07MOSCOW583, RUSSIAN ENERGY: AMBASSADOR MEETS GAZPROM’S MILLER

WikiLeaks Link

To understand the justification used for the classification of each cable, please use this WikiSource article as reference.
Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #07MOSCOW583.
Reference ID Created Released Classification Origin
07MOSCOW583 2007-02-09 10:26 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO2943
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0583/01 0401026
ZNY CCCCC ZZH
O 091026Z FEB 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7326
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000583 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 02/09/2017 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: AMBASSADOR MEETS GAZPROM'S MILLER 
 
REF: MOSCOW 466 
 
Classified By: Amb. William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) SUMMARY.  In a February 8 meeting with the Ambassador, 
Gazprom CEO Alexey Miller praised recent moves on domestic 
gas price reform, and said gas price rises to FSU countries 
would move forward in tandem, and assets are a part of the 
payment mix.  Miller stressed plans in play to develop Yamal 
(work has already started on the giant Bovanenko field), and 
said a tender would be held in May for foreign firms to bid 
as contractors on Shtokman.  He said the 
Burgas-Alexandroupolis pipeline (BAP) deal would "without a 
doubt" help CPC expansion.  Recent talk of a gas OPEC (OGEC) 
was "fanciful," given the predominance of piped gas on world 
markets.  The Ambassador urged Miller's attention to the 
emerging PriceWaterhouseCoopers tax case (Reftel), which 
Miller agreed to look into.  Unexpectedly, at the very end of 
the meeting, Miller produced and summarized a letter from 
U.S. oil major Chevron indicating interest in working with 
Gazprom in bidding on Yukos assets.  END SUMMARY. 
. 
DOMESTIC GAS PRICE REFORM 
------------------------- 
. 
2. (C) Miller was pleased about recent GOR moves to raise 
domestic gas prices over the next five years.  For Gazprom 
especially, the changes will mean the company can finally 
pursue a "clear-cut strategy" for exploration, production, 
and transport.  Lacking long-term contracts for gas supplies 
within Russia - a vestige of the GOR's ability to set prices 
only one year out - the gas industry had been unable to 
properly plan for future production and transportation needs. 
 The new regime will allow "mid-term contracts" that will 
help Gazprom make production plans while passing risks off to 
consumers since the gas would be "sold before it is produced." 
. 
3. (C) The current "super-low" domestic tariffs made it 
impossible to profit from domestic sales, resulting in 
profits being generated exclusively from export sales. 
Scheduling prices to reach netback parity by 2011 will make 
the export and domestic markets (which represent two-thirds 
of Gazprom's production) equally profitable.  This would 
"triple" Gazprom's profits and would be good for independent 
producers as well, and will make the Russian economy more 
efficient and competitive.  Independent producers will get 
equal treatment and industrial consumers of gas in Russia 
will ultimately be treated in "similar and equal" ways to 
European customers. 
. 
4. (C) Russia last year began experimenting with spot sales 
of gas on the domestic market, with Gazprom and independent 
producers permitted to sell 5 billion cubic meters (bcm) each 
on a free trading exchange.  There has been no decision to 
limit the volumes on that free exchange, and one day it could 
represent 10-15 percent of Russia's domestic gas trade 
(roughly 35-50 bcm annually).  So far spot prices have been 
higher than contract prices, but that could change as 
contract prices are scheduled to rise.  The state has decided 
that while mid-term and long-term contracts and spot sales 
will ultimately dominate the domestic industrial consumer 
market (just as they do the export market) while, the 
household sector will be reserved for special treatment, with 
price rises much slower. 
. 
PRICE RISES IN THE FSU STATES 
----------------------------- 
. 
5. (C) Miller argued that Russia clearly cannot disadvantage 
its own economy by subsidizing the production of goods in 
neighboring countries.  Russia expected, and sees, 
modernization and conservation of energy emerging in states 
such as Ukraine that are living with rapid gas price 
increases, and has concluded "there is no reason such 
efficiency would not work in Russia".  This will make the 
entire FSU more competitive.  All FSU prices will reach 
market level one day, including Russia, where lower domestic 
tariffs were actually making the country less competitive 
relative to its neighbors.  Even now, all FSU countries are 
being treated "fundamentally" the same, and where assets are 
being offered in lieu of cash, the listed prices are lower. 
It is all the same to Gazprom whether payment comes in cash 
or assets. 
 
