Russian Chill

Wintershall On Thin Ice

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Mr. Seele wants - and needs - Russian gas.
  • Why it matters

    Why it matters

    Tensions between Germany and Russia over the crisis in Ukraine have adversely affected Wintershall’s business.

  • Facts

    Facts

    • Despite E.U. sanctions, about 6,000 German companies are still active in Russia.
    • In December, Russia halted construction of the South Stream gas pipeline, in which Wintershall was involved.
    • North Sea production accounts for more than half of Europe’s natural gas supply.
  • Audio

    Audio

  • Pdf

Wintershall CEO Rainer Seele has every reason to be concerned about the tension between Germany and Russia: His company drills for natural gas in Siberia, trades Russian gas and is one the closest partners of Russian gas producer Gazprom. Mr. Seele is also president of the German-Russian Chamber of Foreign Trade. Handelsblatt met with him after a business trip to St. Petersburg.

Handelsblatt: Mr. Seele, how did it go in St. Petersburg?

Mr. Seele: Not so well. I watched an ice hockey game. Unfortunately, St. Petersburg lost 1-2 against Torpedo Novgorod.

But you must have done some business as well.

Of course. I traveled to St. Petersburg to meet with Alexander Medvedev.

The deputy chairman of Gazprom, who is also a friend of yours, right?

Yes. We have developed a friendship over the years.

And it has endured in these difficult times?

Certainly. The number of friends I have hasn’t declined in the past year. However, we often talk about the Ukraine crisis, and of course it stands between us. Naturally, this creates an obstacle to business relationships.

Because the Russians have no appreciation for European policy and vice-versa?

It’s becoming increasingly difficult to understand the other side. Our Russian business partners are highly supportive of President [Vladimir] Putin’s policies. And no one understands the sanctions, because they affect the general population most of all.

The sanctions are not undermining Putin’s authority, as was intended. On the contrary, they have encouraged the Russians to close ranks. Nevertheless, I do try to explain the West’s perspective, although it’s very difficult.

What is your view of the approach Germany and Europe are taking in the Ukraine crisis?

Even though I’m skeptical about the success of sanctions, I see no alternatives at this time. But the sanctions should be lifted as soon as serious progress is made.

How much damage has been done to relations between Germany and Russia?

From what I can see, it will take a long time to normalize the relationship.

How will the two nations find a way out of this?

Ukraine is the key. The first goal is to bring peace to the country. Then we will have to quickly provide for economic stability. Only if we achieve this together can we slowly rebuild trust among Russia, Ukraine and the West.

You are trying to achieve this, together with Eckhard Cordes, chairman of the Committee on Eastern European Economic Relations, as well as other heads of German corporations, who meet regularly for talks with the Russian government. Is this secret diplomacy?

Mr. Cordes and I try to meet with Russian politicians to discuss business issues on a fairly regular basis. We don’t focus on the Russian president, but on people like the economy and energy minister. We consciously try to engage in dialogue. Our main goal is to preserve the good position of the German economy in Russia as much as possible.

This is especially true of small and mid-sized German companies, which are suffering the most in Russia but still aren’t leaving the country. Some 6,000 companies remain active in Russia.

Do you think German trade relations are in jeopardy? Is Russia increasingly turning to Asia?

Yes, we are feeling this in bidding procedures, where German companies were clearly desired in the past. Now the awarding of contracts is either heavily delayed or Chinese companies are given preference, even when they don’t reach the same technological level as German companies. So it harms both sides – the German and the Russian side.

Your industry is in the spotlight in the Ukraine conflict. Will the Russians use gas trading as a weapon against the West?

I have no indications of that. In terms of the sanctions, both sides were very eager to leave out the subject of natural gas. The real problem is that Ukraine is no longer able to pay its own gas bills and that the transit of natural gas destined for Western Europe is always potentially in jeopardy.

Your company is more involved in Russia than any other business. To what degree is your partnership with Gazprom suffering in this political crisis?

We are working together as efficiently and effectively as we did before the Ukraine crisis.

But you experienced the Russians’ unpredictability in early December, when they unilaterally stopped construction of the South Stream gas pipeline, in which Wintershall was involved. Is that the way to treat partners?

There is no question that it wasn’t a good thing.

And you expressed your views to Gazprom?

Indeed. We discuss the issues at length, and then we drink a glass of vodka together.

How disappointed were you that the project failed?

We would have liked to do it. And so would Gazprom. But there were clear signals coming from Europe that Gazprom wasn’t necessarily welcome as an investor. That’s why the massive project also made no sense to us in the end. It was ultimately blocked by the European Union.

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Wintershall continues to drill for gas in Siberia. Source: Ria Novosti/SPL/Agentur Focus

 

What does the cancellation of South Stream mean for the European gas supply?

South Stream would have been very important. The new line would have enabled us to circumvent the uncertainties involved with transit through Ukraine. Gazprom doesn’t want to extend the transit agreements, which expire in 2018.

