Stop competing, it's time to collaborate.

Today, at the annual meeting of Gazprom shareholders, Alexey Miller was re-appointed to his position as chairman of the company's board. newspaper The Kommersant published a keynote interview with Alexey Miller, which we present to our readers in the “Documents” section.

What are the main results of 2006 for Gazprom?

First of all, we can highlight the signing of a number of agreements on the extension of long-term export contracts, the sale of new volumes of gas in Europe and entry into the end-consumer market. We are talking about Italy, France, Austria, the first deal with Denmark. Thus, against the backdrop of incessant attacks on Gazprom from individual politicians and the press, European business rationally chooses and strives to develop and strengthen cooperation with us. And this is understandable. The general public learned about the existence of Gazprom only a couple of years ago in connection with the Yuganskneftegaz auction, the conflict with Ukraine and the shocking increase in capitalization. A monster has appeared! What else could the average person think about us? At the same time, our partners are 100% confident in Gazprom. New gas supply contracts, new joint projects, new gas transportation routes are the best answer to all skeptics in Europe and especially beyond.

But the most serious changes apparently took place in the CIS?

2006 was, in a sense, a landmark year for us in this region. The most intense negotiations with Ukraine and Belarus took place just last year. Over the previous few years, the price of gas in Europe has increased several times, but in the CIS it has remained almost unchanged. As a result, Gazprom actually subsidized the economies of the republics of the former USSR due to the loss of its own profits. The main difficulties in the negotiations arose due to the fact that transit countries linked supplies of Russian gas on preferential terms with the fulfillment of our export obligations. Ultimately, we were able to reach fundamental agreements on separating the issues of transit and gas supplies, as well as on observing the principle of equal profitability of supplies for consumers in Europe and the CIS.

The third most important result of 2006 was the decision to liberalize the Russian gas market. It was no longer possible to delay solving this problem any longer. Cheap gas provoked an uncontrollable increase in demand. Throughout the entire period of economic reforms in our country, Gazprom gas remained the only fuel, the price of which was prescriptively regulated based on historical values, and was not determined by real supply and demand. The share of natural gas in the energy balance has increased to more than 50%, and in some regions to 80%, the use of coal, fuel oil and other types of alternative fuel has decreased significantly.

So there won't be enough gas?

Gazprom has already exceeded the parameters of the government's energy strategy, which is the main program document and was adopted only three years ago. Thus, gas production in 2006 was 25 billion cubic meters higher than the 2010 plan. And the production volume in 2010, for which the investment program was developed, corresponds to the maximum production levels in 2020 according to the energy strategy. The artificial cheapness of gas led to a growing imbalance between the expected growth in demand for this resource and the ability of gas companies, including independent ones, to meet the declared demand. Our investments in gas production and transportation would never pay off at the current price levels on the domestic market.

Did exchange trading in gas help balance the situation?

The expansion of exchange trading, the use of medium-term contracts with a price formula for the main volume of supplies to commercial consumers, the gradual achievement of equal profitability of all Gazprom markets - all this will make it possible to create full-fledged market relations in the Russian fuel and energy complex. This will stimulate the development of competition and expansion of the business of independent gas producers. Objective consideration of gas prices for its quality characteristics compared to alternative fuels will ensure its rational use. In addition, without a transition to market gas prices for industrial consumers, our economy is too tempted to remain an exporter of energy resources and energy-intensive semi-finished products, and there is no incentive to invest in the production of high-tech products. Therefore, the decisions taken by the government to liberalize the gas market are important not only for the fuel and energy industries, but also for the entire economy.

You mentioned the auctions for the sale of Yukos assets. Why did Gazprom refuse to participate in them? In particular, the company's top managers previously claimed that the monopoly was interested in Tomskneft. Have you reached an agreement with Rosneft on the purchase of any YUKOS assets?

