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BLUE FUEL
Gazprom Export Global Newsletter
IN THIS ISSUE To Our Readers: “Reliability” with a Capital R
TO OUR READERS:
Alexander Medvedev: Natural Gas Will Change Energy Markets
“Reliability” with a Capital R
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Financialization of Commodity Markets: Impact on Energy Prices
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Gazprom to Ramp Up UGS Capacity in Europe
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Gazprom and Wintershall Sign MOU on South Stream Project
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Welcome South Stream Slovenia LLC Gazprom and Geoplin Plinovodi Announce Joint Venture
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Sakhalin Energy CEO: New Dimension of the Future
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Ajay Shah: The Case for Gas and Innovation
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Security Experts Probe Gazprom’s Views on Security: Delegation of the German Academy Discusses Energy Issues with Gazprom
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Sulfur Exports Double: Sulfur Exports in 2010 Amounted to Nearly 5 Million Tons
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Dr. Gerhard König: Natural Gas is the Partner to Renewables
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GM&T and CITIGROUP Complete Deal on Certified Emission Reduction units (CERs)
In the wake of the catastrophic events in Japan and the resulting impact on the energy market, there can be hardly any doubt that in our trade and in the gas industry in general, “Reliability” with a capital R is the key to success. Gazprom is proud of its record. Time and time again, Gazprom has proven to be a reliable partner for natural gas consumers in times of need. Here are some recent examples: In March, after the Fukushima Daiichi nuclear power station in Japan was damaged by the massive earthquake and the ensuing tsunami, Gazprom Group evaluated its capabilities to respond to the emerging energy gap. It arranged the sale of one LNG cargo to the Tokyo Electric Power Company, which will be delivered in mid-April. We are also evaluating the spare capacity of our LNG fleet that could be made available, if necessary, for transporting third-party volumes toward Japan. As Libya descended into civil war in February, halting the flows along the Green Stream pipeline from Libya to Sicily, deliveries of Russian gas to Italy rose significantly.
Presentation of The Book of Memory in Austria
In 2010, Poland urged Gazprom to ramp up supplies from 7.5 bcm to around 10 bcm per year. The agreement remained stalled for months for a number of reasons. Yet, with Polish reservoirs running dry and Polish partners becoming fidgety, Gazprom ultimately fulfilled its part of the deal without waiting for the formal agreement to enter into force.
KHL All-Star Game: Goals for Every Taste
After the 25 August 2010 explosion on the gas pipeline in the Agry Region,
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Moscow Soloists Reap Applause in Vienna and Rome
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which provides gas to Turkey from Iran, Gazprom’s Turkish partners approached Gazprom Export to increase supplies to make up for the shortages. Gazprom
Export immediately responded, and daily deliveries of Russian natural gas through the Blue Stream pipeline nearly doubled up to 37 mcm per day. A similar surge in supplies was recorded in October due to another request from Turkey motivated by maintenance work on the gas pipeline leading from Iran. A positive reputation is not built overnight. It requires consistency, continuity and conformity with the expectations of the public and with your own commitments. These considerations have guided Gazprom Export for the last 40 years, making it a top priority not just to fulfill obligations but to be ready to respond in times of difficulty, which unfortunately are all too routine.
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© Gazprom Export
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Natural Gas Will Change Energy Markets Remarks for CERAWEEK 2011
Alexander Medvedev, Deputy Chairman of the Gazprom Management Committee, Director General of Gazprom Export
There is good reason to believe that natural gas and renewable fuels will change energy markets as we know them today. Together, these energy sources will contribute to a brighter future characterized by low carbon emissions and secure energy supplies. Natural gas should and will compete successfully against oil in the transportation sector much like it does in the energy generation and space heating sectors. Oil majors have little or no incentive to offer fuel alternatives to consumers, preventing global markets from enjoying major economic, social and environmental benefits. Natural gas and renewable energy can aid global efforts to reduce carbon emissions. While renewable energy is important, its development must continue in a manner that recognizes the benefits of other energy sources as well. Let me begin by reminding you of Hobson’s choice. As you may recall, Thomas Hobson was a well-known Elizabethan horse stable keeper who had a peculiar management system. Hobson would rotate his available horses based on when they were rented last, placing recently-rented horses at the back of the list to allow them to rest. Hobson refused to rent recently-returned horses to his customers, regardless of their preferences. His stubborn dedication to this system came to be known as “Hobson’s rule” or “my way or the highway.” History and current events teach us that when any strong actor tries to force a particular choice onto others, they resist, resulting in suboptimal positions for everyone involved. This has been the case in energy markets for far too long. In our industry, regulations, market or political power and entry barriers prevent market players from enjoying freedom of
choice, which makes my message clear: markets should be open for inter-fuel competition. Gazprom intends to offer just that to its European customers.
The Future of Natural Gas Today, natural gas has the potential to fuel European and global power generation, space heating and transportation for generations to come. Gas may soon compete with oil in a number of sectors. LNG use in heavy duty transportation is only the first step. As gas demand increases, the demand for oil imports will decrease and diminish the market power of those who capitalize on oil supplies. T. Boone Pickens, for example, said U.S. petroleum imports would drop 50% if half of the 18 wheeler long haul trucks in the U.S. switched to using natural gas. Gas reserves are not concentrated and the development of new gas extraction
technologies and shipping options are making these reserves more widely available and mobile than ever. To conclude, we need to avoid taking Hobson’s approach and give consumers more options in regards to energy supplies. In my opinion, Mr. Hobson was a wise but overly stubborn man who made a critical mistake in failing to listen to his customers, and listen we must.
