Gazprom in questions and answears

Q U E S T I O N S A N D A N S W E R S

Y E A R 2 0 0 8 H I G H L I G H T S

Yamal megaprojectlaunched

Nord Stream projectis in progress

Preparations areunderway for the

South Stream project

Gasification of Russia’sregions continues

Sakhalin – Khabarovsk –Vladivostok gas pipelineconstruction projectinitiated

Sakhalin II projecttaken into full-scalecommercial operation

Block 1A of the Achimovdeposits in the Urengoyskoyefield taken into commercialoperation

Contents 3 Chapter 1

Gazprom – Joint Stock Company

9 Chapter 2Strategy

19 Chapter 3Reserves

23 Chapter 4Production

33 Chapter 5Transmission

39 Chapter 6Gas and Liquid Hydrocarbons Processing

43 Chapter 7Gazprom on Russian Market

51 Chapter 8Gazprom on Foreign Markets

57 Chapter 9International Projects

67 Chapter 10Financial Activities

73 Chapter 11Gazprom in Power Industry

77 Chapter 12Ecology and Energy Conservation

81 Chapter 13Social Responsibility

87 Chapter 14Management

93 Chapter 15Contacts

3

Chapter 1Gazprom – Joint Stock Company

Total number of personnel 376.3 thousand people

The state controls 50.002% of the shares

Dividends for 2008 RUB 0.36 per share (recommended)

What is Gazprom?Open Joint Stock Company (OAO) Gazprom is one of the world’s largest energy businesses engaged in natural gas, gas condensate and oil prospecting, production, transmission, processing and marketing both inside and outside Russia, as well as in power generation.

ОАО Gazprom is the legal successor of the proprietary rights and obligations of State Gas Concern Gazprom, including the rights to use land, subsurface reserves, natural resources, as well as the rights and commitments under the agreements concluded by the Concern.

Gazprom holds the richest natural gas reserves in the world. Its share in the global and Russian

OAO Gazprom headquarters

4

Gazprom in Questions and Answers

gas resources accounts for around 17% and 70%, respectively.

Gazprom owns the gas trunklines integrated in the Unified Gas Supply System (UGSS) of Russia.

In accordance with the Russian Federation Presidential Decree of November 5, 1992, the Company is vested with the obligations as follows:

providing reliable gas supply to consumers in the Russian Federation;

supplying gas outside the country under interstate and intergovernmental agreements;

pursuing an integrated science, technology and investment policy with regard to UGSS upgrading and development;

building and financing high pressure gas pipeline branches for rural gasification purposes;

controlling UGSS; providing other producers with access to the

national gas transmission system.

When was OAO Gazprom founded?On February 17, 1993, pursuant to the Russian Federation Government’s Directive following the Russian Federation Presidential Decree of November 5, 1992, State Gas Concern Gazprom was transformed into Russian Joint Stock Company (RAO) Gazprom. In 1998 RAO Gazprom was reincorporated into an open joint stock company.

What companies is Gazprom Group comprised of?Gazprom Group as a vertically integrated energy company is comprised of the parent company – ОАО Gazprom and its subsidiaries engaged in gas, oil and other hydrocarbons extraction, transmission, processing and marketing, underground gas storage as well as other activities including technical control over pipeline systems, oil and gas wells drilling, equipment supply, thermal and electric power generation, R&D, data processing and banking services.

Exploration and production. In this sector there are 23 subsidiary and affiliated companies engaged in

hydrocarbon field exploration and development. Well drilling operations are mainly carried out by specialized subsidiaries: OOO Burgaz and OOO Gazflot.

Transmission of natural gas is vested in 20 subsidiary and affiliated companies conveying gas by trunklines and supplying it to regions. Seasonal and peak fluctuations of gas demand are regulated with the use of 25 underground gas storage sites on the territory of the Russian Federation, which are operated by OOO Gazprom UGS.

Gas, gas condensate and oil processing is carried out at six gas and condensate processing plants of OAO Gazprom, as well as by OAO Gazprom neft and ОАО Salavatnefteorgsintez companies.

Marketing and gas distribution. Natural gas is sold on the domestic market by OOO Mezhregiongaz and 50 Russian regional gas trading companies and their affiliates.

Since the late 1990s Gazprom has started acquiring ownership interests in gas distribution companies that own and operate medium and low pressure gas transmission networks used for gas deliveries to final customers. These assets are managed by ОАО Gazpromregiongaz.

Gazprom’s products are exported via the wholly owned subsidiary OOO Gazprom export.

Peripheral activities. Gazprom Group comprises units performing activities that are ancillary to the core businesses. Such activities include construction, repair, upgrading of and technical control over the Unified Gas Supply System; provision of technological communications; power generation; R&D.

Is Gazprom’s structure optimal or should it be improved?Any prominent corporate structure continuously changes in accordance with a company’s development logic. Gazprom is not an exception.

1. Gazprom – Joint Stock Company

5

The corporate structure of OAO Gazprom undergoes reform for improvement purposes. Stage one of the reform, which was aimed at improving the governance methods, regulatory procedures and budgeting system at the parent company’s level, has been successfully completed.

Stage two of the reform is targeted at enhancing the operating efficiency of OAO Gazprom as a vertically integrated company and streamlining the core business governance structure at the subsidiary level. This calls inter alia for concentrating individual activities within specialized wholly owned subsidiaries of OAO Gazprom.

