Alexander I. Medvedev, Member, Gazprom Management Committee, Director General, Gazexport Ltd., held a meeting with Azerbaijan journalists on February 2, 2004, at Gazprom headquarters.
Alexander Medvedev, Director General, Gazexport (right side), Sergey Kupriyanov, Press Secretary to the Chairman of Gazprom Management Committee (left side)
Ladies and gentlemen, we are glad to see all of you. We are ready to answer your questions.
- As a preliminary remark, we should clarify one issue. Azerbaijani mass media incorrectly reported that our gas supplies to Azerbaijan are to begin in February. This is entirely untrue. The deliveries are regular and in full accordance with the contract. Besides, our January and current deliveries to Azerbaijan are proceeding as scheduled in the contract.
- There were no gas supplies to Azerbaijan in January other than contractual supplies based on Gazprom"s commitments to GNKAR. Let me focus on the structure of this contract. The contract was signed by Gazprom, and all contractual rights and obligations were assigned by Gazexport to Kazrosgaz for the entire 2004. Kazrosgaz is a joint venture established by Kazmunaigaz (a Kazakhstan company) and Gazprom, with each company holding a 50% stake in the joint venture. Gazexport guarantees the fulfillment of contractual obligations. It means that Kazrosgaz fulfills the contractual commitments, and Gazexport secures all the guarantees.
- Why is that so?
- The delivery portfolio is arranged in such a way that it is to our advantage to have Kazrosgaz fulfill the obligations, since Kazakhstan produced gas is a part of these deliveries.
- How large are the delivery volumes?
- Our contract portfolio amounts to 4 billion cubic meters (bcm) of gas. The issue of volume increase to surpass 4 bcm was discussed with our Azerbaijan colleagues. As of now, we agreed to the annual volume of 4.5 bcm, and this is the volume our supplies are determined for the first six months of 2004. Dividing this volume in half gives us a 2.25 bcm to be delivered in the first six months of 2004. This means an increase compared to 2003.
- Is it possible that delivery would be increased to 6 bcm?
- The issue was discussed, and we will discuss it again later in mid 2004. In the first six months of 2004, the deliveries are to reach the 4.5 bcm objective.
- Does this mean that Gazprom is going to be an exclusive supplier? What are your comments regarding the Itera situation?
- Itera is an independent natural gas producer, and its contract portfolio also amounts to 4 bcm of gas. Since they do not have gas transmission capacity, Azerbaijan asked us to increase gas supply to over 4 bcm. As of now we agreed on 4.5 bcm. No one is discriminating against Itera. The company is unable to fulfill its contractual obligations since it does not have any gas transmission capacity.
A trilateral agreement signed by Gazexport, Itera and Azerbaijan stipulates that Azerbaijan"s gas requirements would be proportionally distributed between Itera and Gazexport. This concerns the requirements only. Gazprom has no obligations regarding the fulfillment of Itera"s contractual obligations. We have never issued any guarantees to Itera regarding gas transmission via Uzbekistan or Russia.
- What is the value of the Azerbaijan contract?
- It is easy to calculate. Multiply 4 billion cubic meters to be delivered by the unit price of US$52 per 1000 cubic meters.
- What are Gazprom"s obligations?
- I would like to reiterate that Gazexport is responsible for its own contractual obligations, and the contractual rights and obligations are assigned to our Kazrosgaz joint venture as agreed to by Azerbaijan.
Regarding the source of natural gas supply, this is really a rare example of multi-lateral cooperation within the CIS involving gas originating in Central Asia. This is a combination of gas produced in Turkmenistan, Kazakhstan and Russia, the former being the delivery collateral. Therefore, there are no risks of delivery failures. Gazprom guarantees deliveries in full for the entire 4.5 bcm, including the first half of 2004"s 2.25 bcm. The supply volume increase issue will be resolved in case we are able to expand (as planned) the Uzbekistan gas transmission route in the second half of 2004 as planned. In case the gas transmission capacity expansion plan is implemented, I would not exclude a possibility of Itera"s own additional gas deliveries.
- Are there any plans by Gazprom to develop Shakh Deniz field?
