April 7, 2014 Interview with Handelsblatt (Germany)

Deputy CEO of Gazprom talks about Company’s priorities, dispute with Ukraine and Europe’s fear of supply cut.

Alexander Medvedev is a frequent visitor to Europe. He is ‘Gazprom’s minister of foreign affairs’. Medvedev is not only the Deputy of the Company’s Head Alexey Miller, but also Director General of Gazprom Export, which means he is in charge of trade with Europe. In his open discussions held in Berlin and Brussels, Medvedev attempts to alleviate fears. He speaks frankly in his interview with Handelsblatt.

Mr. Medvedev, last week Mrs. Merkel said that “we need a completely new focus on the energy policy”. In other words: the German government thinks about the ways to reduce the dependence on gas imports from Russia. How do you feel about that policy shift?

I would prefer not to interfere in the German internal political debate. But I would like to remind you that the German government has made it repeatedly clear how important a functioning energy relation between Russia and Germany is, and for both parties. The German government will take the decisions it deems appropriate to, as it is entitled to amend them later when adapting to the economic realities and this is exactly what we see now regarding subsidies for renewables.

Do you really take it so easy?

It would be however useful to openly discuss the consequences of such a policy shift, which will be another burden on German taxpayers and consumers, and definitely won’t bring more stability in supplies but less.

Russia kept supplying gas even during the worst times, and even during the Cold War – we have always respected our contracts. Gazprom never disrupted gas deliveries.

Well, it seems it’s not quite correct. In 2009 due to a dispute with Ukraine less gas was delivered to Europe.

In 2009 Ukraine willfully blocked gas transit, and today Europe still keeps silent about these evident circumstances and continues to accuse Gazprom for that. Europe and Russia are dependent on each other in terms of energy trade, and both parties benefit from it. The dependency in energy trade is mutual, just like the benefits of gas business; otherwise it would not be treated as ‘business’.

Later on, Europe has realized how tricky could be the dependence on Russian gas. Ultimately, it undermined trust in Gazprom.

More tricky or complicated than what? Gas supplies from Libya? Or from Iraq? I think the question should be turned around – can Europe understand that Gazprom doesn’t need any shakes? And also, what happened in 2009 – the problem was not in Russian gas, but it was about the dependence on the sole gas supply route! We are on the way to solve this problem – the Nord Stream pipeline has been built and the South Stream pipeline is currently under construction.

Russian gas is important for Germany. How important is Germany for Gazprom?

Germany is our biggest client in Europe. We value the reputed German pragmatism, business approach and common sense; and Gazprom’s contribution to the energy security of the reunited Germany is also very important to us.

Are you planning to reduce gas exports to Germany?

This is a rather strange question, don’t you think? The export volumes are fixed in the long-term contracts. Every day the buyer defines how much gas we should deliver tomorrow. If we fail, we are obliged to pay fines. And on the other hand, the gas is still in demand by our German clients. Then again, what is the point of reducing revenues from gas exports? So far, unlike Ukraine, our German partners and clients have been paying in full and on time.

«We have always respected our contracts. Gazprom never disrupted gas deliveries»

Are there any concerns that gas supplies could be endangered by current tension between Russia and Europe?

No. The supplies are ‘carved in stone’ in our long-term contracts. We have the obligations to deliver a certain volume, and our clients have the obligation to buy a certain volume. It’s called interdependence.

Gazprom is a state-owned company. In theory, president Putin could use blocking supplies as a political weapon…

Gas is not a weapon, it’s a commodity. We produce and sell gas; trade is a peaceful and positive engagement because it binds countries together. We are interested to sell the blue fuel, to earn money in the interest of our shareholders, both Russian and foreign, private and not. A great number of our shareholders are investors from the United States and the United Kingdom. The Russian government is our biggest shareholder, but not the only one. We are internationally listed. All our shareholders, and their total number exceeds 500,000, including the Russian government, are interested in Gazprom making profit – not war. That’s the reason why we have to insist that Ukraine pays its gas bills, and I am surprised why such a simple fact is still not properly understood in Germany.

Gazprom has already decided to increase the gas price for Ukraine. Isn't it a political move?

The question is not quite correct. We do not raise prices. Prices are set through a formula agreed by seller and buyer in their contract. We simply go back to the previously agreed market-based price formula; and subsequently, discounts have expired. We gave discounts to our Ukrainian partners on the condition that they pay in time for the supplied gas. If they don’t do that, we will no more give that discount. But they have not honored their part of the deal. Ukraine doesn’t pay even at the discounted price. Ukrainian debt is growing. What would any commercially responsible European supplier do in such a situation? What would E.ON or RWE do? When I hear claims that now Europe will be supplying gas to Ukraine instead of Gazprom, I wonder: will Ukraine duly pay Europe for the reversed gas? And what if it’s not going to happen? What will Europe do if Ukraine doesn’t pay for the supplied gas and keeps on accumulating its gas debt, just like it’s happening with Gazprom?

