RIA Novosti
May 2, 2007
Interview with Economy Minister German Gref
(Part 2)
Question: The Kremlin supports the idea of setting up national champions in all sectors, while you advocate a competitive environment. You are one of the few government members who oppose the set-up of new monopolies. Recently you criticized the merger of Gazprom and SUEK. Why would this alliance be harmful for Russia? And do you believe that reforming RAO UES is possible and that it could attract foreign investors?
Answer: It is a mistake to believe that the state encourages the emergence of mega-corporations. The government is making efforts to reform the sectors that have traditionally been dominated by a large monopoly. This process is long and hard.
Another priority of the government's economic policy is to ensure favorable conditions for large investment projects. Implementing the biggest ones, which are related to the country's strategic economic interests, requires attracting first of all Russian investors able to put money into projects that will have a significant impact on the entire economy.
However, I do believe that the participation of Gazprom, Russia's largest investor, in SUEK could have negative consequences. It is important to preserve a competitive environment in the economy instead of working toward state monopolistic capitalism, which may stall the country's development. Gazprom positions itself as a global energy company and is present in oil production, oil refining, gas processing, media assets, power generation, and foreign gas- and oil-exploration, production and refining projects. This requires huge investment and high-quality management. At the same time, meeting Russia's gas demand and honoring its contracts with foreign partners is a serious challenge for Gazprom. It also has huge projects developing new fields, which require enormous investment. I have repeatedly said that Gazprom should focus on its core activities, and I will defend this position. This is my principled opinion.
As to the outlook for RAO UES' restructuring, the deadline has already been set: it is June 1, 2008. Restructuring will progress gradually till that time, and foreign investors, if interested, will have the opportunity to put money into this sector. Now they are especially interested in territorial and wholesale generating companies that have been separated from RAO UES and are being floated on the stock market.
Q.: You have repeatedly said that Gazprom's investment in gas production is insufficient and that there is a risk of a gas shortage because of fast growing demand. What amount of investment do you advocate and what fields are able to ensure sufficient gas production in 2009-2015?
A.: Our ministry has repeatedly pointed out that Gazprom's investment program of recent years allocates only 30% of total funds for production, while development of new fields alone, according to its own estimates, will require $100-$300 billion until 2020. I believe that the problem of stagnating gas production in Russia should be resolved through comprehensive measures. First, it is necessary to reconsider Gazprom's investment in new gas fields, to introduce energy-saving technologies at businesses (this is especially relevant for Gazprom, which consumes 53 billion cubic meters of gas a year) and to ensure the proper conditions for independent producers to increase their production, because their potential is at present limited by the capacity of the single gas supply network. I would also note the lack of clear planning and financing in both existing and new projects.
In 2006, we launched the development of the Pestsovoye field in the Arctic, with a capacity of 30 billion cubic meters of gas. This is comparable to Russia's gas exports to France. As to new promising areas, I can name several fields in Eastern Siberia and the Far East, the gas deposits on Yamal and Sakhalin and, of course, the Shtokman field in the Barents Sea. The fast development of infrastructure in these districts will allow gas export routes to be diversified and output to be boosted.
Q.: If there is a gas shortage in 2011, who will face a decrease in supply, foreign buyers or domestic consumers?
A.: Gazprom is responsible for gas supplies to domestic consumers in compliance with the law. As to gas exports, Russia has proved its reliability as a partner over more than 20 years and has always honored its obligations. Our country has never been accused of disrupting exports. The government is now working to set up the best possible energy balance that will ensure Russia's energy security and its ability to honor all energy supply commitments.
The decision has been made to gradually increase domestic gas prices with a view to reaching the same level of profitability as exports by 2011. In 2007, Russia will go over to gas supply and shipment under long-term contracts. This will guarantee long-term investment plans for both gas producers and consumers, increase investment in developing the gas sector, set up a better energy balance and allocate additional funds for the development of gas production and infrastructure.
As to the near-term outlook for gas production, Gazprom will soon launch production at the big Yuzhno-Russkoye field. Its investment program allocates significant funds (26 billion rubles) for the development of the Bovanenskoye and Kharasaveiskoye fields on the Yamal Peninsula. Preparatory work is underway on the Shtokman field. Along with launching new fields, steps are being taken to develop a free gas market. We have launched regular auctions of gas produced by Gazprom and independent companies. For this purpose, the monopoly has been ordered to guarantee independent suppliers free access to its pipeline network, which is, in fact, state-owned.
