13 March 2018

Alexey Miller briefs Dmitry Medvedev on Gazprom’s Performance in Winter

A working meeting took place today between Dmitry Medvedev, Prime Minister of the Russian Federation, and Alexey Miller, Chairman of the Gazprom Management Committee.

Alexey Miller briefed Dmitry Medvedev on the preliminary results of the Company’s efforts in the Russian and European markets during the winter period.

Particular attention at the meeting was paid to the relations between Gazprom and Naftogaz of Ukraine.


Shorthand record

Dmitry Medvedev: Mr. Miller, let us start off by taking stock of the winter season, since despite the persistent icy weather, including in the European part of our country, the calendar winter is over and the winter climate is also on its way out. What are the results of the season in the domestic market and in terms of exports?

Alexey Miller: The winter period is nearing its end, and we can draw some preliminary conclusions. There is no doubt that this winter’s gas supplies have been affected by the very cold February weather both in Russia and in Europe. Gazprom has fully met the demand for gas in the domestic and European markets.

This February, Gazprom supplied 30.7 billion cubic meters of gas to consumers in the Russian Federation. It was the largest such amount in the past five years. Since the beginning of this year, gas deliveries to Russian consumers from the gas transmission system grew by 5.6 per cent against 2017.

February, especially by its end, was an extremely cold month in Europe, and the demand for Russian gas grew at a very fast rate. Overall, we exported to the European market a record amount of gas for that month of the year, delivering 17.4 billion cubic meters, an increase of 6.8 per cent from the record-high amount exported in February 2017.

For 10 consecutive days, Gazprom broke new records for daily exports to Europe. On March 2, we set a megarecord by exporting 713.4 million cubic meters of gas. It was a very large amount. That amount was delivered thanks to the capacity of Gazprom and, by extension, Russia to meet peak demand. On an annualized basis, our capacity totals 260 billion cubic meters of gas, in view of the understanding that in 2017 — a record-high year — we supplied 194.4 billion cubic meters of gas to Europe.

It is undoubtedly a unique opportunity for us. It is also without a doubt our competitive advantage. And the unique opportunity to meet that peak demand in the market is also a unique opportunity for our European consumers. This winter, Gazprom confirmed its status as a reliable and responsible supplier that honors its obligations in full and on time.

Underground gas storage facilities in Europe are filled by about 25 per cent, which is a very small amount. In some countries that level is critical — around 10 percent. This means that in the coming injection period, in the summer, the demand for Russian gas will remain high. Of course, with indigenous gas production in the European Union declining and the demand for Russian gas rising along with peak demand, new export gas transmission projects aimed at supplying Russian gas to foreign markets are becoming even more important. That includes TurkStream and Nord Stream 2.

Dmitry Medvedev: Indeed, the dynamics of Russian gas consumption show that our gas is in very high demand in the European market. Consumption is growing, which increases the significance of the efforts to optimize gas supplies to Europe, including the projects you have mentioned. Those projects are important.

However, there are other factors that affect gas consumption in one way or another and that have been widely discussed lately. I’m referring to the rulings of the Stockholm Arbitration Institute, the arbitration tribunal, regarding your dispute with the Ukrainian company. What will they entail for Gazprom? What steps is Gazprom planning to take or has already taken with respect to the contract, among other things? As far as I know, you have essentially started proceedings to terminate the existing contract with the Ukrainian counterparty.

Alexey Miller: The Stockholm arbitration tribunal handed down an asymmetrical ruling that undermined the balance of interests between the parties to the two contracts — the contract for gas supplies to Ukraine and the transit contract. According to the Stockholm tribunal’s ruling, Gazprom owes Naftogaz of Ukraine USD 2.56 billion. Almost instantly, Naftogaz of Ukraine released a statement that, based on the Stockholm court’s ruling, Naftogaz would also fine us for 2018 and 2019, that is, until the expiration of the contracts, and we would be forced to pay several USD billion more.

At this juncture, those contracts have become economically unsound, unviable for us, which is why Gazprom has decided to start the procedure to terminate the contracts through the Stockholm arbitration tribunal. We have already filed an appeal regarding the contract for gas supplies to Ukraine. Before the end of March, an appeal will be filed for the transit contract and proceedings will be initiated to terminate the contracts in accordance with established procedure.

Dmitry Medvedev: What will happen to gas transit to Europe? There has been much debate about that.

Alexey Miller: Without a doubt, contract termination is a rather slow procedure. It will probably take a year and a half or about two years. However, there are currently no risks for transiting gas to Europe across Ukraine, unless, of course, there is unauthorized withdrawal of gas by Naftogaz of Ukraine. Needless to say, we expect the Stockholm arbitration court to redress the imbalance of interests between the parties during the new proceedings.

Dmitry Medvedev: All contracts, as lawyers like to say, are bound to change and are eventually either extended or terminated according to procedure. In this case, it is a court procedure. It is a normal legal method of terminating a contractual relationship. I believe that it is critically important for all these proceedings to take place in accordance with the existing regulations, so that the disputing parties themselves are directly involved — I mean Gazprom and Ukraine. This is expressly provided for in the existing agreements. As for other ways of influencing that relationship, I believe that it is absolutely wrong and there is an obvious political connotation — I’m talking about the isolated comments made by European Union officials and even, paradoxically, by the United States Department of State. Neither the European Union nor the foreign ministries of other countries have anything to do with the bilateral relations between Gazprom and its Ukrainian counterparty. Those relations should be mediated in the existing legal environment. Naturally, that process should include all of the relevant procedures, such as appeals and contract termination within the existing parameters.

Alexey Miller: Given the situation, it is the Ukrainian counterparty that has to prove the economic efficiency and viability of continuing gas transit through the territory of Ukraine. We are ready to hear them out and consider proposals, should there be any.

Dmitry Medvedev: Of course, all options should remain open. This is essentially a matter of contract profitability and efficiency, as you have mentioned.


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