Today, I would like to share my views with you on the future of the European gas market and the role Gazprom can play on this market.

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1 Ladies and gentlemen, It is a privilege and a great pleasure for me to address this distinguished audience. It s my first speech at an international conference as Director General of Gazprom Export and I m happy that this is happening in Vienna. Austria is known to be our time-honored partner in Western Europe. Today, I would like to share my views with you on the future of the European gas market and the role Gazprom can play on this market. It is evident that the current commercial and political environment is exceptionally challenging both for the industry and natural gas as a commodity. Turbulent times are when long-term relationships are under strain and undergo a stress-test and when bold decisions and firm actions are essential. There is no doubt that Europe remains and will remain Gazprom s top export market, with nearly half a century long history binding us together. Yet, we are always on the look-out for new business opportunities also outside of Europe. The year 2014 saw the signing of a historic deal to supply 38 billion cubic meters of Russian gas to China for 30 years. Soon enough, we expect gas exported to Asian markets to be comparable to the volumes supplied to our European partners. True, Gazprom is going eastward, so how will our relationship with Europe evolve in the coming years? To answer this question let s first have a look at the prospects for the European gas market. 1

2 Due to declining indigenous production European additional demand for imported gas will reach 165 bcm in 2025 and 208 bcm in Russia s ample gas reserves, supply capacity and competitive pricing combined with moderate yet gradual growth in demand in Europe will ensure that Gazprom will continue to play a vital role on the European market. I am confident that natural gas is destined to play a key role in the continent s fuel mix. After all, one should not forget that it remains one of the most environmentally friendly, economical, and readily-available energy sources. In the long term we expect that the new applications for gas in Europe, namely, small scale CHP (combined heat and power stations), bunkering and road transport, will result in additional demand of almost 140 bcm by The figure is comparable to our company s current export volumes. We also anticipate natural gas to rebound in power generation in the coming years, although this market segment experienced an apparent growth trend in the use of coal. We are committed to contribute to meeting the additional demand for blue fuel. The fastest pace of demand growth will be seen in the transport sector, a segment where Gazprom is already deeply involved. Gazprom Group already operates an extended network of compressed natural gas filling stations in several European states, and also promotes the vast use of LNG on transport. 2

3 However, despite these positive developments and expectations, the future of natural gas in Europe is currently being called into question due to other newly emerged challenges. Surprisingly, some in the ecologically-wise Europe are starting to doubt the role of natural gas in its energy mix, and even go as far as to advocate that Europe should promote the use of cheap and dirty coal. This cannot be accepted as a sensible approach. Recent political turbulences sometimes resulted in negative international sentiment, which is now turning into anti-gas sentiment. This is a worrying trend. Not only for Gazprom, but also for our European partners, for industrial efficiency, for financial rationale in energy development strategy, and even for dealing with harmful emissions and the challenges of climate change. Colleagues, Let us not forget that natural gas can play a crucial role in achieving ALL of the EU s environmental goals! Increasing the share of gas in the EU s energy mix by only 1% can help reduce emissions by 3%, which is no small contribution. Natural gas is also a promising alternative motor fuel, being much cheaper and cleaner than traditional fuels like petrol or diesel. The market of gas-powered vehicles is more advanced than the market of vehicles running on electricity or hydrogen. The infrastructure for gas-as-motor-fuel deliveries already exists while other technologies still face many obstacles when it comes to their maturity and economic viability. Finally, natural gas, unlike renewable energy sources, needs no subsidies. What it does need is fair competition, a level playing field. 3

4 Now turning more specifically to the role of Gazprom, I would like to start by reminding you that Russian gas is actually one of the most affordable of all. The pricing formula is based on the principle of fuel alternatives and takes into account the fuel mix of national markets. Besides, it incorporates the peak shaving mechanism that smoothes the effect of eventual oil price shocks for a period of several months. Due to this formula, our prices are fully predictable and are not prone to sharp changes the way oil is, and yet our clients enjoy the benefits of falling oil price. So, when it comes to gas-to-gas competition, there is no question that Russian pipeline gas is still one of the cheapest options in Europe. Other supply options like LNG are nowhere near as competitive. Many now count on American LNG as a new affordable solution to solve the European energy dilemma. But the comparative analysis shows us that US LNG delivered to Europe on a Cost plus basis will never be cheaper than gas on the British hub, NBP. It means that American LNG supplies if any eventually reach the European market will be too modest in volume to change the continent s energy landscape. When looking at alternatives, we strongly believe Russian gas is going to remain one of Europe s best choices. Despite the current turbulence, felt by the European energy market, Gazprom s share remains stable about 30%. Today, local production in Europe is declining, the political situation in North-Africa remains unstable, and reserves in the Middle East are far from coming online soon for Europe, while Gazprom already provides reliable supplies of blue fuel for our number one partner. 4