The intra-corporate reform centers upon Gazprom’s gas production and transmission companies. Underground gas storage capacities that used to be part of those are now consolidated within a specialized company – OOO Gazprom UGS. While the Group’s processing companies were integrated in 2008 within OOO Gazprom pererabotka, the well maintenance functions were vested in OOO Gazprom severpodzemremont and OOO Gazprom yugpodzemremont. OOO Gazprom tsentrremont (consolidates repair and service assets) and OOO Gazprom dobycha shelf were set up.

In order to enhance the investment performance efficiency the wholly owned specialized subsidiaries OOO Gazprom invest Zapad and OOO Gazprom invest Vostok were established. Besides, during the reorganization of subsidiaries OOO Gazprom transgaz Kuban was separated from OOO Kubangazprom to focus on gas transportation.

Further plans include completing the consolidation of communication, IT and other services.

The structural reform is expected to result in the full unbundling of accounts in production, transmission, processing, underground storage and marketing of gas and liquid hydrocarbons. The reform will allow the Company to significantly enhance the transparency

of costs in the gas production, transmission and marketing sectors.

The restructuring of the intra-corporate governance system aimed at ensuring the structural transparency of the Company and visual identification of OAO Gazprom in Russia and abroad have spelled the development of the major wording principles for subsidiary names. According to these principles each subsidiary name must contain the parent company’s name – Gazprom. The single corporate identity will be adopted by 57 subsidiary companies and organizations of OAO Gazprom.

How many people are employed by Gazprom Group’s companies?As of late December 2008 the total number of Gazprom Group’s personnel equaled 376.3 thousand people. The core business companies dealing with production, transmission, underground storage and processing of gas employed 221.3 thousand people.

How was OAO Gazprom privatized?RAO Gazprom (since 1998 – OAO Gazprom) was privatized fully in line with the Russian Federation privatization laws as well as the Decrees and Directives of the Russian Federation President, and the Resolutions of the Council of Ministers – the Government of Russia.

Personnel structure for Gazprom Group’s major gas production and transmission companies in 2008

11.6%

22.6%61.8%

4.0%

– Employees– Specialists

– Workers– Heads

6


The Decree to transform Concern Gazprom into a joint stock company was considered by the Presidium of Russia’s Supreme Council on October 26, 1992. At the time RAO Gazprom was founded, 100% of the Company’s shares were owned by the Russian Federation.

The sales of shares commenced in 1993 and ended in 1995 with the results as follows: 41% of the shares remained under the state ownership, 10% of the shares were acquired by Gazprom for privatization vouchers, 15% of the shares were purchased by the Company’s current and former employees for vouchers (at least 50% payment) and in cash, 32.9% of the shares were bought by residents of Russia’s 60 regions for vouchers and 1.1% of the shares were handed over to AO Rosgazifikatsiya.

8.3 million worth of privatization vouchers and around RUB 17 billion was submitted as payment for Gazprom’s shares, with 1 million 30 thousand citizens of Russia becoming the Company’s shareholders.

What are the rights of Gazprom’s stockholders?Just like shareholders of other joint stock companies, Gazprom’s stockholders have the following primary rights:

to take part in the General Meeting with the right to vote on all issues falling under the purview of the General Meeting;

to receive dividends.

Ownership of a 2% stake enables a shareholder or a group of shareholders of the Company to nominate candidates for the Gazprom Board of Directors and Audit Commission as well as to bring forward items for the Shareholders Meeting agenda. A shareholder or a group of shareholders with a 10% stake ownership may call for an Extraordinary Shareholders Meeting of Gazprom to be summoned.

In 2002, in order to facilitate efficient protection of the rights and interests of its stockholders, Gazprom

was one of the first Russian companies to adopt the Corporate Governance (Behavior) Code. The document sets out the major principles and mechanisms enabling shareholders to exert their rights as well as creating conditions for the Board of Directors to exercise efficient control over the activity of Gazprom’s executive bodies, i.e. the Management Committee and the Management Committee Chairman.

Moreover, in compliance with the Code’s requirement in relation to the disclosure of corporate data to shareholders, the Board of Directors has adopted the ОАО Gazprom Information Disclosure Rules.

Does the Company provide financial support to its stockholders?The Company is both the participant and organizer of numerous charitable and sponsorship events aimed at developing culture, sports, science and education as well as renders assistance to socially unprotected categories of the population. The Company does not provide any direct financial support to its shareholders.

How is the Management Committee of OAO Gazprom formed?The Chairman and the Members of the Company’s Management Committee are elected to a five-year term by the Board of Directors that has the right to terminate their term of office ahead of time.

How is the size of dividends on OAO Gazprom shares determined?The dividend size depends on the amount of net profit, which is determined based on the Company’s operating and financial results.

The OAO Gazprom Dividend Policy Provision was endorsed by the Board of Directors on April 24, 2001. The Provision sets the net profit allocation rules for a reporting period.

A part of the profit in the amount of no less than 2% of the Company’s capitalization but no more than 10% of the overall net profit is earmarked to pay out dividends.

1. Gazprom – Joint Stock Company

7

ZAO PriceWaterhouseCoopers Audit was selected as the auditor of OAO Gazprom for 2008 under the decision of the June 27, 2008 annual General Shareholders Meeting of the Company.

