A difficult balancing act for head of Gazprom

Alexei Miller has to champion natural gas, while playing down price pressure from alternative supplies, says Sarah Arnott

Alexei Miller will have to perform a careful balancing act when he goes into European energy policy negotiations later this week. The chief executive of Gazprom – the state-owned Russian giant that supplies more than a fifth of Europe's gas – will be called upon to champion the role of natural gas in Europe's energy mix, while playing down the implications of price pressures from shale gas and liquefied natural gas (LNG). At the same time, he has to instill confidence in the security of Russian supply and argue against a policy package that threatens to undermine the company's hopes for a merger with Ukraine's Naftogaz Ukrainy.

But Mr Miller is undeterred. "The 20th century was the century of oil, and the 21st century will be the century of gas," he says with conviction. "Gas is the key fossil resource that will ensure the energy balance of Europe in the short term and in the long term."

Not everyone agrees. European governments are working hard to diversify away from a reliance on imported Russian gas. In part, the moves are designed to encourage investment in alternative, green technologies such as wind farms. But they are also a security measure in the wake of the series of disputes over transportation via the Ukrainian pipeline, the most recent of which saw supplies cut off for 13 days in 2009.

For Gazprom, the political crisis in the Middle East is an opportunity for some positive comparisons. "As far as the events in the Middle East and North Africa are concerned, first and foremost we must reconsider the question of the reliability and sustainability of supply of hydrocarbons from that region to Europe," Mr Miller says.

He also takes sideswipes against what he characterises as a US and European media-generated image of Gazprom as an arm of the Kremlim, using energy as a political weapon. According to Mr Miller, Gazprom's image problem is not with European consumers, who have been supplied with gas for 40 years, during which time the company has "never ever broken its contractual obligations".

"But the image created by the mass media in the US and Europe is a completely different story," Mr Miller says. "It is highly politicised and has nothing to do with the economics of Gazprom."

Image is not Gazprom's only challenge. The company is also struggling to come to terms with what some experts identify as a revolution in the global gas market, transforming the industry from one based on long-term, fixed-price contracts supplied through a highly costly pipeline infrastructure, to a more liquid market with a global price index, much like that of oil.

The driving force behind the shift is twofold: the sudden surge of unconventional gas supplies such as shale in the US and coal-bed methane in Australia, and the development of LNG from major suppliers such as Qatar that can be shipped around the world. Between them, LNG and US shale gas have sent gas prices on the spot market plummeting, pushing European buyers to insist that a proportion of the prices they pay under long-term Gazprom contracts fluctuate with the spot price.

Mr Miller gives unconventional gas supplies short shrift. Such gas is unsustainably expensive to produce, he says. And the buzz that it is a game-changer in the global gas industry is a just a media campaign. "Shale gas is a very well-planned public relations campaign in the mass media, as are global warming and bio fuels," he says.

Gazprom remains confident of Europe's rising appetite for gas, despite European governments' forecasts that the Continent's gas consumption will fall over the coming decades as alternative energy sources kick in and energy efficiency measures such as household insulation take effect.

According to Gazprom, in the future gas-to-liquid technology will see demand for gas to power clean cars balloon. But even in the shorter term, climate change targets across Europe will push energy companies to invest in gas-fired power stations at a fraction of the environmental impact of their coal-fired cousins and a fraction of the cost of renewable alternatives, the company says.

The global financial crisis has sealed the future of cheap Russian gas in the European market, says Mr Miller. He brands European governments' subsidies for alternative energy sources as "no longer morally valid" while governments struggle to balance their budgets.

It is a point that could come up in negotiations with EU policymakers later this week over the bloc's "third energy package", which is aimed at boosting competition by separating supply and production from transmission, but also includes measures to encourage investment in alternative energy sources. According to Mr Miller, the scheme drawn up before the global economic crisis – and due to come into force next month – is no longer viable. "Even with subsidies the future of alternative energy didn't look very bright, but now, after the financial crisis, it looks even dimmer than before," Mr Miller says.

But the biggest issue at the talks is the question of enforcing the separation of supply and transmission, which has huge implications both for Gazprom's proposed merger with Naftogaz Ukrainy, and for its investments in new pipelines into Europe avoiding Ukraine.

Gazprom's main argument focuses on the risk to investments. "The attractiveness of gas transmission networks for Gazprom and large European energy companies which buy big volumes of gas from Russia will become problematic for investors," Mr Miller warns.

But the hit will not only be to the new North Stream via the Baltic to Germany and the proposed South Stream via the Black Sea to Italy and Austria. There are also ramifications for the much-needed upgrade to the trans-Ukraine pipeline which currently carries 80 per cent of the gas Russia exports into Europe.

The row in 2009 between Russia and Ukraine over prices and debts saw gas supplies cut for nearly two weeks, and although Western Europe was largely unaffected, some countries such as Bulgaria and Slovakia suffered significant shortfalls.

Gazprom's proposed merger with Naftogaz Ukrainy is an effort to avoid a repeat of the crisis. But the deal could be under threat from the EU's third energy package, according to Mr Miller. At this week's meeting, the Gazprom chief executive will call on the EU to focus on the potential benefits to Ukraine, rather than on the ideologically driven policies that mitigate against the €6.5bn-worth of investment the Ukrainian pipeline needs over the next seven years.

"Ukraine's adoption of the European rules will create problems with investing in gas transportation pipelines and the update of the gas network in Ukraine," he says. "We need not to politicise the issue but to look at the social and economic benefits to Ukraine of such a huge incentive for development."

Mr Miller will have to work hard to keep all the plates spinning.

A life of energy

* Alexei Miller has been Gazprom's chief executive since 2001 and deputy chairman since 2002. He was appointed deputy energy minister for the Russian Federation in 2000.

* Born in Leningrad, of German descent, Mr Miller studied for a PhD in economics before starting his career in the St Petersburg mayor's office under Vladimir Putin, now the Russian Prime Minister. He was director general of the Baltic (oil) Pipeline System before joining Gazprom.

* He holds a clutch of medals and titles including the Order for Services to the Fatherland and the Sergiy Radonezhsky Order of the Russian Orthodox church.