Examination of Witnesses (Questions 384-399)
MR VITALY
VASILIEV AND
MR KEITH
MARTIN
18 JULY 2006
Q384 Chairman: Gentlemen, welcome to
this evidence session on the UK's dependency on gas imports; that
is the subject of this particular part of our inquiry which started
before the Energy Review was published. We are very grateful to
you for coming this afternoon, and I wonder if I could begin by
asking you to introduce yourselves for the record.
Mr Vasiliev: I am the Chief Executive
of Gazprom Marketing and Trading. This company is based in London,
which is responsible for marketing and trading gas in the UK,
Ireland, Belgium, Holland and France.
Mr Martin: I joined Gazprom Market
and Trading last year in October. I am head of trading. Previous
to that I worked in Shell for 15 years, the last five years as
head of European gas and power trading.
Q385 Chairman: Thank you. We know
that Russia has enormous reserves in gas but we often forget just
how big Russia is and the huge distances which that gas has to
travel to reach its markets. For how long do you think Gazprom
will be able to supply Europe with gas from easily accessible
reserves, and I mean both financially and technically accessible
reserves?
Mr Vasiliev: I think it is important
to know that the overall reserve that Gazprom has is around 29
trillion cubic metres. Sorry, I just used cubic metres but just
to give you the flavour of this figure, it is 17% of overall world
gas reserves. So right now I think Gazprom is supplying 25% of
Europe, and I think Gazprom's ambition is to continue supply in
Western and Eastern Europe. Also, I think to supply other markets
like Asia and the United States, and, as you see I think from
all the figures, we have enough gas to fulfil all our commitments
and we think that there is no question that, when Gazprom reserves
are depleted, we have enough gas to fulfil all our obligations
in Europe in the future.
Q386 Chairman: So can you give me
a feel for the sort of length of time you think you will be able
to export the significant volumes of gas?
Mr Vasiliev: The time period?
Q387 Chairman: Yes.
Mr Vasiliev: We are doing a lot
of work. In terms of resources I remember seven years ago Gazprom
made an estimate of how long the Norwegian reserve was to supply
the European market, and at that time we had the figure of twenty
years. But new technology is coming and new reserves which have
been found which are more difficult to explore are now with new
technology possible. That is why I think the rate of reserves
is increasing. That is why I do not want to anchor you with numbers
like 50, 100 or 170 years, if you just divide the current demands
on the gas reserve, but I think this time period is quite significant.
Q388 Mr Weir: You mentioned the sales
to Europe but also the ambition to sell to other parts of the
world, and indeed Russian authorities recently drew attention
to the fact that there are many potential markets other than the
European Union. To what extent is Europe already in competition
with other purchasers for Russian gas?
Mr Vasiliev: I do not think we
would put the question like there is a `competition' between either
Europe or other parts of the world. Europe is the main market
for Gazprom; I think we have long-term relations and we have a
long history of gas supply in Europe, which started more than
35 years ago. This is the main market for Gazprom, and I think
that in the near future this market will be the main export market
for Gazprom. Of course I think that we have enough gas to supply
Europe; we have enough reserves to meet demands in Europe and
to meet demands in Asia and to meet demands in the United States.
Q389 Mr Weir: So you are confident
even with selling to Asia and the United States there is not going
to be a problem with continuing to supply Western Europe with
gas?
Mr Vasiliev: Exactly. I am very
confident that Gazprom has enough reserves to meet the demands
of all these markets.
Q390 Mr Weir: But some Russian commentators
have suggested that it would be desirable to reduce Gazprom's
financial dependence on the European market. Are you taking active
steps then to diversify your customer base by looking at Asian
and American markets?
Mr Vasiliev: I think it is the
right of these analysts to make their assumptions. As I said,
Gazprom is committed to the market. We built the infrastructure,
we invested in Europe, that is why I think that Europe is one
of the important markets for Gazprom in the future.
Q391 Mr Weir: But to turn the argument
on its head, you do not feel that Gazprom itself does not want
to be too tied to one market? Should it not be looking at keeping
its options open in the other markets?