ZAO PriceWaterhouseCoopers Audit performs:

the audit of the OAO Gazprom (parent company) Accounting Statements in accordance with the requirements of the Russian legislation;

the audit of the Gazprom Group Annual Consolidated Accounting Statements prepared under the requirements of the Russian legislation;

the audit of the Gazprom Group Annual Consolidated Financial Statements filed under the International Financial Reporting Standards.

Who owns shares of Gazprom?Gazprom is Russia’s largest joint stock company with several hundred thousand registered stockholders domiciled both in Russia and abroad. The largest shareholder of Gazprom is the state. In mid-2005, after state run OAO Rosneftegaz acquired a 10.74% stake in OAO Gazprom, the share of the Russian Federation in OAO Gazprom grew to a controlling stake (50.002%). The move enabled to reinforce the state’s control over the Company being of strategic significance for the national economy.

Throughout 2008 the share capital structure didn’t undergo substantial changes.

From 50% to 75% of the net profit is reserved for technical upgrading, new technology development, R&D, turnover asset replenishment and other similar purposes.

A further part of the net profit goes to the reserve fund (under the Company’s Statutes – no less than 5% of the authorized capital).

The remainder is allotted in equal portions as dividends and reserves used for production and social development purposes.

The decision to pay out annual dividends, including with regard to their size and payment method, is taken by the Shareholders Meeting under the recommendation of the Board of Directors. The annual dividend size can not exceed the figure recommended by the Board of Directors.

Are there any preference shares issued by Gazprom?The share prospectus did not initially provide for any preference shares. All shares of Gazprom are ordinary equities.

Who performs independent auditing of OAO Gazprom?An independent auditor of Gazprom is selected through an annually conducted competitive procedure. The procedure results are considered by the Board of Directors of Gazprom, and the auditor’s candidacy is approved at the annual General Shareholders Meeting.

ОАО Gazprom share capital structure, as of December 31, 2008, %

StakeThe stake controlled by the Russian Federation 50.002 The Russian Federation represented by the Federal Agency for State Property Management

38.373

OAO Rosneftegaz 10.740 OAO Rosgazifikatsiya 0.889

ADR holders 22.150Other registered persons and entities 27.848

8


Where can one buy (sell) shares of OAO Gazprom?ОАО Gazprom shares can be bought from their legal holder. Shares can be acquired under a purchase and sale agreement drawn up in pursuance of the existing legislation with subsequent re-registration of ownership rights in a depositary (register holder office) at the share owner’s banking account location. The Company’s shares can also be bought or sold at Gazprombank locations.

Additionally, one can buy or sell Gazprom’s shares through a stock market professional providing brokerage services. Such services are offered, as a rule, by investment companies and commercial banks.

What does ADR stand for?ADR is an American Depositary Receipt freely circulating on foreign stock markets as a receipt for foreign shares deposited with a US bank. ADR is a form of international trading in shares. ADRs for Gazprom’s shares are issued to ensure circulation of the Company’s shares on foreign markets. Before April 18, 2006 one ADR equaled 10 shares of OAO Gazprom.

Beginning from April 18, 2006 the correlation of Gazprom’s ordinary shares per one ADR has been reduced to a 10/4 ratio. The ADRs already in circulation were automatically converted in accordance with the new ratio.

The April 18, 2006 move also enabled to convert ОАО Gazprom ordinary shares into ADRs and vice versa.

Can an OAO Gazprom stockholder sell shares to a foreigner?Yes, it is possible. There are currently no legislative restrictions on foreign ownership of OAO Gazprom shares.

How can a shareholder of Gazprom obtain ADRs in exchange for ordinary shares?The OAO Gazprom ADR Program gives any shareholder the opportunity to convert the Company’s shares into ADRs. To accomplish this, the shares are to be deposited with a local custodian bank (currently Gazprombank), after which the Bank of New York (ADR Program Depositary) issues a relevant amount of ADRs to the shareholder’s account opened with a foreign bank. Since this depositing procedure requires a thorough understanding of the entire process (including respective paperwork, fees and timing), it is more expedient to vest the converting operation in a securities market professional – a brokerage company or a bank that, at the stockholder’s request, will take all necessary actions. At the same time, it is noteworthy here that upon receipt of an ADR the shareholder becomes owner of a foreign security and is liable to the Russian Federation currency laws.

Can a shareholder of Gazprom sell shares on a foreign market?Gazprom’s shares are traded on a foreign market in the form of ADRs. Thus, in order to be sold on a foreign market, shares are first to be converted into ADRs. Naturally enough, it is more expedient to vest such an operation in a securities market professional – a brokerage company or a bank that, at the stockholder’s request, will take all necessary actions.

9

Chapter 2Strategy

What is the strategic goal of OAO Gazprom?The strategic goal of OAO Gazprom is becoming a leader among global energy companies by conquering new markets, diversifying business activities and pursuing supply security.

At the same time, OAO Gazprom views its mission in maximally efficient and balanced gas supply to Russian Federation consumers and highly reliable fulfillment of long-term gas export arrangements.

Nord Stream gas pipeline construction

The strategic goal of OAO Gazprom – leadership among global energy companies

10


What principles does Gazprom’s strategy hinge on?Gazprom’s strategy hinges on the following operating principles:

enhancing the efficiency throughout the entire business chain from production to marketing of natural gas, oil and their derivatives;

expanding and diversifying operations through projects ensuring the creation of high value added products;

meeting the interests of all OAO Gazprom shareholders;

improving corporate governance, enhancing financial and economic transparency;

the leadership’s personal responsibility for the managerial decision making.