The Future of Renewable Energy Renewable energy has a great future and we must continue to further develop this resource so it can be reliable in the future. The EU adopted goals of reducing carbon emissions 80% by 2050. We support this goal and think that other countries, including the United States, could benefit from taking the EU’s positive example. To meet this ambitious goal, the European Climate Foundation called Continues on page 8
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Financialization of Commodity Markets: Impact on Energy Prices Sergei Komlev, Head of Contract Structuring and Price Formation, Gazprom Export
The current decoupling of oil and gas prices, where prices of the two commodities move in different directions, negatively affects Gazprom’s export sales by driving up oil-indexed gas prices and leading to lower gas offtake. The main reason behind the oil and gas price disparity that has lasted for over two years is the financialization of the energy markets, which has a strong influence on prices. Let me remind you of the fact that the necessity to price a commodity via a third commodity stems from the fact that the market for the commodity is not perfect enough to function properly and produce a quality price signal. This was certainly the case in the early years of the gas industry, when gas production required enormous investments and the market mechanisms were in their infancy and therefore not in a position to guarantee a security of supply and demand. As the gas industry has matured, it seems to have become conventional wisdom that the rationale for oil indexation in Europe no longer holds and that the move to spot prices has become a fait accompli. I would argue that the rationale for oilindexation does indeed still hold – more than ever before – and it is now no longer the issue of market immaturity but rather a case of “over-maturity” of the commodity markets that can no longer be ignored. A decade ago, commodity markets were a relatively quiet backwater of the global financial and commodity markets, where the main participants were almost exclusively producers and consumers. According to Barclays Capital, the combined value of commodity index swaps, exchangetraded commodity products and commodity medium term notes was just $6 billion at the turn of the millennium, in December 2000.
these assets surged to $270 billion as the commodity boom peaked. Although commodity investors reduced their appetite in the face of the global crisis, they have subsequently returned with volumes reaching a new fresh peak of $350 billion in the second half of 2010. The financialization of the energy market would not create any problems if the funds were spread more or less evenly across the various energy commodities. However, this is not and has never been the case. There were “darlings” of the financial investors as well as “Cinderellas,” and as a result of this, demand for the so-called “darlings” ceased to be primarily driven by core market fundamentals. This is what has actually happened in the case of oil, where close to half of the above mentioned $350 billion is currently held in the form of long-term crude oil positions. There are two schools of thought as to the assessment of the impact on prices by market financialization: The International Energy Agency represents one school of thought, which claims the financialization of commodities does not drive up market prices. The only force that affects commodity prices, as this school of thought argues, is a mix of actual supply and demand factors, where speculators simply amplify the tendencies set up by the market fundamentals and do so only within a short period of time.
I adhere to the second school of thought, which subscribes to the view that paper trading in commodities is a force that gives its own momentum to pricing structures. Commodity prices are determined not only by fundamentals but by the investments of market participants, who are not directly connected with the goods they trade. Financial investors, in fact, regard these goods as an instrument of inflation risk evasion. The choice of a commodity as a financial paper asset does not increase its physical demand but it does increase its price. This approach does not conflict with the mainstream economic theory that the more paper traders invest in a commodity, the higher its churn ratio is and the better the quality of its price is. When a critical mass of paper investors emerges, the quality of price improves due to the fact that it also starts to capture the ‘vibrations’ coming from the currency markets. In other words, the ‘over sensitive’ commodity price reflects not only its own market fundamentals, but also the deficiencies of the ‘price measurement instrument’ and by and large, a fading trust in paper currencies. In the wake of the financial crisis, gas lost its attractiveness to financial investors, whereas prior to the financial crisis, the ratio of oil to the price of gas hovered within a very narrow bandwidth. Since Continues on page 9
This picture changed as financial investors seeking hedges against inflation rushed into the market with hundreds of billions of dollars. In Q2 of 2008, www.gazpromexport.com | newsletter@gazpromexport.com | +7 (499) 503-61-61 | comm@gazpromexport.com
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Gazprom to Ramp Up UGS Capacity in Europe At the end of January, the Management Committee of Gazprom Group approved the decision to ramp up the company’s underground gas storage (UGS) capacities in Europe. The move fully corresponds with the longterm strategy of Gazprom Group, and is based on the rationale that these facilities help to smooth out seasonal fluctuations of gas demand, reduce peak loads in UGS and provide for better flexibility and reliability of gas supply. Recent history provides ample and unmistakable evidence of this fact. Several UGS facilities are now under consideration in different European countries, which can help bolster the reliability of Russian gas exports. Gazprom Export is conducting feasibility studies about the company’s potential participation in these joint UGS ventures in countries such as Germany, Czech Republic, France, Romania, Belgium, United Kingdom, Slovakia, Turkey, Greece and Hungary, among others. Potential UGS facilities have to be strategically located, which means that they must be located close to the primary transit network of Russian gas and at points best suited to support the flexibility and security of export deliveries. Feasibility studies are then conducted in order to evaluate the associated technical, environmental and investment risks. The safety of individuals and protection of the environment is a
supreme objective. Gazprom attaches the highest priority to the safe performance of UGS while developing the technical design of any future facilities. Currently, Gazprom Export is primarily involved in UGS projects in the countries that transit the bulk of Russian exported gas. For example: • Gazprom Export and WINGAS (a joint venture with Wintershall Holding) operate the Rehden UGS, Europe’s largest facility with capacity exceeding 4 bcm. • Gazprom Export, WINGAS and RAG operate the Haidach UGS facility in Austria. In total, Gazprom Group holds two-thirds of the project capacity. • Gazprom Group has shares in other companies owning and operating UGS facilities: ArmRosGazprom (Armenia), Latvijas Gaze (Latvia) and VNG AG (Germany). Gazprom Group, in cooperation with its European partners, is studying the possibilities of implementing new UGS construction and operation projects. Projects under consideration include: • With VNG, the Katharina UGS is being constructed near Bernburg (Germany). It will have a working gas volume of up to 600 mcm. • With Srbijagas, agreements have been reached on joint implementation of the Banatski Dvor UGS project, which has
Year by Year
the working gas capacity of 450 mcm. To construct and operate the facility, a joint venture, which is now under registration, will have the following shareholding structure: Gazprom will control 51% and Srbijagas, 49%. • With TAQA, an agreement has been reached on the Bergermeer UGS facility in the Netherlands. As agreed, in exchange for a certain amount of cushion gas provided on a temporary basis for injection into the facility, Gazprom will gain access to its working gas capacity. Gazprom Export expects that it will be fully utilizing its own storage capacities in the long-term in order to secure export deliveries to its European customers. Should there be unused storage capacity; the company would be ready to put it up for sale on the open market on a shortterm basis. Gazprom Export is not adverse to competition regarding storage capacities belonging to its projects partners. Project partners generally offer, on open markets, the storage capacities corresponding to their share in the project, and our company is not preventing third party access to storage capacities. Gazprom Export operates in full accordance and conformity with EU regulations and national legislation.
