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Speech by Alexey Miller at “The role and significance of natural gas in the energy balance of the world economy” plenary session at St. Petersburg International Gas Forum

St. Petersburg

If we talk about the future of gas, let us choose a time frame and speak about the period up to 2025. First and foremost, I would like to focus on Gazprom’s predictions concerning global gas demand. Of course, I would also like to say a few words about our vision of the European gas market, which is the top-priority export market for Gazprom, as well as about the Asian market, especially China.

Speaking about global demand, we are absolutely positive that the gas market, the gas business, and the gas industry in general will steadily grow in the next five years. This is my first point.

Here is my second point. This growth will not be affected by the other energy sources. Gazprom expects global gas demand to increase by 17 per cent, or 635 billion cubic meters, until 2025. It should also be noted that the main contribution to this global demand, about 30 per cent, will come from China. Compared to 2017, and the figures I mentioned use 2017 as the baseline, Chinese demand will, according to our estimates, grow by 80 per cent until 2025, adding almost 200 billion cubic meters of gas. We are talking about 195 billion cubic meters, presumably even more.

However, the key market for Gazprom is undoubtedly Europe. It has been our number-one market for 50 years. This year, we celebrated the 50th anniversary of Russian gas supplies to the European market. It all goes back to the contract with OMV. It was our first contract for gas supplies to Western Europe, and Austria was the first country to buy our gas. So, we have had 50 years of reliable and mutually beneficial cooperation and partnership.

What is truly encouraging is the upward trend in Russian gas demand over the last few years. As you know, Russian gas deliveries to Europe totaled 194.4 billion cubic meters in 2017. Those were Gazprom’s deliveries. It was an increase of 8.4 per cent against 2016. And today, we have an increase of 6 per cent, albeit against the much greater absolute figure of the previous record year. This means that in 2018 Gazprom will set a new record for gas supplies to Europe.

A few things need to be said here. Firstly, the absolute amount of deliveries will exceed 200 billion cubic meters. What does that mean? It means that our European supplies will come close to, or may even reach, 205 billion cubic meters of gas. That is the maximum annual amount for all of our European supply contracts. The sum total will cover 100 per cent of our obligations to our partners.

This is a new frame of reference without a doubt. We need to reflect on that. Meanwhile, the demand for Russian gas continues to grow. We saw that in our negotiations with OMV on the margins of the Forum, for instance. We see our traditional partners – I don’t mean just OMV – state that they intend to buy even more gas from us. It should be noted that the figures are pretty much enormous.

So, what the new frame of reference means for us is that we now have a seller’s market in the gas sector. This is new. We didn’t have that ten or five years ago. That’s my first point.

Secondly, I would like to talk about the demand for some of the gas export corridors, specifically the export corridor across the Baltic Sea – the Nord Stream gas pipeline. In the past 12 months, Nord Stream has operated 7 per cent above its planned capacity. Keep in mind that the pipeline has a design capacity of 55 billion cubic meters, although it can export a little more thanks to its technological capabilities. In 12 months, we have delivered 59 billion cubic meters to Europe via Nord Stream. In other words, the demand for Nord Stream as a gas export corridor from Russia is even higher than 100 per cent. This answers the question of whether we need Nord Stream 2. The existing capacities are operating above the design level.

It should be noted, of course, that the Nord Stream 2 gas pipeline is already being built, for one thing. Secondly, everything is going strictly according to the calendar schedule we adopted with our project partners from the very beginning, to the time limits we set back then. Needless to say, some questions remain. Still, the work schedule we have now means that we will absolutely be able to start supplying gas via Nord Stream 2 from January 1, 2020.

We debate Nord Stream 2 rather extensively, although the project is on track, business as usual. But I would like to note that the construction of the TurkStream gas pipeline – that is, the new export corridor in the south – is not just on track but ahead of schedule. In a mere two months, we will complete the offshore section of TurkStream. The first and second strings will have been fully built. Therefore, we will have created gas transmission capacities across the Black Sea for delivering gas to Europe.

When speaking about the European gas market, we should undoubtedly talk about the reserves of Gazprom, the Russian reserves. Keep in mind that Gazprom has 35 trillion cubic meters of gas in recoverable reserves. It should be stressed once again that our reserves will allow us to fully meet the demand from Russian and European consumers in the 21st century. We can meet any demand, be it in the domestic market here in Russia or in the markets of Europe or Asia. Of course, we are talking about pipeline gas above all. Pipeline gas is key to Europe’s gas balance, its energy mix.

In terms of gas imports, LNG accounts for a meager 12 per cent of imports after eight months of 2018. The rest is pipeline gas. Speaking about LNG supplies to Europe, it should be noted that the amounts of LNG deliveries to that market have decreased by 4.5 billion cubic meters in eight months.