Why is business diversification a strategic priority for Gazprom?The Company’s business diversification implies expanding the areas of operations and the range of end products, conquering new markets and developing the logistics schemes. All of the above are the prerequisites for global companies to enjoy their strategic and competitive advantages.

As Gazprom’s Management Committee Chairman Alexey Miller noted: “The strategy of Gazprom is top-down integration in natural gas and diversification in related and high value added products. The present-day structure of the global hydrocarbon business is dominated by universal oil and gas companies. Concentrating the capital and creating an integrated infrastructure leads to lower overall costs and greater profit growth”.

What are the strategic projects of Gazprom?The strategic challenges of OAO Gazprom are met through the execution of the following promising projects:

Exploiting the Yamal Peninsula resourcesThe Yamal Peninsula fields are an OAO Gazprom strategic resource base capable of maintaining production rates over a long run. Yamal’s explored natural gas, condensate and oil reserves amount to 10.4 trillion m3, 228.3 million t and 291.8 million t, respectively, of which 5.8 trillion m3 of gas, 100 million t of condensate and 227 million t of oil is concentrated in the largest fields of the region: Bovanenkovskoye, Kharasaveyskoye and Novoportovskoye, with Gazprom

Layout of Yamal Peninsula fields

LABYTNAGI

SALEKHARD

MalyginskoyeRusanovskoye

Leningradskoye

Kharasaveyskoye

Rostovtsevskoye

Novoportovskoye

Shtormovoye

Utrenneye

TambeyskayaGroup

BovanenkovskayaGroup

SeveroKruzenshternskoye

K A R A S E A

2. Strategy

11

Group as their licensed operator. Potential annual production of natural gas and liquid hydrocarbons from the above fields is estimated at 178 billion m3 and 7 to 9 million t, respectively.

The Development Program for an Integrated Gas Production, Transmission and Supply System in Eastern Siberia and the Far East, Taking Account of Potential Gas Exports to China and Other Asia-Pacific CountriesThe Energy Strategy of Russia prescribes establishing new gas production provinces in Eastern Siberia and the Far East.

The available regional gas reserves are sufficient for meeting prospective needs of eastern Russia and arranging for gas supply to both domestic and foreign consumers. The initial in-place onshore gas resources of Eastern Siberia and the Far East amount to

52.4 trillion m3 (including 37.9 trillion m3 in Eastern Siberia and 14.5 trillion m3 in the Far East).

In September 2007 the Industry and Energy Ministry of the Russian Federation endorsed the Development Program for an Integrated Gas Production, Transmission and Supply System in Eastern Siberia and the Far East, Taking Account of Potential Gas Exports to China and Other Asia-Pacific Countries (Eastern Program). In accordance with this document Eastern Siberia and the Far East will see the setting up of four new gas production provinces (Sakhalin, Yakutsk, Irkutsk, Krasnoyarsk).

The primary development principles for a gas supply system in eastern Russia are as follows:

giving priority to meeting gas demand of Russian consumers and maintaining sustainable gas supply throughout Russia by

The largest fields in Eastern Siberia and the Far East

R U S S I ASakhalin IV-VI

Srednevilyuiskoye

Chayandinskoye

Talakanskoye

Kovyktinskoye

Yurubcheno-Tokhomskoye oil, condensate and gas field

Sabinskoye oil, condensate and

gas field

Krasnoyarsk Krai fields

VerkhnechonskoyeUrengoyskoye

Sakhalin I-II

M O N G O L I A

C H I N A

12


expanding the Unified Gas Supply System (UGSS) eastwards;

shaping a natural gas market based on prices formed with the account of competition between various fuels without direct administrative pricing regulation by the state;

implementing an export policy based on a single gas exporter.

Russia’s Government entrusted OAO Gazprom with acting as the Program execution coordinator.

The Sakhalin Island was identified as an initial site for full-scale commercial development.

Gas resources of eastern Russia are featured by a complex composition of components with a considerable content of helium, oil fringes, and a big condensate factor. These features of eastern fields objectively require a special approach to the exploitation of resources in the Yakutsk, Irkutsk and Krasnoyarsk centers as compared to Western Siberia. Here, it is necessary to apply state-of-the-art technologies and fully utilize all components found in the produced gas. The point is not to just produce gas, but to arrange for a complex of gas-chemical companies in eastern Russia and to export products with high added value.

Exploiting Russia’s Arctic offshore resourcesThe Russian Arctic shelf is considered by OAO Gazprom as one of the most promising regions for discovering new and developing existing hydrocarbon fields.

The initial aggregate hydrocarbon resources of Russia’s continental shelf average 90.4 billion t of fuel equivalent, of which about 82% is gas. The main hydrocarbon resources (about 70%) are concentrated in the Arctic Seas, namely the Barents, Pechora and Kara ones, with gas and condensate prevailing in the Barents and Kara Seas and oil – in the Pechora Sea.Gazprom owns upstream licenses for such unique fields as Shtokman and Prirazlomnoye.

The explored gas and condensate reserves of the Shtokman gas and condensate field make up 3.8 trillion m3 and 31 million t, respectively. The field is located in the central offshore part of the Russian sector in the Barents Sea.

Shtokman will be the resource base for Russian gas exports to Europe by the Nord Stream gas pipeline and for liquefied natural gas (LNG) production.