2006
2007
2008
2009
2010
Volume of working gas (bcm)
1,4
2,1
2,5
2,5
2,5
Daily production (mcm)
18,2
22,8
30,0
30,0
30,0
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Gazprom and Wintershall Sign MOU on South Stream Project Gazprom and BASF SE recently announced that a Memorandum of Understanding has been signed between the two companies, providing for the participation of Wintershall Holding GmbH in the South Stream project.On 21 March, Alexey Miller, Chairman of the Gazprom Management Committee, and Jürgen Hambrecht, Chairman of the BASF Board of Executive Directors, signed the agreement in the presence of Russian Prime Minister Vladimir Putin, providing for participation of Wintershall in constructing the offshore section of the gas pipeline. The document outlines the basic terms, conditions and principles for the German company to join the offshore section the project. For instance, the Memorandum
identifies that Wintershall Holding GmbH will acquire a 15% stake in South Stream AG, while Gazprom will retain 50%. The Memorandum also stipulates the conclusion of new long-term contracts for natural gas supply to the joint venture company Wintershall Erdgas Handelshaus Zug AG (WIEE). “Our company and Wintershall have a long history of partnership that overcame such challenges as joint pre-development of the Achimov deposits in the Urengoy field and launch of the Nord Stream gas pipeline construction. The interest of European energy majors in the partnership within the South Stream project proves significance and relevance
of the project for Europe,” said Alexey Miller. “With Gazprom and other European partners we have already shown how we can increase European supply security with natural gas through the Nord Stream Baltic Sea Pipeline. Together we are now strengthening the supply security in the south eastern EU member states, where Gazprom and Wintershall have been successfully involved in gas trading for many years. As economic growth in the region increases, so does the demand for gas. In the future, we can directly and reliably supply these customers via the South Stream pipeline,” said Dr. Jürgen Hambrecht.
Welcome South Stream Slovenia LLC Gazprom and Geoplin Plinovodi announce joint venture Alexey Miller, Chairman of the Gazprom Management Committee, and Marjan Eberlinc, President of the Board of Geoplin plinovodi d.o.o., recently signed the South Stream Slovenia LLC Shareholders’ Agreement in Ljubljana during the official visit of Russian Prime Minister Vladimir Putin to Slovenia. South Stream Slovenia LLC is a joint project company set up on a parity basis to implement the South Stream project in Slovenia. It will engage in project documentation preparation, fundraising, construction and operation of the gas pipeline in Slovenia. “Creation of the joint project company demonstrates a serious approach of
Gazprom and Geoplin plinovodi to the South Stream project implementation in Slovenia. The project is to give a fresh impetus to the economy of Southern and Central Europe: South Stream is to create new jobs, attract investments and boost regional integration processes. Cooperation of energy companies within this multinational project will increase reliability and flexibility of Russian gas supply to the European markets,” Alexey Miller noted. “With the accession to the creation of the joint venture company South Stream Slovenia, Geoplin plinovodi and Gazprom are concluding intensive and very successful preparatory activities,
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whereas with the signing of the agreement itself, the companies further confirm project’s wider significance and role. South Stream project is an opportunity for Slovenia to strengthen, within the activities of Geoplin plinovodi and Gazprom, its international position on the list of countries with a safe and reliable energy transfer which is very important today. The project’s significance is even greater because of the challenges that global energy policy faces due to the consequences of a wide range of natural and social phenomena we have been witnessing recently,” Marjan Eberlinc said.
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New Dimension of the Future Andrei Galaev, CEO, Sakhalin Energy Investment Company Ltd.
LNG, which beat the project’s initial target by 47%. It was an unprecedented worldclass achievement, especially taking into account that the production process ran parallel to the start-up and commissioning of the project’s facilities. In 2010, the LNG plant reached its goal capacity and, thanks to successful debottlenecking, even exceeded it.
In February 2011, Sakhalin Energy Investment Company Ltd. celebrated the second anniversary of the launch of Russia’s first and only LNG plant. The plant reached full capacity by mid-2010 and today is the most advanced and 6th largest LNG plant in the world, accounting for 5% of global LNG capacity. With this plant in operation, Russia joined an elite club of LNG exporters. Stable LNG deliveries from Sakhalin are a testimony to the successful development of one of the most complex and promising Sub-Arctic oil and gas projects. While Europe has been the main target for Russian gas exports for the past 40 years, Russia has been exploring new export markets since the late 1990’s. Another strategic objective of the country’s oil and gas industry was the development of offshore fields in the Far East and Arctic, which required the construction of new production and transportation infrastructure.