Mr Vasiliev: I think it is important
that Gazprom is a commercial company and is looking at economics,
and maybe I will switch to another topic. When you are talking
about LNG—and maybe later we will talk about the UK—
LNG is quite easy to divert, for example, reading the price signal,
from UK to United States, and maybe in a certain period of time
the gas will not flow to UK but will go to the United States.
With pipeline gas it is much more difficult. There is investment
in the pipeline system, so there is not such a huge opportunity
for diversification. Investment in the pipeline system relies
on the gas flowing on a long-term basis for a long period of time,
so all these issues should be borne in mind in terms of the decision
which way we are going or not. The reason Gazprom wants to explore
the new markets is because we have enough reserves and it will
want to receive additional value from that. That is why we are
looking at other markets like Asia or the United States.
Q392 Judy Mallaber: We noticed that
last winter there was a problem in supply because of the very
cold weather. Although you were able to deliver to Western Europe
contracted gas supplies there was a request for additional supplies,
because it was so cold you were having to meet domestic demand
so there was not an unlimited supply, and there has been some
concern already mentioned about whether you are investing enough
to be able to have the full exploitation of your gas reserves.
What are you doing to open up new reserves which might be tapped
for sales to Europe to meet the exceptional circumstances we had
last year when there was a request for greater gas supplies?
Mr Vasiliev: To answer the first
part of the question, last winter was extremely cold, I think,
not only in some parts of Europe but also in Russia, but I think
the Russian infrastructure system and the production system could
work perfectly. In some sense the system was stretched because,
as far as I know, in some parts of the production fields the temperature
was -64F. It is very difficult to imagine, sitting here in London,
what -64F means, but this was an extremely cold winter, one of
the coldest winters in the 60 we could have. As far as I know,
your system, the National Grid system, is just designed for one
in 50 winter, so if this happened in the UK your system will not
operate at all. But our system in Russia will continue operating
and performing our obligations, and we will increase our production
to fill demand. But just to understand, the system was stretched
and it was very difficult because it was extremely cold in Russia,
but still Russia showed that even in this demand which happened
last winter Russia is capable of fulfilling its obligation. On
the other part of your question about the investment, each year
Gazprom has continued to invest US$9-10 billion in the new reserve,
and these are annual figures. What is also important is that the
investments are coming not just in the new fields and production,
because I think at the beginning the Chairman announced that there
are huge distances from the fields in Siberia and, for example,
the UK market and just to give you an example it would be more
than 7,000 miles from the fields to the end consumer in the UK,
so it will physically take 11 days I think for the gas with the
molecules to come through all these countries to the UK, so what
is important is not only investment in production but also in
transportation, so the question is not only how to produce but
how to bring the gas from point A to B. That is why part of our
investment plan and what we are doing is investment in the infrastructure.
If you are interested more in the detail maybe I should take a
step back because I am just responsible for marketing and trading
in the UK, so I do not completely have all the details about these
plans and the investment in each particular field that we are
doing, but if you are interested in this information Gazprom is
ready to provide you with the written evidence, and we would be
ready to give it to you in one or two days.
Q393 Judy Mallaber: It would be helpful
to have information about investment and also what the increase
in production is that you are undertaking, and I do not know whether
you are able to say whether your competitors in Russia are increasing
gas production and investing in new reserves?
Mr Vasiliev: Unfortunately I am
not aware of any competitors' production but, again, if Gazprom
has this information I promise you we will provide it to you in
written evidence within one or two days.
Q394 Judy Mallaber: That would be
very helpful. Does Gazprom supply gas from the Central Asian Republics
in Europe, or do their gas reserves come via you?
Mr Vasiliev: I think it is important
to note that that is how Gazprom built its portfolio, with the
gas we are buying from Central Asia and the gas we are producing
in Russia. That is how we built our portfolio and this is how
this portfolio is being brought to Europe. I think it is important
to note, and maybe this is a question also related to our supplies
to the UK, that it is very difficult to say from a molecule point
of view whether this gas is from Russia or from Norway, for example,
if we are talking about the supply in the UK, because when you
sign the agreements with the transportation company it is a kind
of black box. So you give the gas at point A and then I think
by an act of God at the same time the same amount of gas comes
from point B, and what is happening inside of the box is only
known to the transporter, because what they are doing is they
are optimising their flow and mixing the gas and trying to find
the best way to divert the gas. That is why the question about
the molecule is very difficult to answer.