Prirazlomnoye oil field is the basic deposit for the development of marine oil recovery in south-eastern offshore of the Barents Sea. Prirazlomnoye’s recoverable oil reserves account for 46.4 million t allowing to annually extract some 6 million t of oil.

Liquefied natural gasОАО Gazprom considers the possibilities of accessing global markets with a new product – liquefied natural gas (LNG).

Global gas consumption undergoes an average increase of 2.5% year-on-year with the bulk of the growth driven by LNG.

LNG has become an integral part of the global gas trade and is currently classified as a key factor for the world market formation. In 2008 LNG marketing volumes reached 237.8 billion m3 growing more than twofold since the early 1990s. The forecasts point to a further twofold expansion of the LNG market after 2015, to be largely stimulated by boosting demand for natural gas in the USA, the UK and Asia-Pacific countries.

Deliveries of gas in the liquefied form take priority in terms of market coverage opportunities irrespective of a geographical location.OAO Gazprom implements a by-stage strategy to expand its presence on the LNG market. Within stage one (spot deals and LNG – pipeline gas swaps) the Company supplied liquefied gas to the USA, the UK, South Korea, Japan as well as

2. Strategy

13

Mexico and India. Since 2005 total LNG sales have averaged 2 billion m3.

The next stage of this strategy began in February 2009 when an LNG plant was taken into operation as part of the Sakhalin II project. In April 2009 the first carrier with Russian LNG onboard arrived in Japan.

Further building up LNG production both in Russia and abroad in parallel with marketing efforts will enable the Company to have by 2030 a strong presence on the global market of this commodity.

Characterized by the biggest capacity, liquidity and over-demand, the Atlantic Basin market is considered by Gazprom as the most attractive supply target.

Exploiting and utilizing hydrocarbon resources in Central AsiaUzbekistan. Since mid-2004 OAO Gazprom has been involved via its ZAO Gazprom zarubezhneftegaz subsidiary in rehabilitating gas production from the

Shakhpakhty field (some 400 million m3 of annual production).

In January 2006 OAO Gazprom and National Holding Company Uzbekneftegaz entered into the Agreement on the Major Geological Survey Principles for Ustyurt Investment Blocks in the Republic of Uzbekistan with Subsequent Oil & Gas Field Development under the PSA Terms.

Pursuant to the Agreement, the Russian side will develop a by-stage geological exploration program for new Ustyurt investment blocks and, in case of new field discoveries, will have an exclusive right to negotiate with Uzbekistan their development under the production sharing agreement (PSA) terms. The natural gas to be produced in the Ustyurt region will be marketed through the integrated OAO Gazprom – OOO Gazprom export channel.

Kazakhstan. Represented by TsentrCaspneftegaz, a joint venture between OAO Gazprom and

Uzbekistan’s fields

Р О С С И Я

В КОРЕЮ ИСТРАНЫ АТР

В СТРАНЫ АТР

ПРИГОРОДНОЕ

ЮЖНОСАХАЛИНСК

ДОЛИНСК

TASHKENT

Сахалин – 2(ПильтунАстохонское)

О Х О Т С К О Е М О Р Е

A R A L S E A

СМИРНЫХ

ТЫМОВСКОЕ

КАТАНГЛИ

ВАЛ

Сахалин – 2(Лунское)

Shakhpakhty

Ustyurt Plateau

О . С А Х А Л И Н

M O Н Г O Л И Я К И Т А Й

Я П О Н И Я

СКОВОРОДИНО

ЧИТА

УЛАНБАТОР

ИРКУТСК

НОВОСИБИРСККРАСНОЯРСК

БОГУЧАНЫ

ПРОСКОКОВО

АБАКАНБАЛАГАНСК

НИЖНЯЯПОЙМА

БАРНАУЛ

НОВОКУЗНЕЦК

ТОМСК

НИЖНЕВАРТОВСК

УРЕНГОЙ

ОМСК

ТЮМЕНЬ

ВЛАДИВОСТОК

ТОКИО

ХАБАРОВСК

КОМСОМОЛЬСКНААМУРЕ

БЛАГОВЕЩЕНСК

БИРОБИДЖАН

КОРСАКОВ

1 2

3

4

5

6

K A Z A K H S T A N

T U R K M E N I S T A N


U Z B E K I S T A N

14


OAO LUKOIL, Russia cooperates with Kazakhstan within the framework of the Agreement on the Joint Hydrocarbon Resource Exploitation Principles for the Tsentralnaya Geological Structure. The Russian side is engaged in the preparation of a feasibility study for the project related Production Sharing Agreement, with electrical exploration and a geotechnical survey at a construction site for the first appraisal well so far completed, an ecological and hydrometeorological study performed and a provisional geological model for the projected field developed.

In June 2002 OAO Gazprom and АО National Company KazMunayGas set up on a par and registered in the Republic of Kazakhstan the KazRosGaz joint venture engaged in purchasing and marketing natural gas, processing it at Russia’s plants and running other businesses.

In July 2006 Kazakh and Russian Presidents signed a Joint Declaration to promote the long-term cooperation when

processing and marketing gas from the Karachaganak field. Within the scope of the Declaration, OAO Gazprom and AO National Company KazMunayGas entered on June 1, 2007 into the Agreement on the Major Creation and Operation Principles for a Joint Venture on the Platform of the Orenburg Gas Processing Plant (Orenburg GPP). The parties also signed a long-term contract to purchase/sale and process up to 16 billion m3 of Karachaganak gas. The bulk of the processed gas will be destined for Kazakhstan, and the remainder will be marketed under export contracts.