The gas liquefaction process involves a Shell-licensed Double Mixed Refrigerant (DMR), which was specifically developed to ensure maximum production effectiveness during cold seasons in Sakhalin. Sakhalin Energy’s LNG plant has two LNG trains where gas is treated and liquefied. Each LNG train holds acid gas removal units (СО2 and Н2S), molecular sieve gas dehydration plants, mercury removal units with activated carbon, fractionation units for refrigerant production and stabilized condensate and gas liquefaction units. LNG is directed into two isometric storage tanks with a capacity of 100,000 m3 each. The tanks are designed as two-wall structures 37 m high and 67 m in diameter. Internal LNG storage tanks consist of cold resistant 9% nickel steel while pre-stressed concrete is used in external tanks. Heat
insulation between the internal and external tanks limits heat penetration and maintains the required temperature in the internal tank. The LNG is kept in the tanks prior to uploading to LNG tankers. LNG is offloaded using a special 805 m long jetty with four arms, including two offloading arms, one dual purpose arm and one vapor return arm. The LNG jetty can accommodate LNG carriers ranging from 18 to 145 tcm. The loading takes six to sixteen hours depending on the vessel’s mass. The jetty can service up to 160 LNG carriers per year. Like all of the facilities at Sakhalin-2, the LNG plant was constructed taking the high seismicity of the region into account, allowing it to withstand major earthquakes. Sakhalin-2 encourages the development of Russia’s LNG transportation market. Sakhalin Energy currently uses three “Grand” class vessels to transport LNG from the project to key markets. All three vessels are owned and operated by RussoJapanese consortia, including well-known Russian shipping companies Sovcomflot and PRISCO. While these LNG carriers
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These projects are large-scale and geopolitically significant initiatives that could significantly enhance global energy security. Russia has already benefited from their development. For example, the development of the green field shelf at Sakhalin-2 opened up markets for Russian hydrocarbons and LNG in the Asia-Pacific Region. In the first 10 months of operation, the Sakhalin LNG complex produced 5.3 mt of www.gazpromexport.com | newsletter@gazpromexport.com | +7 (499) 503-61-61 | comm@gazpromexport.com
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Ajay Shah: The Case for Gas and Innovation Blue Fuel: Shell has been in the gas business for decades. What is the company’s vision of the role of gas in the future energy mix? Ajay Shah: There are three main reasons why I believe natural gas can and will play an important role in the future energy mix. It is an abundant, affordable and environmentally acceptable resource.
Ajay Shah is Head of Strategy and Portfolio in Shell’s Global LNG team. Blue Fuel asked him about the importance of gas and LNG, and the value of innovation. Royal Dutch Shell plc is one of the world’s largest oil and gas producers. By 2012, the company is projected to produce more gas than oil. With interests in numerous LNG ventures around the world and access to the world’s key markets, Shell is also the largest equity LNG supplier among international oil companies. Since 2009 Shell and Gazprom have successfully partnered in the Sakhalin-2 Project, and Gazprom Neft and Shell also jointly operate a group of Salym oil fields in western Siberia. In November 2010, Gazprom and Shell signed a MOU on strategic global cooperation, establishing the foundation for broader international collaboration and deepening the already strong relationship.
To continue to power people’s lives, we need to mobilise the entire mix of energy sources. At Shell, we think that global gas demand will rise by 50% by 2030, which is a faster growth rate than oil. Global LNG demand is likely to double this decade, driven by demand in Europe, China as well as a host of other Asian and Middle Eastern countries that will soon begin importing LNG. Blue Fuel: So demand is abundant. Can the same be said for gas supplies? Ajay Shah: The International Energy Agency (IEA) estimates there is 250 years’ supply at the current rate of consumption. But the IEA also warns that it will require cumulative investment of some USD 5 trillion (or USD 220 billion a year) to increase supplies by 40% over the next twenty years. The industry will have to introduce innovative technologies, commercial structures and strong partnerships in order to make this happen. Gas, and particularly LNG, can play a key role to meet growing gas demand. LNG offers great flexibility to both suppliers and customers, as it can come from a wide variety of sources and can go to multiple destinations. As the LNG industry has become truly global, we see ever greater scope for investment.. The successful Gazprom-Shell partnership in the Sakhalin-2 venture showcases this potential. It is a venture with many
Shell FLNG • FLNG unlocks so-called ‘stranded’ gas as it produces, liquefies, stores and transfers LNG at sea. It can provide a means of developing smaller or more remote gas resources. As such the technology is complementary to onshore LNG. • The Prelude gas field, located approximately 200 kilometers off shore northwest Australia, is the planned site for Shell’s – and the world’s – first FLNG project. • Measuring 480 by 74 meters – which is the equivalent of seven Boeing 747s – Shell’s FLNG facility will also be the largest floating facility in the world today. • Shell discovered the Prelude gas field in January 2007. Current plans would see final investment decision in 2011.
firsts: the first LNG project in the Russian Far East; the first sales of Russian gas in the Asia-Pacific and North American markets; and the first LNG project in such a harsh environment. This abundance of natural gas resources and the expansion of the LNG industry together enhance gas supply security and will thus reduce long-term price volatility. This should give governments and investors even greater confidence in natural gas for the longer term. This abundance of natural gas resources and the expansion of the LNG industry
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Natural Gas Will Change Energy Markets Continued from page 2
for 60% of energy generation to come from renewable fuels by 2020. A recent Pace Global study commissioned by Gazprom estimates that total investment in renewable energy sources would need to reach €2.1 trillion, or more than France’s annual GDP, just to meet these targets, with €1.6 trillion of this funding coming from government subsidies. Such high large figures make it difficult to even comprehend the amount of investment needed to reach the 2050 goals.
transportation solution despite enjoying massive government subsidies. This can also happen to renewable energy if we rush its development.
New technologies are often introduced with the help of massive and unnecessary government subsidies, ultimately increasing energy prices for consumers. Often these technologies are flawed and require additional investment to function effectively. For example, the Concorde airplane, while initially introduced to the market as a revolutionary technology, turned out to be noisy and inefficient. The Concorde thus failed to become an effective
My Conclusion
Hasty renewable energy development is driven largely by a combination of Russophobia and a desire to be carbon responsible. While I support carbon emission management and believe that it should continue, Russophobia should definitely end.
Let’s offer customers in Europe and North America true choice: First of all, we must work together to promote inter-fuel competition in the transportation sector. This is the best way to ensure price stability and supply security across global markets. It is time for Europe to understand that gas can compete with oil in the transportation sector and may even prevail against it because it is
cleaner, cheaper and more reliable. If gas serves as our foundation fuel, not only Europe, but global markets will: • Be less dependent on concentrated oil supplies • Be cleaner as gas emits 30% less carbon than oil • Enjoy lower energy prices due to fuel diversification Second, we must continue to develop new renewable energy technologies without destroying their promise by putting them in place before their time. And finally, since Hobson’s choice is a false choice, we need to act individually and collectively to guarantee that the substantial energy and environmental benefits of natural gas are not squandered in the name of illusory goals, political preferences and unsubstantiated fears. We have a good future together but only if we work together.
