Photo Gallery: 'We Sell Gas First, Then We Extract It'

Foto: epa Sergei Ilnitsky/ picture-alliance/ dpa

SPIEGEL Interview with Gazprom Chief Alexei Miller 'We Are Only Serving Our Customers' Demand for Russian Gas'

Gazprom chairman Alexei Miller, 48, discusses the controversial link between oil and gas prices, the question of whether new pipelines to Europe can ever be profitable and his company's international image as the long arm of the Kremlin.

SPIEGEL: Mr. Miller, two and a half years ago, you said that you wanted to make Gazprom the most valuable company in the world. Instead, the company's market capitalization has actually fallen from $300 billion to $130 billion. Are the wonder years behind you?

Miller: Our shares have risen in value by 35 percent in the last six months alone. That's no small amount. So, no, the wonder years aren't over for Gazprom. They're over for financial capitalism based purely on paper securities. We spoke about a $1,000 billion stock-market value in early 2008. But that was before the global financial crisis -- in other words, based on the coordinates system of this paper financial capitalism. That system is now discredited.

SPIEGEL: That may well be true, but even your long-time German partner, energy utility E.on, seems to have lost its faith in the future of Gazprom. Executives there want to sell E.on's 3.5 percent stake in your company.

Miller: Businesses buy and sell stakes for a number of reasons. Gazprom is no exception. But we don't do it based on how sustainable these companies are.

SPIEGEL: So why is E.on selling its stake in Gazprom?

Miller: E.on probably has internal reasons for its decisions. E.on is free to buy and sell shares in Gazprom, the world's largest gas company. We have 580,000 kilometers of pipelines, 33.6 trillion cubic meters of gas reserves and long-term supply contracts for 4.3 trillion. The state holds a majority stake, but 49 percent of the shares are freely available. Whoever wants to can buy 5, 10 or 20 percent of these pipelines and reserves. Unfortunately, the same thing can't be said for Gazprom in Europe ...

SPIEGEL: ... where it is always a problem when Gazprom shows interest in another company.

Miller: A while back, it emerged that Gazprom was supposedly interested in acquiring a stake in British energy company Centrica. You should have seen the uproar in the British press and parliament! That happens again and again.

SPIEGEL: Is the rumor that you want to acquire a 49 percent stake in the Ruhrgas subsidiary of Germany's E.on true?

Miller: Another rumor. And again it's all about not letting the Russians get involved. So much for the open market in Russia or in Europe.

SPIEGEL: So what's the truth to the rumors?

Miller: I don't want to talk about specific companies but rather about our strategy. We are guided by one simple principle when it comes to acquisitions and investments. We position ourselves as a global energy company with an integrated vertical network from exploration and extraction to transport, storage, marketing and distribution right down to the end consumer. And we want to achieve that on different continents. E.on, Ruhrgas, BASF and our Italian partners such as Eni are part of that network. Investments for us aren't financial transactions. They're part of our strategy ...

SPIEGEL: ... which Ruhrgas would fit into very nicely.

Miller: No one has proposed anything to us.

SPIEGEL: Gazprom's market has fundamentally changed. Thanks to new exploitation and transportation techniques, there is suddenly a surplus of gas. Customers like Ruhrgas could buy ahead more cheaply on the spot markets, but because of long-term supply contracts find themselves forced to pay a higher price to Gazprom. Has that tarnished your relationship?

Miller: The gas price reached $350 on the spot markets in December. The average price of Russian gas for Germany (in 2010) has been $308. Plus we're speaking about different products if we mean the spot markets on the one hand and long-term supply contracts on the other. You can't buy a three-year contract on the spot markets. What's important for the consumer isn't so much the absolute maximum price paid as much as stability and sustainability (of supply).

SPIEGEL: At times, the difference in price was as much as 50 percent, which led to tough negotiations on reductions in prices with your customers.

Miller: In December, the price was even higher than for gas for long-term contracts which are linked to the oil price and are absolutely predictable. And we stuck to our agreements even when prices on the spot market were a lot higher.

