Examination of Witnesses (Questions 420-434)
MR VITALY
VASILIEV AND
MR KEITH
MARTIN
18 JULY 2006
Q420 Mr Hoyle: Because the Committee
has received written evidence from Moncrief Oil claiming that
Gazprom has failed to honour its contract for the joint development
of the Yuzhno-Russkoe gas field in Eastern Siberia, and has illegally
resold its stake in the field to another company. How does Gazprom
intend to settle this matter?
Mr Vasiliev: Again, I am not much
involved in this one but we can give you the written evidence.
My only answer is that they are claiming this and they have already
claimed it in the US courts. As far as I know they lost one trial;
I think they are trying now to sue BASF about this; but I think
that the decision who is right and who is wrong is the prerogative
of the US court so let us await the decision of the court and
not judge it now.
Q421 Mr Hoyle: But you have obviously
recognised there are UK investors involved as well and that they
could lose a lot of money if it is not solved. Does Gazprom appreciate
that this raises questions about corporate ethics at a time when
it is apparently interested in entering the UK market? It certainly
sets the wrong precedent if you are looking to show that this
is a good company; we need to make sure that these problems are
settled, and settled very quickly.
Mr Vasiliev: As I said regarding
the previous question on the decision from the United States court,
if we are talking about what is the corporate governance or corporate
ethics within Gazprom, let me pass this question to Keith Martin
who is a British citizen and ask him what he thinks of the corporate
ethics within the Gazprom group.
Q422 Chairman: Before you do that,
let us be clear, you say that this matter has already been before
a US court once and found in your favour once?
Mr Vasiliev: Yes.
Mr Hoyle: There are also others. The
property rights already appear to be linked through the YUKOS
affair so it is not just that; there are others. That is what
I am saying, Chairman, and I look forward to further written submissions.
Q423 Chairman: Mr Martin, have you
had more disputes since you have been at Gazprom than at Shell?
Mr Martin: No, not at all. On
the governance at Gazprom group, they did not quite know what
to expect. Clearly, from working in Shell I had an understanding
of the depth of the company and what was possible with the company.
The interesting thing is this is the Gazprom group's liberalising
vehicle; it is getting its exposure to liberalising markets and
how they work. The corporate governance standard is incredibly
high, all the way from the financial rigours that the accounts
go through, the external audits, to the way we are internally
risk-managed and the way that is overseen by another part of the
group as well. Also, the fact we have two groups looking over
us—a supervisory board and also a board of directors as
well. So I have found the corporate governance to be of the highest
possible standards. The other thing that is quite interesting,
certainly on the deals I have and I have not had any exposure
to the wider Gazprom group except via gas export, is that they
are men of their word. When they strike a deal they strike it,
and certainly I have seen in the third party negotiations that
I have dealt with thus far, a handshake means you do not need
the contract to follow. I must admit that is the thing that has
surprised me, how much is done in that respect. I think it is
also followed up rigorously by contracts to make sure they are
enforceable in law, but they have been very honourable in all
I have seen them do.
Q424 Roger Berry: Those who are concerned
about UK dependence on gas imports sometimes present a vision
of this long pipeline coming to Western Europe and we are at the
end of it and, therefore, one of the concerns is precisely that
we are at the end of it. Now, Mr Martin, you referred to the fact
that Gazprom, in looking at the UK market, would plan to source
gas supplies not only from Russia but from whatever other sources
might be convenient. I would find it quite helpful if you could
say a little bit more about those other sources that you either
currently source from or that you have in mind in the near future.
Mr Martin: I think there are a
number of ways of sourcing the gas. There is clearly the open
market, there is the wholesale trader market and we have seen
that getting deeper and longer in tenure. There is also the significant
infrastructure coming in line in terms of Langeled and BBL and
there are people with significant stakes in those pipelines that
are looking to sell gas in the UK and ideally replace gas in the
continent, and the Gazprom group is ideally placed to do that,
so my guess is you are going to see more DONG-type deals. So it
makes perfect sense for us. The Gazprom group has got an ambition
to be in the UK market, it wants to have this diversity, so it
is a marriage effectively. You also have substantial in-the-future
LNG facilities coming on-line again, and, again, Mr Vasiliev has
made the point that the UK is a target list for LNG.
Mr Vasiliev: We have just referenced
several times the DONG deal. Does everybody understand what we
are talking about?
Mr Martin: Do you know the way
the DONG deal worked?
Q425 Chairman: I do not so I would
be grateful for an explanation.
Mr Martin: The DONG deal is effectively
a tripartite deal. The first part of the deal was a sale by Gazexport
to DONG so that it could enter a new market, the Danish market.
The second stage was a sale by DONG to GM&T based in the UK
when the Langeled pipeline comes in. The first stage of the deal
on the DONG side is subject to the energy volumes coming on-line,
the new supply source, but the beauty of it is DONG effectively
secures supplies from gas exports, GM&T secures supplies in
a place where it is logistically weak relative to DONG, so everybody
wins and the real saver is the transportation cost between the
two.
Q426 Chairman: So, in a nutshell,
if you could summarise, your response to those who say the UK
should really be worried about purchases from Gazprom because
we are at the end of this pipeline, all this gas is coming from
Russia, it is a long way away, it might somehow not get here—your
reply would be, in summary, what?
Mr Martin: The Gazprom group is
putting its money where its mouth is. It is investing heavily
in the pipeline infrastructure, the interconnector. It is doing
it via storage, it is doing it via acquisition to be able to sell
to different parts of the market; it is also doing it by structured
third party deals as well, so I think just about every conceivable
combination of being able to supply the UK is what the Gazprom
group is looking to do. That should be a fairly good news story
for the UK in terms of giving it comfort; that the Gazprom group
wants to have a long-term exposure to the UK market.
Q427 Mr Wright: Last autumn everybody
was aware of the gas price spike that we suffered in the UK, and
even with that there was a problem with supply and, indeed, you
mentioned the interconnector and the LNG import facilities, and
when we took evidence it was quite clear they were not using the
full capacity they could have been. How confident are you that
you can deliver the contracted gas to the UK?
Mr Martin: Very confident. We
do not agree anything we do not think we can physically do, so
we are very, very confident. The issue around the use of the interconnector
has been widely debated, and I am sure you have taken evidence
from a number of stakeholders. We are also keen to see the outcome
of that. The one thing for sure is we respond to price signals
so the Gazprom group and GM&T in particular tried its best
to flow extra gas from central Europe over to Zeebrugge so we
could sell it across the pipeline as well. That was part of our
submission to Ofgem so we are very happy to talk about that. Anything
we can do to respond to price signals is what we will do, but
we do not sign contracts unless we fully believe we can commit
and honour them, which we have done even during the price spikes,
and even during all the other problems we have never failed to
miss a contract in the UK.
Q428 Chairman: When we talk about
your contracts in the UK, the gas you are delivering in the UK,
just to understand your commercial strategy, we are not just talking
about Russian gas that would come in—and I understand the
technical problem about the box and it goes in one end and comes
out the other and you are not sure what is Russian and what is
not—but you are also trading, are you not, genuinely on
the international market? For example, you recently bought some
gas, LNG, from Gaz de France and imported it into the Isle of
Grain, so you really are trading internationally and bringing
gas from wherever you can get it?
Mr Martin: Yes. We act as a proper
trader so if we see an arbitrage opportunity we will take advantage
of the arbitrage opportunity. Likewise if we have spare capacity
and there is an ability to flow it, according to pricing we will
look to take that ability.
Q429 Mr Weir: On LNG, Mr Vasiliev
earlier made a perfectly valid point that they invested in infrastructure
to bring gas by pipeline which is a guarantee the gas will come
to the UK, and he also made the point that LNG can react more
to pricing, and you will get a better pricing for LNG, say, in
the United States than in Europe because of diverting. Now, we
heard some evidence earlier that after Hurricane Katrina hit the
Gulf Coast LNG was being diverted to the United States rather
than coming to the UK, so should we be worried that Gazprom is
importing much more LNG than is coming through the pipeline?
Mr Vasiliev: In terms of LNG,
right now, the Chairman mentioned the deal with Gaz de France
so basically it was a logistical swap. We gave the European pipeline
gas to Gaz de France which was exactly the same amount of gas,
I think, as the LNG which we supplied to the UK. So right now
I think that Gazprom does not have equity in LNG gas, so all the
projects we have mentioned in our discussions like the Shtokman
project or the Baltic LNG project will come on-stream I think
in 2010 or 2011, so what we are trying to do is just look at the
opportunities to trade, where we can get cheaper gas and deliver
it to the UK or to other markets. Again, to stress this topic,
I think LNG business is more global, more mobile, so when we are
talking about the huge portfolio of energy in the UK market, the
UK market must understand that you are competing globally, with
the United States, Japan, Korea and China—even with tankers,
it is not so easy, you cannot quickly divert the cargo so that
is a kind of exaggeration, but in terms of price signals, in terms
of the market, LNG, and gas actually, will flow from the lower
price market to the higher price market. In some sense I think
this business will develop and grow so we do not see it as any
threat. I think it is the right decision for the United Kingdom
to have diversified supplies, with part based on LNG and part
on the pipeline gas, but I think still there should be understanding
that the capacity you have in the UK does not automatically match
exactly the amount of gas that will come to the UK.
Q430 Chairman: Gas has become a very
political subject for a variety of reasons in the UK. Obviously
we had a very tight winter in the winter that has just gone and
we know we are going to have a tight winter again in the winter
to come, and at the time of that growing concern there were the
problems in the Ukraine which rather focused attention on your
role. What would you say to British consumers who were unnerved
by what they saw happen in January this year?
Mr Vasiliev: Just to give you
a fact, whatever happened in Ukraine Gazprom Marketing and Trading
fulfilled all its obligations, so all our customers in the UK
who had a contract with Gazprom Marketing and Trading got the
gas in exactly the amounts which they needed.
Q431 Chairman: Obviously the rest
of the European Union has perhaps more reason to be anxious about
Russian gas than we have. We have a huge diverse range of sources
of supply: Norway, the Continental Shelf itself, Qatar, which
has said publicly that it wants to get 20% I think of the UK market,
Tunisia, Egypt, there is a whole host of places out there. Why
is there so much interest in your company and your country?
Mr Vasiliev: I think I would like
to ask you maybe!
Q432 Chairman: I thought you might
have an answer. It is the Russian Bear, I think! Unless my colleagues
have any further questions, you have managed to get through this
without saying what your market share aspirations are for the
UK, unlike Qatar, and all the shareholders in Centrica are still
on the edge of their seats waiting to know what your aspirations
are there too. I cannot lure you into saying anything more about
your intentions in the UK market?
Mr Vasiliev: As we said, we are
quite interested in the UK market and Gazprom has certain commitments
to the UK market by signing long-term contracts, by investing
in the pipelines and the interconnector; Gazprom is investing
in storage, and Gazprom is participating in its joint venture
with Germany in gas so we are continuing to look at further investment
in the UK. It is very important to show that there is a certain
commitment from Gazprom to the UK market. Gazprom Marketing and
Trading is interested in building the trading capability as a
trader of energy in the market, so I think that we are already
contributing to decreasing your gap between supply and demand.
As I said, last year we supplied 2.4 bcms which corresponds to
just 2 or 3% of the market, so this year we will try to do our
best to deliver more. Of course, these are insignificant volumes
for the UK market, 4 or 5% currently, but still it is already
a contribution and will assist in trying to decrease the gap between
supply and demand. So I think my response tends to show that this
market and the UK is very interesting for Gazprom, and Gazprom
has long-term ambitions on that.
Q433 Mr Hoyle: Would it be fair to
say that Gazprom's policies are only as good as each Russian election?
Mr Vasiliev: As I said before
it is worth 50 plus 1%—
Q434 Chairman: We had a Government
Minister in front of us this morning on another subject and he
kept on giving the same answer to questions too; you have clearly
learned a thing or two from him! Mr Vasiliev and Mr Martin, we
are very grateful to you. Thank you for agreeing so willingly
to come and give evidence to this Committee, which we deeply appreciate.
Mr Vasiliev: A last comment; we
have brought some brochures for you. I understand you may have
something more interesting to do tonight but these brochures give
full details about our investment. What is important, I think,
is that this first step is that we are meeting and talking to
you, but maybe I could ask a personal favour of you. My boss and
Deputy Chairman, Mr Medvedev, is quite jealous that you invited
me and not him, so maybe next time please invite him. He is ready
to come and answer all of your questions.
Chairman: That is an invitation we may
well reciprocate on, as it were; we are very grateful for that
thought. Thank you. We look forward to our recess reading, I expect,
rather than overnight tonight. Gentlemen, thank you very much
indeed.
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