Security Experts Probe Gazprom’s Views on Security Delegation of the German Academy Discusses Energy Issues with Gazprom Recently, Gazprom headquarters in Moscow hosted a 40-strong delegation from German Academy for Security. Top officials, politicians and businessmen were given a presentation in the Gazprom Dispatching Center and were hosted by Alexander Medvedev, Deputy Chairman of Gazprom Management Committee and CEO of Gazprom Export. During the discussion, guests were briefed on a wide range of timely topics. They were mostly interested in prospects for the development of various energy sources after the earthquake and tsunami in Japan; cooperation between Gazprom and European entities; the controversy over the EU Third energy package; technical security of gas
extraction and transportation in Russia; and the social policy of Gazprom Group, among other issues. “Decisions on security issues have long-term effects. Take for instance the move to start natural gas supplies from the Soviet Union to Germany; it was at height of the Cold War. Nevertheless, the leadership of Germany and Europe made a smart decision to bet on Russian gas. If it had happened, let’s say, some 10 years later, the economic landscape of Europe would have been different, less appealing, and the oil and gas prices would be different as well,” said Alexander Medvedev.
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Sulfur Exports Double
Sulfur Exports in 2010 Amounted to Nearly 5 Million Tons In 2010, sulfur exports through Gazprom Export reached a historical high and amounted to 4.969 million tons, which is 98% more than that of 2009, when exports totaled 2.5 million tons. Since 2008, Gazprom Export has been the only exporter of sulfur produced by Gazprom Group. The largest sulfur producers are Gazprom Dobycha Astrakhan and Gazprom Dobycha Orenburg, jointly producing approximately 6 million tons per year. Gazprom Dobycha Astrakhan, ranked third in the world in
terms of annual sulfur production, set a record in 2010, by shipping 5.8 million tons of sulfur to buyers. Gazprom Export independently performs the main part of logistics, delivering sulfur intended for export by railway from the factory to the transit ports (Ust-Donetsk, Nikolaev, Ilyichevsk, Ust-Luga). It also reloads sulfur in river crafts at Buzan port during navigation. North Africa, the Mediterranean and Latin America are the key markets for Gazprom Group’s sulfur consumption.
“Our company maintains an open dialogue with all the end-users, understanding the importance of direct contacts between the producer and consumer, which is aimed at fully meeting the global market needs. Thus, a new form of global marketing of sulfur with full participation of Gazprom Group, Gazprom Export and their counterparts in the sulfur market is now organized,” said Sergey Sakharov, Head of the Department of Oil, Oil Products and Petrochemicals at Gazprom Export.
Financialization of Commodity Markets: Impact on Energy Prices Continued from page 3
2008, however, the ratio of the price of oil to gas has diverged significantly and is as extreme as 3 to 1. The question is: How to restore the economically reasonable price correlation of oil and gas, acceptable to the whole industry? There are three options to reach this aim: • Option 1 –“Traders out of the energy commodities temple” • Option 2 –“Traders into the natural gas temple” • Option 3 –A preservation of oil indexation. “Traders out of the energy commodities temple” is no more than a figure of speech. It is not possible to stop the financialization of the energy markets and it will remain inevitable unless we have a stable global currency, something which will not happen any time soon. What we can do, however, is adjust the price of oil in our contracts and use this price as a benchmark, albeit removing its ‘speculative’ component. Indeed, estimates on the impact of speculation or hedging on crude prices range from a premium of 15% on the conservative side to as high as 50%.
Option 1 is therefore clearly not an option. What we see is not only the continuation of the oil-gas price disparity but a broadening of the range of commodities that have become the “darlings” of investors seeking to hedge against currency fluctuations. And now we can see that metals also represent an attractive alternative. When the majority of other commodities are racing higher in the midst of very contrary fundamentals, the illogical market behavior can be explained as such: these commodities were earmarked by financial investors and received their support and blessing. Gas producers would have to buy investment goods at artificially blownup prices, while watching their own prices being depressed either as a result of the “Cinderella syndrome” or due to voluntary price adjustments. The second option looks more feasible than the first option. In order to attract financial investment, the first thing we need to do is to stop disseminating ‘bearish’ information on gas. After all, there is no reason for the industry to look worse than it is in reality. Industry fundamentals would improve and there are good messages that we could deliver, as according to our preliminary estimates, gas consumption in Europe in 2010 hit all-time highs.
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It will take time, however, for the financial markets to appreciate natural gas as an instrument for currency hedging. There is a reason that natural gas futures haven’t taken off as inflation hedge. Specific commodities chosen as inflation hedge have to feature a standardized spot price structure in global markets. Natural gas doesn’t fit this description, with its differing degrees of price seasonality in different locations and many different pricing structures. It also tends to represent more localized markets as the vast majority of gas is still transported by pipeline. The continued emergence of mobile LNG has led to some greater correlation of markets but not to the extent to enables gas to catch up with the broader commodity price trend. There are good chances that it may not happen in the future. As commodity investment is becoming ‘physical’ amid paper commodity market regulations, gas will hardly become the ‘darling’ of exchange-traded physical funds. Storage and insurance costs for gas are much higher than for oil and metals. Spot market pricing is not a solution. The solution, as we see it, is as follows: oil indexation as a means of mitigating the consequences of systemic market inefficiencies. April 2011 | Vol. 4 | Issue 1
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Natural Gas is the Partner to Renewables Interview with Dr. Gerhard König, Managing Director of WINGAS GmbH & Co. KG
Dr. Gerhard König: WINGAS has been on the market for 18 years now, and it was precisely investment in gas infrastructure in which the company began. To date, the WINGAS group has already invested more than 3 billion euros in the development of a pipeline network, and is planning to invest another 3 billion euros between 2010 and 2015. These investments will be aimed at important infrastructure projects that will allocate additional supplies of gas within the EU. Today, against a background of falling domestic production in central Europe, we believe it is particularly important to create a new infrastructure that will allow additional imports to the EU to maintain a healthy competitive environment. And WINGAS, as a Russian-German joint venture, not only makes a very significant contribution to the energy security of Europe, but also increases the competitiveness of natural gas as an energy source.
