Vladimir Putin hosts a meeting in Kirishi, Leningrad Region on deliveries of natural gas to consumers on the domestic and foreign markets


“It is our duty to guarantee that the natural gas needs of Russian consumers – housing and utilities, industry, agriculture, and private consumers – are met. We must also strengthen and expand our presence in world markets. It is evident that the future of the gas complex depends on its technological modernisation, cost reduction, and greater production and financial efficiency.”

Vladimir Putin's introductory remarks:

Good afternoon, ladies and gentlemen.

We visited two new projects today – not all of us but some of the colleagues present here. We saw the development of the Ust-Luga port, and a gas-vapour installation just started up. Both are ambitious projects worthy of the Russian economy.

The development of the Ust-Luga port began in 2000. To be precise, that was when its construction was planned, while construction itself started in 2002. Last year, the port already transhipped more than 22 million tonnes, and its capacity doubles with each passing year. Cargo transshipments will make at least 44 million tonnes this year and 180 million tonnes by 2018 – I am absolutely sure about this forecast, and the growth rate proves it. Ust-Luga will surely become one of the largest ports in Northwestern Europe. This is an excellent pace. The port is showing good results and creating new jobs. It is notably contributing to the national infrastructure.

However, let's talk at this meeting about the development of the gas industry with an emphasis on the current situation. Let's discuss domestic market supplies and exports, and sum up the industry's performance in seasons that are problematic in any country – autumn and winter. They are especially hard in Russia, as 70% of its territory qualifies as northern.

On the whole, I think the situation in the industry is positive. Gas extraction increased by 3.1% last year, totalling 670 billion cubic metres, and investment is developing at a good pace. Gazprom alone invested 3 billion roubles in its development within the previous three years – an annual average of one trillion roubles. Major projects are being implemented to open up new fields, develop gas transport infrastructure, and extend gas supply networks – particularly in the Far East.

Another essential stage of the ambitious Eastern Gas Programme was finished last year when the Sakhalin-Khabarovsk-Vladivostok pipeline was launched. Sakhalin gas has become a major developmental resource for housing utilities and the entire energy industry, and promises many new jobs. Nevertheless, I would like to say – and I hope that the heads of the Far Eastern regions will hear this: Gazprom builds the pipelines but after that the rest of the work moves forward very slowly. This gas needs to reach household consumers, our citizens. To do this, we need state programmes, we must set up relevant companies, administrative bodies must work systematically, the necessary financial resources must be allocated in time so that these programmes can be implemented. Otherwise, this gas will stay in the pipelines. But this is a separate issue. We will return to it during a discussion with heads of the East Siberian and Far Eastern regions.

The industry’s long-term prospects are based on the development of the Yamal Peninsula. This year, industrial gas production will start there and the first phase of the Bovanenkovo-Ukhta system of pipelines will be commissioned. I would like to emphasise that it was built primarily with the use of domestic pipes, and this is an excellent example of the energy sector creating a considerable demand for a number of related sectors.

In fact, Yamal will become a new oil and gas region in Russia comprising production centres, transportation, a sea port, and gas processing and liquefaction enterprises. This is a large industrial project, which is unique in terms of its complexity and the projected returns. In the long term, it will ensure an increase in gas production to 140 billion cubic metres per year. The development of the Shtokman field is also underway. This will considerably increase our resource potential. I would also like to mention the diversification of our transportation routes. As you know, the first phase of the Nord Stream, 27.5 billion cubic metres of pumping, was launched in November 2011. This means that the Russian and the European gas transportation systems are now directly connected, which certainly enhances the reliability of supplies and removes many transit risks. The work on the second line is underway according to plan, and over half of the sea route has been covered. I hope, that the work on the second line will be completed within the planned period. This will amount to a total of 55 billion cubic metres of pumping. I expect that the construction of the South Stream along the bottom of the Black Sea will begin in late 2012.

I would like to emphasise again that Russia has always been a reliable partner on the global energy markets. We highly value this reputation and are open for mutual cooperation with all our foreign partners, including investment projects and joint participation in the development of production and infrastructural assets. In building our strategy we should proceed from the understanding that the demand for natural gas will undoubtedly go up. This is true for our domestic market, which is certainly a priority for us, and international markets both in Europe and in the Asia-Pacific Region. According to experts’ estimates, gas supplies for domestic needs and for export in 2012 will exceed the pre-crisis level of 2007.

