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Interview

with Valery A. Yazev, Deputy-Chairman and President, State Duma and Russian Natural Gas Society

12.02.2009 / Energyboardroom

The European Energy Charter seems to be one of the pillars of the supplier-buyer relationship between Russia and Europe. Although Russia initially agreed to it, it did not ratify it. What is the position of Russia regarding the Charter? In your view, as deputy Chairman of the State Duma, what are the pros and cons of the Charter for Russia?

Well, you knocked at the right door. I’m the person who has been banning ratification of the Charter. The Charter has been in the State Duma for 7 or 8 years and we are not going to ratify it. There are several reasons for it, firstly: The Charter doesn’t contemplate nuclear products trade. Secondly: the Charter does not consider issues about sea transportation of the energy resources and refers Russia to Turkey to negotiate the transit of the Russian oil and liquefied gas through the Bosporus and Dardanelles straits. Thirdly: we are not satisfied with the right of first refusal, which is included in the Provisions on Transit of the Charter. We may end up in the situation when we, for instance, have a supply contract with Gas De France till 2046 and Moldova ?I’m speaking just for an example ?won’t provide us with a pumping tube in 2013, fulfilling its right of the first refusal. Next: We are not satisfied with the provision of the Charter saying there should be tariffs in the Russian pipeline system equal both for internal consumption and for export as this will immediately lead to double the price (of gas) for the Russian consumers.
Finally, the fifth integration amendment to the Charter initiated by the European community. They drew all the EU countries, and today its 27 members, out of the effect of the Transit Provisions of the Charter. So, Europe wants Russia to ratify the Charter whose effect is not extended over Europe itself, which seems extremely cynical to us. That is why we accept the fundamental provisions of the Charter, but their practical implementation, including those of Transit Provisions which I mentioned above, are not acceptable for Russia. We need a new international legislative regulator, which will include everything good about the Charter and will be void of the above defects.
When you talk about a ‘regulator’, are you proposing an external European regulator?

Indeed, I’m talking about a Eurasian regulator.

You have mentioned in the press that the Russia-Ukraine gas transit conflict we witnessed last January shows the inefficiency of the Charter?

It’s a libel. I would like to say that the Russian-Ukrainian conflict has three main reasons. One is the monopolistic transit position of Ukraine. Also that gas prices to Ukraine are not economically justified. And last, the unstable political situation due to the power struggle between Timoshenko (Ukrainian Primer Minister) and Yushchenko (Ukrainian President), on one side, and Timoshenko ?Yushchenko-Yanukovich (opposition leader), on the other.

Are you saying that Russia is a hostage of Ukraine’s internal problems?

Of course not! We don’t deal with Ukrainian politics. What I was actually saying is that the Russian-Ukrainian conflict proved the Charter to be inefficient but was not due to its inefficiency. Because, since Ukraine signed and ratified the Charter, it ought to fulfill its obligations under the Charter, but neither the Secretariat of the Charter nor its other mechanisms put a single effort to resolve the conflict and apply sanctions against Ukraine, which halted the transit of the Russian gas. Why do we need a Charter that does not work?

You mentioned that one of the issues of the conflict with Ukraine is that there is a de facto monopoly of transit through that country to bring gas to Europe?

I didn’t say that. Again it’s a libel. I was talking about monopoly, but it doesn’t mean that that country is the only transit way. We have three main directions, but 125 billion cubic meters go through Ukraine, which is the bulk of the gas transit to EU, and bypasses Ukraine?.

Blue Stream (trans-Black Sea gas pipeline from Russia into Turkey) carries 16 billion cubic meters, Belarus together with Poland has a transit of 60 billion cubic meters, while Ukraine, of 125 billion cubic meters. Ukraine benefits from a quasi monopoly.

Because of that, Russia is proposing to its EU customers to embrace the North Stream and South Stream gas pipelines in order to avoid conflict with the so-called ‘transit countries’?

Exactly, but they will not be the alternative to the Ukrainian pipelines. By 2020 Russia will need to transport additional 100 billion cubic meters per year to Europe and that is what North Stream and South Stream are meant for. The Ukrainian pipelines will also be in use but they will transfer less gas, hence there will be less possibility to, so to say, blackmail by stopping the transit.
South Stream and North Stream are additional transport ways, which will diversify the transit system and reduce the dependence of Russia and European countries on Ukraine.

On May 7th the European Commission will be having a ‘summit on energy security’, proposed by Mr. Andris Piebalgs, and one of the issues that will be most likely discussed is the Nabucco pipeline. As a gas expert, how do you see the feasibility of this project and is it a serious competition for the Russian projects?

Of course it is not competition for the Russian projects. The Nabucco project implies to pump 30 billion cubic meters per year. By that time, by 2020 approximately, we’ll have been exporting today’s 180 plus?0 and 80…. about 350 billion cubic meters. So if they construct Nabucco nothing will change for Russia. There are even certain worries that there will be no gas (available) for the project. To have gas (for Nabucco) from central Asia, they will need to build a pipeline through the bottom of the Caspian Sea, but taking into account the current legislation for the Caspian Sea this is not such an easy task to accomplish. Also, its needs to be understood that Russia has bought gas from Uzbekistan, Kazakhstan and Turkmenistan Russia ten years in advance and at European prices, so these (exporting) countries would see no sense in looking for another customer for their gas. Another source, Azerbaijan, has recently become a net exporter of gas.