Blue Fuel: In 2010, the EU approved a bill that ensures equal access to gas supplies to all consumers in the EU, in particular through the development of gas infrastructure. What steps is WINGAS taking? Dr. Gerhard König: WINGAS of course knew of the preparation of the bill and followed the process closely. We were already very well organized before 2010 with our 100% subsidiary WINGAS TRANSPORT, which operates the overall gas pipeline network at the heart of Europe in Germany. The company acts independently on the market and has achieved the position of an interface for European natural gas transportation. Blue Fuel: What has already been done and what is the company planning?
Blue Fuel: Some experts fear that the adoption of this law will have a negative impact on your partnership with Gazprom. Dr. Gerhard König: This bill will not have any negative impact on the partnership with Gazprom. But it may have a negative impact on the company’s commitment to invest in Europe, like the proposed regulatory regime, which applies certain income restrictions upon us. We, like many other companies, are not willing to invest in infrastructure on such conditions. Gradually, the EU is becoming aware that in order to ensure an uninterrupted supply of gas, we need to invest in infrastructure. We are hoping that this awareness will be reflected in the future to create the appropriate investment incentives that are currently missing. A few words about the impact on our partnership: Gazprom and Wintershall have similar evaluations on many
issues, including decisions relating to investments. During the past 20 years we have come to a level of understanding and confidence that continues to pay off. It is a successful model we intend to continue. Blue Fuel: BASF-Wintershall has been working with Russia and Gazprom for 20 years and WINGAS for 18. How can you best summarize the results over this period? Dr. Gerhard König: The main conclusion that I have come to - looking at the 20year history of our partnership - is that if there is will, entrepreneurial courage and mutual trust between partners, you can achieve a lot. And, speaking figuratively, when you have these three elements in seed form, you can grow a large tree with deep roots. Gazprom and Wintershall cooperate not only in the sale of gas with WINGAS, but also in production. We are working together in Western Siberia and are also cooperating in the sphere of transport on the Nord Stream gas pipeline. It seems to me that we have developed a partnership that is unique in its nature, intensity and depth. Blue Fuel: You have stated that you plan to expand your presence in Europe. How is WINGAS implementing this plan? What will be done this year and in the medium term? Dr. Gerhard König: In 2003, we entered the Belgian market. We are now supplying about 40 industrial customers and have started to acquire regional distribution companies. Our plan for Belgium is to reach a 10% market share. We have been present on another market for several years now that is commonly believed today to have the most intense competitive environment: The UK. Additionally, we plan to increase our presence in other Western European countries, and recently signed a first major contract with a public utility gas supplier in the Netherlands to supply Continues on page 11
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Natural Gas is the Partner To Renewables Continued from page 10
1 bcm of gas per year to Eneco Holding NV. The contract was signed for an 18– year term – an indication of our long-term commitment to the European gas markets. Blue Fuel: You mentioned the construction of Nord Stream’s subsidiary pipelines. How is the construction of OPAL and NEL progressing? Dr. Gerhard König: The construction of the OPAL pipeline, which passes Germany to the Czech Republic border, is progressing at a good pace. It is the longest construction site in Europe and on schedule. Recently, we provided a splice between OPAL and the Czech pipeline system on the border. Next is the construction of a compressor station and the development of the terminal in Lubmin near Greifswald, in the north of Germany. As for NEL: This pipeline, too, is designed for the transportation of Russian gas from Nord Stream to Rehden in Lower Saxony, where it will be connected with the European gas network. We are already close to the beginning of construction and expect that pipeline to be ready to operate in Q4 of 2012 when the second line of Nord Stream will come on line. Blue Fuel: Spot market gas trading is developing more and more in Europe. Which kind of contract – spot or longterm – can ensure greater reliability for the market? Dr. Gerhard König: The spot market has grown very strongly over the past few years and this trend will continue. But, if we are talking about the sustainability of the market and the reliability and security of supply, I believe that long-term contracts in which prices are “linked” to a basket of petroleum products have every right to exist.
Blue Fuel: Environmental protection and the reduction of emissions have already become integral parts of business. What is WINGAS doing to meet environmental standards? Dr. Gerhard König: Given that natural gas is the most environmentally friendly of all fossil fuels, the business of WINGAS is already geared to climate protection and sustainability. This is a main focus of our activities and we have accumulated a lot of experience in matters of energyefficient technologies. In addition, we should bet not only on renewable energy sources, but also on gas as a natural partner to renewables. WINGAS is doing this by promoting capabilities to combine natural gas and renewable energy sources, such as rooftop solar panels with gas heating. Blue Fuel: According to the International Energy Agency, the total growth in energy demand by 2030 could reach as much as 45%. What market share do you think natural gas will take? And is nuclear power a serious competitor? Between the two, which has the better future? Dr. Gerhard König: Regarding growth in world energy demand, we agree with these forecasts. There certainly will be significant growth, especially in the Asian countries. Furthermore, we are expecting a specific energy mix that will inevitably include natural gas. Blue Fuel: In general, do you think alternative energy sources have a chance in the future? Or shale gas? What are their prospects on the market? Dr. Gerhard König: The share of renewable energy will increase, because this is a matter of political will. We need
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to think seriously about what is optimal in terms of costs and benefits obtained at the point of output. Therefore, I expect that the share of wind power will increase along with an increased share of hydro power. With regard to solar energy, at least in Central and Northern Europe, I do not see much growth potential. As for shale gas, it’s a somewhat different story. It is not a renewable energy source. In America, shale gas is in use already. In Europe, the possibilities of its development are being studied at present. The attitude toward shale gas is quite different to that in the U.S. I do not expect that shale gas will play a significant role in Europe in the next 10 years. Blue Fuel: What events will be key to WINGAS in 2011? Dr. Gerhard König: With regard to significant events, surely the most important one will take place in Q4 of 2011: the commissioning of the Nord Stream and OPAL pipelines. If we are talking about investments in storage facilities, we expect strong progress for Jemgum gas storage. But in the end, the goal for 2011 remains the same like in years before: to grow. With a view on the challenging market conditions, this won’t be an easy task. Blue Fuel: Are there any other “noncore” business areas? Dr. Gerhard König: We belong to the very few European energy companies that focus with full force on their core business: natural gas. This is our product, and here we see substantial growth potential. The success we achieve attests that our framework is competitive and sustainable.
