“Ein herzliches Grüss Gott”, ladies and gentlemen! It is a special pleasure for me to visit Vienna, and it is a fine tradition of starting the business year with the European Gas Conference. It has been a mixed year for the European gas sector. On the one hand, producers have been under pressure from gas prices falling in the wake of oil prices; on the other, this has made gas more competitive by making it more affordable for consumers. This has been one of the factors promoting the growth of natural gas consumption in Europe and its comeback to power generation. Let’s hope we are finally seeing a steady trend toward changing the situation where gas, a clean and abundant fuel, has been ousted from Europe’s energy balance, even as consumer interest in it has only grown in the rest the world. Clean natural gas had been replaced by coal in European power generation of late. Obviously, this trend has not brought Europe any closer to meeting its ambitious climate targets. Some ambitious targets for transition to a carbon-free economy were announced at the recent COP21 conference in Paris and endorsed by the entire international community. Presumably, this is another factor that should facilitate a steady rise in the share of gas among the world’s priority energy sources. After all, gas consumption strikes a unique balance between the environmental and the economic benefits. No other energy source can deliver that. Coal may be cheap, but using it has a detrimental impact on the environment. Petroleum products are convenient to transport, but expensive and by no means ideal from the standpoint of emissions. This plays a particularly important role in the transport sector. For all their “green” advantages, renewables are too volatile to rely on exclusively. Nuclear power means accepting the risk of major environmental issues in the event of accidents. Clearly, gas is the best choice for working toward a low-carbon economy.

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Thus, after several years of reduced gas consumption in Europe – driven by declining economic activity, decreasing use of gas for power generation, and fairly mild weather conditions – demand on the continent is now recovering, having shown 4% growth over 2014. So where did Europe get these moderate but still rather significant gas volumes – around 19 billion cubic meters? Obviously, the continent’s domestic output continued to fall, as in previous years. So Europe’s growing demand for natural gas last year was met primarily by imported gas. What’s more, contrary to what some may have assumed, LNG was by no means the sole source of these volumes. Gas imports from Gazprom in 2015 grew by more than 8% thus considerably outstripping the market trend, while re-gas terminals stayed substantially underutilized. In total, Gazprom Export supplied almost 159 billion cubic meters of gas to Europe in 2015 – only slightly below the record figures of 2013, and significantly higher than the average indicator in the past five years.

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We are sure, and most experts agree, that Europe’s gas import needs will continue to grow fairly rapidly in the long-term outlook. Gas is already making a comeback to power generation, having managed to reverse the “coal renaissance” trend.

In the future, substantial volumes of gas will also be required for transport, including shipping, where vessels have to meet increasingly stringent emission requirements. According to a consensus forecast by the world’s leading analysis agencies, Europe will need to import additional 140 billion cubic meters of gas by 2015 and 165 billion cubic meters by 2035.

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It is quite clear that in order to meet these growing appetites for imported gas, transmission systems should be constructed right now. This is why we and our partners have decided to expand the Nord Stream project, which reliably delivers natural gas directly to the European Union. The planned expansion will raise the trans-Baltic pipeline’s throughput capacity to 110 billion cubic meters a year. These figures mean reliable supplies of resources for heating and electricity for tens of millions of European households. This is exceptionally relevant indeed not only to meet future demands, but also to substitute falling domestic production in Europe given the decline of production on Groningen gas field in the Netherlands, the largest in Europe. Moreover, major oil and gas companies including Norwegian ones are now cutting their investment programmes in order to answer the sharp fall of gas prices in Europe. According to the Norwegian Petroleum Directorate, in 2016 investments into gas production and transportation in Norway will plunge by more than 20% compared to 2014. In these stringent conditions Gazprom offers Europe new infrastructure projects. Furthermore, it should be mentioned that gas from Nord Stream 2 will not go to consumers in North-Western Europe only. According to our plans, gas will be delivered to the Baumgarten hub here in Austria, and from here it can be transported to many other countries in Central and Southern Europe.