Turkmenistan. The relationships between Russia and Turkmenistan in the gas sector are based on the long-term bilateral Agreement of Cooperation in the Gas Industry signed in April 2003 by Russian President Vladimir Putin and Turkmen President Saparmurat Niyazov. The Agreement is in force from January 1, 2004 till December 31, 2028.

Within the scope of the Agreement, OOO Gazprom export, a Gazprom subsidiary, and State Trading

Central Asia – Center gas transmission system

ПОРТУГА

ЛИ

Я

ТУНИС

И С П А Н И Я

ВЕЛИКОБРИТАНИЯ

Р О С СИ

Я

ИРЛАНДИЯ

ФРАНЦИЯ

ИТАЛИЯ

А Л Ж И Р

Т У Р Ц И Я

У К Р А И Н А

ГЕРМАНИЯ

ШВ

ЕЦ

ИЯ

НО

РВ

ЕГ

ИЯ

ПОЛЬ

ША

Ф

ИН

ЛЯН

ДИ

Я

ГР

ЕЦИ Я

БОЛ ГАРИЯ

Б Е ЛАРУ

С Ь

ЛА Т ВИЯЛИТ ВА

ЭСТОНИЯ

Р УМЫНИЯ

ЧЕХИЯ

В ЕН Г РИЯ

А ВС Т РИЯ

Г РУ ЗИЯ

ЮГОСЛАВИ Я

I R A QСИРИЯ

ХО

Р В А ТИЯ

K A Z A K H S T A N

K Y R G Y Z S T A N

U Z B E K I S T A N


I R A N A F G H A N I S T A N

A Z E R B A I J A N

T A J I K I S T A N

ЧЕ РНОЕМОР Е

ARALSEA

CASPIANSEA

2. Strategy

15

Corporation Turkmenneftegaz concluded for the same period a long-term contract for Turkmen natural gas.

Kyrgyzstan. In May 2003 OAO Gazprom and the Government of the Kyrgyz Republic entered into the long-term Agreement of Cooperation in the Gas Industry for the period of 25 years.

In January 2006 OAO Gazprom and the Government of the Kyrgyz Republic signed the Memorandum of Intent for the establishment of a Russian-Kyrgyz joint venture in the oil and gas industry.

In May 2007 OAO Gazprom and the Government of the Kyrgyz Republic entered into the Agreement on the Major Geological Survey Principles. As part of the Agreement, Gazprom received two licenses for the Kugart and Eastern Mailu-Suu areas.

In July 2008 the parties endorsed the By-Stage Geological Survey Program for these areas between 2008 and 2011.

Tajikistan. Cooperation between the Government of the Republic of Tajikistan and OAO Gazprom is regulated by the long-term (till 2028) Agreement on Strategic Cooperation in the Gas Industry of May 15, 2003.

In June 2008 the Agreement on the General Principles of Geological Survey of Oil and Gas Prospects in the Republic of Tajikistan (Rengan, Sargazon, Sarykamysh, Zapadny Shaambary) was signed.

Expanding the Central Asia – Center (CAC) gas transmission systemThe CAC gas pipeline system is nowadays the main transmission route for gas exports from Turkmenistan, Uzbekistan and Kazakhstan.

After more than 30 years of operation the CAC system has significantly outlived its lifespan and needs substantial upgrading. CAC’s throughput capacity at separate sections does not exceed 45 billion m3 per annum.

In order to secure transmission capacities for Turkmen, Uzbek and Kazakh gas transit, OAO Gazprom has developed the Priority Actions Program targeted at debottlenecking CAC and entering into long-term contracts to transit gas across Uzbekistan and Kazakhstan.

A stimulus for the above actions has become the signing in May 2007 of fundamental interstate documents: the Joint Declaration to develop gas transmission capacities in Central Asia (signed by the Presidents of Kazakhstan, Russia, Turkmenistan and Uzbekistan) and the Joint Declaration to build the Pre-Caspian gas pipeline (signed by the Presidents of Kazakhstan, Russia and Turkmenistan).

Constructing the Pre-Caspian gas pipelineOn December 20, 2007 Kazakhstan, Russia and Turkmenistan entered into the Cooperation Agreement for the construction of the Pre-Caspian gas pipeline.

The Kazakh segment of the Pre-Caspian gas pipeline is projected to annually transport up to 40 billion m3.

The total length of the Pre-Caspian gas pipeline is around 1,700 km, of which over 500 km will run through the territory of Turkmenistan and around 1,200 km – through Kazakhstan.

Developing hydrocarbon fields abroadIn recent years Gazprom has been engaged in geological exploration offshore India and Vietnam.

In September 2005 Gazprom won the tender to explore and develop two blocks of the offshore Urumaco I and Urumaco II gas fields in Venezuela and was awarded 30-year upstream licenses. The first four years of operations are projected to see the implementation of a geological exploration program including seismic survey and exploration wells drilling.

In December 2008 Gazprom and Venezuela’s state run oil and gas company PdVSA signed the Agreement to jointly study the Ayacucho III block in the Orinoco Oil Belt. At the same time, Gazprom

16


won in December 2008 the tender to explore and produce hydrocarbons in El Assel onshore block of the Berkine Basin, Algeria.

The tenders were won for exploration and production of hydrocarbons in license prospects 19 (Mediterranean Sea offshore) and 64 (Ghadames Basin) in Libya.

