Select Committee on Trade and Industry Minutes of Evidence


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.


 
previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 7 November 2007