We assessed the potential risks of participation in these auctions as too high for Gazprom. And with regard to any agreements, Gazprom is an open company, and if we really reach specific agreements, we immediately and directly announce it. This also applies to the implementation of individual clauses of the partnership agreement with Rosneft.

Nevertheless, Gazprom received its share in the assets of Yukos through an option with the Italian Eni and Enel regarding Arcticgas, Urengoil and Gazprom Neft. When and under what conditions does the monopoly implement these agreements?

As always - on time and on market conditions. This deal has attracted increased attention, but we must not forget that this is the implementation of only part of a large package agreement with Eni. We are taking our cooperation with the Italian company to a qualitatively higher level. Just as Gazprom already works with German partners, with Eni we are building a joint business along the entire value chain - from the well to working with consumers, including gas transportation projects. The agreement on the South Stream gas pipeline shows that European countries share our concern about transit risks. As you remember, it was their leaders who first made proposals to evaluate the advantages of constructing a new southern corridor. Europe needs new volumes of gas and increased reliability of supplies. South Stream meets these needs. Eni has long been looking for new joint projects with Gazprom, trying to repeat the success of Blue Stream.

Do you consider this project a success, although it is still underutilized?

Firstly, its workload is increasing according to a long-agreed plan. Secondly, we are not the only ones who think so. Ask the Turks what they would do without Blue Stream after the explosions and interruptions in gas supplies on gas pipelines that go to Turkey from third countries. For more than one year and more than once over the course of months, we have maintained the gas balance in Turkey, increasing gas supplies via Blue Stream by almost one and a half times the plan. This is especially sensitive for Turkey in winter.

Gas from the Caspian region is considered as one of the sources of resources for the alternative Nabucco project. Isn't South Stream a political decision that puts an end to this project, which is being implemented without the participation of Gazprom?

Why do you consider these projects alternative? If the Nabucco project is economically justified, has a confirmed demand for gas and an appropriate resource base, nothing can stop it. And Gazprom in the future could become a participant in Nabucco, especially since we are in constant contact with its initiators.

After Gazprom purchased Kovykta, which is advantageously located in relation to China, it would be logical to export gas to China from there. And leave gas from Sakhalin on the domestic market. But then a conflict of interests arises with Rosneft regarding the Sakhalin-3 project. Where will the gas from Sakhalin and Kovykta go?

The supply directions and resource base are determined by the program for Eastern Siberia and the Far East, adopted by the Government of the Russian Federation. Kovykta is not among the priority export projects. Production at this field will begin much later than on Sakhalin.

How are negotiations going on attracting partners to the Shtokman field development project? In August, when the Norwegian Statoil and Hydro merge, there will be three foreign contenders left for the project to develop the Shtokman gas condensate field. Their number corresponds to Gazprom's initial requirement for the number of partners. Maybe you can take all three of them and start a project?

As you know, in October 2006, Gazprom decided that it would be the sole holder of the license for Shtokman. Potential foreign partners nevertheless continued negotiations with us to search for other formats of cooperation. Negotiations on the first phase of development of the field are close to completion, and I think that we will soon announce that specific agreements have been reached. We consider Shtokman as a resource base for the export of Russian gas to Europe through the Nord Stream gas pipeline (North European Gas Pipeline, Nord Stream.-- Kommersant ), as well as for the construction of a plant for the production of liquefied natural gas - LNG.

What is going on at Shtokman now: what work is being carried out, what is the amount of financing from Gazprom, what is the specified time frame for the project?

A schedule has been developed to ensure synchronization of the start of production, gas supplies via the gas pipeline and LNG production with Gazprom's long-term gas balance. The first Shtokman gas will be produced in 2013. In 2007, the volume of investments in the development of the field will amount to 17.1 billion rubles. This project is of unique importance not only for Russia, but also for the global gas market. The geographical location and scale of this field are such that in the future Shtokman will become one of the links in the global energy security system. We are ready to cooperate with our foreign partners in all areas of this project.