The reason for that is the Asian market, of course. Even though the gas prices in Europe have risen by almost 20 per cent since January 1, 2018, the price of LNG is still higher. Crucially, LNG prices in Asia are a third higher than those in Europe. Essentially, LNG continues to overflow from Europe to Asia. This trend has been going on for years. Moreover, experts have started to call Europe “the last resort” for LNG.

Although much talk is going on about new plans for LNG deliveries, there is no doubt that pipeline gas supplies from Russia will always be more competitive than LNG deliveries from any other part of the world. It goes without saying.

A few words should be said about why the demand for Russian gas in Europe keeps growing. This is primarily due to a decline in European production. A case in point is a well-known field in the Netherlands, Groningen, where natural gas output has fallen by 23 billion cubic meters in the last five years and, apparently, will continue to dwindle.

Other factors include the coal exit programs adopted by a number of countries. There is a program for the period until 2022 in France and a program until 2025 in the UK. In France, the share of nuclear power generation, which has traditionally been substantial, will shrink from 70 to 50 per cent by 2025. These factors are systemic in nature, and, I stress yet again, they indicate that the growing demand for Russian gas is fundamental. Therefore, we expect further increases in our exports.

Speaking of the Asian market, it should be noted first of all that the growth in demand is still offset by LNG supplies there. When it comes to the soaring LNG supplies in the global market, it is the Asian market that generates this demand for LNG.

China, with its highest rates of gas consumption, is apparently a major source of this demand. As we know, the gas demand in China grew by 15.3 per cent last year and has added another 17.5 per cent this year. Those are impressive figures indeed. This is the first aspect.

Secondly, since pipeline supplies play a very important role in the reliability and stability of gas consumption, the share of pipeline gas will definitely increase. China is a country with a continental climate in the north and northeast. And consumer demand rises significantly in the autumn-winter period.

Let me emphasize straight away that it is pipeline gas, not LNG, that enables us to meet that peak demand within minutes. And, of course, attempts to achieve that through LNG are much less effective. This is my first point. My second point is, it is much more expensive. Therefore, it is absolutely logical that China will increase pipeline gas imports.

In this regard, special mention should be made of the project for pipeline gas supplies from Russia to China, which is already underway. We are also discussing new routes, obviously. Speaking of an ongoing project that is running ahead of schedule, we have the Power of Siberia gas pipeline. To date, Gazprom has completed 94 per cent of its share of work under the project in Russia. There is absolutely no doubt that Russian pipeline gas will start flowing to the Chinese market on December 20, 2019.

Of course, we are discussing new gas transmission routes with our Chinese partners, our Chinese friends. First of all, I would like to note that the negotiations on the western route have recently intensified. We have scheduled a number of meetings for the near future, and we hope to reach final agreements. I would like to remind you that we have already signed the Heads of Agreement for the western route with our partners from CNPC. The only issue that needs to be settled is the price.

The issue of winter peaks in China can actually be resolved even faster. We should understand that, unfortunately, the current suppliers of pipeline gas to China cannot ensure flexibility amid seasonal fluctuations. Let me emphasize that, considering Gazprom’s competencies and experience and, most importantly, taking into account the newly-built gas transmission infrastructure for the Power of Siberia project, ramping up supplies in excess of the contractual amounts via Power of Siberia is the quickest way of resolving the issue. This option is currently under discussion.

Speaking of new gas transmission routes to China, I should mention potential supplies from the Russian Far East. That is also an emerging export channel.

About the Chinese market: let us look at how gas imports to China are growing and in what amounts. While indigenous production grew by 8.5 per cent in China last year, the total imports of LNG and pipeline gas increased by 27 per cent. We expect that the annual imports to China will reach 120 billion cubic meters this year alone. This is a huge figure. China has enormous potential and enormous opportunities.

In conclusion, I would like to mention the new agreements on the project we are implementing jointly with Wintershall. OMV joined that project yesterday. This is indeed a crucial, landmark project. Why? It is strategically important because its mission is to ensure cooperation with our partner companies, Wintershall and OMV, in the European market, across the entire value chain of the gas business: gas production, transmission, underground gas storage and sales.

OMV is joining the project for gas production from the Achimov formations within Blocks 4A and 5A of the Urengoyskoye field. And we are both involved in a large gas transmission project – Nord Stream 2. We also interact and look into further cooperation in the field of underground gas storage in Europe. On top of that, OMV is an excellent and efficient trader of Russian gas in the European market. In this way, the companies are sharing risks across the value chain in the gas business. Undoubtedly, this is a much more advanced mode of operation in terms of trust between partners. This is not just a purchase and sale contract but rather a joint effort throughout the process chain.

This is the outcome of our 50-year collaboration. Yesterday, when Rainer Seele, Chairman of the Executive Board of OMV, and I were signing documents in the presence of Russian President Vladimir Putin and Austrian Federal Chancellor Sebastian Kurz, we noted that, because the project would last until 2069, for the next 50 years, its successful completion would become a wonderful gift for the 100th anniversary of the gas cooperation between Austria and Russia, between Gazprom and OMV.

Thank you for your attention!