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Ladies and gentlemen, dear colleagues, Our forum is being held under the motto “Sustaining Future Global Growth”. It expresses the main task that stands before us, the energy and gas companies today, – to as soon as possible meet the growing demand for energy and at the same time improve the ecological index of energy. According to demographers, the world’s population will reach 8.5 billion people by 2035. At the same horizon, experts from different countries are predicting the results of implementing possible strategies for the development of world energy. In the meantime, the 7 billionth person was born on September 3, 2011 on our planet. These billions of people today need a favorable environment and energy for economic growth.

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It is quite possible that there is future for renewable energy sources and technologies, which are still in the experimental stages. Nevertheless, fossil fuels account for the main power generation at present. Moreover, the need for available energy at affordable prices is now so great that we have seen – with great concern – the rapid increase in the use of coal, the most intense source of hazardous emissions. The rate of growth in world energy demand is clearly outpacing development of energy technologies based on solar, wind, tides, or carbon capture and storage. This means that for a sustainable development, the global economy immediately needs an energy alternative. Here, natural gas offers such alternative. The untapped potentials of hydrocarbon energy are quite large – whereas the world’s recoverable oil reserves are estimated at 182 billion tons, the total recoverable natural gas reserves are estimated at about 850 trillion m3. The technological potential is even more untapped – gas technologies are almost ready for expanded use in the world economy, while the economic efficiency of using natural gas to achieve environmental objectives in the energy sector is well known to experts. Experts and analysts are more and more confident about the coming of the “golden age of natural gas”. However, in order to fulfill its mission and provide the world economy with default fuel, the gas industry itself must stay on the path of sustainable development, and the key to solving this problem – integration in the broadest sense: integration of markets, integration of technologies, integration of innovations with reliable ideas that ensured the entrance of the gas industry into today’s frontiers.

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The gas industry has experienced significant and truly revolutionary changes in the last decade. It seems that not so long ago, the gas world was divided by seas and oceans, on regional segments, within which the pipeline completely “ruled”. Rapid development of LNG technologies within a decade dramatically changed the picture, raising hopes for an all-out globalization of the gas business, and for the wiping of boundaries between markets located in different continents.

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However, industry planners had hardly formed a new global picture of the gas business before a breakthrough in the commercialization of the so-called “unconventional” gas production technologies, again made significant changes to the rules of the game – now it is a good practice to say that the future gas industry belongs to alternative sources to natural gas. Now we are witnessing a new perspective of the widespread conversion of gas importers to exporters, almost a total self-reliance and restructuring of the entire world system of the gas business on the principles of trading and full liberalization of markets. In these circumstances, we believe that we need to have sober look at what is happening. We need to see what the prospect is not as we would like, but as it could be, if we act based on today’s realities. What are these realities?

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The global gas business has entered a stage of comprehensive diversification and structural diversity. World gas trade increased by 4.2% in 2011 alone. This growth was due to increase in exports from Russia, Qatar and Turkmenistan. Moreover, despite the high growth of LNG supplies, pipeline transport is still in the leading position. Regional pipeline systems continue to develop rapidly, while interregional transportation facilities for network and liquefied natural gas complement them, responding to the dynamics of global growth. With the development of international trade, export gas pipelines, which previously connected two countries – the exporter and importer – began a transformation into transcontinental systems. Today, there is a transborder gas market in the North American continent. The EU is working to create a single European gas market. Integration processes in the growing Unified Gas Supply System of the former Soviet Union are continuing. Despite the powerful factors of globalization, in reality there are three macro-regional markets today – North America, Europe and East Asia. Each of these markets retains its regional identity.