5 As I said at the very beginning of my speech, Gazprom remains and will remain committed to Europe. We did our utmost to solve our differences with Ukraine s Naftogaz. We continued to supply gas for months after having received our last payment. We concluded the current winter package deal to help Ukraine in the cold season and high demand. Why did we do it? Because being a reliable supplier is our top priority. We cannot allow ourselves to endanger the well-earned trust and confidence of our European partners. We never backtrack on our commitments. This is also the reason we have in the past years consistently worked on building more reliable supply routes to Europe. We have drawn lessons from the 2009 gas transit crisis. Now, the Nord Stream pipeline has already been up and running for a few years. And it has proven to be a highly reliable route to deliver gas straight from Russia to Germany and further on to other European markets. We wanted to do something similar in Southern Europe, because we know how difficult it is for those countries to ensure that gas reaches their grids. Unfortunately, our proposals to build the South Stream pipeline ran into the European Commission s position, which was not conducive to implementing this project. The problem is not only in the regulations, and not only in the Third Energy Package. The fact is that Bulgaria would not grant permit for the construction of the South Stream pipeline. Once again, let me reiterate: gas transit through Ukraine is a system problem which has not been solved so far while putting into jeopardy the security of our supplies to Europe year after year. It is evident that neither we nor our European partners can achieve a final settlement, and the Ukrainian non-compliance with the Winter package due to financial constraints is a clear proof. At present, Ukraine has no more than 10 bcm of gas in its underground storage facilities. It means Ukraine cannot guarantee stable gas transit. This is the key reason why a gas hub at the Turkish-Greek border is the only option to guarantee security of supplies to Europe and ensure market predictability. In December, Gazprom s cooperation with Turkey experienced a strategic upgrade, and we have now decided to reroute the pipeline to bring Russian gas to the border of the EU instead. The plan is to pump 63bcm of Russian gas through the proposed Turkish Stream pipeline. While 14 bcm is destined for the Turkish market, the rest would be available for our European customers at a hub on the border with Greece. I am convinced this new project will serve the best interests of all parties involved. 5

6 Besides the pipelines, we are investing heavily in gas storage infrastructure. That helps provide a stable and flexible supply to Europe. In 2014, volumes of our gas in the European UGS facilities exceeded 5 bcm. And the company plans to expand its own underground gas storage capacity in Europe to 5bn m3 by Gazprom has always considered underground gas storage as a key factor of safe and reliable gas supplies to Europe; therefore, the increase of active gas stocks in the European underground gas storage facilities remains a priority for us. The company plans to increase the volume of active gas available in the European UGS facilities through the construction of new, and the expansion of the existing storage tanks. The project of construction of the Damborice underground gas storage in the Czech Republic jointly with Czech MND is one example. Another example is the expansion of the Katharina underground gas storage in Germany. Besides, new storage capacity may be built along the new gas transportation routes in the longer term. This all allows us to continue our work as a reliable supplier of gas to Europe. We stand ready to provide European markets with the gas they require. But if it wants it, Europe needs to make sure the right conditions are in place to let market forces play their part. Gas is not a political weapon, it is a commodity. Next steps In parallel, Gazprom is exploring other operational activities. As a global company, we are always on the look-out for new business opportunities and we believe Asia presented us with one, which was impossible to decline. I was personally involved in closing a landmark deal with China last year, and I am very happy that Gazprom is stepping into this new venture. 6

7 Of course, the new focus does not mean having to re-focus. Despite our natural drive for diversifying our customer base, we are fully committed to our long-standing and trustworthy European partners with whom we share a history of efficient and beneficial cooperation for almost 50 years. Gazprom Export continues to pursue a diversification strategy that not only increases our market reach, multiplies export gas destinations and business clientele, but also further enhances existing relationships with our customers in Europe. The relevant obligations on gas supply to China will not affect contracts already concluded with other purchasers of Russian gas. On the contrary, the concept of gas deliveries to China via the western route, which is now the subject of negotiations, stipulates the use of the same reserve base. Gazprom possesses sufficient gas resources and production capabilities to meet these obligations altogether. We are investing billions of dollars and euros to develop the world s largest gas reserves so that European customers can take advantage of the benefits of the most ecologically-friendly fossil fuel. We have grounds to believe that the political environment in Europe will be restored to a situation in which we feel welcome again. We are keen to continue doing business and hope the European Union in the future will foster exactly that. Business, pure business without any political motives. Russians and Europeans are bound together: by our history, our geography, our commercial relations, and, ultimately, by our common interests. Let us benefit from this mutual dependence, rather than running the risk of breaking it down and parting ways. And let s allow gas to do what it does best: provide clean energy for the future! Thank you very much for your attention! 7