An Ominous Warning That the
Rapid Rise in Oil Prices
Has Only Just Begun

[Includes speech by Alexei Miller, Gazprom CEO below]

DANNY FORTSON / The Independent (UK) 11jun2008

The chief executive of the world's largest energy company has issued the most dire warning yet about the soaring the price of oil, predicting that it will hit $250 per barrel "in the foreseeable future".

The forecast from Alexei Miller, the head of the Kremlin-owned gas giant Gazprom, would herald the arrival of £2-per-litre petrol and send shockwaves through the economy. His comments were the most stark to be expressed by an industry executive and come just days after the oil price registered its largest-ever single-day spike, hitting $139.12 per barrel last week amid fears that the world's faltering supply will be unable to keep up with demand.

Mr Miller's prediction is well beyond even the most heady market forecasts, the most extreme of which fall between $150 and $200 per barrel, and was explained only by vague references to demand from the developing world. It nonetheless stoked an already febrile atmosphere of growing public anger across Europe over a soaring fuel cost that is wreaking havoc at nearly every level of the economy.

The British Government was urging motorists yesterday not to panic-buy petrol in anticipation of a strike on Friday by lorry drivers who deliver petrol to forecourts for Royal Dutch Shell, assuring motorists that contingency plans would ensure sufficient supplies.

In Spain, the regional government of Catalonia enacted an emergency action plan to bring in fresh food and fuel supplies after nearly half of its forecourts ran dry and supermarkets shelves were left bare. The situation was the result of the second day of an "indefinite" nationwide strike staged by lorry drivers in Spain seeking their government's help to contain the effects of expensive petrol. Scattered protests by drivers and fisherman in France and Portugal also continued yesterday.

In a speech [below] to the European Business Congress in Deauville, France, Mr Miller offered little prospect of relief. He warned that the world was experiencing a fundamental shift in energy prices that will end at a "radically new level. We expect that the oil price will approach $250 per barrel in the foreseeable future".

Philip Shaw, an economist at Investec Securities, warned that oil at that level would exert an extraordinary drag on the economy at a time when it is already decelerating at a rapid rate. "The word is ouch," he said. "Forecasts are forecasts though, and I think it should be treated with some level of scepticism."

The most visible result of $250 oil would be at the petrol pump, which is already at a record 116.9 pence per litre for unleaded. Because more than half of that price, about 68p, is due to duty and taxes, the general rule of thumb is that each $2 increase for oil means a 1p increase of petrol at the pump. Oil at $250 a barrel would mean an increase of almost 60p in petrol prices, even before VAT.

The price of everything from food to energy would see significant price rises. Household electricity and gas bills are particularly vulnerable. Power companies have begun warning of a second round of major tariff increases for household bills this year that they say they will need to push through just to break even.

Mr Miller placed some of the blame on financial speculators for oil's price rise – it has more than doubled in the past year – but said that the primary reason is simple supply and demand, driven by the rapidly expanding countries of the developing world, principally China and India.

It is a view shared by the International Energy Agency. In its monthly oil report, the developed world's energy watchdog said yesterday that the "abnormally high prices [for oil] are largely explained by fundamentals". But whether the price of oil will reach $250 is uncertain at best. Most expect it to reach a breaking point before that figure. The IEA said that the high price would eventually "choke off" demand and a balance between supply and demand would return.

What is certain is that for Europe, Mr Miller's role will become increasingly important as head of the continent's single biggest gas supplier. He also warned against "protectionist tendencies" in Europe, where worries have grown that the company is being used as a blunt negotiating tool of the Kremlin. "The relationship between Gazprom and Europeans is one of mutual dependence. We rely as much on European consumers as they depend on us," he said.

"In all frankness, I am concerned about certain protectionist tendencies resurfacing in the EU ... How wise it is that the European Commission invents an 'anti-Gazprom clause' to keep investments which are so needed for more efficient satisfaction of raising demand."

source: 11jun2008

Alexey Miller’s Speech at Press Briefing

11th Annual General Meeting of
European Business Congress, Deauville, France 10 June 2008

Speech of Alexey Miller, Chairman of OAO Gazprom Management Committee, European Business Council President

Good morning, ladies and gentlemen!

Thank you very much for coming to Deauville and for joining us in this briefing.

In a couple of hours, Deauville will host this year’s General Meeting of the European Business Congress (The EBC) with more than 260 representatives from 70 companies and organizations in 21 OSCE member countries.

The EBC was created to support the integration of the Eastern and Western European national economies. The Congress is gradually becoming a very authoritative European and international organization. Right now the EBC includes largest energy companies and financial institutions and energy is the key of the global development process. That is why today’s General Meeting will focus on the central topic of “The Globalization of Energy Markets”.

My colleagues and I today plan to discuss major tendencies in energy markets and to share Gazprom’s business strategy with you before the session, and then answer your questions.

Today, Gazprom is the third largest company in the world with a market capitalization approaching three hundred and sixty billion dollars and overall hydrocarbon reserves estimated at nearly thirty trillion cubic meters. Our market capitalization has grown forty six times since 2000. The last six years saw the Russian gas production growth top the world industrial charts. Gazprom is rapidly transforming itself from a Russian company with international undertakings into a global corporation with Russian roots.

The world economy will require ever more energy. New economic power-houses are emerging, with fast rates of industrial growth and increased demand for oil and gas. As a result we are seeing both growth in energy prices and increased competition for existing resources.

This context makes the gas price issue sensistive as well. During the Paris EBC meeting we forecasted the European gas price to reach 400 dollars per thousand cubic meters by the end of 2008. But even Gazprom with its access to detailed data on the state of gas markets, underestimated the growth trend. As of now, the average prices of our European supplies have reached 410 dollars per thousand cubic meters.

