Examination of Witnesses (Questions 400-419)
MR VITALY
VASILIEV AND
MR KEITH
MARTIN
18 JULY 2006
Q400 Chairman: But the Shtokman project
would supply gas to the United States of America, would it not?
Mr Vasiliev: I think this is the
primary market but the UK will be also one of the markets.
Q401 Chairman: It is obviously encouraging
for us to see investment being made by major multinational companies
alongside Gazprom in Russia, but there are also some other signals
which could be a little bit more cause for concern. The Bill currently
going through your Parliament to give you total control of all
exports from Russia seems to run slightly contrary to the liberalising
instinct of the rest of Europe. What is the origin of that Bill,
how important is it to Gazprom, and why?
Mr Vasiliev: Again, I cannot comment
on behalf of the Russian Government but basically this Bill has
just confirmed the current status quo, that the gas export
comes 100% to Gazprom, so nothing has changed under this Bill.
The issue is also related to the realisation of the Russian market,
because there is a huge gap between the domestic prices and other
export prices. That is why I think we have taken a decision again
in the Russian government and why Gazprom supported the liberalisation
of the Russian market, but I think it is a very difficult and
complicated topic. As far as I know it took the United Kingdom
more than 20 years to liberalise the european markets; we are
in the first phase and I think the subjects are connected.
Q402 Chairman: But can you see it
makes observers here sometimes a little nervous when they see
a very powerful company like yours, one of the most powerful in
Europe, being given that very privileged and specialist access
when it comes to exports?
Mr Vasiliev: First, as I said,
it has already existed for 35 years, and that gives you a certain
comfort, but I do not see any difference, for example, between
you receiving gas from Algeria, which is also a significant operator,
or even Norway, which we could call a management operator. That
is what I think is the difference with Russian supply.
Q403 Mr Hoyle: The Chairman has started
the point I was going to make, actually. Does Gazprom see its
demand to be able to operate within the single market on the same
terms as European companies as being compromised in the way that
the new law, that the Chairman has just mentioned, is a monopoly
on the exports of gas in Russia? Is this not an example of double
standards? I think the Chairman is absolutely right. At the same
time you are saying: "Well, it is not us, it is the Russian
government", but did the Gazprom board of directors support
the new law and, if it did not, did it lobby the Duma either to
secure its passage or to abort its passage?
Mr Vasiliev: I do not have the
information; I think that is the decision of our board of directors
and I am not directly involved but, again, we could give you written
evidence on that. But I could comment on what you are saying.
I do not see a double standard. The issue is that the Russian
market is not liberalised. There is a huge gap between prices
in Russia and export prices, so until the market has matured it
is premature to take the decision which you are talking about.
Q404 Mr Hoyle: Let me try a different
way, in a sense. Does Gazprom see its own corporate governance
responsibilities as being compromised by the fact it is only controlled
by the Russian State?
Mr Vasiliev: I think the Russian
State is present on our board of directors—
Q405 Mr Hoyle: But they also own
51%. The five members of the Presidential Administration sit on
the Gazprom board, as well as the first Deputy Prime Minister,
so one might wonder surely there is a big influence of what the
Russian Government wants to see? In fact, the argument would be,
as an example, that cutting gas supplies to the Ukraine at the
beginning of 2006 was widely seen as being motivated by foreign
policy and a priority of the Russian State rather than Gazprom?
Mr Vasiliev: Again, I think there
are two topics here. One topic is the 50 plus 1% share in the
participation, as you have already noticed, the seats on the board
of directors, and the decisions of the government just come to
the board of directors of Gazprom. In terms of Gazprom as a company,
it is a commercial company and what we are doing within Europe
is commercially driven.
Q406 Mr Hoyle: So what you are saying
is what happens in Russia is different from the Ukraine and what
happens in Europe, within the company?
Mr Vasiliev: No. What I am saying
is that Gazprom is a commercial company.
Q407 Mr Hoyle: That is owned by the
State, owned by the Russian Government 51%?