SPIEGEL: But E.on is losing customers because they consider the prices too high.

Miller: We love and respect our customers. But they are concerned about their own profits and not the price for the end consumer. Of course, nobody wants reduced profit margins. It's the market that decides what the consumer pays. Gazprom's share is never higher than 50 percent. The rest is made up of the local partner's profits, transport costs within Germany and taxes.

SPIEGEL: In reality, why in your supply contracts is the gas price still linked to the oil price so that it rises even when demand is low?

Miller: Because gas isn't a classic stock market commodity like oil, for example. In the future, gas will also be used much more widely as a synthetic, liquid fuel. Two of our research centers are working on this technology. If we look at the calorific value of oil and gas, gas is considerably cheaper than oil. All the large gas producers -- not just Gazprom -- say that the gas price should be based on its calorific value.

SPIEGEL: Nevertheless, many experts believe that, due to increased supply, the price for gas on the spot market will remain low in the long term. Does that mean the construction of a number of new pipelines to transport gas from the East to Europe will turn out to be gigantic bad investments?

Miller: We work on a simple basic principle. We sell the gas first and then we extract and transport it. All the gas destined for the Baltic Sea pipeline (Nord Stream) has already been sold in long-term supply contracts. So the pipeline is 100 percent full. We will deliver 55 billion cubic meters of gas a year.

SPIEGEL: The Baltic Sea pipeline was originally intended to cost €4 billion ($5.31 billion), but now there's talk of it costing €8 billion. Is it still worth constructing?

Miller: The overall costs haven't increased since March 2008. They come out at €7.4 billion. That's an efficient investment. The Baltic Sea pipeline belongs 50 percent to Gazprom, and 50 percent to our European partners. It's our joint pipeline and doesn't pass through transit countries. That means we don't have to pay any transport costs to anyone. Our 50 percent of the costs are roughly equivalent to the amount of money we lost in just a few days during the gas crisis with Ukraine.

SPIEGEL: Does that mean gas in Germany will get cheaper?

Miller: You know very well that the gas price isn't set by the construction of a pipeline.

SPIEGEL: So your profits will only increase ...

Miller: ... as will those of our partners. Neither Gazprom nor our European partners set the price; that depends on the price of oil. So the matter of the fairness of gas and oil prices is actually a matter of the fairness of financial capitalism.

'We Have Absolutely Nothing against Nabucco'

SPIEGEL: The link to the oil price has nothing to do with financial capitalism. If there's more gas than oil, then the price should really go down.

Miller: Not true. Because then gas will have to replace the oil.

SPIEGEL: We've always been taught that the price is determined according to supply and demand.

Miller: During the financial crisis we experienced a lot of things that no one had ever been taught. The world and Europe were shaken to such an extent that they still haven't got over it even today. So your teachers weren't that smart.

SPIEGEL: Still, you have to insist on the link to the oil price so that your investments will add up. Why, in addition to the Baltic Sea pipeline and at a cost of up to €24 billion, are you building the South Stream pipeline, another East-West pipeline that's due to start deliveries of gas to southern Europe via the Black Sea in 2015?

Miller: Both pipelines fall fully in line with our strategy, which, incidentally, is fully in line with that of the European Union, namely to diversify the transportation of gas. Nord Stream and South Stream create new transport corridors to Europe. Currently, up to 80 percent of Russian gas goes via Ukraine. As the Russian proverb says: "Don't put all your eggs in one basket".

SPIEGEL: We have the same proverb in Western Europe, too. That's why Europeans are supporting the alternative Nabucco pipeline project -- also as a counterweight to Gazprom.

Miller: We have absolutely nothing against Nabucco.

SPIEGEL: But you're doing everything you can to torpedo it. South Stream and Nabucco want to source gas from the same region, from countries such as Turkmenistan and Azerbaijan. It costs Gazprom more to buy gas in Azerbaijan than it does to produce it yourselves in Russia. You likely want to cut off Nabucco's supply from the outset.

Miller: No, what we actually want to do is supply the southern Russian regions bordering Azerbaijan. We currently send gas from the Yamal Peninsula in the north of Russia to Europe for a greater profit than sending it to the south of Russia itself would bring in.

SPIEGEL: It will be difficult for the Nabucco consortium to fill a pipeline if you buy up gas for use in South Stream.

Miller: As with the Baltic Sea pipeline, we first sell the gas, then we extract it and then we deliver it. We won't be competition for anyone with the 63 billion cubic meters we want annually for South Stream. We are only serving our customers' demand for Russian gas. But we certainly won't build a pipeline and only then start thinking about what to do with such and such an amount of gas.

SPIEGEL: That's all well and good for South Stream and Gazprom, but it leaves Nabucco empty.

Miller: If the Europeans want a Nabucco pipeline, they should build it. We have nothing against the idea. Nabucco is their problem. Our job is to deliver our gas to our customers as stipulated in our contracts.

SPIEGEL: Is it true that you offered (German energy utility company) RWE a stake if the group would agree to pull out of the Nabucco consortium?

Miller: I never held talks to that effect. But in theory, we don't mind if someone involved in the Nabucco project also wants to be involved in South Stream. Austrian company OMV is involved in both pipelines. There are also German companies that are interested in South Stream.

SPIEGEL: Might that be BASF and its gas subsidiary Wintershall?

Miller: No comment. But there aren't that many companies on the German energy market.

SPIEGEL: Are such matters really settled at your company headquarters or 14 kilometers away at the Kremlin?

Miller: How wonderful. The perfect cliché for readers in the West. It's true that Gazprom is a state-owned company in that more than half of its shares belong to the state. Because the state is the majority shareholder, it sets the strategic goals: diversifying our markets, our transit routes and our products. The state hasn't asked us to do anything else. Gazprom makes operating decisions very quickly. That is the great advantage we have over the competition.

SPIEGEL: You are sometimes called Russia's second foreign minister.

Miller: (Laughing) I've never heard that one before.

SPIEGEL: They called you that in Armenia. In any case, the way you set your prices seems to follow political guidelines. Friendly states like Armenia get Russian gas at a preferential price.

Miller: That's not true! We've agreed with Armenia that, in the future, they should buy our gas at market rates. Until now they've been paying with shares in their energy and gas-supplying companies. That's why we now own more than 80 percent of Armenia's natural gas infrastructure: pipes, underground gas stores, pipelines and a part of a power plant. The same applies to Belarus. Furthermore, we have a Union State  with Belarus, so there are no duties, which accounts for 30 percent of the gas export price. The state decides whether it can waive that money or not. If that's politics, then it has absolutely nothing to do with Gazprom.

SPIEGEL: Ukraine was punished when it had a president inimical to the Kremlin in the shape of Viktor Yushchenko.

Miller: We still deliver to Ukraine today according to the same price formula as we did when President Yushchenko was in office. But the Russian state has now waived the payment of duties. This means that gas deliveries to Ukraine are just as profitable for us today as they were under Yushchenko. Ukraine is a prime market for us.

SPIEGEL: Understandably, you don't like the image you have of being the long arm of the Kremlin. Is it because of your image that your efforts to sell Russian gas direct to the German end consumer by investing in local utilities there failed?

Miller: If we could deliver gas direct to the end consumer, Germans would definitely be paying less. That's absolutely certain.

SPIEGEL: Is the €125 million that you're planning to spend on the Gelsenkirchen-based Schalke 04 football team over the next five years to improve your image in Germany really worth it?

Miller: We're the team's general sponsor. Of course we have mixed emotions this season. The club is doing very well in the Champions League but less so in the Bundesliga. But we believe in Schalke and are sure the team will soon be back at the top. Schalke is a brand in German football in the same way that Gazprom is a brand here. Sport and culture bring people together. They help us respect and trust each other more.

SPIEGEL: Mr. Miller, we thank you for this interview.

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