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Time Magazine: Russia’s Natural Gas Mogul Speaks

Wednesday, Apr. 11, 2007

Russia’s Gazprom is a giant by every measure. The state-run corporation is the world’s second large energy company, controlling 26.6% of global natural gas reserves, producing one fifth of the world’s natural gas and supplying a quarter of what Europe consumes. Gazprom also controls 10.2 billion barrels of crude oil reserves. Critics see Gazprom as a monopolist monster but Alexander Medvedev, Deputy Chairman of Gazprom’s Management Committee and General Director of Gazpromexport, sat down with Time’s Yuri Zarakhovich to espouse Gazprom’s view of itself as a benevolent giant.

TIME: One often hears: “What’s good for Gazprom is good for Russia.”

Medvedev: Not just for Russia — for the world. With the deficit of global energy supplies growing, the fortunes of the global energy very much depend on the state of health of Gazprom as a strong, competitive, unique energy company, which owns unique assets. The better it is for Gazprom, the better it is for the world consumers.

TIME: In February, Russian President Vladimir Putin described as “interesting” the idea of establishing a natural gas equivalent OPEC — a producers’ cartel that might control up to 80% of world’s natural gas reserves and 40% of natural gas pipe transportation. Last Monday, gas producers met in Qatar. Does Russia seek a leadership role in a gas cartel similar to Saudi Arabia’s one in OPEC?

Medvedev: In Qatar, exporters agreed to keep up consultations on how to coordinate their activities. Growing development, production, transportation costs and technological challenges objectively require such consultations. Only Russia, Qatar and Iran have a long-term gas supplying capability. Other producers can only complement these three. Any attempts to diversify natural gas supplies won’t amount to more than a three-finger combination. [A Russian equivalent of “not worth a fig”] Nobody has the right to restrict exporters’ policy coordination, in which Russia objectively plays the leading role, due to our resources and production. I’m really surprised that consumer countries, the Americans in particular, call this coordination a weapon of blackmail and extortion. This rhetoric is unfounded.

TIME: Gazprom insists on its position as the single owner and operator of Russia’s United Gas-Supplying System (UGS). Gazprom denies pipeline access to a handful of independent gas producers who are still left. At the same time, Gazprom talks of market liberalization, and market technologies.

Medvedev: In 1998, six companies had access to the UGS. In 2005, 38 companies did. They — including [oil giant] Lukoil and [the mammoth state-run] Rosneft transported 65 billion cubic meters of gas, that’s more than many countries’ entire annual production. Gazprom retains its control over the UGS, because it’s an immensely complicated organism. Developed in the Soviet Union, it used to incorporate gas-transporting systems of several countries that are members of the Soviet Union no more. One of the mistakes that our so-called “reformers” made was having the UGS sadistically dismembered. Now, Gazprom’s attempts to reunify elements of this once integrated system, albeit on the economic rather than political grounds, are of critical importance, irrespective of what countries they are in.

TIME: Gazprom’s tough line in recent “price wars” with Russia’s immediate neighbors earned it the nickname of “Russia’s pipe-line troops.” Is Gazprom sensitive to the fact that its drive to reunite the erstwhile Soviet gas transportation system, and acquire gas-transportation and distribution systems in other foreign countries, is seen as an advance of “pipe-line troops” into Europe?

Medvedev: Gazprom’s strengthening positions on the world scene couldn’t help but cause concern on the part of our competitors who, among other things, have mobilized the public opinion. In reality, all our issues with Ukraine and Belarus pursued the goal of transferring our relations on to a market basis. The time of multi-billion subsidies is gone. There is no politics anymore. Just business. No contract — no gas. Now, we have five-year contracts at least, which only improves security of supplies. As for other countries, if there is an opening to buy assets there, we go for it, just like any other company would.

TIME: What if an outsider tries to buy into your UGS?

Medvedev: We won’t sell. You can’t compare these situations. Why should we lose the unique system of 150.000 kilometers of gas mains? No other country has anything like that. But our aspirations to buy similar assets elsewhere are explained by our wish to deliver our goods to our customers in the most efficient way.

TIME: Why does Gazprom opposes the idea of separating its production facilities from transporting and marketing operations to improve efficiency, the way they do in Europe?

Medvedev: One of market economy’s basics is a producer’s ability to deliver his end product to a consumer. Natural gas is basically an end product. To deny the producer the right to deliver this end product is the same as to demand that a car maker deliver cars without wheels, while remaining responsible for car safety.

TIME: Last year, Russia confronted investors of the Shell-led Sakhalin-2 Western consortium with a choice of either surrendering control to Gazprom, or leaving. They surrendered.

Medvedev: In 2005, Gazprom signed a protocol on joining Sakhalin 2 with 25% and one share. Suddenly, they doubled the stock on us. Also, Sakhalin 2 was based on the Production Sharing agreement, with the Russian state reserving the right to decide what expenses are reimbursable. The state doubted the capital expenses they claimed. Also, the consortium failed to meet its ecological safety commitments. The state couldn’t ignore that. Personally, I didn’t spare time to look into this issue, because I come from Sakhalin. We resumed talks, only once the issues of expenses’ compensation and ecological damage had been settled. The state lifted ecological restrictions on the project, once Gazprom stepped in, because we submitted a plan to clear up the damage and make sure that nothing of the kind happens again.

TIME: Foreign investors have been long counting on Russia making 49% of the giant Siberian Shtokman field development available to them. Now, Gazprom remains the 100% developer of Shtokman. Meanwhile, TNK-BP seems to be losing its rich Siberian Kovykta gas field to Gazprom.

Medvedev: Indeed, talks on the 49% foreign entry went on quite long. However, the assets offered by foreign companies were no match to the Shtokman field’s resources. Now, we’re holding talks with foreign companies on their part in Shtokman’s development under a new business model, with Gazprom retaining 100% of the field’s resources. As for the Kovykta field, its current developer fails to live up to the approved development schedule.

TIME: Still, Gazprom seeks foreign investment to develop new fields.

Medvedev: Gazprom doesn’t have a financial resources’ problem to develop its fields. However, we’ve mastered the world’s practice of attracting billions to develop complicated projects and of sharing project risks. We do have a number of major development and production projects with foreign involvement.

TIME: The year 2006 ended in a gas conflict with Belarus that threatened gas supplies to Europe. Any other such conflicts to be expected by the end of this year?

Medvedev: No. At present, the problems with all our transit countries have been taken care of.  

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