Gazprom & the EU: Let's Talk to Each Other

At the final leg of South Stream: The Evolution of a Pipeline, which took place yesterday in the European Parliament in Brussels, Belgium, the themes of communication and a willingness to come up with a mutually beneficial solution between Russia and the European Union were hammered home. Specifically, how to implement the natural gas pipeline project in the context of the Third Energy Package.

The event's opening speech came from a representative of one of the sides: Alexander Medvedev, Deputy Chairman of the Management Committee and Director General of Gazprom Export, who hinted at the potential misunderstanding between the two seemingly opposed sides in this question.

"I strongly believe that it's better to talk with each other than to talk about each other, or to read about each other," explained Mr. Medvedev, "because sometimes you are shocked how far away it is from reality."

Addressing the question of whether the pipeline project might be granted an exemption from the Third Energy Package, he said: "If we look at the applicable legislation, exemption could only be given only before the final investment decision is taken. We are not in an idea stage, we are in an implementation stage, so formally exemptions could not be applied. So we are in discussions with the European Commission how to find the solution which will be in compliance on the one side and, on the other, will allow to utilize capacity which will be created in compliance with export contracts."

"I would like to stress that all 63BCM of gas is contracted," he added.

He noted that Gazprom and Europe were bound by common history, geography and common interests: homes, schools, industry, etc. Europe needs access to low carbon energy sources that are safe and clean, like natural gas, also admitting that the company would be in a bind without its best customer.

"Gazprom literally depends on its gas sales to Europe, which account for two-thirds of our income and defines our commercial well being," he said, adding that the two sides were bound together by decades of success, starting in 1967.

This went on until 2009, he recalled, when the transit of Russian gas was stopped by Ukraine, which brought about the need for an alternative.

Gazprom, said Mr. Medvedev, was committed to its European relationship, making investments to increase gas storage capacity and to build new supply pipelines.

"Our purpose is very straightforward and simple: to diversify supply routes to Europe and to create a comprehensive system of delivering Russian gas to European countries, irrespective of location."

"The South Stream gas pipeline is our flagship investment in this regard," he continued, "and a truly pan European project. South Stream will provide the European Union with a new, direct access to the vast gas reserves of Russia and the possibility to import as much as 63BCM/year of natural gas via four pipelines. This is the equivalent of 700 LNG tankers reaching European shores every year."

Meanwhile, he noted that domestic European production would inevitably decline in the coming decades and the continent would need to import more and more natural gas, even with dim prospects for economic growth. Europe, he added, would need new gas infrastructure to meet this growing demand for imports. Indeed, Europe could even face an import gap.

According to Mr. Medvedev, South Stream would cost around EUR 15 billion of which he said international investors and banks would absorb about 70%. "We neither request nor expect European tax money to help build South Stream, nor any other political favors for that matter. South Stream is a private investment and a commercial project," he said.

South Stream, he said, would decrease transit risk by normalizing the share of Russia's gas exports running through Ukraine.

Among the benefits that the natural gas pipeline would bring to Central and Southeastern Europe, he listed direct investments, thousands of jobs, tax revenues for host countries, and a secure energy supply which could stimulate investments in other industries. Displacing power plants running on oil with gas-fired facilities could also help increase air quality in those countries, reducing the carbon footprint, he said.

"Gas markets are not well enough connected. This project will be a great tool to forge the integration of these markets and bring Southeast Europe closer together," he added.

"South Stream will open a new chapter in what has become a time tested story of cooperation," said Gazprom Export's Director General Alexander Medvedev.