- The Shakh Deniz project is formed, its corporate structure is finalized. Neither Azarbaijan, nor the consortium participants invited us to join the project, and as of now we are observers only.
- What are this particular project"s prospects in view of the Blue Stream project impediments?
- I don"t quite understand what kind of impediments in the Blue Stream project you are talking about. All issues were resolved during the negotiations with BOTAS.
The problems regarding Russian gas supplies are solved, all the issues related to long term supply volumes and prices are agreed upon, and the contracts are now in full compliance with the international standards. We experience no problems at all in our interaction with the Turkish side. This is the case with the Blue Stream project deliveries, and the same is true for all our gas contracts.
Therefore, the Turkey independently plans import supply volumes for domestic consumption. As you know, it imports natural gas from a number of countries, Russia being among them. These countries include Iran and Algiers. Turkey plans its needs on its own; therefore it is able to do the same in regard to gas supplies from Shakh Deniz.
As far as I know, current deliveries to Turkey"s domestic market are estimated at approximately 2 bcm. That is why I do not treat the so-called Shakh Deniz gas supply competition on the Turkish domestic energy market seriously.
- Is there a possibility that Russia-produced gas will compete with Azerbaijani gas, among others, in Europe?
- First of all, we have to define the question, namely, the parties involved in the competition, whether it is Russia-produced gas competing with Azerbaijan-produced gas, or it is the other way round. I think we have to consider supply volumes to answer this question.
As far as I know, the first stage of Shakh Deniz gas production will total less than 7 bcm. The gas pipeline overall capacity is 7 bcm, and that includes consumption in transit, namely in Georgia and Turkey. Therefore, in case we subtract Turkey"s domestic consumption (2 bcm) and Georgia"s domestic consumption (2 bcm), there will be 3 bcm left for delivery to Europe. You are aware of the volumes of natural gas supply from Russia to Europe, and the above mentioned remaining 3 bcm is not likely to be a serious competition for Russia"s gas supplies, even in case this volume (3 bcm) is in fact delivered. Besides, there are serious doubts regarding the economic efficiency of the project. The consortium will have to decide for itself whether it is economically viable to supply gas to Europe. I am not in a position to comment on this problem.
- Are these issues going to be discussed during I. Aliyev"s visit to Russia?
- As far as I know, natural gas reissues may be reflected in the documents prepared for signing. The reliability of gas supplies to Azerbaijan is among these issues. And it is an issue of bilateral agreements that are currently in the drafting stage. We would be satisfied in case the issue is discussed. It was discussed at our meeting with Mr. I. Aliyev, and we stated that we would be satisfied in case the issue comes up during the meeting. A. B. Miller, Chairman of Gazprom Management Committee, is planning a visit to Azerbaijan. A number of cooperation issues beyond bi-lateral trade will be discussed during the visit. Azerbaijan offshore oil and gas fields" development will definitely be discussed. In case we are offered participation in a project we consider interesting, we will be happy to consider our participation. As far as I know, there are a number of interesting projects in Azerbaijan that are not yet allocated, and we will be glad to contemplate our potential involvement. But this is a commercial secret.
- How serious is this commercial secret?
- Large projects amount to billions of dollars.
In case Gazprom is invited to Azerbaijan, it is going to be a large and significant project.
- Lukoil is gradually withdrawing from Azerbaijan, their reasoning being that the domestic market and the local reserves are not large enough. What are your estimates regarding Azerbaijan natural gas industry?
- As you may know, the public data on Azerbaijan natural gas reserves sates that the reserves amount to 1.5 trillion cubic meters. Shakh Deniz reserves constitute the biggest share of the declared reserves, and, as far as I am aware, neither the development test well is completed yet, nor the drilling evaluation data has been made public yet. We are anticipating the evaluation data, including the information on Shakh Deniz. Again, speaking of the Shakh Deniz deposit, the sectional structure is finalized, and Lukoil is a minority partner being a participating company in LUKARKO. We are not satisfied with such type of participation in the projects that we are involved in. We prefer to be the principal partner. Certainly, Shakh Deniz is an issue in our negotiations with the companies like British Petroleum or Statoil. Large corporations coordinate their business activities, and this is quite natural. I am going to meet with Statoil"s President in mid February, and I think that Shakh Deniz will be discussed at the meeting. The meeting will be focused on "Market activities coordination" as a preliminary subject.