Our task is to meet the Russian consumers’ growing demand for gas, which this includes utility services, industry, agriculture and household consumers, as well as to consolidate and expand our presence on the global markets. It is also clear that the future of the gas sector lies in its technological modernisation, the reduction of costs and enhancing the production and cost effectiveness.

As for costs, I would to draw the attention of Gazprom managers and the Ministry of Energy to the rise in Gazprom tariffs which we planned last year. I understand that this means a greater burden due to an increase in the mineral production tax, but we should seek to make reserves by cutting costs rather than by increasing the tariffs. Let us return to this issue in detail. I am aware of the requests you have submitted to the Ministry of Economic Development – we plan no increases apart from those we decided  to make last year. If you feel tension in the company or in the industry on the whole, let’s discuss what kind of support we can provide to you, but the tariffs will not go up.

What else would I like to add? First, we need to increase the industry’s capabilities, enhance its infrastructure, resolve the bottleneck problems in the gas distribution system and build new gas storage facilities. This will ensure that we have room for maneuver and can meet the demand both on the domestic and foreign markets.

Secondly, an intense gasification of Russian regions is a priority. We have discussed this issue on numerous occasions. Today, the level of gasification is over 63% (63.2%). This certainly enhances the quality of life, especially in rural areas. What was the increase in the last few years, Mr Miller? About 10%?

Alexei Miller (Gazprom CEO): Since the start of the gasification programme in the middle of 2005 it’s almost 10% (9.5%), yes.

Vladimir Putin: 10%? That’s a good rate.

Alexei Miller: Yes. In rural areas it’s a little higher. Just as we were instructed, it’s 70% for the gasification of cities and towns and 47% as of today in the countryside, that makes a total of 63,2%.

Vladimir Putin: That’s a good rate. We just need to coordinate this Gazprom work with the related operations on low pressure networks in the regions. This is what I said regarding the Far East and Eastern Siberia. Here, in the European part, this synchronisation seems to be going well but we need to maintain or even increase the current rate. We have to continue the project – undoubtedly, mains gas should come to all the areas where it is economically viable and technically feasible. At the same time we need to develop safe and reliable technologies for providing residential communities with bottled gas. By the way, we spoke about this and I would like to go back to it – and car transport, of course: using natural gas as motor fuel looks exceptionally promising. I would ask the relevant agencies and transport companies to look into this.

Thirdly, Russia has the world’s largest known reserves of natural gas – over 50 trillion cubic metres. No one has more than Russia. But that’s not the end of the story. There’s more! If we take a closer look and work on what we have, there will definitely be much more than 50 trillion. Yet this does not take expanding the raw material base off the agenda. We have all the possibilities to do that, we have to form reserves for the future, to conduct geological exploration of new territories including the Arctic shelf.

My fourth point concerns the introduction of modern, environmentally-friendly and resource-saving technologies, developing capacities of advanced processing of natural gas, including oil-well gas. I would also like you to pay attention to fostering cooperation with the energy companies, primarily in projects concerning the so-called modern generating capacities such as combined cycle gas turbines like the one that was commissioned here in Kirishi earlier today, in the Kirishi State District Power Plant. How much has the new technology increased power efficiency? 

Alexei Miller: Efficiency has gone up from 38 to 55%.

Vladimir Putin: Can you imagine such an increase, from 38 to 55… Just think how much more electric power you can get from that amount of gas!

We need to take a closer look at the opportunities offered by the LNG market. So far there is only one big project operating on Sakhalin-2. New liquefaction plants are due to appear in the coming years as a result of the exploration of the Yamal and Shtokman deposits. Russian liquefied natural gas should occupy a large niche in the global energy markets.

Sixth point. As I have already said, we must encourage efficiency improvements in the gas industry by developing and encouraging competition among other things. Today the proportion of independent gas extraction companies has reached 24% and our task is to ensure that there are unified rules and standards of operation. Ultimately we have to shape a modern competitive fuel market that will operate in the first instance in the interests of our citizens and national producers so that tariffs and delivery terms are economically justifiable and do not place too heavy a burden on consumers.

In this connection I would like to say the following. There are proposals to scrap fines for non-acceptance of gas for those consumers whose annual consumption is less than 10 million cubic metres. This topic is particularly sensitive for small and medium-sized businesses and for agricultural companies: often the principle “”take it or pay” has significantly impacted the profitability of businesses and put many business initiatives at a serious disadvantage. We have discussed this problem with Gazprom on a number of occasions at the Energy Ministry. What do I want to draw your attention to? I agreed with Gazprom’s stance that large consumers are capable of and should draw up the necessary schedules, whereas small and medium-sized businesses often lack these kinds of opportunities. That is why I consider the decision taken today to be completely fair and I hope that those consumers will see a positive end result.