Of course, much will depend on Gazprom, but we also seriously hope that the share of independent producers will grow. Now they account for 29%-35% of gas supplies to the industry and the energy sector, and the figure is set to reach 50% by 2015. We project that up to one fourth of Russian gas (150 billion cubic meters) will be sold on the gas exchange by that time.
I believe that the measures we are taking will help to avoid a domestic gas shortage. And the government will not get a headache trying to decide where to sell gas, abroad or to domestic consumers. But, honestly speaking, if there is a gas shortage after all, we will perhaps be more worried about the domestic market. Without energy, economic growth will slow down. The country's gas exports have been too big for a long time, and they cannot grow at the same pace. As domestic and export prices become equal, domestic gas sales will replace revenues from gas exports. Judging by the first three months since the launch of the gas exchange, the market price in Russia has been growing tremendously.
Q.: Gazprom seems to be still inclined towards large acquisitions, both in the oil sector and abroad. For example, it has made it clear that it wants 50% of TNK-BP. Can you imagine Gazprom becoming a shareholder in Gaz de France some day?
A.: Much is being said about Russian gas producers' expansion abroad. And it is not always impartial. Such trends are typical for all big multinational energy players like Gazprom. Energy companies want to reach consumers on national markets directly, not content themselves with selling energy to national resellers. An analogue of this is foreign investors' desire to invest in field development instead of buying commodities from sellers.
Gazprom has plans to enter Europe's retail markets. Notably, from 2008 it will sell gas to consumers in Italy, France, Austria and Hungary. Late last year it signed agreements with Italy's ENI and Gaz de France, which will allow for direct supply of Russian gas to the Italian and French markets from 2007. Direct supplies to Italy will reach 3 billion cubic meters by 2010, and deliveries to French consumers will total 1.5 billion cubic meters a year. Similar agreements were signed earlier with Austria's OMV and Germany's E.ON.
As is well known, the price of Russian gas supplies to Europe is only half of the retail price at which it is sold to consumers. So an increase in exports benefits local resellers and speculators rather than those who produce this gas in the Arctic and lay pipelines in the permafrost. I do not see any danger for French consumers if gas is delivered to their homes by Russian gas producers instead of French resellers. It is the price and quality of service that matter.
As to Gazprom's investment in assets outside its core activities, I have opposed it and I believe that the priority for a company like Gazprom should be increasing gas production, meeting the economy's growing gas demand, and faster development of exploration and necessary infrastructure. I do not agree with its arguments that gas reserves should be developed after future amounts are already sold and that it is risky to make a huge investment when you do not know whether this gas will sell. It is not correct to assume the current situation and market demand will stay the same for many years to come.
Q.: When will Russian consumers buy gas at market prices? Will Russian industry have time to adjust to market prices? Won't liberalization of gas tariffs for Russian companies deprive them of the last advantage they have over foreign rivals?
A.: Gas prices in Russia are regulated by the government. Since 1991, they have fallen significantly behind the industry index. Gas is the cheapest item in the energy basket (coal, oil, fuel oil and gas) in our country, which does not reflect its demand. On the one hand, this situation is a competitive advantage for us, but on the other, it does not help to attract sufficient financing to the industry.
Last fall, the government worked a lot on determining the best scenario for raising gas prices. It drafted a schedule that allows reaching a price that will ensure profits on the domestic market equal to those from exports by 2011. Russian consumers have four years to adjust their investment programs and budgets and get ready for market-level gas prices.
It is important to note that the increase in gas prices alone will not eliminate the need to set up a market mechanism for setting gas prices inside the country and to develop the gas market in Russia. The emergence of market price-setting mechanisms will be encouraged by equal development conditions for all players on the gas market, the transparent system of access to gas distribution, the possibility of signing long-term contracts with consumers and mechanisms for attracting investment in pipeline development.
As to the influence energy prices have on the competitiveness of Russian companies, their growth will encourage the implementation of energy-saving technologies. This strategy can be pursued with the help of long-term contracts for electricity and gas supplies, reducing the amount sold at regulated prices and raising prices to a level at which it will be economically necessary to implement energy-saving projects.
(The continuation of the interview with Economic Development and Trade Minister German Gref will be posted soon.).