Mr Vasiliev: No. It is not a state-owned
company. As I said, it is 50 plus 1%, and the Russian Government
is sitting on the board, and is taking the decision. I am not
arguing that the most important decisions are taken by the State
but I think our share is even less than Norwegian Statoil, which
is a much larger state or, for example, Gaz de France or EDF—
Q408 Mr Hoyle: But they did not turn
off the gas to Ukraine.
Mr Vasiliev: —they are doing
their jobs through the boards of directors.
Q409 Mr Hoyle: But in fairness they
did not turn off the gas to Ukraine. What we are talking about
is a majority vote. If you have got over 50%, you own the company.
Mr Vasiliev: I think it gives
the right to take a certain decision, but it does not mean that
it is a state-owned company.
Q410 Mr Hoyle: Would you not think
this should not be a consideration in the UK's attitude towards
Gazprom and its desire to acquire a controlling share in Centrica,
or other energy suppliers?
Mr Vasiliev: Of course I agree
there is a certain perception about Russia and Gazprom, as well
as in Russia there is a certain perception about Britain, but
I think that the perception that exists in the UK does not mean
necessarily that it is true, and part of the reason that I am
here and why Gazprom is ready to talk about this is to show you
that the perception about Gazprom and Russia is a little different
from what is the practice.
Q411 Chairman: Following on from
that, what interested me about the whole Ukrainian affair was
not that you cut off the Ukraine because they were not paying
very much for their gas, and there has been a justification in
the UK press that you will get them more in line with market prices,
but you carry on supplying Belarus at very low levels. It does
look as if gas prices are a tool of diplomacy viewed from London.
Mr Vasiliev: As you know, we are
right now in negotiation with Belarus to increase the price, and
that was already a decision taken almost six or seven months ago,
just to give you an example that your comment is not completely
right. That is why I think Gazprom was trying to build the relationship
based on the market price. But the other issue that is very important
to note is that the price that Ukraine is getting is significantly
lower than the market, and I would like to hear your opinion on
the fact that during last November, when there were peak prices
in the UK, your industry, your fertilising and chemical plants
shut down their production because they could not compete with
the low price of the Ukrainian production, and I expected the
United Kingdom and the European Union also to pay attention to
that. That means that your industry, and this is plain, on the
competitive price and the market price is a source of energy,
but I think you are competing with the Ukrainian production which
is getting cheaper, subsidised prices.
Q412 Chairman: On transit, briefly,
there is a lot of gas in Russia, and you have not made the point
yet, which I thought you might have made, that you have never
breached a contract to Europe in your time supplying Europe as
a gas supplier, even during the Cold War, but there are concerns
about transit problems for gas. Should we be more concerned about
transit problems across Europe than we are about supply of gas?
Mr Vasiliev: It is important to
produce the gas but what is also important is to bring the gas
from point A to point B. Right now 80% of Gazprom's exports are
coming to the Ukraine, so when you are talking about the security
of supply in the UK one of the options is diversification of supply
but also diversification of the routes, and Gazprom is also concerned
about that so this is why we are looking at alternative routes
of how to bring the gas into Europe and part of this is our North
European gas pipeline project.
Q413 Chairman: I am very grateful
for what you have said so far but let's look more specifically
at the UK now, if we may. What is your aspiration for market share
in the UK?
Mr Martin: What we are looking
to do is diversify our portfolio. Up until recently Gazprom has
been trading at a wholesale level and we have been doing with
other wholesale counterparts, including the likes of Centrica,
for example, and our recent acquisition of the Pennine customer
base and the deal we have structured with NGSS gives us a different
access to the market. What we are looking to do is move to the
SME sector, so that will give us effectively full exposure from
wholesale all the way, right down to small restaurants, pubs and
chains, apart from the domestic. What we are looking to do is
substantially grow our SME share over the next year or so in particular.