Gazprom is now looking into its potential involvement in oil and gas projects in Bolivia, Egypt and Iran.

Nord Stream and South Stream gas pipelinesThe Nord Stream and South Stream gas transmission projects will open fundamentally new routes of Russian gas deliveries to Europe for the purposes of enhancing European energy security.

Nord Stream will stretch some 1,200 km across the Baltic Sea from the Portovaya Bay (Vyborg) to the German coast (Greifswald). The new gas main will annually supply up to 55 billion m3 of Russian gas to European consumers.

Nord Stream has been included by the European Union in the list of priority Trans-European Energy Networks. The project will enable Gazprom to diversify export flows and directly link Russia’s gas transmission pipelines with the European gas network. Nord Stream’s distinctive feature is that it by-passes transit countries, and this reduces third-party risks and Russian gas transmission costs as well as enhances the reliability of gas exports. The gas pipeline construction will contribute to expanding gas supply to Russia’s Northwest Federal District.

In September 2005 OAO Gazprom, BASF SE and E.ON AG entered into the in-principle Agreement to build the Nord Stream gas pipeline. In 2008 Gasunie (the Netherlands) joined the project. The construction of UGSS sections in northwestern Russia, to be used, amongst other things, for gas supply by Nord Stream, was initiated in December 2005. The first string is scheduled to begin operation in late 2011.

Venezuela’s offshore blocks

V E N E Z U E L A

Island of Aruba

Island of Curacao

CORO

EL TABLAZO

C A R R I B E A NS E A

CARDON III

URUMACO I

URUMACO III URUMACO II

MORUY III

C O L U M B I A

2. Strategy

17

The transnational South Stream gas pipeline project contemplates supplying the Russian blue fuel across the Black Sea to South and Central Europe.

The gas pipeline will run under the Black Sea from the Beregovaya compressor station in Russia to the Bulgarian coast and further through the territories of European countries. The total length of the section across the Black Sea will average 900 km, with maximum depths exceeding 2 thousand m.

The full capacity of the offshore section is 63 billion m3.The offshore section is constructed by Gazprom in partnership with Italy’s ENI.

In order to build onshore sections of the gas pipeline abroad Gazprom entered into agreements with companies from Bulgaria, Hungary, Greece and Serbia.South Stream will be brought online no later than 2015.

SRTO – Torzhok gas pipelineStarting from 1995 OAO Gazprom has been constructing a gas pipeline from the Urengoyskoye field in the northern Tyumen Oblast (SRTO) to the town of Torzhok. The gas pipeline will be a crucial element of the existing multiline Urengoy – Nadym – Peregrebnoye – Ukhta – Torzhok gas transmission system and will enable to boost gas supply to industrial and household consumers in Russia’s Northwest region as well as to secure gas exports via the Yamal – Europe pipeline.

18


19

Chapter 3ReservesWhat reserves does Gazprom have?

Gazprom possesses the world’s richest natural gas resources, with its share in the overall global and Russian proven gas reserves accounting for some 17% and 70%, respectively.

Gazprom Group’s А+В+С1 gas reserves totaled 33.1 trillion m3 as of December 31, 2008. Due to a bigger scope of geological exploration and obtained upstream licenses, gas reserves grew by 11.2% versus the previous year.

Gazprom annually audits new fields and adjusts the reserve volume and value of deposits audited earlier, taking account of the reserve dynamics (accumulated production and growth) as well as changes in gas production costs, taxes and prices.

Under the Russian classification of reserves:

Gazprom’s natural gas reserves 33.1 trillion m3

gas condensate reserves 1.3 billion t

oil reserves 1.6 billion t

Сurrent value of reserves: USD 230.1 billion

Shift camp at Bovanenkovskoye field

20


Independent audit of Gazprom Group’s reserves and their current value

Gazprom’s share in the global gas reserves

As of December 31, 2008 an independent audit was performed under the PRMS international standards on Gazprom’s A+B+C1 88% of natural gas, 85% of gas condensate and 92% of oil reserves.

According to DeGolyer & MacNaughton’s appraisal, Gazprom Group’s proven and probable hydrocarbon reserves are estimated at 27.3 billion t of fuel equivalent and priced at USD 230.1 billion.

Recently Gazprom has boosted its geological exploration activities. What are the outcomes?A major outcome is determined by the fact that in the past three years the replenishment of Gazprom’s gas reserves has been exceeding the level of its gas production. In 2008, thanks to geological exploration operations the Company accrued 581.6 billion m3 of gas, which is 5.5% up on its production level. Only in the past three years Gazprom’s subsidiaries discovered seven new hydrocarbon fields: Chikanskoye in the Irkutsk Oblast, Akobinskoye and Zapadno-Rozhdestvenskoye in the Orenburg Oblast, Karmalinovskoye in the Stavropol Krai, Kamovskoye in Evenkia, Zapadno-Pestsovoye in YaNAO and small sized Valyntoyskoye in Western Siberia. 28 deposits were found in the fields discovered earlier and the explored reserves were built up in the Shtokman field. Furthermore, in 2008 OOO TsentrCaspneftegaz (50% owned by OAO Gazprom) discovered a new field – Tsentralnoye

17%

USD 230.1 BILLION(excluding the data on Gazprom neft)

CONDENSATEGAS OIL

– audited reserves – unaudited reserves

92%88% 85%

Natural gas reserves by the main world regions (as of January 1, 2009)

Region trillion m3

Middle East 72.59FSU 55.83 including Russia 47.65Africa 13.83Asia-Pacific 12.05North America 8.65Central and South America 7.46Europe 4.73

Calculated based on: Energy Information Administration – “World Proved Reserves of Oil and Natural Gas, Most Recent Estimates”, March 3, 2009

3. Reserves

21

– in the Caspian Sea. The C1+C2 hydrocarbon reserves of the field – 169.2 million t of fuel equivalent.