The Blue Stream project and Shakh Deniz issues were discussed at the intergovernmental level. Mr. Kalyuzhny made a number of proposals in the course of his negotiations with Azerbaijan representatives to contemplate a possibility of routing the Shakh Deniz gas through the Blue Stream pipeline, which would be economically viable. Azerbaijan representatives previously stated that, keeping in mind the necessity of delivery diversification, this transmission route was not of any interest.
- It was rumored that Russia was going to charge an exceptionally high tariff. Is that true?
- The negotiations never reached the issue of tariffs. We are ready to discuss the issue, and we are awaiting Azerbaijan"s initiatives. You are aware of the fact that GNKAR"s stake is insufficient for holding independent negotiations. We know the rules of the game within the consortium very well, and we are watching the developments closely.
- Do you think our countries" bilateral relations" improvement may be influenced by your optimism?
- The atmosphere during the negotiations, and the fact that the President of Azerbaijan met with Alexander Ryazanov, Deputy Chairman of Gazprom Management Committee, and me, speaks for itself, since we discussed the issue of Azerbaijan gas supply reliability among other issues, including our future large-scale cooperation. Large-scale cooperation specifics deserve separate negotiations. But the fact that it was discussed speaks for itself. I suppose that the matter could be discussed further during the meeting between Mr. I. Aliyev and President V. V. Putin. If that is the case, we will be glad to develop our cooperation in certain aspects. Today I cannot predict what results this cooperation is going to bring in.
- Is Azerbaijan making its gas supply payments on schedule?
- We are not anticipating any risks in this respect. The fact is that our contractual relations are based on the assumption of Azerbaijan"s solvency. Taking into consideration Azerbaijan"s current consumption level at 10 bcm to 11 bcm of natural gas, the domestic consumption in the country cannot be sustained without imports until Shakh Deniz is brought on stream. Azerbaijan"s domestic consumption is estimated at the level of 5 bcm for 2004, and at the same level for 2005 until Shakh Deniz is operational. We are discussing the 6 bcm level, and as of today, Gazprom, including its subsidiaries, is the only reliable source of gas supply. I would like to emphasize once again that Kazrosgaz, a Kazakhstan - Russia venture and our subsidiary, is unique in the CIS market, since, by starting natural gas trading business, it is already moving to the next stage of development. Therefore Kazrosgaz has become an instrument of Russia - Azerbaijan cooperation. If you look at the situation in broader terms, you realize that this is an example of tri-lateral cooperation, since the parties involved include our colleagues from Ukraine and Turkmenistan, and gas supplies to Ukraine are also a part of the process. This is an emerging and important grass-root in our cooperation that will gradually evolve and be acknowledged with in the future.
- Mass media reported that Chechengazprom was not going to allow gas transit.
- Looking back, you realize that 470 million cubic meters of natural gas was delivered to Azerbaijan; the deliveries were made on schedule, although there were some difficulties in regard to Chechengazprom. This is a state owned company, the Ministry of Energy oversees its activities, and therefore all the technical problems will be solved. The Chechen territory is somewhat risky, but the 4 bcm of natural gas was transited without any technical problems in 2003. I hope all the technical problems are going to be resolved this year as well.
I am not aware of any delivery volume allocations, and I think that there will not be any. The problem has two aspects, one is the payment for deliveries to Chechnya, and the other is the transit of gas via Chechnya. It is impossible to make no payments for gas supplies, and receive transit charges in the form of gas supplies only. Therefore this is a complicated issue, since it is interconnected with the problem of Chechnya reconstruction; one of the sources of funding is gas supplies in lieu of transit payments, and I think this problem will be solved.
- What are your comments on the necessity of gas exporter"s organization establishment?
- I do not consider an establishment of an organization similar to OPEC necessary at this point in time. There are a number of national forums where experts discuss business activity coordination issues, and the issue of an organization similar to OPEC"s, including gas supply quotas, is not even considered, at least as far as I know.
February 9 2004
http://www.gazprom.com/eng/articles/article9761.shtml