But Nord Stream met active resistance from a number of European countries. The EU Antitrust Commission has warned that Gazprom will have to sell its stake in the project if an amendment to the gas directive is adopted as part of the liberalization of European gas markets. Maybe we should delay starting construction? And wouldn’t it be better to build a second Yamal-Europe branch, which would cost three times less than the underwater gas pipeline across the Baltic?

This is neither legally nor geographically tenable. Nord Stream runs from the Russian coast along the bottom of the Baltic Sea in neutral waters. At the same time, I would like to note that the gas that will be supplied via Nord Stream has already been sold, consumers are waiting for it in 2010, and we would advise the European Commission to carefully analyze the possible impact of a delay in the implementation of the project on future price conditions in Europe. As for Poland, this country has no demand for additional gas supplies from Russia, which means there is no need to build new gas transmission capacities in the direction of Poland. If the situation changes in the future, gas can be supplied from the western direction, and such proposals have already been made.

What should Gazprom Neft ultimately become - a company with its own market capitalization, with its own oil reserves, or a production division of a monopoly with all oil licenses retained by Gazprom? Will you remove Gazprom Neft from the quotation lists? How are you going to increase Gazprom Neft's production to 40-45 million tons?

Gazprom Neft's strategy provides for a much more ambitious production growth - up to 80 million tons per year by 2020. The same document outlines the main steps to achieve this goal. Combining the resource base of Gazprom's liquid hydrocarbons and the production capabilities of Gazprom Neft will give a very good result. To carry out such a merger, we, of course, will exercise the option with Eni and buy 20% of the shares of Gazprom Neft. Then we will determine the form of consolidation of share capital and resource base. Further tactics are suggested to us by the increased interest in the stake in Gazprom Neft, shown at the stage of preparation for the auction. Most likely, the company will remain public and listed on the stock exchange. We might further consider using a blocking stake as the basis for creating a new international alliance.

What are Gazprom's plans in the energy sector? How will you structure the acquired energy assets? What place does the joint venture with SUEK occupy in this structure? What will it be called, who will manage it, what assets and how much will Gazprom contribute? Will it be a public company? Are you entering into this joint venture to finance the renewal of gas generation only or coal generation too?

In recent years, Gazprom has been actively expanding its presence in the electric power industry. Our strategic goal is to form an effective group of power generation enterprises as one of Gazprom's core activities. The share of gas use in the electricity sector is very high, and this allows us to ensure good synergy with the gas business. Our goals include increasing return on capital, diversifying tariff regulation risks, and optimizing the fuel balance. As a major shareholder of RAO UES of Russia and OAO Mosenergo, Gazprom intends to become one of the major, but not monopoly, players in the reformed Russian electricity market.

Gazprom's involvement in coal-fired power generation projects will make it possible to implement schemes for balanced consumption of coal and gas and thereby increase the efficiency of gas marketing. For this purpose, we intend to create a joint venture with the largest coal company in the country - SUEK. The joint venture will include the electric power assets of Gazprom and the coal and energy assets of SUEK. Now we continue to structure the deal; first of all, we need to decide what generating assets we will receive for our stake in RAO UES of Russia.

How will you manage your non-core assets? In particular, as far as we understand, you are going to sell a controlling stake in Gazprombank this year. What will happen to SIBUR Holding in such a situation? Will it be completely transferred, for example, to Gazfond? What are the plans for SIBUR - sale of a stake to a strategic investor, IPO, reorganization with the separation of chemical companies of a narrower profile?

It is generally accepted that we buy everything. In fact, our core sectors are gas, oil and electricity. We sell non-core assets. The budget for this year alone provides for the sale of non-core assets worth more than a billion dollars. As for Gazprombank and SIBUR, these are non-core assets for Gazprom. Plans for SIBUR can combine different approaches: a strategic investor, an IPO, and reorganization.