Now that South Stream is dead, we in Europe lack a solution for the transport of 63 billion cubic meters of gas, or about 15 percent of annual requirements. Europe will need that gas, but we won’t be able to get it from alternative sources in the short term.

What’s the solution?

We should enter into a dialogue with Gazprom and discuss the concepts it is pursuing with the gas deliveries that are now planned through Turkey.

So Russian gas is the only solution?

I’m in favor of a healthy mix. But we shouldn’t allow prejudices or the fact that we are currently in a political ice age seduce us into giving up a particular source altogether. We also have to ask ourselves how reliable the alternatives are, such as gas wells in North Africa or in the Middle East.

This is why we should expand our domestic supply in Europe, which includes conventional fracking. We should increase gas production in the North Sea. Many people don’t know that more than half of the natural gas needed in Europe is still produced in the North Sea.

Just a few weeks before the South Stream scandal, the Russians cancelled another piece of business that had been planned: Gazprom was to take over the gas trade company Wingas in Europe, and in exchange, Wintershall was to gain a bigger share of a Siberian gas field.

I want to emphasize that it was a shared decision. We sat together and decided that given the circumstances – and the political situation in particular – had deteriorated so much, an asset swap no longer made sense.

You had been preparing the deal for more than a year, but only realized that just before closing it?

The situation escalated between Russia and the West at the end of the year. Brussels kept warning against depending too greatly on Russian gas. Gazprom started to doubt whether the group would really be welcome in Europe as an investor. But it’s true; we weren’t able to take up the opportunity of extending our cooperation with Gazprom.

Wingas has practically changed owners. What’s the situation there now?

It’s just as it was before the planned swap. Wingas would have certainly benefitted from developing beyond a trade company into the sales company of the world’s biggest producer of gas. But the company is still profitable and now we’re running it together with Gazprom, just as we’ve been doing throughout our 25-year partnership.

Are you unhappy that after the deal with Gazprom fell through, you can’t tap more gas in Siberia?

We regret it. It is one of the most attractive gas fields we’ve been offered. The mining there is very profitable.

Isn’t that a lucky thing, too? After all, you won’t have to invest more money in Russia at a time when the political and economic situation is so uncertain. That’s good news for the capital markets.

Unfortunately, that’s true – and I do feel torn. But I want to emphasize one point – namely that despite the political tensions and sanctions, we’ve been managing our joint gas-mining venture in Russia perfectly. I haven’t seen any negative effects. Our production there is safe and very profitable. We won’t be able to produce in other regions at the same low costs that are possible in Siberia.

On the other hand, we want to position ourselves more internationally. We’ll take the money that we don’t invest in Siberia and put it into other key areas. Ultimately, however, such diversification will weigh on our results.

The Russia crisis is just one area of concern for Wintershall. There’s also the fall in oil prices. Could things be any worse for the company?

I wish the price of oil was at a different level. But that doesn’t mean it’s a disaster for us. We’re still impressively profitable, even at the current oil price. There’s also the fact that 75 percent of our production is gas and only the smallest part of that is linked to the price of oil. But we will react and keep cutting costs.

Are you also reducing investments?

We already have fewer investments than planned because of the cancelled asset swap with Gazprom and the failure of the South Stream pipeline project. That will increase our cash flow significantly.

By how much?

We would have invested hundreds of millions this year in South Stream alone. But we are taking a close look at how economical other projects are, including a gas project in Qatar, for example. After we’ve examined them, we’ll postpone some projects, or cancel them.

How do you think the oil price will develop?

If I knew, I’d charge you for that information. Seriously speaking, there’s a lot of oil on the market and in holdings, and there are producers coming back to the market, like Iran. So there are no real signs that the oil price will recover in the near term.

But the oil industry is cancelling investments in new drilling projects and that will ease the situation a little in the medium term. We’re expecting a range of between $60 and $70 this year.

Where would Wintershall like to drill for more gas?

In Germany, we’re experiencing a fall in production for the fourth year in a row. Here’s what I think. Let’s bring valuable production back here. We still have to be able to do traditional drilling. But we’ll also start doing more in Norway, working with Statoil at the new offshore gas field Aasta Hansteen 2017/18. We’ll make that gas available for sale in Europe.

Some people say Wintershall is too active in crisis regions and that’s why it’s seeing some hard times. How do you respond to that?

The latest developments show we’re a highly profitable company and have dynamic growth that’s hard to match anywhere else in our industry. Despite the low oil price, we achieved in 2014 impressive operating results that matched those of the previous year.

Sure, Wintershall’s portfolio has a few risks. But we’re managing that. If we weren’t making a profit anymore, then I could understand the criticism. We’ll continue to develop our portfolio but also keep an eye on the geographical risks.


Video: Wintershall’s drilling operation in Siberia.

 

Jürgen Flauger covers the energy sector for Handelsblatt. Bert-Friedrich Fröndhoff is deputy head of Handelsblatt’s companies and markets department. To contact the authors: flauger@handelsblatt.com, froendhoff@handelsblatt.com

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