26 June 2010

Test on Tenacity: “Passed”

Throughout last year's crisis and the relatively stable recovery of consumption of natural gas by our main foreign customers that followed, Gazprom Export was faced with a challenge: mobilize resources to resist pressure of the crunch and cope with increased loads of extra work to optimize crisis management.

We had to resort to fine-tune and, at the same time, aggressive marketing and negotiating techniques. By the end of the year, we managed to improve the state of affairs within the range of maneuvers left by the consequences of the economic and financial crisis which originated not in our part of the world but turned global.
Gas production and export volumes decreased all the same. Total gas supplies by LLC Gazprom Export in 2009 to countries abroad countries amounted to 142.88 bcm. Yet, revenues worth USD 44 billion left the company feeling rather comfortable.

At that time the price of Russian gas, pegged to the oil products “basket”, was higher than the spot market price. Still, we are confident that it is important to stick to long-term contracts with a stipulated price formula because for the past decades this mechanism has proved to be most efficient in securing interests of both producers and consumers. We shall remain loyal to long-term contracts in the future because they ensure stability of supplies.

We managed to reach a reasonable compromise with European partners that proved that long-term contracts guarantee a high level of reliability and flexibility and which allows amendments to respond to changing market situation without violating the spirit and letter of contracts. Eventually, the fundamentals of the European gas market – the “take or pay” principle and the price formula – remained intact.

Our company’s strategy aimed at diversifying routes for gas deliveries to Europe was not affected by the volatility in demand and pricing on energy markets: we remained steadfast and consistent in forwarding our main infrastructure projects – Nord Stream and South Stream.

The Nord Stream project, which is a joint initiative of five European companies – Gazprom Group, German Wintershall and E.On Ruhrgas, Dutch Gazunie and ready to come on board the French giant GDF SUEZ – has obtained all the required environmental licenses. The parties have already agreed on sources of finance, and gas of the first pipeline string has been contracted.

The South Stream project is at an important stage of development: intergovernmental agreements signed with several countries have launched creation of joint project companies that will be in charge of the development of feasibility studies, financing, construction and operation of national sections of the gas pipeline. The ground is ready for EDF, one of the leaders of the French energy market, to join the construction of the offshore section of the gas pipeline.
We continue discovering and exploring new global markets. Due to the launch of the Sakhalin-2 project on production of liquefied gas (LNG) our company entered the Asian-Pacific market which is a challenging but at the same time large and promising market.

It is illustrative that in the midst of the euphoria about low prices on LNG spot markets and prospects of development of a “shale Klondike” in the USA (its assumed success some companies would like to clone in Europe too) in real-size world common sense prevails. And it is not by chance that we have signed an agreement for additional supplies of Russian pipeline gas to Poland under long-term contracts that have been extended on the request of the Polish side until 2037.

Gas business, like any other business, does not know smooth paths, well-paved avenues of approach, let alone mellow and benign environment: here rules are dictated by competition. Nobody and nothing, even the global crisis, can make business give up the rivalry over markets, sources of raw materials, marketing channels, partners, advanced technologies, and finance. On the contrary, competition is getting more and more intensified. Gazprom Group aims at deriving profit and increasing capitalization, hence, it has to take account of this political and economic aspect of the global energy industry. We are glad to have on our side many European partners with sophisticated understanding that the suppression of Russia on the gas and other energy sources markets runs counter to their business goals and does not serve the purpose of achieving regional and global security.

We assume that the synergetic effect of mutually beneficial cooperation with international partners will not only contribute to ensuring reliable energy supply and receiving tangible material benefits but will also help to create an environment of mutual understanding and interdependence, which is a key factor underlying success in business.
Our company has maintained its leading positions on key export markets, passed the endurance test during the setback in demand and prices and continues to demonstrate flexibility in adjusting to new realities. This should be regarded as the main end-result of 2009. There is nothing else in store for us but further progress and new achievements.

Alexander MEDVEDEV,
Deputy Chairman of OAO Gazprom Management Committee,
Director General of OOO Gazprom Export


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