the assistance of Russian professionals over the course of 2015, which increased the daily deliverability by early 2016. The possibility of expanding the UGS facility is under consideration; the final decision has yet to be made.

What are your plans for the construction of UGS capacities and power stations in China? What is the planned ownership structure of those facilities? Do you plan to work with end consumers in China?

In June 2016, Gazprom and China National Petroleum Corporation (CNPC) signed the Memorandum of Understanding in the field of underground gas storage and gas-fired power generation. In July, the companies signed the roadmaps for implementing that Memorandum. Now, we and our Chinese partners are conducting feasibility studies for joint projects in the field of underground gas storage and gas-fired power generation in China. The results will determine our further decisions regarding the joint projects.

LNG

When will the third train of the LNG plant under the Sakhalin II project be built to completion?

In June 2015, Gazprom and Royal Dutch Shell signed the Memorandum for the construction of the third train of the LNG plant as part of the Sakhalin II project. The document specifies the target dates for the design stage and the project in general, as well as further actions and basic principles of cooperation in preparing the project for the final investment decision.

In December 2015, Sakhalin Energy Investment Company, the Sakhalin II project operator, started developing the project documentation. The third train is scheduled for commissioning in 2021.

What are the plans for the Baltic LNG project? Which markets are supposed to receive gas from this project?

The investment rationale for the Baltic LNG project in the Leningrad Region has been developed. The project provides for the construction of an LNG plant with an annual capacity of up to 10 million tons (with a possible expansion to 15 million tons) in the port of Ust-Luga. Feed gas for the project will be supplied from the Unified Gas Supply System. We consider the Atlantic countries, the Middle East, and South Asia as the potential target markets. Gazprom LNG Saint Petersburg is now preparing for the development of the project documentation.

On June 16, 2016, Gazprom and Royal Dutch Shell signed the Memorandum of Understanding on the Baltic LNG project at the St. Petersburg International Economic Forum 2016. Now the companies are exploring the possibilities and prospects for implementing the project in accordance with the document.

How do you assess the prospects for LNG exports from the U.S. and Canada?

At present, Sabine Pass is the only project exporting LNG from the U.S. Four more projects are currently under construction and may be put onstream before 2020. However, it depends primarily on the market environment whether or not those projects will export LNG and to what regions.

One should remember that LNG exports from the U.S. are characterized by high flexibility: most of them are contracted to portfolio aggregators without destination restrictions. Therefore, the target markets for U.S. LNG will be defined by natural gas prices across regions. What is interesting in this context is that most of exports from Sabine Pass in 2016 went to Latin America, the Middle East, and Asia-Pacific. Europe received just two shipments, one each in Spain and Portugal, whose markets are practically cut off from the common European gas transmission system. That is why U.S. liquefied natural gas is no competition to us in today’s Europe.

As for Canadian projects, many of them failed to ensure acceptable profitability in the low oil price environment and were deferred as a result. Perhaps they will be resumed when the market enters the new investment phase.

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