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Alexei Miller also talked about the state of Russian-Ukrainian gas cooperation and the implementation of the South Stream project.

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President of Russia Dmitry Medvedev: Good afternoon, Mr Miller! Let’s begin by looking at Gazprom’s 2011 year-end results. Please give me a brief summary, and then we will discuss another issue.

Gazprom CEO Alexei Miller: For Gazprom 2011 ended on a positive note. First of all, we are pleased that we outstripped the target volumes we had set for 2011 by approximately 7.5 billion cubic metres of gas. Overall, Gazprom extracted and supplied to the market over 513 billion cubic metres of gas, including over 150 billion delivered to Europe, our main target market. Compared to 2010, we delivered 13 billion more cubic metres of gas to the European market. We’re certainly pleased since, despite the signs of crisis we are seeing in Europe, overall demand for Russian gas grew in 2011, although we observed something a bit unusual, with two opposing trends in two major EU nations. The demand for gas in those nations grew, while in other states, it not only stabilised, but even decreased. Still, the total volume of supplies was significantly greater than in 2010.

As for the domestic market, I would like to note a significant gas demand growth in key branches – agrochemicals, cement sector – by nearly 10 per cent. We supplied 3.5 billion more cubic metres of gas to power industry companies. All this speaks to the fact that the Russian economy was developing in 2011, and this growth in energy consumption, gas consumption, is certainly a good indicator of economic growth in our nation.

“We have a solid contractual basis for continuing the work with our Ukrainian partners, while we continue the discussions concerning our future gas cooperation.”

We continued implementing one of our priority programmes: the provision of gas supply, which certainly has significant social importance. Based on the 2011 results, our average gas supply level for the whole of our nation is over 63 per cent now, with more than 70 per cent for the cities and more than 45 per cent in rural areas.

Since the launch of this scheme, the nation’s gas supply level has grown by more than 8 per cent, and in accordance with the objective you set earlier, the rate is slightly higher in rural areas. We are giving priority attention to rural parts of the nation, and will continue to do so.

Naturally, I would like to note that in 2011, Gazprom made widespread progress in the Far East and Eastern Siberia. We have completed construction of the Sakhalin-Khabarovsk-Vladivostok gas pipeline, whose goal includes the provision of gas supply to that region and gas deliveries to power industry facilities for the APEC summit.

You are aware that we have constructed the pipeline to Petropavlovsk-Kamchatsky and have begun supplying gas to Kamchatka. Thus, we have significantly broadened the total area of Russia under the gas supply scheme. Initially, the provision of gas supply scheme covered 25 regions. Now, we are working in 69 regions and in 2011, we were able to take the level of financing for this project to almost 30 billion rubles, slightly under 30 billion.

This year, the work to provide gas supply will continue. First and foremost, we will update master plans for providing and supplying gas. When we launched this programme, one of the challenges before us was to provide gas supply on a new procedural basis. In particular, we needed to develop master plans for each region, and every year, we must approve plans and timeframes to synchronise the work, since providing gas supply is a two-way street. In addition to financing by Gazprom, it also requires financing from local authorities or administrations, since it involves intra-village networks or systems within a house or a boiler-room – this funding is the responsibility of local authorities. So one of the issues that we will try to resolve in 2012 is updating the master plans (after all, quite some time has passed since they were developed), and we will continue working to fulfil these objectives at the same pace.

Dmitry Medvedev: This objective will become relevant in the near future precisely because we initially proceeded from the assumption that we will need to continue providing gas supply to new areas, completing the process in places where it is necessary and expedient to use gas, so it is imperative to allot money for this purpose. And naturally, the regions’ responsibility must be proportional, because initially, this programme was devised as a scheme based on synchronisation and co-financing.

And another question, Mr Miller. Before the New Year, I had a meeting with the President of Ukraine, where we discussed various issues and options for cooperation. In addition to new documents, our conversation touched first and foremost on major new projects. Has anything been done yet? Or the situation is still not developing?

Alexei Miller: Nothing significant has happened, Mr President. So far, our Ukrainian friends have only talked about cooperation in this area, but there haven’t been any concrete suggestions. We can hope that some concrete proposals will be made in the near future. But Gazprom is also concerned by the statement that Ukraine plans to buy much less gas than stipulated by the contract. The figure they give is 27 billion cubic metres of gas.

Dmitry Medvedev: Please remind me what we have in the contract.

Alexei Miller: The annual volume under the contract is 52 billion cubic metres of gas. This contract with Ukraine is valid until the end of 2019. It contains the “take-or-pay” provision, which requires Ukraine to pay for a minimum of 80 per cent of that volume.

“South Stream will now be revived, following the decisions made by the Turkish side.”

Dmitry Medvedev: And what measures are envisaged by the contract in case Ukraine fails to take up the indicated volume of gas?

Alexei Miller: In that event, the “take-or-pay” provision is applied.

Dmitry Medvedev: So they must pay for the remaining volume?

Alexei Miller: Yes, they have to pay for the gas they failed to take up. But Ukraine made statement without discussing it with the Russian side. No amendments were made to the contract, especially if we are talking about changing annual contractual supply volumes for the next year. Under the existing contract, such arrangements are possible only six months before the contract goes into effect.

Dmitry Medvedev: In other words, this was a unilateral statement.

Alexei Miller: Yes, it was a unilateral statement made by the Ukrainian side. They feel that if they breach the contract, we can still proceed in a civilised manner. But I think that if this happens, we will act appropriately.

Dmitry Medvedev: We will act in a civilised manner. How else can the Russian side act?

Alexei Miller: We will act in a civilised way in accordance with the provisions of the existing contract.

Dmitry Medvedev: Very well. But in any case, we have a solid contractual basis for continuing the work with our Ukrainian partners, while we continue the discussions concerning our future gas cooperation. Do I understand correctly?

Alexei Miller: Yes, without a doubt. Our Ukrainian friends indicated these terms as acceptable for the Ukrainian side, including the assessment of Ukraine’s gas pipeline system value. According to absolutely all experts – both Russian and foreign – the indicated value of the Ukrainian pipeline network is too high, and most importantly, at this time, we do not see any factors or reasons why this value should grow in the future.

We perform our contract for Russian gas transit via Ukrainian territory in full, but I would like to emphasise that compared to 2010, the 2011 volumes of gas transit via Ukraine decreased by five billion cubic metres, even though the overall volume of Russian gas exports has increased. This is because in 2011 new routes have appeared, just as competitive as Ukraine’s. They include the route through Belarus, as well as the Nord Stream, commissioned in 2011; we also launched gas deliveries directly from Russia to Germany. In addition, we increased supplies to Turkey through the Blue Stream, a direct trans-Black Sea gas pipeline that carries natural gas from Russia to Turkey.

Dmitry Medvedev: Let’s hope that South Stream will now be revived, following the decisions made by the Turkish side.

Alexei Miller: After the Turkish side gave its permission to build the South Stream through its exclusive economic zone, it essentially resolved all the issues that Gazprom had faced with regard to launching the South Stream pipeline construction.

In accordance with the government decision, at the end of last year Gazprom already approved corresponding documents to step up work on the South Stream project and move the construction launch date from 2013 to the end of 2012.

Dmitry Medvedev: I feel it is imperative to consider all these factors in making major decisions, including with Ukraine. And our partners must understand that there is a variety of options for Gazprom to supply gas to Europe. And what you refer to as the assessment of value of gas pipeline system itself, or appraisal of any other assets – naturally, this is an economic matter, but nevertheless, things are developing, and these factors must be taken into consideration.

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