In conclusion – regarding the performance results for the industry for the autumn-winter period. In essence, this is an annual test that examines all the links in the technological chain – from the natural gas producers to the power generation and housing maintenance complex. I would like to point out that we have gone through this winter virtually without any serious breakdowns. Of course, there was some tension but on the whole, thank God, there have been no global upheavals anywhere due, in part, to the effective coordination between the respective ministries, energy companies and regional authorities. At the same time the reliability guarantees should go up in the future, and we should be able to avoid what we call small or medium incidents, and we had quite a few of those this winter, too. I think it makes sense to introduce one additional requirement on the energy companies in order for them to obtain certificates for their facilities regarding their readiness for coping with the autumn and winter peaks. This new requirement should be to have long-term contracts for the delivery of alternative types of fuel so that any problems that arise can be solved quickly and without any fuss.

And yet another issue I would like to draw your attention to is repayment discipline. The reasons behind and the structure of the debts in the industry need to be thoroughly investigated. As of today 15 constituent members of the Russian Federation have debt arrears with Gazprom, and the total debt makes a nice round sum of 110 billion roubles. We have spoken about this several times, in some cases the formal debtors are residents who pay their bills on time but the money does not reach the energy supplier, it gets stuck in all sorts of housing maintenance and other offices. We must put things right here and find out the reasons behind this situation. I am asking you to put forward suggestions on how to improve the payments system at all the stages of the pricing chain. Where necessary, we will get the law enforcement and control agencies involved. Just like in electricity generation, we need to eradicate all the murky and semi-criminal schemes from the market as unscrupulous dealers are feeding on these schemes.

When we were looking at the combined cycle gas turbine with the head of Gazprom, we exchanged views on the general situation in the industry, including those affected by this problem. The problem has become chronic in some regions. We will give it the highest priority in the immediate future.

Minister of Energy Sergei Shmatko, over to you please.

Sergei Shmatko: Thank you, Mr. Putin. Esteemed colleagues, the winter of 2011-12 is not over yet but we already have some preliminary results. I would like to inform you again that this year we have been breaking all imaginable records. It’s been a really cold winter – energy consumption in the Unified Power Grid reached 466 million GWatt hours which is 1.7% higher than consumption. In over five unified energy systems of the country the consumption was higher than last year.

We have set a record (Slide 3) on power consumed over the past 20 years and reached the level of 155 GWatt. That much power has not been consumed in Russia since 1991, not in fact, since the collapse of the Soviet Union.

Of course, one of the reasons has been the unusually cold January and February we’ve had, but we have had these types of cold spell before yet electricity consumption has never been this high.

A few words about how we prepared for this. Our inspections of the electricity companies returned good results. As a matter of fact, only one company failed the inspection, that was TGK-14. Mr Putin, we reported to you on the situation at the Ulan-Udenskaya Thermal Power Plant, and we took it under control. We have fulfilled all your decisions concerning repairs at the station, taken late last year, and so had no problems getting through the winter.

As for fuel stockpiles at the plants, I believe that we have resolved this problem, on the whole, because we have had no problems with fuel at the power stations for three years. This year we had a minor problem with railway wagons, but we resolved it jointly with Russian Railways and the Ministry of Transport and in fact have even built up surplus fuel reserves at all power plants. I would like to stress this is not for the country overall but for each particular power plant, they each had surplus fuel reserves, which was a big help. You have touched upon a major element, a significant problem… We are acting with due regard for our experience in the Novosibirsk Region and the Altai Territory concerning fuel supplies to Biyskenergo. The problem boils down to this: Contracts for the supply of reserve fuel expired on January 1, and the owners – Kuzbassrazrezugol and Biyskenergo – started litigation over the terms of the supply of fuel. Fuel reserves were running out fast, so we had to step in. Mr Sechin (Deputy Prime Minister Igor Sechin) held a meeting on this issue in late January. We secured the signing of a fixed-term agreement, but we believe that the ready availability of a long-term reserve fuel supply should be included as part of the plant’s preparedness certificate, at least for the autumn and winter season. This is very important now. I would also like to thank Gazprom for their contribution. We had a problem with the Tver utility system which had their gas supplies restricted for commercial reasons, namely payment arrears, as you pointed out. But when the cold season began we resolved the problem jointly with Gazprom and decided to lift the restrictions even though the debt had not been repaid, but this once again highlights the responsibility of consumers. We believe that, in principle, commercial reasons should be no reason for stopping the supply of fuel during the autumn and winter, but requires raising the standards of corporate consumers.