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Regional specificity is reflected, in particular, in natural gas pricing in various regions. Global LNG suppliers are not yet able to satisfy requests as to organize a gas-to-gas competition at a level sufficient to equalize prices on a global scale. Prices in East Asia are significantly higher than the European level, not to mention the American prices, which are actually behind a protective barrier of government policies aimed at using natural gas as a means to restart the American economy. Whereas North America is planning its economic future based on self-sufficiency in raw hydrocarbons, the reverse process is seen in Europe, and European consumers will need high volumes of imports. The East has its own characteristics. Developing economies in Asia are demanding more and more energy, while often not able to be guided by environmental considerations in determining their energy priorities. In this region, the issue of access of the growing population to modern energy sources and the issue of ensuring economic growth using energy sources are gaining the greatest relevance. Data show that major energy demands will come from countries like China and India in the coming years, and this demand will maintain an appropriate tone of the Asian gas market. The map of gas market state regulation looks very uneven. Most countries prefer regulation to spot pricing. The market is very objectively preserving the features of the traditional organization. This fact must be taken into account for the stability of the world’s gas supply system, especially when it comes to improving the pricing and contracting system in the gas industry.

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It seems to us that primitive, almost Orwellian scheme: “Hub is good, while indexation is bad” is today not relevant. We believe that in the search for optimal solutions, we must first think about ensuring the investment attractiveness of gas production and transportation. One should not forget that despite all the innovations in business organization in the era of LNG, long-term contracts have retained their importance as a means of sharing risk and ensuring long-term investments. Now is the time to identify ways of improving the system. Contracts can be based both on the principles of spot pricing and on correlation of prices for alternative energy resources. We believe that contracts based on the price of substitute resources, can be adapted, as much as possible, to the objectives of sustainable development of the industry. The new feature may consist in the fact that as an alternative energy source for price determination (price indexation), we could choose not exhaustible resources but renewable ones in the future. Whereas in the past, at the dawn of the gas industry under the Dutch model of long-term pricing, such a sustainable alternative to the exhaustible Groningen gas field was oil, today, such an alternative could be provided by renewable energy or electricity prices derived from it. However, until this happens, we need to consider very carefully the proposals on abandoning oil price indexation. We need to use the funds available to neutralize the negative aspects of transformation of oil futures into a speculative tool that once took place.

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The trend of rising oil prices is clearly shown on the slide-chart, reflecting the dynamics of oil prices (in 2010 prices) over the past half century. This trend is considered to be the main reason for the gap between the prices of indexed contracts and spot contracts on natural gas. However, we believe that a much greater obstacle to sustainable development of the industry consists of not actually an uptrend, but a significantly strengthening volatility – as is seen in the chart of a selected time scale. This volatility is a reflection of the uncertainty and lack of confidence in the prospects for development, and this uncertainty is a factor adversely affecting investment activities. In our view, long-term contracts are the means for reducing volatility and risks associated with the uncertainty of the future, and protecting the economic interests of the supplier and consumer. The issue of liberalization of natural gas markets requires no less a responsible approach. Designed to ensure the best quality of the supplier’s services and the lowest price, it may backfire under certain conditions. Liberalization of markets is dependent on regional characteristics and the level of resource availability. The most liberalized markets in North America and UK emerged in their present form during periods of high self-sufficiency. When it comes to markets that are dependent on external supplies, even a high level of diversification of suppliers cannot be a full guarantee of continuity of supply. Availability of suppliers, who have long-term commitments, and guaranteed delivery and marketing systems, provide such guarantees. In this case, a vertical integration of suppliers becomes a tool to stimulate the development of mineral resources and production capacities, that is, liberalization and energy security are far from being synonymous. The path to a flexible balance between different approaches, between the old (well established) and new (promising new benefits and prospects), inclusive of the balance between spot and long-term contracts, is the most reliable path to energy security.

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Dear colleagues, Assessing the prospects for sustainable development of the gas industry, Gazprom, with the maximum degree of responsibility, establishes its own corporate priorities, pursuing not only the goal of maximizing profits, but also the long-term interests of the broader community of stakeholders. In our calculations, we rely on our vision of a new architecture of world gas markets, on our real opportunities, available resources, technical equipment, geographic location of reserves, production and transportation capacities. In our plans, we assume the rate of growth in world demand for gas by 55% by 2035. This increase will, by more than 80%, be achieved through developing economies of countries outside the OECD. We also believe that gas reserves, including those owned by Gazprom, are sufficient to meet annual demand at 5 trillion m3. If necessary, production may be increases by another 0.5 trillion m3. However, in this case, the marginal cost of production will increase by approximately 50%.