Here I see the perspective of selling 7-12 billion cubic meters per year in 10 years time. So there’s only Iran left. But we all know about the attitude of Europe to the country and the US attitude to Iran’s nuclear file. On top of that, Iran has no funds to explore its gas fields. Also, Nabucco is to go through Turkey. In my opinion, Europe will have a headache with this bigger than in the case of Ukraine, because Turkey is already putting forward its preliminary conditions for entering the EU and only after that they may agree to the construction of the pipeline. Today Europe already transfers 16 billion cubic meters through Turkey via Blue Stream and, if Nabucco goes through the country as well, we might end up having another monopoly.

So, you are saying that taking into account the geopolitics of the pipeline, it seems like Russia is the best option?

Just unmatchable!

But as most of your clients are in Europe, don’t you think Russia is at the expense of the European market too?

It is dependable.

Taking into account such dependability, do you believe Russian is sparing enough diplomatic and commercial efforts to seduce new gas markets, particularly in Asia?

It is key to understand that Europe, as our customer, is ”yesterday today and tomorrow.’ Asia, in particular Japan, South Korea, China and India, is our ‘tomorrow’. We will build a pipeline to South Korea from the Sakhalin fields either through North Korea, or by sea. The Altai pipeline to the northwest of China will be built on time.

If you agree on the price?

We will, why not?

It seems the Chinese don’t want to pay the European price for gas?

They are ready to pay. I met with the Administration of China National Petroleum Corporation (CNPC) last summer and they are satisfied with the European price. So far, the issue is about the transit from Yamal (fields in the north of Russia) to the borders of China because the distance is longer than that to Europe, so the gas should cost more and we’ve been negotiating about this. However, the Chinese are well known as tough negotiators. On the other hand, China will also need to construct a pipeline from its northwest to its northeast, because most of the consumers are located there. So the negotiating process is going on, not always easily, but it is going on. Taking into account Korea, China and Japan, I think it should be about 150 billion cubic meters per year that we will, no doubt, supply to Asia in 15 years time.

Going back to the issue about the dependence of Russia on its European supplies; the dependency exists and it’s mutual, as today Europe depends on the Russian supplies by 27%, as well as Russia depends on its European consumers. That is why we both long time ago reached common grounds and realized our mutual responsibility.

Are you satisfied with the relationship with Europe? How would you like Russia to be perceived by Europe’s administration and end-consumers?

Europe sees us as a reliable partner and we have proved this to be truth by 40 years of unbreakable supplies. And only twice, in January 2006 and January 2009, there were problems with Russian gas supplies. Mind you, in 2006 Europe blamed only Russia and this year the situation was different. Of course Russia suffered serious political image and economic losses due to the stoppage of the gas transit. But in the second half of December I traveled to Europe to warn them Ukraine would stop the transit. As well as I was there in the beginning of January: in Strasbourg, in Brussels, in the European Parliament, PACE, met with the business community, with the head of Eurogas Dominio Dispenza.

As President of the Russian gas Society I addressed, on the 5 January, the Secretariat of the Charter explaining the situation, so now they all have a more balanced perspective of Russia and Ukraine’s roles in the conflict. By the end of the dispute, Russia was blamed due to the two main reasons; 1. Russia is a big country, a big political player. Do something with Ukraine and give us the gas! 2. European companies concluded contracts directly with Gazprom. Perform your obligations and leave your transit problems for yourself. Yet, everyone in Europe understands that the fundamental reason is the monopoly of Ukraine.

In the current financial crisis, one of the worries is that Russian energy companies might not have the money needed to develop any new projects. Is that a real threat to the industry or not?

It is a misperception of the reality… Let’s consider the issue step by step – as I’m currently preparing a comprehensive report ‘Crisis and the global energy ‘ I have deeply studied the issue. Of course, the crisis will have enormous negative effects on the global energy industry with the fall of oil prices, and consequently the prices for gas, as well as carbon, nuclear energy, uranium…Companies all over the world are reducing their investments in the oil production and transit projects. This might lead towards the end of the crisis to a situation where the world may face a lack of energy. Of course, Russian energy companies in turn have had to reduce their investments. To support them, the Russian government will apply a special rate policy regarding the Russian ruble so that the profits of the companies, in Russian equivalent, do not change considerably. Regarding the projects we are talking about, the North Stream and the South Stream, they will be fulfilled by the international consortiums. As to the North Stream, I’m talking about Gazprom, Gasunie, EON-Rurhgas, Wintershall. South Stream: Gazprom and ENI Consortium. Funds will be taken from financial institutions, not from the profit of the companies. So I see no problem in this regard.

I recently meet with the executive director of the North Stream, Mr. Matias Varnik, and I can tell you there are no reasons for a reduction of investments in the project. They are now presenting the project benefits throughout Europe.

Moreover, on the 31 of March I’ll be running the Inter-parliamentary hearings in St.-Petersburg, with the 10 country-members, and there are enough reasons to assume the pipeline will be built in time. South Stream, I believe, will be fulfilled a bit later, in terms of time, but everything should be all right there too.

Mr. Yazev, what will be your final words to the readers of the Oil & Gas Financial Journal from Moscow to Houston?

I would like to wish all the participants of the energy market to go through the crisis with minimal losses and secure the global energy safety, which means giving sufficient energy resources at the right time, at the right place and for an acceptable price to keep the world developing in the future.

Thank you Mr. Yazev for speaking to us!

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