Russian Energy Minister Sanctions? Not a Problem

Days before Gazprom suspended gas deliveries to Ukraine, Russian Energy Minister Alexander Novak spoke with Handelsblatt about Ukraine, Europe and China. His defiant message: Western sanctions are helping Russia.
Russia cut off gas supplies on Wednesday to the Ukraine. In an interview before the cutoff, the Russian energy minister said his country was benefitting, not suffering, from western sanctions.

After negotiations failed in Vienna, Russian gas company Gazprom on Wednesday suspended delivery of natural gas to Ukraine, where it is aiding separatist militants wage war on government troops in the eastern half of the country.

"Ukraine did not pay for July gas supplies," Gazprom chief Alexei Miller said in explaining the move. Gazprom halted gas supplies to Ukraine at 10 a.m. local time on Wednesday. Mr. Miller said Gazprom would not send more gas to Ukraine without payment. A day earlier, Ukraine's Naftogaz had said it would stop buying gas from Gazprom. Ukraine tried and failed to get a big price discount from Gazprom.

In an interview with Handelsblatt before the supply cutoff, Russian Energy Minister Alexander Novak said the discount sought by Ukraine would force Gazprom to sell gas at below-market rate.

 

Handelsblatt: Minister Novak, after the cancellation of the South Stream pipeline through the Black Sea, Gazprom's rejection of Europe was considered a done deal. Now Gazprom wants to build another Baltic Sea pipeline with E.ON, Shell and others. Is this Russia's return to Europe?

Mr. Novak: It was never our plan to turn away from Europe. We have always viewed Europe as our strategic partner, given our historic relationships in the energy sector. Russia has always been a reliable energy supplier to Europe and we are now expanding that with new pipelines and doubling the Baltic Sea pipeline.

But what about the demonstrative turn toward China a year ago?

That too is a priority, of course. The economy in the Asia-Pacific region is growing quickly and so is the demand for energy. The boom in Asia is an enormous opportunity that we want to exploit, especially for the eastern part of our country. We want to be part of Asia's boom.

But it looks more like a competition with Europe than an addition. Why else is gas from a field with production that could have been delivered to Europe being diverted into a pipeline to China?

It's part of our strategy of consolidating our entire gas transport system. The construction of the China pipeline enables us to connect the system throughout the entire country. But it's true that more than just Russian reserves in our Far East and in eastern Siberia are now destined for delivery to China. And it's about more than just gas deliveries now. We are also talking about electricity, coal, oil, renewable energy and the joint construction of power plants, power lines and ports. However, we do not see Europe and Asia as contradictions, but rather as Russia's parallel priorities.

Is the planned construction of two additional pipelines through the Baltic Sea a response to the fact that little progress is being made on the pipeline planned for Turkey?

No, we have been thinking about doubling delivery capacity through the Baltic Sea for a long time, mostly because we anticipate an increase in gas consumption in Europe. And the partners involved in the new Baltic Sea pipeline, like Shell, E.ON and OMV, see declining domestic production in Europe and a growing need to import gas. The new Baltic Sea pipeline is meant to be one step toward further diversification of supply routes.

 

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But aren't you hearing the calls for diversification away from Russian gas in Europe?

Of course we are. But this is just a politically motivated approach directed against Russia. In the end, Europe will need more gas because it makes environmental sense. We are fully competitive with our pipeline gas, and politics shouldn't get mixed up with business. We also believe that a restriction would completely contradict the rules of the World Trade Organization (WTO). If there are antitrust allegations, okay, then antitrust agencies should investigate. But if projects that mostly involve European companies are to be obstructed, it's nothing but political intervention.

But the only reason to build the new Baltic Sea pipeline is to put an end to current transit through Ukraine by 2020…

No, the main reason is to meet the growing demand for gas in Central Europe. And the construction of Turkish Stream, the pipeline in Turkey that will continue through Greece and into Southeastern Europe, is intended to diversify the supply routes to the region.

But why does transit through Ukraine have to end?

Because more and more risks to safe transit of our gas have developed in the last two decades. And the Ukrainian pipeline system is also very outdated. It makes us wonder what makes more sense: modernization or building a new pipeline along a different route.

And who is paying for the gas needed in the Donbas region?

Ukrainian provider Naftogaz, according to the current contracts. But we are of course familiar with Naftogaz's difficult financial situation. And if the European Commission has assumed the mission and role of rescuing Ukraine, it should provide financial assistance to Naftogaz and the Ukrainian economy.

 

Alexander Novak, the Russian energy minister, said his country is not suffering from western sanctions. Russia on Wednesday cut off natural gas supplies again to Ukraine.

 

So Russia will not deliver gas to Donbas on its own account?

Donbas is part of Ukraine, and gas deliveries to the region are part of deliveries to Ukraine.

Let's talk about another region: How much of an impact does the shale gas boom in the United States and the decline in the price of oil have on the Russian energy economy?

Here are some clear facts: Russian oil production increased by 1.2 percent in the first five months of the year. In other words, the price crisis has not affected production volume at Russian energy companies. But of course the low price of oil means that up to 10 percent of planned investments in our oil sector are being postponed or were already deferred. There will be a change in the investment programs. But we also increased exploratory drilling by 10 percent in the first five months. Our oil and gas companies have survived the challenges brought on by the low price of oil.

But do you see a risk that the decline in investment will lead to a reduction in Russian oil production?

Our energy strategy between now and 2035 calls for consistent production. We are no longer planning to increase production. We want to maintain the production level we have already achieved, partly through modern and more complex production technologies.

Can you obtain those technologies, despite the sanctions?

The sanctions even benefit our industry, because we now fully depend on replacing imports, so that our own companies are operating at full capacity. And we developed the technologies that are considered modern today in Russia in the 1960s, but we didn’t use them because we had much easier and cheaper ways to produce our oil and gas until now. But we are in favor or cooperation with Western companies – and they continue to do business in Russia, despite the sanctions.

Why are they doing that? BP is intensifying its joint venture with Rosneft and Shell is cooperating more closely with Gazprom.

Because it makes a lot of sense for them economically. If you ignore the political factor, Russia happens to offer very good conditions. The best thing for us would be competition between Russian and foreign companies in the oil services sector. The main problem with the sanctions is the financial sector and the absence of funding.

 

Aren't you worried about an expansion of the sanctions?

If a wolf is afraid, he shouldn't go into the forest. We are not dealing with politics at the moment, but with our economy. That's my job. I don't talk to companies about politics, but about concrete, joint projects.

You were just elected to the Gazprom supervisory board – as yet another minister to be added to the board. Is the government dissatisfied with the work at Gazprom?

It merely shows that, in the current difficult crisis, the government wants to be more actively involved in managing companies that are partly state-owned, so that it can better synchronize the companies' and the government's strategies. The government is convinced that it needs to play a more active role in these companies.

 

Mathias Brüggmann is the head of Handelsblatt's foreign affairs desk, leading the coverage of the Ukraine crisis. To contact the author: [email protected]