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We anticipate further development of interregional and intercontinental trade in natural gas, due to the uneven distribution of resources. Moreover, we expect that after the completion of gas pipeline systems in Eurasia between Algeria and Western Europe, as well as between Russia and China, a giant transcontinental gas market covering Europe and Asia can be formed. An analysis of possible scenarios of traffic flows by 2035 shows that Gazprom’s transport and export activities will be based on supplies that are carried by pipelines laid on the land and the sea. The pipeline is the basis of Gazprom’s strategy on ensuring sustainability of the natural gas supply system for both Russian and foreign consumers. The Nord Stream project has become a new word in supply security in the European market. The laying of another export gas pipeline under the Black Sea will be a development of this success. The reason for our confidence is obvious enough – behind this project is real gas from Russian gas fields, in an amount sufficient to service a new channel (Southern Gas Corridor) for Europe’s energy supply. We have no doubt Russian gas will be in demand in Europe. This is evidenced by evaluations of our direct partners. This is indicated by forecasts by international energy organizations. Moreover, despite the fact that Europe has set for itself the task of reducing the energy intensity of its economy, and despite the challenges of economic growth, we continue to consider the European market as a priority and we expect that the Russian (Gazprom’s) gas will occupy a 30 % market share in Europe.

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With regard to the development of LNG, we adhere to the principle of sufficiency, taking into account the direction of the main gas flows and their development prospects. The Pacific direction is supported by a complex of measures based on the Sakhalin project and a prospective project in Vladivostok. We will get into the area of maritime transport in the Atlantic basin, based on the development project of the Shtokman field.

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We believe that the strategy of relying on conventional natural gas resources is Gazprom’s most justifiable development strategy for sustainable development of the global gas industry. With regard to unconventional resources, they are also under our constant attention. In this case, we rely on the assessments of our experts, according to which in the global structure of unconventional gas resources, coal gas and natural gas of low-permeable reservoirs in general exceed the estimated resources of shale gas. Here, low-permeability gas reservoirs – followed by coal-bed gas – dominate in Russia by quantitative index. That being the case, on a priority basis, we deal with the development of coal gas production technology, leaving shale resources as a strategic reserve for future generations.

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Our work on building a balanced strategy for the company seems to us as a contribution to the implementation of the forecasts that by 2035, Russia will be the largest contributor in global increase of supplying the world economy with natural gas. The combination of large-scale supply of pipeline gas, carried out by Gazprom Group companies, and opportunities for intercontinental trade in LNG, gives us an opportunity to engage in solving global problems of energy supply, driving our business to a global scale, integrating Russia into the global gas market and more broadly – into the world energy market.

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Dear colleagues, Understanding our role as a key natural gas supplier in the markets of Eurasia, we also think about what actions need to be taken to the extent possible in order to achieve the goal of preventing climate change in coming decades. We think that we need to unite our strength in expanding the use of natural gas. The most prospective in this respect is transport. Transport accounts for 27.5% in the world energy balance with a forecast of growth to 30.8% by 2035. However, it also accounts for about 28% of CO2 emissions. Meanwhile it is known that the use of natural gas in road transport can achieve substantial economic effect. Moreover, the level of harmful emissions will drastically reduce. Expanded use of natural gas is quite a clearly visible perspective. More investments in technologies for natural gas use, including in transportation, will be the result of the gas boom that we see today in North America. Eventually, this will lead to expansion of the market for natural gas as motor fuel. We have been working on this topic for a long time. Even in the former Soviet Union, a technology for the use of natural gas as fuel not only for cars but also for other types of vehicles such as railway locomotives and aircraft in civil aviation was developed. Being the leader in the NGV market in Russia today, Gazprom is actively working on the development of corresponding segment of the national auto transport. However, international efforts are needed to achieve tangible results. Automakers and companies willing to cooperate in international infrastructure fuel projects should be involved in the overall activity. Gazprom is ready for such cooperation. In order to promote its initiatives on introducing gas-engine fuel, Gazprom together with the National Gas Vehicle Association, annually holds a specialized exhibition GasSUF, an International Scientific Conference “Gas in motors”, regular auto races Blue Corridor, and supports the Russian rally-raid team E-car.

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