OREANDA-NEWS. June 01, 2015.

I’d like to greet all the Conference participants and wish you fruitful work.

Firstly, I’d like to say we have some good news. The volume of gas supply to Europe, Gazprom’s supply in 2015 shows an upward trend in comparison with the similar periods of 2014. We observed this trend in April and it has continued in May. As a matter of fact, gas supply in May 2015, as compared to the similar period of the previous year, will grow by more than five per cent. It means that we expect an increase in annual Russian gas supply to the European Union in absolute figures exceeding the last year’s volumes. The main thing here is that a share of Gazprom’s gas in the European market is also growing. You know that we achieved a very good result in 2014 – we obtained a 30 per cent market share.

In the meantime, this upward trend has been observed for three years so far. I can say it for sure that by the 2015 year-end our activities will allow us boosting our share in the EU gas market. 30 per cent is a big number, but the share of Russian gas supply in the EU import volumes is even bigger. Today we secure two-thirds of imports and, you know, it is quite a lot. Moreover, two-thirds is not just the imports of Russian gas in the overall imported volume, but it is also the share of imports in the overall EU gas consumption volume. We can confidently state that the volume of imports to the European market will only grow.

If we go 15 years back, to the year of 2000, and compare the volume of imported supplies to the European market, we’ll see a 17 per cent increase over these 15 years. Thus, we can with no doubt expect that during the next 15 years, i.e. by 2030, the import share will grow by nearly the same amount. The question is: from what sources and in what volumes the European market will be receiving gas?

Speaking of the factor affecting the European gas market, the key factor is, primarily, the domestic production decline in Europe. It was not yesterday that this trend started shaping up. Some European countries, which had quite recently been net exporters, have already turned into net importers in the recent couple of years. According to Gazprom’s estimates, within the above-mentioned period of 15 years – by 2030 – a decline in European domestic gas production will equal 80 billion cubic meters of gas. Another trend should also be taken into account – dropping pipeline gas supplies in absolute figures from other traditional gas supplying countries, which presently deliver pipeline gas to Europe. That is why, the factor of declining gas production in Europe will be overriding in 15 years to come.

Certainly, a while ago the European market put high hopes on liquefied natural gas. But we know that Europe lost in this battle for LNG and this clear trend is quite transparent if we look at the figures of the past five years.

In 2010 the LNG share was 30 per cent in the European consumption. Over the last five years it has dropped by 12 per cent, and presently the LNG share is only 18 per cent. If we have a look at Europe’s role in the global LNG market, we’ll also see that within the same five years this share has decreased from 30 per cent (the European share in 2010) to 14 per cent. What conclusion can we draw? A single conclusion can be drawn – LNG as the factor of the European gas market development will not play any considerable role in the future decades.

Actually, it is not just a matter of price, it is also a matter of the competitive ability of the Russian gas. As for the attractiveness of the European market for LNG suppliers, we see that presently major suppliers do not place the European market higher than on the third position of their ratings. By the way, the same refers to Iran, which stated that in the near future its priority would be producing LNG for supplying it to East Asia. As for Russian pipeline gas, we all know about the interrelations between the volumes supplied to the market and the distance from production sites to the market.

Within the existing market environment, today and in the mid-term, bearing in mind the European demand for Russian gas in the amount of 120 billion cubic meters a year and more, we do not have any LNG competitors capable of supplying gas at the distance of up to 10,000 kilometers from the European market. That is why Russian gas is and will be competitive in the European market over a very long term.

We certainly expect that in the next 15 years the absolute volumes of European gas consumption will grow. Anyway, right now we see quite promising outlooks for gas-powered generation. According to our estimates, gas consumption in the European gas generation might escalate by 12 per cent by 2030. We believe that the role of coal in the European energy market will be reevaluated in the near future. Such decisions are not far off at all.

As for the relevant outlooks for Russian gas, I’d like to say that if, for example, the EU market shrinks in absolute figures or remains at the same level in the next 15 years – that is, it will show no growth – or, au contraire, grows in absolute figures, there will be no changes for the Russian gas either with regard to the growth in supply volumes in absolute figures, or with regard to the share of Russian gas in the European market.

If absolute gas consumption in Europe declines, if the market becomes a bit smaller, Russian supplies in absolute terms will only build up and their share will grow, too. That is why, regardless of the European market fluctuations and its absolute consumption, it is totally clear that additional supplies of Russian natural gas will be in demand.

Everyone is well aware what happened in traditional gas supplying countries: dramatic changes have taken place in European gas-producing countries just within the last few years, namely, a decrease in the current production volumes and, all the more so, in the future production volumes. That is why there is no doubt that Russian gas will be sought for by the market.

But if we look at 2030 from the point of contracted volumes with relation to the current consumption in Europe, we’ll see that only 30 per cent of the current consumption volume is contracted out for a long period of time. You know, it’s very little, so we can make a conclusion that today the issue of entering into mid- and long-term contracts is topical for Europe, it is relevant and urgent. Moreover, 15 years is a shorter period than our traditional long-term contractual periods of 20 to 30 years.

Let us take a look at what is going on with gas transmission capacities in the European Union. Well, firstly, I’d like to say that the construction of LNG regasification capacities is a vivid example of how accurate our forecasts were and how sound our investment decisions were, because currently 75 per cent of the EU regasification capacities stand idle. They are simply non-demanded. There are some issues in this context.

But such issues also exist considering pipeline gas-related projects. New projects are emerging now. Particularly, you know it well, there is a project called Eastring. It is a very interesting project, its capacities are worth dozens millions of dollars. But so far no feasibility study has been done for this project and the membership is unclear. On the other hand, it is being included into some priority lists of infrastructure projects. While the potential participants of this project, as we are all aware, didn’t negotiate with anyone on gas supplies via this gas pipeline at all. A question arises then: how will gas get into this gas pipeline? Let’s hope that in the near future such talks will be held, but anyway, the issue of what gas will be injected into this gas pipeline and when, is very important and crucial.

The Trans-Adriatic gas pipeline, the so-called TAP. In this project the situation with resourcing is a bit better than in Eastring. But if we look at the commissioning schedule of this gas pipeline, we’ll see that four years ago it was announced that first gas would be supplied via TAP in 2017. Four years have passed, and today we hear that gas supplies via this gas pipeline will be launched in early 2021. Over these four years they extended the project schedule for another year and they did this every other year. Experts believe that for some time this trend of adding one more year to the schedule might last for some more time.

Anyway, we’d like to wish the best of luck to all other gas transmission projects. These projects are no competitors for Gazprom, because, when planning and designing our gas transmission projects we link them to our gas volumes, and we know what gas volumes and what target markets we are going to deal with.

Considering the above-mentioned issues, namely that within the next 15 years the demand for Russian natural gas in the European market will grow, we can state for sure that the issue of new gas transmission capacities for Russian gas supplies to the European market is still on the agenda.

A few words should be also said about Ukraine certainly. Of course, we can’t but be pleased that by the end of May, the volumes of Russian gas consumption by Ukraine have grown more than thrice in comparison with April volumes. But on the other hand, I can say that such volumes of Russian gas purchased and injected into the Ukrainian UGS facilities – and you know that Ukraine is already injecting gas for the coming autumn-winter period – these current rates and volumes will not allow Ukraine injecting the minimum gas volumes required for passing a cold winter period, the volumes which would enable both Ukraine and European countries pass the winter period 100 per cent risk-free. The only conclusion can be made here: Ukraine should boost the volumes of gas purchase in the near future. Today the rates of purchase and injection are insufficient. We know that in order to pass a cold winter – and nobody knows what the 2015–2016 winter will be like – Ukraine needs to have 18 billion cubic meters of gas a year in its UGS facilities. This figure won’t be reached if the rates of gas injection and purchase remain at the current level.

Late last October the trilateral talks among Russia, Ukraine and the European Union were completed, considering the issue of partially settling the debt for Russian gas supplies. You know that these talks ended in a very positive and fruitful way: Ukraine had undertaken a commitment to repay USD 3.1 billion by late 2014, and it did. But within these talks an agreement was also reached that starting with November 1, Gazprom wouldn’t charge Ukraine with take-or-pay penalties. But then there is a period from January 1 to October 31, 2014. According to the contract, Gazprom has to and does enforce take-or-pay penalties on Ukraine for 2014 in the amount of USD 8.197 billion. The relevant letter will be sent to Naftogaz of Ukraine today, the same letter will be forwarded to the Stockholm Arbitration Court. Presently, Ukraine’s total debt for 2014, including the take-or-pay penalties, equals USD 29.477 billion, out of which USD 2.604 billion is Ukraine’s debt for gas supplies in 2013 and 2014 plus late fees. USD 200 million – such a round amount has accumulated for Gazprom’s gas supplies to Ukraine’s southeast under the existing contract, for which Naftogaz of Ukraine doesn’t pay us. The rest of the amount is comprised of take-or-pay penalties for 2012 and 2014.

Rounding up my speech, once again I would like to point out that the absolute volumes of Russian gas supplies to the European market will grow as well as the share of Russian gas in the European market. The demand for new gas transmission capacities for Russian gas supplies is evident, and these issues are to be negotiated, we do negotiate them and we are poised to enter into the relevant productive agreements. If we try to formulate what the current European gas market is now, it is the supplier’s market, with not so many suppliers standing in the waiting line.