MOSCOW 00000583  002 OF 003 
 
 
. 
DEVELOPMENT PLANS INCLUDE YAMAL... 
---------------------------------- 
. 
6. (C) Looking ahead, Miller observed that western 
speculation about a future gas production shortfall was 
grossly exaggerated.  In fact, Gazprom has a plan for the 
nation's gas balance to 2030, and at least until 2013 those 
plans are firmly and absolutely covered by "concrete" field 
development schemes.  After reviewing overall gas
demand for 
the last few years, Gazprom is basing its future plans on a 
"maximum demand" scenario, not a conservative scenario.  This 
year and next Gazprom will is working to improve its 
forecasting ability, but until that process is complete 
Gazprom will continue basing its plans on this maximum demand 
scenario.  Fields on the Yamal Peninsula are Gazprom's first 
priority, especially the giant Bovanenko field, where work 
has already begun. 
. 
...AND SHTOKMAN... 
------------------ 
. 
7. (C) Regarding Shtokman, Miller emphasized several times 
that Gazprom has the rights only to the license for using the 
subsoil resources.  As soon as the gas/oil is out of the 
ground, nothing precludes various business deals with foreign 
firms at any point in the chain of production, refining or 
liquefaction, or transport.  This means western firms cannot 
book reserves, but there's plenty of other business to be 
done together.  Gazprom is open to such deals, and that is 
what is behind the recent re-opening of talks with foreign 
firms.  Gazprom plans to hold its first tenders in May for 
foreign firms to bid as contractors, and letters to this 
effect had been sent to Chevron, ConocoPhillips, Total, and 
Norsk Hydro.  (Note: He did not mention Statoil but 
presumably meant to.)  All the companies had "confirmed" 
(NFI) except Chevron who was expected to "confirm" soon. 
(Note. Chevron told us later that neither Chevron nor Norsk 
Hydro had received letters as of February 8.) 
. 
8. (C) Miller defended last year's shelving of the offer to 
partner with western firms to develop Shtokman.  Western had 
not put sufficient assets abroad on the table, given the huge 
resources Shtokman has to offer -- and current price trends. 
"Swapping assets" was Gazprom's original intention, but no 
worthy assets were on offer and those offered were "far, far 
too low" in value, and only a few producing assets had been 
proffered.  Gazprom had been willing to consider a "balance" 
of producing and non-producing assets, but no package met 
Russian requirements.  Western firms seemed overwhelmed at 
the scale of what they would have to surrender in return for 
a piece of Shtokman.  More volumes had come to light in 2006 
at Shtokman, which made it all the more difficult for western 
companies to meet Gazprom's requirements. 
. 
...AND SAKHALIN 
--------------- 
. 
9. (C) Miller admitted that Gazprom's view of Sakhalin 
differed now that it is a shareholder in Sakhalin 2.  Piped 
gas doesn't have much future in the eastern half of Russia 
due to a low population, but LNG is obviously going to be a 
big story.  Piped gas for export is a possibility, but then 
the key concern must be the interests of the producer, 
whereas with LNG clearly the interests of the consumer are 
paramount. 
. 
CPC and BAP 
----------- 
. 
10. (C) Miller offered little new on the recent news that 
Russia, Bulgaria, and Greece had signed an agreement on the 
Burgas-Alexandropolos Pipeline (BAP) in which GazpromNeft, 
Rosneft, and Transneft would collectively hold 51% of the 
shares.  Progress on such a route would "without a doubt" 
help achieve resolution of the expansion of the Caspian 
Pipeline Consortium (CPC).  Both are clearly important 
contributions to world markets. 
. 
MIDDLE EAST TRAVELS AND "OGEC" 
------------------------------ 
. 
11. (C) Miller said he will accompany President Putin on his 
 
MOSCOW 00000583  003 OF 003 
 
 
upcoming trip to the Middle East including Saudi Arabia, 
Jordan, and Qatar.  Miller intends to tie this in with a stop 
in Turkmenistan to attend the presidential inauguration.  As 
for recent talk of a "gas OPEC" ("OGEC"), Miller dismissed it 
as fanciful.  Gas is fundamentally different than oil, and 
piped gas cannot conceivably support an OGEC's purported 
purposes.  All the talk is just meaningless speculation, and 
the motives behind the media stories about OGEC were suspect. 
 "Why is this story raised? Who is it for?" 
. 
PRICEWATERHOUSECOOPERS 
---------------------- 
. 
12. (C) The Ambassador raised the recent tax cases against 
PWC, and urged Miller's attention to the matter.  Miller 
professed ignorance but had nothing but the highest praise 
for PWC's work for Gazprom over many years, and promised to 
look into the situation. 
. 
YUKOS 
----- 
. 
13. (C) In an unexpected closing, Miller produced a letter 
from U.S. oil major Chevron and read from it, summarizing 
that the firm was offering to work with Gazprom in the 
upcoming auctions for some of Yukos' assets.   This letter 
was proof of at least two things - first that U.S. firms 
could do business with Gazprom without booking reserves after 
the recent Shtokman decisions, and second that U.S. firms 
were willing to buy into Yukos assets.  The Ambassador did 
not comment in response.  (Note: Gazprom did not inform the 
Embassy of its intentions to release a press statement about 
the meeting, or to publicly refer to this letter.) 
. 
COMMENT 
------- 
. 
14. (C) Miller was confident, which is understandable since 
Gazprom is on a roll.  Miller's logic for raising domestic 
gas prices was sound, and his explanation of raising prices 
to FSU customers only slightly defensive.  Miller's test of 
our view of the radioactivity of Yukos assets -- both by 
raising it with the Ambassador and by issuing the press 
release -- previews Gazprom's intentions to bid on the assets 
and the general desire (dating back at least to December 
2004) to legitimize the Yukos affair. 
BURNS

Wikileaks

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: