blue fuel newsletter | february 2014 | vol. 6 | issue 7

BLUE FUELFebruary 2014 | Vol. 6 | Issue 7

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www.gazpromexport.com | [email protected] | +7 (499) 503-61-61 | [email protected] 1

The secrets behind the reliability of Gazprom’s export supplies

Gazprom Export Global NewsletterFebruary 2014 | Vol. 6 | Issue 7

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Page 9

Page 5

Shale will not lower European gas prices

Raising political awareness for NGVs in France

© Gazprom Export

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BLUE FUELGazprom Export Global Newsletter

Publishers Contact Info:www.gazpromexport.com | [email protected] +7 (499) 503-61-61 | [email protected]

To Our Readers: Gazprom’s gas bounces back on the European energy market ..........................................................Pg. 4

The secrets behind the reliability of Gazprom’s export supplies...................... .....................................................Pg. 5

Largest LNG carrier at Gazprom Group named “Velikiy Novgorod” ..................................................................Pg. 6

GAZPROM Germania and Audi’s commitment to NGV growth ..............................................................................Pg. 8

Raising political awareness for NGVs in France .........................Pg. 9

First LNG-powered buses to arrive in Warsaw by early 2015 ..........................................................................Pg. 10

Discussion paper: How the Third Energy Package is changing the gas business in Europe ..................................Pg. 11

South Stream Transport signs an agreement with sea ports of Bulgaria ...............................................................Pg. 13

Survey shows Germans view Russia as a strong energy partner ........................................................................Pg. 13

Shale will not lower European gas prices ..............................Pg. 14

Stradiveri and Bashmet Captivate Barbican ...........................Pg. 15

Letters to the editor ................................................................Pg. 17

In this issueFebruary 2014 | Vol. 6 | Issue 7



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Gazprom set a new historical record last year with 162.7 bcm of natural gas exported to Western, Central and Eastern European states (including Turkey), which represents a 16% increase in sales compared to 2012. Several EU member-states demonstrated a double-digit growth of Russian gas imports with Italy (+68%), the UK (+54%) and Germany (+21%) at the forefront.Gazprom Export predicts that the natural gas industry will continue to grow. Europe’s love affair with renewables unwittingly led to a significant increase in coal-based power generation. In Germany, which is Europe’s leader in developing renewable energy, power generation from coal recorded its highest level in more than 20 years. However, increasing coal use jeopardizes Europe’s professed climate goals. Natural gas is the most reliable and clean energy source that can be used as a back-up to power generation from renewables. Gazprom continues to discover and develop reserves, such as the Bovanenkovo gas-condensate field on Yamal peninsula that was opened for production in October 2012. The reservoirs of this giant field contain about 4.9 tcm of gas, equivalent to Germany’s gas demand for the next 60 years. By 2017, the field must reach a full production capacity of 140 bcm per year or about 1/3 of Europe’s current gas demand.Conservative forecasts foresee a gradual surge in European gas demand, which takes into account the accelerated downfall of domestic production and the growing appetite for imports. Gazprom’s abundant gas reserves could serve as a safety net to ensure energy security in Europe. However, the question remains: does Europe have any other economically viable options? Apart from its resource base, Gazprom has some of the most extensive export pipeline networks, such as the Nord Stream subsea gas pipeline, that mitigates transit risks and increases the European energy security. Similarly, the South Stream pipeline project currently underway will provide sufficient energy to cover the demand of about 38 million European households.One of Gazprom Export’s most valuable competitive advantages is its flexibility for clients under long-term contracts. For example, during the unpredictable winter season, Gazprom Export is able to accommodate the high gas demands that fluctuate during the abnormally mild winters alternating with extremely cold snaps. According to recent estimates, the seasonal swing in volumes of Russian gas’s daily deliveries nearly doubled over the last 15 years. Gazprom Export is able to smooth demand fluctuation thanks to its ability to fulfill the flexible daily nominations. Furthermore, Gazprom Export is closely watching the evolution of the European gas market and is ready to adapt its marketing policy to the changing conditions.The European energy market is currently at a crossroads. There are several risk factors and challenges that need to be addressed, such as the dwindling indigenous gas production registered in the UK and Norway. Moreover Dutch authorities have recently decided to cut output from Groningen gas field starting from 2014. In addition, the LNG supply with Qatari and African LNG carriers is changing track to more lucrative Asian markets and thus is hard to forecast. There is also political instability in gas producing states such as Egypt, Nigeria and Libya. Nations are all concentrating on the environmentally controversial and long-term oriented shale industry. Despite the challenges, Gazprom Export’s gas is positioned as the most secure and cost-effective option for Europe during a time of geopolitical turbulence. However, it is up to Europe to decide on their trusted and dependable energy supplier.

To Our Readers: Gazprom’s gas bounces back on the European energy market




The increase in natural gas exports to European countries, including Turkey, in 2013 was not only due to favorable market conditions, but also due to Gazprom Group’s competitive advantages. A veteran of the Russian gas industry, Yuri Zaytsev, reveals some of its commercial successes.

Gazprom’s uniqueness is rooted in its remarkable production “firepower,” which enables the company to increase its export potential. In 2013, we produced approximately 490 bcm of gas, while our production facilities enable us to offer up to 617 bcm to the market. According to various estimates, Russian gas – at current consumption levels – will last for at least 70 years even if nothing new is explored. In addition, Gazprom is adding to its reserves annually more than it is extracting.

Let’s take Yamal as an example. We will soon bring the Bovanenkovo gas field production to 115 bcm per year. Today, this field delivers 140 mcm of gas per day via the Yamal–Europe and Nord Stream pipelines. These scales should be evaluated with the consideration that production in these regions is carried out under the most complex climatic conditions – with permafrost and -40°C air temperature. But the most advanced technical solutions are used at these fields. The pipeline has a pressure of 100 atmospheres. Complicated technologies are used for gas cooling. The drying process is controlled by water dew point measurements in many parts of the system, and they are always below -30°C here. This means that the gas is completely dry. There are no complaints against its quality.

Thanks to these hydrocarbon reserves, Gazprom does not experience failures in deliveries, unlike a number of foreign suppliers located geographically further south. When there’s a sharp fall in temperature, the supplier’s oil field facilities stop and they are forced to default on their contractual obligations. At the same time, in the Far North – Urengoy, Yamburg, Zapolyarnoye and Bovanenkovo gas fields – work continues even if temperatures drop to below 40°C.

Why does this happen? The answer is simple. We invested heavily in production facilities. We constructed roads, created the entire infrastructure, everything is heated by electricity, there are places to drain liquids, condensate and to repel water. The oil field facilities are serviced by competent and trained personnel who are always ready to arrive in heated machines when the temperature is at -35°C to service any facility. Moreover, all the equipment at the central processing facility is housed in special shelters.

We have the most extensive network of gas trunklines in the world – 168,000 kilometers. Additionally, supply reliability and security is high. These multi-line pipelines are run through “corridors” that are interconnected using system jumpers. For example, the Yamal Center corridor and the corridor from Yamburg, Urengoy, Zapolyarnoye and other gas fields leading to the Center are interconnected with multi-line jumpers. This enables Gazprom to redeploy any gas volumes between them if required. There are also facilities for reverse flows. In Europe, such interconnectors are only in their early stages of construction.

The Urengoy corridor, for example, has 10 lines, six of which operate during winter, if necessary. In summer, fewer lines are in operation. They are equipped with shops, jumpers and loopings (a section of the pipeline laid parallel to the main pipeline; it is engaged when there is a need to increase the capacity of the latter). You can witness the margin of safety for yourself. Each line of the pipeline has compressor stations built about every 150 km.

Gazprom’s system for maintenance and repair of oil field facilities and gas pipelines is the most important production and transportation security factor. Unlike Europeans, we do not consider this as a “non-core asset.” This is why we do not sell it to private companies. We have warehouses that house an emergency reserve of pipes at regular intervals along each pipeline route. They are kept in piles and are treated to avoid rusting, and are packed with stubs. They have a route road. If any pipeline or knot somewhere ruptures, we will not have to order it and deliver it because we already have everything in place.

Each station has emergency repair services, equipped with modern bulldozers, pipe layers, welding equipment, etc. to be used for scheduled maintenance and emergency response. Gazprom has the most modern equipment for diagnosis. We continuously monitor the technical condition of the linear part

The secrets behind the reliability of Gazprom’s export suppliesBy: Yuri Zaytsev, Councillor to Director General of Gazprom Export

Continues on page 6




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of pipelines, crane facilities, jumpers, and other facilities. This is done according to a yearly plan.

Gazprom also has a large helicopter fleet, which sets us apart from our competitors. These helicopters have on-board equipment to detect leaks at valve stations and underground parts and can deliver a repair crew to the site. It also helps reduce the time it takes to fix any defects and address potential emergencies.

The unique network of underground gas storage facilities is another pillar of our reliability. Gazprom created an underground gas storage network with a total active capacity of more than 68 bcm. This network can offer an offtake of about 725 mcm per day.

Finally, Russia has a very favorable legal framework in terms of the management of its gas transportation system. Gas flows are controlled from a single control center, facilitating quick decisions to transfer gas volumes to different regions. If it is not a force majeure situation, but just a need to move additional gas volumes to a region, then the problem is solved by the duty

manager. He has the right to regulate flows, of course, abiding by current regulations.