We also had a major problem at the West Siberian Thermal Power Plant. In general, heat supply in Siberia and the Far East are a separate issue which we will address during next autumn and winter, including from the standpoint of enhancing monitoring of repairs. But there are systemic problems with organising the heat supply, in particular caused by mistakes made while trying to fix technical failures. Nearly 148,000 people were expecting problems when the temperature of the heating agent in the heat supply network fell to 40 degrees Celsius, leaving us only two or three hours to make the decision to drain the water from that part of the system, meaning that the situation in the city would be critical for at least 15-18 hours. We resolved the problem jointly with the Ministry of Regional Development and the territorial administration; we discussed it and then took the necessary decisions. We need to address these problems at the system level, as there are three incomplete heating loops in the city, so we need to create reserve supply systems.

There were also problems in southern Russia, where we had a highly unusual situation. Kubanenergo is operating in a rather mild climate, but winds of up to 40 metres per second and the temperature of minus 15 degrees there. The decisions we took after the winter of 2010/2011 to purchase over 2,000 special vehicles and prepare more than 8,000 emergency rescue and repair teams allowed us to deal with highly complicated energy supply problems in the region within days, working jointly with the regional government.

Although our problem this year was similar to the one in 2011, when we had to enact Schedule One, limiting gas consumption at power plants in 45 regions, just in case, this year we resolved the problem and so did not have to enact Schedule One, thanks to our concerted actions with Gazprom. This is a major achievement. We have reported on this problem to you, about the need to coordinate our actions in this sphere with Gazprom, after making an economic analysis of the consequences of using reserve fuel. We believe that we have worked efficiently this year. We have approved joint guidelines in this sphere, yet power plants have used an additional 500,000 tonnes of fuel oil. At the same time, they reduced the consumption of coal to 97,000 tonnes, compared with 408,000 tonnes last year. I would like to speak on this issue in greater detail later on, when I will report on the gas industry.

Mr Putin, I believe it is very important that we have proved the effectiveness of your decisions to index electricity prices in 2012 when we postponed their regulation to July 1. We have done this because even during an unusually cold spell, when we had to use reserve fuel by prior agreement with the generating companies and regional authorities, we still kept wholesale prices from rising. In fact, we are keeping electricity prices at the level of late December and early January.

I would like to make a fundamental point: we have reduced the number of so-called technological disruptions. We have calculated that the number of blackouts, and incidents of power loss and emergency reduction of power by 150 MW or more have been cut by about 18%. However, we cannot rule out small and medium malfunctions, in particular in the electricity supply, but we are capable of raising our response levels to such malfunctions, as the past winter has shown.

While we’re on the subject of the past winter, it should be said that the system created under your instructions following the reform (liquidation) of RAO UES, when the federal and regional electricity security headquarters were set up and when we developed cooperation with the Regional Development Ministry, the regional authorities and the Federal Service for Supervision of Environment, Technology and Nuclear Management… We worked very well this year, monitoring repairs at the power plants, taking decisions to revoke operation permits and other necessary actions in critical situations, as well as cooperation with Gazprom. As a result we can say that we have created an efficient system of preparing the energy sector for winter, a system that has been restarted after the reform of RAO UES. And this past winter – we didn’t have much luck, the winter could have been mild but it turned out very difficult and cold, with above-average snowfall. Nevertheless, we have proved that the system is operating efficiently.

Now let us briefly discuss the main trends in Russia’s gas sector that were outlined during the preparation for the winter. We have already measured the main indicators. The production of natural gas in Russia reached an all-time high last year, at 670 billion cubic metres, and I must note that this growth was achieved thanks to independent gas producers. In particular, Novatek showed an increase of 15 billion (15.5 billion). On the whole, independent gas producers, including vertically integrated oil companies, accounted for 24 percent of the gas balance.

We have been watching the situation closely into 2012, and we have registered several records posted by the country’s gas production and transportation industries: we have seen an all-time peak in daily transportation volumeson February 3, 2012, and peak offtake from underground gas storage tanks on February 2, as well as peak daily gas extraction on January 10, 2012 at 2.1 billion cubic metres.