What will you do if Ukraine cannot pay its bills?

We would like to treat Ukraine as a reliable client and a reliable transit country. After all, we are paying them billions in transit fees to guarantee the safe transit to Europe. I hope Europe is now in a position to positively influence Ukraine. We would welcome if someone persuades Ukraine to finally pay for already delivered and consumed Gazprom’s gas.

If Ukraine blocks the transit of Russian gas, how would Gazprom supply gas to Western Europe?

In order to avoid risks with unreliable transit countries, Gazprom and its European partners have built the Nord Stream gas pipeline via the Baltic Sea, and are planning to build South Stream pipeline through the Black Sea. We’re spending a lot of money to guarantee energy security to our European customers. We see it as a responsible approach on behalf of a responsible gas supplier.

Percentagewise, how much gas does Gazprom sale in Europe?

In 2013 Gazprom supplied some 280 billion cubic meters of natural gas to consumers in Russia, 56 billion cubic meters – to CIS and Baltic States, Georgia and South Ossetia, and 163 billion cubic meters – to our partners in Western and Central Europe including Turkey. Thus, our exports to Europe represent about one third of our total sales volume and about 65 per cent of Gazprom’s revenues.

Is it an option for Gazprom to export more to China in order to lessen your dependence on Europe?

It’s not only an option; it’s called ‘diversification’. Sometimes we see aggressive and even unfair approach to our Company in Europe. We cannot afford to depend on politically motivated conditions. We also want to monetize our resource base in the Asian part of Russia and to enter the Asian market, the premium market.

The USA and Europe have decided to impose sanctions on Russia, which are linked to the Crimea crisis. What does it mean for Gazprom?

The sanctions will not affect our business. In general, as history proves, sanctions have never created a win-win situation.

Do you think that sanctions, especially the economic ones, could be a weapon?

I am a manager, not a philosopher or a historian.

Did you talk to any member of the German government in recent days?

Gazprom maintains a constructive dialogue with the German government and the European Commission, and both parties are keen to continue the trend.

How long will it take to ease the tension between Russia and Europe?

It’s a political question; and I should say it again that I’m a manager, not a politician.

How Europe could benefit from Gazprom supplies?

What are the benefits? Gas is the cleanest fossil fuel. Europe does not have other secure sources of natural gas for decades to come. Only Russia is able to meet the growing European gas demand. Norway, Algeria, the UK and now the Netherlands are starting to have production problems due to the depletion of their resource base. Possible shale gas production will be very expensive and capable only to replace a part of declining domestic conventional gas production. LNG, including from the USA, will come only if prices in Europe significantly go up. Other new sources may offer small volumes. Europe has to accept the reality: for the moment, Europe is no more an attractive gas market. Asia and now South America propose much more interesting terms and conditions for doing business.

The USA has already marketed liquefied natural gas to reduce Europe’s dependency on Russia. Do you have any concern with that?

We don’t have any concern with that, it’s part of the business. But I can clearly sense that there are certain attempts to treat LNG as a political weapon against Gazprom and Russia. That’s ironic, since we often stand accused of politicizing things. In reality, the gas to Ukraine is still flowing, despite the fact that Ukraine doesn’t pay the bills. However, from the economic point of view, American LNG is not able to offer competitive prices in Europe, and the USA does not have large volumes to deliver overseas. Most of American LNG export will go to Asia and South America, where prices are more attractive. If there are politically driven decisions, and this LNG will be shipped to the Old World, then Europeans should be ready to pay higher prices than for pipeline gas. Under the current pricing conditions, Europeans would need to pay a Europe’s double price, to be able to lure the LNG away from Asia.

“I can clearly sense that there are certain attempts to treat LNG as a political weapon against Gazprom and Russia."

Many people consider Gazprom to be too bossy. Would you like to improve your corporate image?

No matter what we might do, it is impossible in the near future. The USA and Europe need an ‘enemy’, and we seem to perfectly fit the role of a bogeyman.

Gazprom is going to acquire German Wingas, the second largest gas distributor. It means that Gazprom will control a huge part of the German wholesale gas market. Many Germans would fear such a market power.

We do not see and do not understand the reasons for such a fear. In Berlin and in Brussels the regulating bodies overseeing the issues of competition have approved this deal. So is this about business or politics? We want to do business, we are not afraid of competition. The acquisition of Wingas, which from the beginning was a joint venture of Gazprom and Wintershall, will best serve the interests of German consumers by improving the quality of products and services provided.

Even the largest underground gas storage will then belong to Gazprom...

And why don’t you ask if I am afraid of driving a Mercedes Benz or drinking German beer? What if Germany is using them as a ‘transport weapon’ and as a ‘beer weapon’?

German companies wish to increase their share in Siberian gas fields. Is Gazprom ready to provide greater access?

We have excellent experience in such partnership agreements with German companies, but this is not all. Asian partners are also very interested in some of our projects in the Russian Far East and Eastern Siberia.

Mr. Medvedev, thank you for the interview.