All together, gas reserves, high-tech equipment, a system for maintenance and repair of oil field facilities and gas pipelines, underground storage facilities, favorable legislation, and gas flow control flexibility ensure the system security of gas supplies both for domestic consumers and for export. This system has been put together over several decades and it is now operating effectively. We are being reproached for high “expenses,” but these are crucial investments in for our system’s security.

The secrets behind the reliability of Gazprom’s export suppliesContinued from page 5

Largest LNG carrier at Gazprom Group named “Velikiy Novgorod”A delegation of senior OAO Gazprom and Gazprom Marketing & Trading (GM&T) executives took part in the naming ceremony of the newly built LNG vessel ‘Velikiy Novgorod’ at the STX O&S shipyard in Jinhae, South Korea. The ceremony was attended by the Deputy Chairman of the Gazprom Management Committee and Director General of Gazprom Export, Alexander Medvedev, as well as the President and CEO of Sovcomflot, Sergey Frank.

The GM&T group will charter the ‘Velikiy Novgorod’ from Sovcomflot, the owner of

the vessel and Russia’s largest shipping company. The ship will be the first vessel chartered by the GM&T group from Sovcomflot and the biggest LNG carrier in GM&T’s fleet to-date.

The state-of-the-art LNG carrier ‘Velikiy Novgorod’ features membrane tanks with a cargo capacity of 170,200 cm and is powered by a tri-fuel diesel-electric propulsion system. Its ‘Ice2’ ice class and winterization equipment allows the vessel to sail in icy conditions, including through the Northern Sea Route during the open water navigation period. The ship is classified




according to the Russian Maritime Register of Shipping and Lloyd’s Register. The vessel is manned by a Russian crew, including graduates and cadets of the Admiral Makarov State University of Maritime and Inland Shipping (SUMIS) in St. Petersburg, Russia.

The vessel is named ‘Velikiy Novgorod’ after an ancient city in the Northwestern part of Russia that, from its foundation in the 9th century, has played a key role in the formation and development of the Russian State. In 1992, it was recognized as a World Heritage Site by UNESCO.

BackgroundGazprom controls the world’s largest ice-class LNG fleet and is the first company in the world to carry LNG through the Northern Sea Route on one of its vessels.

Gazprom’s project “Sakhalin-2” uses ice-class vessels to transport LNG and a crude/condensate blend from its loading facility in the port of Prigorodnoye year-round. The vessels are LNG tankers, named ‘Grand Elena,’ ‘Grand Aniva’ and ‘Grand Mereya’ and the oil tankers are named ‘Governor Farkhutdinov,’ ‘Sakhalin Island’ and ‘Zaliv Aniva.’

Five other LNG tankers chartered by Gazprom have ice-class and winterization equipment, which allows them to export

LNG from all current (“Sakhalin-2”) and future (“Vladivostok LNG” and “Baltic LNG”) Gazprom projects year-round, as well as to sail via the Northern Sea Route during open navigation.

One of these vessels ‘Ob River’ sailed through the Northern Sea Route twice in 2012, first in ballast, and then with a cargo of LNG from Norway to Japan. It was the world’s first LNG vessel to do it.

Gazprom’s LNG tankers fleet1. LNG Pioneer. Built - 2005. Shipowner – MOL (Japan).

Cargo capacity – 138,000 m3.

2. Ob River. Built – 2007. Shipowner – Dynagas Ltd (Greece). Cargo capacity – 149,000 m3.

3. Yenisei River. Built – 2013. Shipowner – Dynagas Ltd (Greece). Cargo capacity – 155,000 m3.

4. Lena River. Built – 2013. Shipowner – Dynagas Ltd (Greece). Cargo capacity – 155,000 m3.

5. Velikiy Novgorod. Built – 2014. Shipowner – Sovcomflot (Russia). Cargo capacity – 170,000 m3.

6. Pskov. To be delivered in Q4’14. Shipowner – Sovcomflot (Russia). Cargo capacity – 170,000 m3.




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GAZPROM Germania and Audi’s commitment to NGV growth

Business and academics joined Vyacheslav Krupenkov, senior managing director at GAZPROM Germania and Dr. Ulrich Hackenberg, board member for technical development at Audi (in the photo), to discuss the role of natural gas in German transportation, environmental policy and harnessing the potential of alternative fuel in the future.

Dr. Timm Kehler, managing director of erdgas mobil GmbH, started the event with an overview of the latest industry developments, “Natural gas is now the most important alternative fuel.” Over 7,800 new natural gas vehicles were sold in 2013 – 50 % more than in 2012. Kehler also noted that natural gas is by far the most cost-effective transportation fuel. A kilogram of natural gas contains around the same energy as 1.5 liters of super petrol, but costs only half as much. “Driving a natural gas vehicle used to mean giving up much of what makes driving fun, and that’s no longer the case. Natural gas vehicles now offer just as much performance as petrol vehicles,” said Kehler.

Professor Stefan Pischinger, head of RWTH Aachen University’s Institute for Combustion Engines, highlighted the long-term availability of natural gas. Natural gas supplies are guaranteed for hundreds of

years, he said. The greater initial cost of CNG vehicles, which can cost up to €3,000 or more, will be amortized in three to five years. The variety of models available had also increased significantly in the past few years, he said.

That statement was reinforced by Peter Weisheit, Volkswagen AG’s technology spokesman, who outlined the Volkswagen Group’s fuel strategy. Volkswagen now offers a Golf Variant TGI with a CNG engine that meets European policymakers’ emissions goals of 95 grams of CO2 per kilometer. Demand is increasing, and the cost is just €1,000 more than a comparable diesel model, said Weisheit. Weisheit also reinforced Volkswagen chairman Dr. Martin Winterkorn’s comments on Volkswagen’s strategy for the coming years by stating that Volkswagen needed to spend more time on natural gas in the next few years than it had in the past.

His remarks were echoed by Timo Vehrs, director of business development at GAZPROM Germania. Gazprom has been committed to developing the natural-gas-for-transport segment, he said. “We plan to be operating at least 35 natural gas filling stations by the end of 2015 and are working on other sites in neighboring European countries,” said Vehrs.




Gazprom has also entered the (LNG) industry since it can be stored very compactly when cooled to -161°C. LNG entered the market in north-east Poland, and it’s currently being used to fuel public transportation buses.

“There’s still a lot to be done,” said Vehrs. For example, pricing at the pump continues to lack transparency because unlike petrol and diesel, natural gas is priced per kilogram, meaning that it is not clear to consumers how much they are saving. “The best-case scenario would be to have a petrol-equivalent price displayed to make it clear how much more cost-effective natural gas is than super and diesel,” said Vehrs.

The experts were all pleased with the German federal government’s decision to extend tax credits for natural gas vehicles beyond 2018. The decision will reinforce that natural gas is the more cost-effective option over petrol or diesel in the long term.

GAZPROM Germania’s Krupenkov and Audi’s Hackenberg concluded the session by holding a Q&A session for the media representatives in attendance. When asked about the future of natural gas, Krupenkov responded, “Natural gas has enormous potential as a means of using motor vehicles

in an energy-efficient, cost-efficient, and environmentally friendly manner. We’ll continue to invest in our network of natural gas filling stations.”

Krupenkov also announced that Gazprom will be sponsoring the 2014 Volkswagen Scirocco R-Cup. The Scirocco R-Cup is the world’s only race powered completely by natural gas supplied by Gazprom. “The Scirocco R-Cup shows that high performance, eco-friendliness, and high emotions are not mutually exclusive. We look forward to the Volkswagen races,” said Krupenkov. A natural gas race is also being planned in Moscow.

Audi’s Hackenberg’s final remarks were dedicated to reinforcing natural gas vehicles’ importance to the Volkswagen Group. “We want to be the world’s most ecologically friendly automobile manufacturer by 2018 and therefore we remain committed to natural gas vehicles,” said Hackenberg. The Audi A3 g-tron is almost ready to be launched, and the second-generation MLB platform will be designed to handle CNG engines – and not just for the A3. “The A4 will certainly be available with a natural gas motor. It’s even a possibility for the A6,” he said.

Raising political awareness for NGVs in France

Gazprom Marketing & Trading (GM&T) France, in partnership with energy media group BIP Enerpresse, hosted a brainstorming session with industry executives and political stakeholders to raise awareness of the potential for natural gas vehicle (NGV) development in France.

This event took place amidst political discussions around the French energy mix, as the French Parliament is expected to debate a draft bill on energy transition as early as in the

second half of 2014. Moreover, the transportation sector is currently center stage as the predominance of diesel is being questioned. This event was aimed at presenting a comprehensive overview of the French market for NGVs, exploring European initiatives and assessing opportunities and constraints stipulated by the current French regulatory environment.

Over 120 industry representatives and decision-makers attended the 90-minute session to listen to the diverse perspectives of five expert speakers: Eugene Pronin (in the photo), Senior Specialist for LNG Export at Gazprom Export, Jean-Marc Celsa, Product Director at IVECO, Corinne Berthelot, head of the French trade association for NGVs, Florence Tordjman, Deputy Director for Energy at the French Energy Ministry, and Antonio Tricas from the European Commission’s Clean Transport and Sustainable Urban Mobility unit.

All speakers stressed the necessity of promoting the development of natural gas as a motor fuel in France and creating incentives to make up for France’s relative delay compared to its neighboring countries, notably Germany and Italy.

Continues on page 10




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The advantages of natural gas in transport such as noise reduction, decrease in soot (up to 96%), nitrogen oxide (by 70%) and greenhouse gas emissions, as well as lower cost, security of supply and technical knowledge were highly praised in all of the speakers’ contributions.

“We need real political will for NGVs to develop,” stressed Pronin, to which Tordjman responded that political awareness of the benefits of this alternative fuel already existed. Antonio Tricas from the European Commission unveiled the ambitious goals set in the draft Clean Power for Transport Directive: the installation of 105 compressed natural gas for light vehicles fuel stations and the construction of 18 LNG stations in France by the end of 2020.

All speakers made regulatory and political recommendations. Tordjman stressed that incentives must be implemented to further expand NGV and LNG stations and

make them accessible to all consumers. Pronin asked for European regulatory harmonization, while the head of the French trade association for NGVs Berthelot called for more long-term fiscal incentives for industrial players and stressed that NGVs were the response to concerns over air quality in urban areas. Tricas noted that biogas injection in gas networks will also be favored by the implementation of new European standards by 2015.

Iouri Virobian, President of GM&T France, introduced and concluded the event, emphasizing the most interesting points made by the speakers. In anticipation of a new Energy Transition bill, the event demonstrated Gazprom’s and its subsidiaries’ interest in investing in the development of NGV infrastructure throughout Europe and in France in particular, and highlighted the importance of a conducive regulatory environment.

Raising political awareness for NGVs in FranceContinued from page 9

Warsaw Bus Company MZA and Lider Trading Company came to an agreement on a contract to supply 35 LNG-fuelled buses to Warsaw. The contract, which was signed at the city hall of the Polish capital, also includes the development of a refuelling station.

The first LNG-powered buses will be introduced to the streets of Warsaw by early 2015. Lider Trading, the distribution partner of GAZPROM Germania and Polish city bus maker Solbus, will supply the buses and equipment.

Solbus, Lider Trading, and GAZPROM Germania gained respect for convincing MZA of the environmental and economic benefits of using natural gas as a

transportation fuel. According to the contract, Solbus will deliver innovative LNG-fuelled urban buses, while GAZPROM Germania will supply the LNG and invest in the fuelling infrastructure.

This is not the first investment by Solbus and Gazprom Group aimed to develop a sustainable transport system in Poland. In October 2013, both companies launched a project to supply 11 LNG-powered buses to the Polish city of Olsztyn. This project is the first aimed at introducing such buses into the European public transport sector.

LNG was introduced to the public transportation system in Poland as part of the wider European strategy supported by Gazprom Group towards a more eco-friendly

First LNG-powered buses to arrive in Warsaw by early 2015




and economically attractive transportation structure based on natural gas. Amid rising petrol and diesel prices and under tighter environmental regulations, methane is one of the most prospective fuel alternatives. The main advantages of natural gas are that it meets the most stringent emission standards

for hazardous air pollutants, it is attractive in price, and it is widely available. Additionally, gas engines are less noisy than petrol or diesel engines.

Discussion paper : How the Third Energy Package is changing the gas business in EuropeBy: Alex Barnes, Head of Regulatory Affairs, Gazprom Marketing & Trading (GM&T) Limited

In the 1980s and 1990s, economic thinking shifted from the view that the gas industry did not need to be a monopoly to be commercially viable. The mind-set was that only one part of the gas business was a true “natural monopoly,” a business where it was not economically viable to have a competing business. This part of the gas business is the transportation part of the chain, the owner and operator of the pipelines.

The European Union (EU) also wanted to liberalize its energy markets in order to benefit from competition between suppliers, whether upstream or downstream, and help improve its economic competitiveness. This eventually led to the Third Energy Package, which was passed in 2009 and has been in full-force since 2011. The Third Energy Package includes detailed rules for the way the gas market is structured, which in turn affects the way business is done.

1. The way transportation capacity is booked is changing dramatically. Capacity will now be sold and allocated via auctions, and any capacity which is booked, but not used will be made available to the market. This means that as long as there is sufficient physical capacity to flow gas, there will be greater competition between different national markets as gas will be able to flow from low priced markets to higher priced markets.

2. The EU’s security of supply legislation requires that countries build additional pipelines connecting them

with neighboring markets to cope with the loss of a major source of supply. The idea is that this will make it easier for gas to flow from countries with plenty of gas to those who might otherwise have a gas emergency due to significant loss of supply. However, as the loss of a major source of supply does not happen every day, this again means that there will be plenty of capacity available to flow gas between national markets, and therefore encourage more competition.

3. The price at which pipeline companies sell its capacity will change as result of structural modifications. Capacity is no longer sold on a point-to-point basis, (e.g. from border to power station) but on an entry-exit basis. Companies book entry capacity to enter a market zone which means that they are at the trading hub, and exit capacity to leave the trading hub to go to the customer (e.g. power station, stadtwerke, large factory). Pipeline companies are regulated as to how much revenue they are allowed to earn, and then decide how to structure their capacity charges to earn their allowed revenue. Under proposed rules they will be allowed to raise their tariffs for the following year to make up the shortfall.

Lastly, new rules will change the point at which upstream suppliers sell gas to downstream companies. In the future, it will be possible to sell gas only at the Virtual Trading Points or hubs, as it will not be possible to book or nominate gas flows to delivery at the border between two national markets, like it currently does.

These structural changes will impact Gazprom. But as with all changes, they can become both threats and opportunities. The opportunities include the following:

1. Gazprom will have much greater access to the European market. In the old world, Gazprom was reliant on selling to a few large customers who in turn sold to end distribution companies and end users. Gazprom could not access these customers because it could





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not book capacity to them. In the new world of entry exit and hubs, Gazprom can book entry access enabling them to access the trading hub. From the hub, it can then access all the customers in that market, from power stations and distribution companies (like the ‘Stadtwerke’ in Germany) to small customers such as shops and households. This gives Gazprom a much greater scope to manage its demand risk, both in terms of price and volume. For example, Gazprom can easily supply power stations itself, an important consideration as it moves into the power business.

2. The new capacity rules give Gazprom much greater scope to optimize its transportation costs. In the old world, it was not easy to book capacity in a way which matched the expected offtake of gas. Often, companies were required to book on a peak basis, which meant that for much of the year their booked capacity being paid for was not being used. The new rules mean that Gazprom can book more capacity in winter quarters when demand is likely to be high and less in summer quarters when demand will be lower. Moreover, the new rules allow capacity to be booked a month ahead, day ahead and within daily basis, so that if it needs more capacity than originally calculated Gazprom can book supplies as its needed (even on the day of delivery, if needed). This offers Gazprom a scope for large savings and offers an advantage that few other gas companies

in Europe have, namely its in-depth knowledge of the pipeline networks and gas flow patterns in Eastern Europe. This knowledge will enable Gazprom to be in a good position to know when capacity will likely to be in short supply and therefore when is the best time to book it, either far in advance or on a day ahead basis. In places where Gazprom is the only supplier of physical gas, there is little risk of someone else booking the capacity to compete with their order.

3. The new market mechanisms and spot markets place a greater value on flexibility. If demand for gas goes up, due to a cold snap, or supply goes down because LNG is diverted elsewhere, the price for gas will go up. However, it will be companies with gas that have the ability to respond to changes in demand and will benefit. Gazprom, which has access to large quantities of gas in storage, and has large pipelines that can increase flow rates, is ideally placed to do this. With the ability to book capacity on a as needed basis, Gazprom can decide if it wants to flow more gas to the markets and thereby increase its revenues and profits.

There is no doubt that the Third Package has created major challenges for Gazprom. But it hasn’t altered the fundamental fact that Europe needs gas and Gazprom remains in an excellent position to supply it.

Discussion paper : How the Third Energy Package is changing the gas business in EuropeContinued from page 11




The German public widely recognizes Russia as a reliable energy supplier. In fact, a large majority of German citizens are in favor of further expanding economic relations between Germany and Russia The German polling institute Forsa, commissioned by Wintershall, concluded that Germany views Gazprom as its largest internationally active crude oil, natural gas producer and a long-time business partner.

Forsa asked over a thousand German citizens their opinion about economic relations between Germany and Russia, while focusing particularly on energy issues.

A large majority of Germans clearly rate the country’s economic relations with Russia as positive. Almost 90% of respondents believe that relations will remain stable and continue to expand in the future.

Reliable energy supplies Russia is the world’s largest natural gas producer and Germany and Europe’s most important energy supplier. Russia has cultivated a close energy partnership with Germany for over four decades which is clearly reflected in Forsa’s survey results, 70% of those asked see Russia as a reliable natural gas and energy supplier for Europe.

Mario Mehren, member of the board of executive directors of Wintershall Holding GmbH responsible for Russia, commented on the survey results, “I am pleased that Russia is fixed in people’s minds as a reliable energy partner. After all, we have enjoyed decades of excellent cooperation with our Russian partners. In our various joint ventures, every day we see cooperation based on mutual trust at work.”

Survey shows Germans view Russia as a strong energy partner

South Stream Transport has signed an agreement with Bulgarian sea ports, to store pipes which will be used for the construction of the South Stream Offshore Pipeline.

South Stream Transport identified suitable storage areas at the Port of Burgas and Ports of Varna-East and Varna-West. Over a period of four to six years, the agreement stipulates that ports can be used as marshalling yards and for any necessary logistical services.

The South Stream Offshore Pipeline will consist of four parallel pipes across the Black Sea, each pipe made up of

over 75,000 pipe segments. With the construction start date scheduled for later this year, the pipes will be placed on board specialized pipe-laying vessels.

South Stream Transport CEO Oleg Aksyutin emphasized that, “The marshalling yards in Bulgaria will play a key role in terms of logistics for laying the offshore pipeline.” According to Aksyutin, the project will on one hand improve the local community’s business environment and on the other hand ensure the timely construction of the South Stream offshore section.

South Stream Transport signs an agreement with sea ports of Bulgaria

“At Wintershall we see Russians and Germans cooperating every day in a spirit of trust.”

- Mario Mehren

Alexander Medvedev, Deputy Chairman, OAO Gazprom, Director General, Gazprom Export and Gerhard König, Chairman, WINGAS, at the construction site of the new WINGAS office in Kassel.





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These views in this article represent those of Thomas Porcher, who holds a Ph.D. in economic sciences and is an associate professor in commodities markets at the ESG Management School, as well as a lecturer in economics and geopolitics of energy at the University Paris Dauphine. He authored the book, The Mirage of Shale Gas.

BF: Do you believe that the exploitation of shale gas in Europe could bring about an energy revolution similar to the one happening in the United States?TP: We have to recognize that there won’t be an energy revolution without a decrease in energy prices. In the United States, gas prices were divided by three, leading to a drop in energy cost, an improvement in competitiveness and stimulated employment. But for the time

being, nothing seems to indicate that European gas prices would decrease as much, assuming that they decreased at all. The main reason is that the European gas market does not work the same way that the American market does.

The European market is more rigid, as it is based on a 10 to 30 year long-term contract with supplying countries. These contracts take into account spot prices, up to 46% in France, yet they are also indexed on oil prices. Even if we assume that spot prices will decrease with the production of shale gas they act as a stabilizer since the share depends on oil prices, which have been increasing since 2004.

There is currently a debate on whether prices are to remain at such low levels in the United States. Ben Dell, from Bernstein Research in New York, suggests that in order to cover the total costs needed for research, develop, and exploit of shale gas, the country should set the price at $7.50 to $8 BTU, which is almost as expensive as European gas! Some gas company CEOs, like Aubrey McClendon of Chesapeake Energy Corp., even talk of a price bubble and claim that such prices are unsustainable.

Moreover, the belief that gas prices could decrease in Europe is based on the premise that the extraction costs are lower than market prices. Now, nothing indicates that this will be the case, and if

Shale will not lower European gas prices

Positive influence on political relations The economic relations between the two countries also influence the political relationship between Germany and Russia. Around three quarters of Germans believe that close economic ties will improve political relations between the two countries.

Mehren added, “This study shows us how multi-faceted public opinion is. In particular, people are very aware of the relevance of good and stable economic relations for many areas of society. That gives us further encouragement for our work.”

Germans view Russia as a strong energy partnerContinued from page 13




the extraction cost is indeed higher than gas prices on the market, there will be no economic benefit to exploit gas.

Lastly, some support the exploitation of shale gas for its environmental benefits, while also touting the economic benefits its production would provide. This is a very poor perception of the interaction between extraction conditions, cost and prices. If extraction conditions respect the environment, then extraction costs automatically increase and gas prices on the market have fewer chances to decrease.

BF: Do you think the production of shale oil will cause a supply shock that will lower oil prices?TP: Some observers suggest that oil prices could decrease along with the development of the production of shale oil. This is a mistake because the oil market does not work the way traditional markets do.

The OPEC cartel produces 40% of the world’s oil supply and adjusts production quotas according to prices. As a result, if the global oil offer increases thanks to the production of shale oils, OPEC will react by adjusting production quotas in order to maintain high crude oil prices.

Secondly, we have to take into account the various extraction costs, which depend on the area of operation. Nowadays, oil companies work in increasingly more remote areas, for instance in French Guiana, drilling extends to 6,000 meters deep. In order to be profitable, such projects require crude oil prices to be high to cover the high extraction costs. Furthermore, shale oil has become profitable only recently,

when oil prices rose. The trend growth of extraction costs in the oil industry has played the role of a price stabilizer.