At the same time, daily consumption within Russia has risen by 134 million cubic metres, to 1.9 billion cubic metres. This is a 7.5 percent growth. The daily volume requests from European importers have also grown, while daily supplies of Central Asiangas and gas from Azerbaijan, have dwindled by 4.2 million cubic metres.

So what were the most important conclusions that we have drawn from analyzing our cooperation (I am referring to the power generation sector) with Gazprom?

You have already mentioned one of the most important points here: the current state and capacity of gas storage tanks. So what is the situation there and what concerns do we have? The main underground storage tank capacity indicators are included in our general plan for the development of the gas industry. We have only recently approved that plan. Still, at this stage we have not been able to fill them with gas as rapidly as this plan requires. The actual volume of gas pumped into that system is 65 billion cubic metres, or 9.1 billion less than the planned amount. The actual daily collection of gas is 647 million cubic meters, or 122 million cubic metres below the target set in the general scheme. This is a matter of principle. We believe, although this general plan is more of a recommendation, that its targets, or forecasts, have to be met nevertheless. This is a matter of principle and it is crucial for living through a winter successfully. As for the reasons for the lag, I must note that building and repairing the underground tanks is not properly financed. In 2009, the government spent 5 billion roubles on this programme (a highly important indicator of the current condition of the country’s gas transportation system); in 2010, the funding increased to 10 billion and in 2011, to 24 billion. The plan for 2012 is 16 billion. We believe that this amount, 16 billion, is not sufficient in this situation, and we will put forth a relevant proposal on this matter.

Another important indicator of the system’s work that I would like to cite is the current state of repair of trunk gas pipelines. In fact, the 2011 targets have not been fully met in this area either – only 50-60 percent of the plan. It is widely known, Mr Putin, that a pipeline’s service life is around 30 years. The system requires regular check-ups and evaluations of its technical condition, as the bulk of the current pipelines began operating before 1990. We are in fact approaching the end of the service life for most of the pipelines, which means a targeted programme will be needed to repair and upgrade them. Pipelines that have been used in excess of 30 years account for about 30 percent of the country’s gas transport system; about 36 percent have been in operation for 25-30 years. My main point is, we are proposing that Gazprom should annually coordinate its investment in pipeline development and repairs with the Energy Ministry, and we would exchange information on the results of these investments each year to identify problems and adequately estimate potential risks.

On the whole, I would like to emphasise the important role of independent gas producers. There is one problem here. Independent producers, as well as oil companies, have been announcing plans to increase gas production significantly, especially associated petroleum gas. In particular, Rosneft plans to increase gas production by 15 billion cubic metres by 2014, or 127 percent from the 2011 level; TNK-BP by 9.7 billion, and Novatek by 7.8 billion cubic metres as compared with the 2011 levels. This means that we need to revise the regulations for connecting producers to the gas transportation system, and on its reliable operation.

On the whole, we believe that we have completed the heating season without having to enact Schedule One and resorting to limiting gas consumption. This is an important achievement. We believe that the performance of the gas industry has been at a high-level, meeting the highest possible production targets. That level of production was largely achieved due to independent gas producers. We believe it is essential to adopt some long-term rules of the game on the gas market, conducive to a further increase in gas production by independent companies. This primarily has to do with possibly prolonging the access that they obtained earlier to the pipeline system for successive periods in a notification format, if the producer and the consumer extend their contract involving the same volume of gas to be channeled through the system, as well as giving them access to lucrative deposits and gas consumption facilities.

We have already mentioned the need to coordinate the investment programme with the Energy Ministry, and to share annual monitoring results. We also think it advisable to draft a five-year programme for the development of gas production according to a general plan based on the anticipated demand on the domestic and foreign markets, the levels of gas production and withdrawal from storage tanks during the peak consumption period. In our opinion, the peak values registered in the gas transportation system are an innovative approach to cooperation between the energy industry and Gazprom. We believe that these peak values should be measured and taken into consideration when estimating the key national economic indicators.

Mr Putin, colleagues,

We believe that we have accumulated vast experience in our cooperation. We will summarise this experience at a national conference on this past winter scheduled for April. As usual Mr Putin, we are happy to invite you to attend that conference. There is a lot to show. I can assure you that the Russian energy companies will continue this practice of working smoothly through the heating season together with Gazprom, and of meeting their goals. Thank you.

Vladimir Putin: Thank you.

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