Immediately what we are looking to do is embed the Pennine customer
base and make sure that we serve those customers well, and then
look to rapidly expand after that and grow the portfolio. In terms
of absolute market share we have heard quite a few stories in
terms of what it is going to be, but obviously Gazprom is well
positioned with its interconnector, with its commodity position,
and also with the ability to diversify its portfolio. You have
probably also recently read that we have structured deal swaps
with the likes of DONG, the state gas company, whereby we have
sold DONG, for I guess export, gas from central Europe; now we
have taken that gas back in the UK. When the Langeled pipe system
comes on what we are looking to do is have more diversity in our
portfolio by structuring similar types of deals with other players
as well, so what we should have is the ability to supply customers
from a range of sources, third party, plus also our own as well.
In terms of where we get to as a percentage, it is going to be
a significant market share, it is going to grow over the next
couple of years, and what we are going to do is look to spread
that risk in terms of third parties and also the way we sell that
gas to the market as well.
Q414 Chairman: Obviously there is
quite a high demand for your gas; it is a popular thing to have
at present; do you think you will be able to achieve your commercial
objectives in the UK?
Mr Martin: I think we will. We
see the UK market as very interesting due to the liberalisation
process and the opportunity it affords; we have substantially
invested in the UK via the Interconnector pipeline, via storage
deals, and we are also doing that in terms of our recent acquisition,
although it is relatively small on that scale, and also the fact
we are willing to structure long-term deals like the DONG deal
to diversify our supply portfolio. I believe the UK is seen as
a significant market for Gazprom Market and Trading.
Q415 Chairman: Of course, one of
the best ways of building your market share in the UK is through
an acquisition, and we have seen comments attributed to but not
directly quoted from the Russian Envoy to the G8, Igor Shuvalov,
that in his view if other countries let Russia into their downstream
markets, it will never be in Russia's interest to disrupt supplies
and this will increase energy security. Presumably conceptually
you would agree with what Mr Shuvalov has said there?
Mr Martin: I must say I struggle
with the argument not to see. I think Russia has had a history
of long-term supply to Europe. For 30 plus years it has been doing
it very successfully. I guess the issues that have arisen at the
start of the year have woken up the general public to how successful
gas export has been in supplying very steadily and building excellent
relations across Europe. Certainly when I was at Shell everybody
knew that Gazprom is a key counterpart. That was shared by all
the majors, and the likes of Centrica. So what Gazprom is looking
for, certainly what GM&T is trying to achieve, is a security
of demand for the Gazprom group; to be able to grow in different
ways to ensure that we have a home for our molecules to send them
through, even if not directly our molecules, as Mr Vasiliev said,
so if we swap them with third parties. That makes a lot of sense.
If you think about the logistics it flows as gas from east to
west and a lot of companies that supply the UK have the ability
to send that supply into central Europe as well, so the ability
to do swap supply in central Europe and for them to give us back
in the UK makes great sense to us.
Q416 Chairman: You clearly have the
gas and the technical resources to deliver it, but you also have
quite a lot of money, of financial clout and we also hear lots
of rumours about your shopping list here in the UK. You have talked
about one acquisition you have made already, Pennine. Are there
plans for further significant acquisitions in the UK?
Mr Vasiliev: Right now we have
made the one acquisition. It is not a big deal but this is very
important for Gazprom. Basically what happens is this is the first
time in the history of our company that we are coming into retail
business, so we do not have as 100% company any retail business,
any small or medium-sized enterprises anyway, outside of Russia.
It is important for us to understand how this retail business
works. Although it is a small number of customers we need to understand
how the rules of the market are working, how the regulation is
working, so right now we are more concentrating on our current
acquisition and we are trying to see how we can make this particular
company scale up, how we can develop this company, this business
further. Whether it is going to be an organic growth or whether
there is going to be further acquisition I think is already a
second step and we are looking at that, but right now we need
to understand what we have and how to develop that.
Chairman: You should think about a career
in politics—that is a very good answer!
Q417 Mr Hoyle: On the question of
property rights, is it Gazprom's policy to honour all contracts
signed with foreign companies?
Mr Vasiliev: But what do you mean?
Q418 Mr Hoyle: If you sign a contract
with a foreign company, is the contract binding with Gazprom?
Mr Vasiliev: Do you mean on the
gas supply?
Q419 Mr Hoyle: Yes. On gas fields.
Mr Vasiliev: Yes, of course.
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