Q395 Mr Wright: Our predecessor Committee
in the last Parliament took evidence which suggested that one
of the growing tensions between the European Union and Russia
over gas was the demand amongst the supporters of market liberalisation
to end the traditional long-term gas supply contracts. What sort
of contracts could give security to companies such as Gazprom
which quite clearly have to make long-term investments in infrastructure
to deliver that gas to the communities?
Mr Vasiliev: I think this type
of long-term contract is the basis on which Gazprom worked for
more than 35 years, and when I am talking about long-term contracts
I am talking about 20-25 year contracts, which just helped Gazprom
to attract financing and helped Gazprom to finance a huge project,
so all this investment in the new field will actually be US Dollars
investment. But saying that, for example, in our company in London,
we have the long-term contract with Gazprom Moscow, so Gazprom
signed a long-term contract with Gazprom Marketing and Trading,
and Gazprom Marketing and Trading are selling this gas in the
market—
Q396 Mr Wright: So you would consider
a long-term contract would be 20-25 years?
Mr Vasiliev: Yes. What I am saying
is that Gazprom has a long-term contract with us but Gazprom Marketing
and Trading sells under different terms and conditions, so because
we are working in a liberalised market in the UK and liberalising
markets in Continental Europe, I think that we as Gazprom Marketing
and Trading are providing a different service, providing a different
type of contract. What I am trying to say is that Gazprom is learning
how to work with a different type of contract, so it could be
one year, three years, or less than one year. Of course, in our
portfolio long-term contracts are the basis for financing, and
this is not only the question that Gazprom wants to do it; it
is the question to banks. I also want to note that when we are
talking to United States' markets, for example, even UK markets,
when we are talking to banks they say, "We are ready to accept
the price risk in liberalised markets but we are not ready to
accept the volume risk". Mostly we can debate there is no
volume risk in liberalised markets so we can always sell the gas,
the question is at what price, but still the banks do not want
to take the volume risk. That is why they prefer to have a long-term
contract at credible supplies, and this is the requirement of
the banks to finance future investment in Russia.
Q397 Mr Wright: Do you think this
contract will be compatible to encourage liquidity and competition
within the European market?
Mr Vasiliev: I think in future
Europe will be fully liberalised and the portfolio will be different.
If you look at the material markets a certain percentage will
be based on a long-term contract, a certain percentage of the
contract will be based on spot trades, a certain percentage on
the short-term and mid-term contract. If you look at the UK or
the US there is a different percentage of contracts which exist
in the market and those long-term contracts will never die. There
will still be buyers who will be interested in long-term contracts,
and there will be other customers who are interested in absolutely
different contracts. The markets need all types of contracts and
I think that will be the future of European markets.
Q398 Chairman: Can I ask you, on
the subject of liberalisation, about investment by foreign companies
in Russia with Gazprom? I am just a little bit unclear. What is
the status of the Sakhalin project? That is agreed, is it not?
The investments by Exxon Mobil and Royal Dutch Shell?
Mr Vasiliev: I think it is agreed
and Exxon Mobil and Shell have invested in Sakhalin 1 and 2, and
just to give you one example I think it was last year we agreed
with Shell about a swap so that Gazprom was coming into the Sakhalin
2 project, and Shell were getting 50% of Gazprom's reserves in
the field of Zapolyarnoye, so they already I think are in the
final phase of the development of the fields. As far as I know,
and if you need the written evidence we can provide you with it
but as far as I know, Sakhalin Energy, which I think is a dimension
of Shell, is already signing contracts with different Japanese
and American customers.
Q399 Chairman: And excuse my ignorance
but the Shtokman project, which I think was due to be announced
this week or next, at around the time of the G8 Summit, is that
separate?
Mr Vasiliev: I think it is separate
but, again, Shtokman is a huge project and, as far as I understand,
Gazprom, I think I told you, for arrangements which we called
assets warmth, so the foreign companies are getting access to
the Gazprom reserves but I think in return we want to give either
the upstream assets in different countries or the downstream or
midstream assets in different countries as well. So as far as
we understand it the Shtokman project is a huge and complicated
project, that is why I can only repeat what Mr Khristenko said,
our Minister, that the decision about the parties is expected
later this year.
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