Lately industry analysts have been trying to find reasons for high volatility of the oil market. What are the reasons for drastic one-day price fluctuations against the background of no serious events? We think that they are partially driven by speculations, but such deals do not define the market trends. The reason is that we are living through the great surge in hydrocarbon prices which will end at a radically new level. We expect that the oil price will approach 250 dollars per barrel in the foreseeable future.

The competition for access to energy resources is heating up right now. We constantly face this tendency during negotiations with our partners, implementation of various projects and signing of contacts. There are three major markets that are fiercely competing for gas: Europe, Eastern Asia and Northern America. But this is good news for Gazprom as it stimulates the demand for our main product – natural gas – both in the East, and in the West, and the current technologies of gas liquification let us enter the North American market as well.

In order to meet increasing demand, Gazprom realizes substantial investments to develop new gas fields, transport routes, storage facilities and trading hubs across Europe and elsewhere. The Gazprom's investment program is expected to reach thirty billion dollars in 2008 already and in the nearest years investments will considerably grow up.

It is a well established fact that Europe will soon face a serious shortage of transport capacities. Therefore, gas pipeline investments rank prominently amongst business priorities of the Company.

Together with our partners BASF/Wintershall, E.ON, and Gasunie, Gazprom works successfully for implementation of the project of the Nord Stream pipeline. Once finished, Nord Stream will offer at least 55 bcm of natural gas per year to a range of northern European markets, such as Belgium, France, the UK, Germany, and other countries. In case of necessity capacity of the Nord Stream may be further expanded.

Meanwhile, Gazprom and its partner ENI make progress in advancing the South Stream pipeline. This project is another stepping stone to contribute to Europe’s energy security and will enable the high growth countries of Central and Southern Europe to meet their increasing gas demand in a reliable manner. We have already concluded agreements with Bulgaria, Hungary, Serbia and Greece and have had fruitful negotiations with a range of possible other transit countries. I would like to use the occasion to declare: the issue of the gas pipeline routing has been resolved, the project configuration has been resolved. During meeting within the framework of the Saint-Petersburg Economic Forum we have agreed that both Slovenia and Austria would be able to take part in the project.

Some people see South Stream as a threat against implementation of the Nabucco project. All I can say is that given the rising demand for gas in Europe these projects do not compete. First of all, they do not compete in terms of the resource base.

Recently, much has been said in Europe about the need to diversify its energy sources. Europe’s desire to diversify energy supplies is very understandable. But this talk seems to be based on a strange assumption that anything is better than to rely on Russian energy suppliers. It is hard to see a justification for this misplaced belief.

Sometimes the zeal to diversify at any price leads to absolutely inexpedient results. Take the Central and Middle Asia region as an example. Numerous officials and companies from the European Union, the United States and China have taken numerous diplomatic efforts aimed at obtaining a wider access to resources of this region. However, in reality we observe the effect which we have called "Caspian paradox". Trying to bring new suppliers to the market thus strengthening competition of sellers in Europe the directly opposite situation is created. No new gas has appeared in Europe but competition among purchasers in the Caspian region strengthened. This immediately manifested itself in a sudden increase in prices.

For decades Gazprom has managed uninterrupted supplies to European consumers, in particular, during the Cold War and Russia’s subsequent transition from a planned to a market economy. The relationship between Gazprom and Europeans is one of mutual dependence. We rely as much on European consumers as they depend on us.

In this context, in all frankness, I am concerned about certain protectionist tendencies resurfacing in EU. I am wondering how wise it is that the European Commission invents an “anti-Gazprom clause” to keep investments which are so needed for more efficient satisfaction of raising demand, for ensuring of reliability and flexibility of supply of our European consumers with Russian natural gas, for ensuring of energy security of the EU countries?

This is the same as if to put barriers in the Gulfstream way which heats the entire North Europe.

It is not a very reasonable policy to create new restrictions under conditions of deficit of energy resources. And we are not original and not alone here. Among our European partners there are a lot of our supporters. And we will coordinate our efforts with them in order to persuade European officials that one should not saw off the bough on which he is sitting. Otherwise we will have to face not only energy deficit but deindustrialization of the continent!

We strongly believe that cooperation and international integration, but not protectionist barriers, will be the best defence for national and general European interests when it comes to gas supply.

This is why Gazprom is implementing its business priorities first and foremost by advancing joint projects with our European partners. In 2007, we achieved notable advances in these projects. Let me exemplify this with two examples:

One of the largest projects of the company is development of the giant Shtokman field which Gazprom will exploit jointly with France’s Total and Norway’s StatoilHydro. This project will contribute to meeting the increasing gas demand in Europe and other regions. A particularity of the project implementation scheme is that for the first time in the history of Russian supplies gas will be delivered for 50 years through the Nord Stream gas pipeline from a specific field (one of the largest in Russia) thus directly joining the producer with the end consumer.

The second – yet very important - example is the joint exploitation of the Yuzhno-Russkoye gas field with Germany’s BASF. The project covers the whole cycle from production to end-user and is becoming a joint business, more far-reaching than the usual relationship between buyer and seller. This is a qualitatively new level of cooperation with our European partners which we believe can become a model for advancing energy security in Europe.

Ladies and Gentlemen!

As the mutual dependence of suppliers and consumers of energy continues to grow across the globe, we play an active role in making the future European gas market work reliably. It is clear that helping to promote the economic integration of East and West is one of the most important roles Gazprom will play.

source: 11jun2008