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The Nord Stream 2 will be laid across the Baltic Sea bed, along a tried and tested route. Essentially, the subsea pipeline will duplicate the first project, built to the highest standards and meeting the strictest environmental protection and safety requirements. Rather than reinventing the wheel by creating an entirely new route, we have decided to use the successful experience of the existing pipeline, which transports gas to European consumers reliably, without any transit risks. So there will be no need for us to spend months designing the project from scratch, not to mention the considerable cost savings. I would like to emphasize that Gazprom is not alone in considering it necessary to build Nord Stream 2. This conviction is shared by Europe’s largest energy corporations, with whom we have already signed a shareholder agreement. They include in the first line, our hosting company today - Austria’s OMV. Royal Dutch Shell, Germany’s BASF and E.ON also hold stakes in the new project, along with ENGIE of France. The shareholders list includes companies who participated in the first Nord Stream project, with first-hand knowledge of the trans-Baltic gas pipeline’s advantages. The interest shown by these energy majors confirms that Nord Stream 2 is indeed in demand and commercially attractive.

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The growth of Gazprom’s supply to the markets of Western Europe also proves the prospectiveness of Nord Stream’s expansion. Last year more than 65% of Gazprom exports to Europe came to Western Europe compared to 58% in 2010. Europe will need a great deal of natural gas in the coming decades, and there will be room enough for all in the gas market. What should be ensured now is equal terms for everyone – creating the fair competition environment. Last but not least, let's not forget the costs of new infrastructure for European taxpayers. Actually, Nord Stream 2 won’t cost them a cent: this project is not seeking any funding from the EU, since we and our partners are prepared to finance it ourselves.

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Gazprom is a modern corporation that keeps track of European gas market development trends and adapts its strategy to changes there. It would be hard to accuse us of not being straightforward – after all, we are continually improving our trading system, introducing new instruments, maintaining daily dialogue with our clients and taking account of their wishes in signing new agreements and working on existing contracts. Last September, Gazprom Export held its first ever auction for gas supplied via the Nord Stream pipeline to the Greifswald and Olbernhau delivery points. The auction resulted in over 40 deals with 15 counterparties from various European countries, including established partners and new clients alike. We have tried a new trading mechanism that allows to diversify our business on our traditional markets. Gas auction proved that such way of trading does have a niche in Europe, objectively limited by the market itself. In future, Gazprom plans to sell up to 10% of its export volumes at auctions of this kind. Incidentally, some supporting evidence for our position can be found in the trading results for gas supplied to Greifswald for subsequent transmission via the OPAL pipeline’s restricted capacity. Just one lot was sold at auction there. I’d even call this example the exception that proves the rule. And the rule is this: nobody but Gazprom is interested in using the OPAL pipeline’s capacity. Unfortunately, the capacity-restricting regulation remains in force, so a modern pipeline that could be transporting heat for European citizens and energy for the European economy continues to work underutilized.

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Our position is that the concept of energy security in Europe is not only about diversification of supply routes. Flexibility and security of supply are the top factors to contribute to energy security. Getting back to our policy of flexibility, I’d like to emphasize that Gazprom’s operations make use of all gas trading instruments, including oil products indexation and hub indexation. I can assure you that hub-based contracts make up a high proportion of our portfolio. Isn’t this the best evidence that we are taking a progressive approach? Our open and flexible policy does not, however, mean fluctuating from side to side. In a sector where investment cycles are measured in years and contracts cover decades, changing to suit fleeting market shifts would be short-sighted, to say the least. We still believe that the European market’s established hybrid price formation model offers the best possible reflection of the balance of power and interests between suppliers and buyers. Conversely, the idea of applying spot prices across the board not only violates fair play principles for price formation by sending inaccurate pricing signals, but also endangers the gas supply system’s reliability. Whereas conventional long-term contracts allow consumers to manage their purchases, taking more at peak demand periods and less when demand falls, the spot market’s purchasing mechanism gives buyers no such opportunity.

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I wish to emphasize that even with the historically-established picture in a number of EU member states, where Russia is the sole gas supplier or one of few suppliers, Gazprom cannot dictate pricing terms to such consumers. The formula-based price, once set, evolves automatically. Our price formation is always market-based, allowing for the specifics of each country’s energy balance.

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It is in our key interests to maintain and multiply the role of natural gas – the cleanest fossil fuel and the best energy source for transition to a low-carbon economy. This strategy can be realized only if gas exporters, consumers, and official bodies are willing and able to hear out and listen to each other’s arguments, break down the walls of mistrust and misunderstanding instead of raising them, and remain open to dialogue rather than a monologue of ultimatums. Thank you for your attention!

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