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Ajay Shah: The Case for Gas and Innovation Continued from page 7
together enhance gas supply security - and so will reduce long-term price volatility. This should give governments and investors even greater confidence in natural gas for the longer term. Blue Fuel: What is Shell doing to keep pace with growing demand? Ajay Shah: In a fast-changing and highly competitive world, innovation is a key differentiator for Shell. We have been at the forefront of technological innovation in the gas industry for over 40 years – but we don’t take this for granted. Innovation helps us to increase gas production at existing projects, and to monetise gas resources that were previously considered stranded. Shell’s overall investment in research and development has been the largest of any international oil and gas company for some years. We also recently adopted a new technology strategy, with three principal goals. First, we want to innovate to improve our existing business activities. For example, onshore innovation includes Gas to Liquids (GTL) technology. Through the GTL process, we can produce cleaner burning products, including gasoil and kerosene. GTL is another way to unlock gas reserves. It is complementary to existing technologies such as LNG and pipelines, and will take gas-products into new markets. We also develop designs for LNG plants with higher efficiencies and improved environmental footprint, such as Shell’s Double Mixed Refrigerant (DMR) liquefaction process which has been applied successfully in Sakhalin. DMR is the heart of our floating LNG (FLNG) design and we believe DMR also has the ability to open new frontiers in Arctic LNG.
The second goal of our innovation strategy is to develop more of the groundbreaking technologies that open up new markets. An example would be FLNG. Our plans for the Prelude field (Shell 100%) in Australia are most advanced, but we think that there are opportunities to use this concept in other parts of the world.
Ajay Shah: Shell is developing exciting opportunities across the globe and major innovation is taking place, in areas such as exploration, liquefaction and GTL conversion. We look to make progress in these areas through strong partnerships and mutually beneficial relationships across and along the value chain.
The third part of the strategy is nurturing innovation in emerging technologies at the frontiers of science and technology. Major innovation is taking place there, especially in areas like computing and algorithms, nanotechnology, fundamental chemical processes, conversion technology, biotechnology and exploration technologies.
We also believe Russia will be able to discover and develop new resources, and through its knowledge and capabilities Gazprom is uniquely positioned to continue its stewardship of the country’s energy resources. At the same time I believe Gazprom and Shell combining forces – the world’s biggest gas supplier and the ‘gassiest’ oil company – would leverage strengths and capabilities that will create substantial value to both.
Blue Fuel: And what can we see in the foreseeable future?
The Pearl GTL Project (in Qatar) • Being Shell’s GTL flagship project, it will use gas from the North Field, the world’s largest single nonassociated gas reservoir, from which some 1.6 bcf/d of wellhead gas will be produced.
• Shell will export Pearl’s high value, differentiated premium products, including GTL gasoil, kerosene, naphtha, normal paraffin and base oils for lubricants, to markets around the globe.
• Peak production will see some 140,000 b/d of GTL products through two GTL production trains and associated facilities.
• The Pearl GTL project will be the world’s largest integrated GTL complex. Major construction is now complete, on schedule, and commissioning for start-up is underway as planned.
• The project will also produce approximately 120,000 b/d of condensate, liquefied petroleum gas and ethane.
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GM&T and CITIGROUP Complete Deal on Certified Emission Reduction Units (CERs) Gazprom Marketing & Trading Limited (GM&T) and leading global financial services company Citigroup agreed at the end of January on the sale and purchase of Certified Emission Reduction units (CERs) for delivery in the first three years of the upcoming Phase 3 of the European Union’s Emissions Trading System (ETS), valued at over €10 million. Under the agreement, the seller will guarantee delivery of compliance-grade CERs to the buyer every year from 2013 to 2015. The agreement therefore removes the two risks that have prevented Phase 3 from trading: volume risk and EU ETS eligibility of the CERs delivered. “We are delighted to have reached what we believe is the first Phase 3 contract of this type, in terms of tenor, volumes and CER eligibility. Despite the current uncertain environment, we are certain that our different market structures will allow us to continue to provide liquidity to the market for the Phase 3 of the EU ETS,” said Ignacio Gistau, Head of Portfolio Management & Trading at GM&T. “Citi is committed to the environmental markets. As a bank we need to and are providing developers and clients with a perspective and prices beyond 2012. We are very happy to have found a good partner in Gazprom,” said Benedikt von Butler, Director of Environmental Products at Citigroup.
About Gazprom Marketing & Trading Gazprom Marketing & Trading Limited (GM&T) is a UK-registered whollyowned subsidiary of Gazprom, the world’s largest gas company by asset base, accounting for 17% of the world’s total natural gas reserves and for about 70% of natural gas reserves in Russia.
the optimization of Gazprom’s energy commodity assets and downstream expansion through its marketing and trading network. With subsidiaries in Houston, Singapore, Paris, Berlin and Manchester, GM&T trades energy commodities including gas, power, oil, carbon, LNG and foreign currency.
GM&T is headquartered in London and was established in 1999 to manage Gazprom’s marketing and trading activities in the liberalised markets of Europe. GM&T is responsible for
Gazprom has a well diversified CDM Portfolio, sourcing and marketing CERs beyond 2013 thus helping to finance clean energy projects.
About Citigroup Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 140 countries. Through its two operating units, Citicorp and Citi Holdings, Citi provides consumers, corporations, governments and institutions with a broad range of financial products
and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, wealth management. Additional information may be found at www.citigroup.com or www.citi.com.
New Dimension of the Future Continued from page 6
are chartered on a long-term basis, shortterm chartered vessels are also available.
is currently exploring various options to expand and develop the project further.
Ninety-eight percent of annual LNG plant capacity is contracted on a long-term basis. Japan receives about 65% of total LNG produced, while the rest is directed to South Korea and other destinations including India, China and Taiwan.
Gazprom Chairman Alexey Miller said that “while the 20th century was the age of oil, the 21st century will be the age of gas.” For Russia this means developing its immense gas reserves in the Arctic and other regions, including offshore the Sea of Okhotsk.