Recently, the Russian and international press, from high stands and even in the US Congress have repeatedly spoken about the prospects for creating a “gas OPEC”. Are you ready to join him?

I would not limit myself to the gas industry on this issue. Modern business is rapidly globalizing and going beyond the boundaries of industry and national markets. That is why two years ago Gazprom decided to begin creating a global energy company. And today, without exaggeration, we can say that the process of transforming Gazprom from a “national champion” company into a global energy business leader has taken place. Over six years, the company’s capitalization increased 25 times, and by the end of last year its value amounted to more than $270 billion.

We are not only developing a unique resource base, increasing production potential and investing significantly in modernizing the pipeline system, but also developing new markets, diversifying energy transportation routes, and also developing new types of business - we are actively entering the electric power industry, the oil business, and developing the entire hydrocarbon processing chain. In addition, Gazprom is becoming a major player in the LNG market. This means active expansion of business types, regions of activity, and additional risk reduction.

The results of Gazprom's work in recent years clearly demonstrate its effectiveness as a global competitor; it is enough to remember that we are already second among the world's energy companies. And we won’t stop there. It is precisely because of the rapid development of Gazprom’s business in recent years that we, perhaps more acutely than our colleagues and market partners, feel the inconsistency of the “rules of the game” existing in the energy sector with the modern challenges of the global economy.

What do you mean?

The global energy market is characterized, firstly, by increased competition for resources, rising costs of resources, the closure of a number of markets, and secondly, by a noticeable increase in the risks of various market participants. In particular, energy consumers constantly express concerns regarding the reliability and volumes of supplies, and forecasting their costs. Transit countries, which play an increasingly important role in the global energy exchange system, do not hide their concern regarding the prospects for maintaining existing transportation volumes and tariffs, which, in turn, is inextricably linked with the need to maintain and modernize transit energy systems. In turn, suppliers still cannot be confident in maintaining the pace of market development, the balance of supply and demand and acceptable profit margins, which jeopardizes the return on investment and undermines the fundamentals of running an energy business. Gazprom, like all market leaders, constantly faces similar problems in its work.

While pursuing a consistent course towards liberalizing the Russian domestic market, Gazprom, when operating in European markets, at the same time faces various manifestations of a discriminatory nature. Instead of unfounded fears about Gazprom’s inability to provide supplies under long-term contracts, we expect our international partners to recognize the obvious fact that the company’s confirmed reserves are sufficient both for the unconditional and long-term implementation of all concluded and planned agreements, and for ensuring full-scale entry into new markets. We expect support from our European colleagues regarding the need to modernize the gas transportation system of transit states, including taking into account Gazprom’s entry into the capital of the relevant companies. In this regard, I would like to express the hope that the joint venture between Gazprom and Beltransgaz will allow us to avoid the situations that arose in the Ukrainian gas transportation system last spring.

What measures to resolve the situation can we talk about - is it still a “gas OPEC” or something else?

The systemically emerging risks of the global energy market require the creation of a system of global energy security, the construction of which is only possible if there is a transition from competition between national champions to cooperation between global leaders. The basis for building such a system for all market participants should be the adoption by its subjects of simple and understandable mechanisms for reducing the main risks and the construction of a system for coordinating the interests of both global leaders and participants in national markets.

The fundamental principles could be the development of a system of long-term commercial contracts, including for transit; mandatory international audit of reserves; adoption of regional and global strategies for their expansion; coordination of energy balances for the medium and long term and issues of the pricing system, including taking into account the development of the LNG market. Finally, the creation of a system of international cooperation on technological and environmental support for global energy projects.

Apparently, we could talk about creating an international energy organization - an analogue of the UN Security Council, but in the energy sector. Unlike the “gas OPEC” you mentioned, this organization should not regulate production quotas, which, of course, is also very important, but should deal with the coordination of strategic principles of cooperation in global energy markets. Stop competing, it's time to collaborate.