BF: Do you think the production of shale oil and gas in the United States will cause a global geopolitical disruption?TP: The theory that there will be a geopolitical disruption due to the production of shale gas and oil reflects an inaccurate analysis of the oil market. As for geopolitics, in the past production of unconventional oil similar to that in the United States has not provoked any geopolitical disruptions.

After the oil crisis in the 70s, the production of oil in Africa and South America strongly developed in order to diversify supply sources and weaken OPEC’s power. The global oil supply has increased strongly and mechanically, and OPEC’s share decreased from 55% in 1973 to less than 30% in 1985.

Some experts predicted a major geopolitical disruption, and the implosion of OPEC; however, 40 years later, the geopolitical deal has not changed much. The reason is that the geopolitical power of an oil-producing country is not determined by its production level; rather it is determined by its ability to mobilize its oil when other producers become unsteady. The reason Saudi Arabia has become such a major geopolitical player is because it has a production margin that allows it to replace an unsteady producer. What is most essential to being a major geopolitical player is the political will to compel production.

Stradivari and Bashmet Captivate BarbicanAs part of the UK-Russia Year of Culture 2014, the Moscow Soloists Chamber Orchestra performed a series of works by Britten, Shostakovich and Tchaikovsky at the Barbican Hall, conducted by the world-renowned virtuoso violist Yuri Bashmet.

For the first time, the orchestra performed on the prized Antonio Stradivari instrument collections from the Russian State at The Royal Academy of Music, London. Students from the Royal Academy of Music, Maestro Yuri Bashmet and Kristine Balanas, performed viola and violin solo pieces.

This unique collaboration between the Moscow Soloists Chamber Orchestra and the Royal Academy of Music illustrated the rich and diverse cultural heritage of both the Russian and British cultures. It also showcased the potential for future artistic collaboration between the two countries.

Maestro Bashmet said, “Last night’s performance was truly magic and unique. The audience was incredible. It has been an absolute pleasure and honor to kick-start the UK Russia Year of Culture in London. The Barbican is such a unique venue, which was absolutely perfect for the occasion. It helped underline the magnificence of the Stradivari instruments we used. We are grateful to the Royal Academy of Music for their support in making this concert happen. It has been a pleasure to perform alongside Kristine Balanas and the Royal Academy students. The Academy let us use two Stradivari violins and one Stradivari viola specifically for the occasion.”

Kristine Balanas said, “It has been an honor to be invited to perform alongside Maestro Bashmet and the Moscow Soloists.”





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The Royal Academy’s Principal, Professor Jonathan Freeman-Attwood, added, “It’s a privilege for the Royal Academy of Music to work again with Maestro Bashmet on another exciting project. I have warm memories of his 1997 Mozart Sinfonia Concertante performance with the Academy Symphony Orchestra and our Menuhin Professor, Maxim Vengerov. I am also grateful for this outstanding opportunity for our fine young colleague, Kristine Balanas.”

The day before the Barbican Hall concert, Maestro Bashmet held a public inspirational viola master class session that he led with students from the Royal Academy of Music at the Academy’s main concert hall, the Duke’s Hall. The master class included William Walton’s Viola Concerto and Dmitry Shostakovich’s (1906-1975) Sonata for Viola and Piano, op.147. The master class

was attended by well-known professors of music, students and representatives of the British media.

Sponsors The Gazprom Group proudly supported this unique concert within the framework of the project, “Stradivarius in the Capitals of the World.” Gazprom group became a sponsor in 2011 and that year, with the support of Gazprom Export, the antique instruments from Russia’s State Collection of Unique Music Instruments were played outside of Russia for the first time. Since then, concerts have been held with great success in Vienna, Rome, Warsaw, and Berlin, all as part of the “Stradivarius in the Capitals of the World” series.

Stradivari and Bashmet Captivate BarbicanContinued from page 15




I spent 48 hours trapped in a snow storm near a Gazprom gas station in Căldărușanca, on the E85 road, near Buzău, Romania.

On Saturday, 25 January 2014, there was a huge storm and police had to block the main road I needed to get home to Buzău from Bucharest. That left me trapped along with 27 other cars in a Gazprom gas station parking lot until the road was cleared.

I wanted to personally thank Gazprom’s staff at the Căldărușanca gas station. The team was wonderful, professional, kind, courteous and friendly. The employees handled the crisis situation professionally. I now realize it wasn’t easy to have almost 80 people stuck in their station for 48 hours, but they handled the situation flawlessly.

Well done Gazprom Căldărușanca! You are great!

- Daniel Sima, Buzău

Letters to the editor

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blue fuel newsletter | february 2014 | vol. 6 | issue 7

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