Since the most successful projects never stop moving forward, Sakhalin Energy
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It is obvious that Sakhalin Energy’s successful implementation of Russia’s first LNG project encourages further energy development. Sakhalin Energy’s experience working in harsh weather conditions climate, developing offshore assets, assessing seismic safety and transporting gas by sea sets an important precedent for the development of future projects. April 2011 | Vol. 4 | Issue 1
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Moscow Soloists Reap Applause in Vienna and Rome In March, the renowned chamber orchestra Moscow Soloists, conducted by maestro Yuri Bashmet, celebrated classical musical heritage in the course of two concerts consecutively held at the Viennese Music Association (Musikverein) and the Auditorium Conciliazione in Rome. In Vienna, the orchestra was joined by the violin master Julian Rakhlin, and in Rome, the performance was illuminated by the famous Italian violinista Uto Ughi. “A small miracle should happen at every concert. This is the credo of every artist,” said maestro Yuri Bashmet.
The concert in Rome took place within the framework of the Year of Russia in Italy, and was intended to be a contribution to the cooperative event. For the very first time, the orchestra brought a collection of precious historical instruments on a tour outside of Russia. The collection included nine violins, a viola and a violoncello by Antonio Stradivari, as well as other instruments from the 17th and 18th centuries. “I have been dreaming of having these instruments perform together for 20 years,” Bashmet said.
Vienna
The orchestra performed a wide variety of musical pieces composed by Mozart, Tchaikovsky, Bella Bartok, Max Bruch and Italian grand masters. “I am pleased to note that together with OMV, our time-honored and reliable partner in Austria, we bring to the public the cream of cream of the Russian musical world,” said Gazprom Export CEO Alexander Medvedev.
Rome
Presentation of The Book of Memory in Austria The Book of Memory, a publication sponsored by Gazprom Export, among others, was presented at the Russian Embassy in Austria on 27 January 2011. The extensive work undertaken to compile the book, which features a complete list of Soviet citizens that died and were buried in Austria during and after World War II, lasted for almost two decades. Through the combined efforts of Austrian activists and research and archival institutions in both countries, a unique database was created from which the citizens of Russia and other CIS countries are able to learn the fate of their relatives and visit their graves. Austria gave this book to Russia as a gift in recognition of the fact that 20 years ago, Austrians gained access to
Russian archives and found data on about 130,000 captured compatriots. Austria is the first country to establish a database of Soviet citizens who died on its soil during the war and post-war years. Data was collected on about 60,000 people, all of whom are buried in Austria, where their graves are carefully looked after. The database contains not only the names of fallen Red Army soldiers, who make up about half of the list, but also the names of concentration camps prisoners and citizens driven to forced labor, which make up the other half of the list. Through data taken from Austrian sources, search operations and the discovery of new remains, researchers have managed to restore the identities of those who are buried.
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Sergey Nechaev, Ambassador of the Russian Federation to the Republic of Austria, and Valery Yazev, Deputy Chairman of the State Duma of the Federal Assembly of Russian Federation, delivered the welcoming speech at the presentation of the publication.
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KHL All-Star Game: Goals for Every Taste The third KHL All-Star Game in St. Petersburg was attended by more than ten thousand hockey fans and produced an extraordinary result, with Jagr Team edging out Yashin Team 18-16. The ceremonial faceoff was made by the Chairman of KHL Board of Directors Vyacheslav Fetisov and KHL President Alexander Medvedev. Sergei Mozyakin and Alexander Radulov were named the MVPs of the game. MVP Mozyakin brought his son along to the game and placed him on the bench to assist Vladimír Vůjtek and Oleg Znarok. The third-grader looked a lot more serious than the coaches as he attentively watched his father repeatedly hit the target. The Atlant forward and leading scorer’s final tally was five goals, while Jaromir Jagr was not far behind, scoring four. “But we knew we’d win,” Jagr laughed after the game. “We were confident of victory.” Jagr’s confidence notwithstanding, his Eastern Conference Stars entered the final period with a three goal deficit, thanks to Yashin goaltender Konstantin Barulin’s heroics. Barulin replaced Dominik Hasek in goal midway through
Photo provided by the KHL: Alexei Yashin (Left) and Jaromir Jagr (Right) at All Star Game
it appeared Kuznetsov was failing to deliver. It was only when the Westerners pulled their goalie in a frantic attempt to tie the score that Kuznetsov, charging towards an empty net, got an opportunity to score. Hasek tried to tackle Kuznetsov from behind the boards with his stick and a defenseman’s stick was thrown in desperation, but neither impeded his progress. Yet in another blow to
“But we knew we’d win,” Jaromir Jagr laughed after the game. “We were confident of victory.” the second period and, from there, resolutely refused to be beaten. Traktor forward Evgeny Kuznetsov, fresh from victory in the Superskills shootout competition, almost ran out of luck in the main event. Kuznetsov had promised to produce something striking for the spectators, but as time passed,
Kuznetsov, referees ruled the goal had come just after the end of the buzzer. In the end however, Kuznetsov was awarded the goal. “It’s really tough for us in games like these,” said goalkeeper Stefan Liv, who was replaced by Mikhail Biryukov.“I
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wished Misha luck, but also warned him that it wouldn’t be easy.” And it was into Biryukov’s net that possibly the finest goal of the game was scored: with his weaker arm, Mozyakin shot from the tightest of angles, so it was shocking when the puck ended up nesting in the near corner of the net. The goal seemed to fire up Biryukov, and from then on he sprang to life at every minor threat, as if he were in a cup final rather than a friendly game. But on a day when the defensemen do not support the goalies and fail to intercept passes, there is little a goaltender can do to keep the score down. Additionally, of the more than 26 million earned foreign media impressions from over 330 placements, approximately 75% of the overall KHL All-Star Game coverage was focused on Denis Kulyash’s record-breaking slap shot, which he produced in the Superskills competition. Denis made the hardest shot at 177.58 km/h. Ultimately, the results pleased the spectators, who packed the St. Petersburg arena to the rafters and whose shouts exceeded the 100 decibel mark as the game reached its end.
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