What are the latest license acquisitions of Gazprom?In 2008, pursuant to the directives of the Russian Federation Government, OAO Gazprom obtained 10 exploration and development licenses for subsurface blocks (fields) of federal significance on the Yamal and Gydan Peninsulas, in the continental shelf of the Sea of Okhotsk and in the Republic of Sakha (Yakutia), with their A+B+C1 reserves estimated at 3.3 trillion m3 of natural gas and 143.2 million t of liquid hydrocarbons as of December 31, 2008.

Thus, as of year-end 2008 Gazprom Group held 262 licenses to search for, explore and produce hydrocarbons in Russia and 19 similar licenses abroad.

What is Gazprom’s strategy for its mineral resource base?Gazprom’s strategic challenge in relation to its resource base is to maintain a parity between the reserves growth and production as well as to provide for the expanded reserves replenishment in the long run.

A fundamental document determining the OAO Gazprom mineral resource base replenishment strategy is the Program for the Gas Industry’s Mineral Resource Base Development up to 2030. The Program aims at securing stable performance of the Company and expanded replenishment of hydrocarbons.

Under the Program, the period till 2030 is planned to see an at least 23.5 trillion m3 of gas increase through geological exploration, with liquid hydrocarbon reserves to grow 3.4 billion t.

Up to 2010 the major prospecting targets will be the West Siberian, Timan-Pechora and Pre-Caspian regions, with more intensive work to be performed in the Ob and Taz Bays of the Kara Sea and the Pechora Sea offshore.

In 2011-2020 the Arctic offshore, Sea of Okhotsk, Krasnoyarsk Krai, Irkutsk Oblast, Sakha (Yakutia) and Sakhalin Island offshore will also be the principal exploration areas contributing to the mineral resource base replenishment.

In a longer perspective a priority will still be given to the Arctic regions of Western Siberia, Eastern Siberia and the Arctic offshore. There are also plans to launch prospecting activities in new, so far unexplored areas of the Siberian and Far Eastern Federal Districts (northern Evenkia, Sakha (Yakutia), Chukotka, Kamchatka).

Distribution of Gazprom Group’s natural gas reserves in Russia as of December 31, 2008

0.3%

2.1%

7.8%

2.3%

– Siberian and Far Eastern FD

– Offshore

– Northwest FD– Southern FD

– Volga FD– Urals FD

73.2%

14.3%

22


23

Chapter 4Production

Gas production by Gazprom Group:

512.0 billion m3 in 2001








How much gas did Gazprom produce in 2008? What is the share of Gazprom in the Russian and global gas production?In 2008 Gazprom Group produced 549.7 billion m3 of natural and associated gas (in 2007 – 548.6 billion m3).

At the end of the first half of 2008 gas production by the Group exceeded the target by 5.5 billion m3. However in the second half Gazprom was forced to cut gas production by 16.8 billion m3 versus the preset target for this period due to a sharp decline in consumption on the national and international markets.

Today, the share of Gazprom in the total Russian and global gas production accounts for 83% and 17%, respectively.

Production in Yamburg

24


Marketable gas production in world regions, 2008

NADYM�PUR�TAZ22.3 TRILLION M3 (C1+C2)

SHTOKMAN FIELD3.8 TRILLION M3 (C1+C2)

YAMAL PENINSULA10.4 TRILLION M3 (C1+C2)

33.1 TRILLION M3 (A+B+C1)GAZPROM

RUSSIA47.65

TRILLION M3

(A+B+C1)

Reserves in promising gas production provinces

Gas production by Gazprom Group In order to ensure data comparability, the figures for 2002 through 2005 are calculated via a methodology in line with

the preparation principles for Gazprom Group’s consolidated statements

100

200

300

400

500

600

2006 2007 20082004200320022001 2005

552.5 555.0 556.0 548.6 549.7547.6525.6512.0

Region billion m3

FSU 814.7

including Russia* 663.5

North America 797.7

Asia-Pacific 410.6

Middle East 379

Europe 300.9

Africa 201.5

Central and South America 150.9

Source: The 2008 Natural Gas Year in Review – Cedigaz, May 6, 2009

* – production volume as provided by the Russian Federation Ministry of Energy

4. Production

25

Most of Gazprom’s basic fields are at a declining production stage. What does Gazprom undertake to maintain and boost gas production?A production decline at basic fields is offset through systematic commissioning of new gas production capacities as well as through higher utilization efficiency of the existing resource base.

Over the last five years Gazprom brought into operation the Zapolyarnoye, Vyngayakhinskoye, Ety-Purovskoye, En-Yakhinskoye fields, the Tab-Yakhinsky block and Pestsovaya area of the Urengoyskoye field as well as the Aneryakhinskaya and Kharvutinskaya areas of the Yamburgskoye field and the Yuzhno-Russkoye field. The full capacity of these fields is in excess of 195.7 billion m3 per annum.

In 2008 block 1A of the Achimov deposits in the Urengoyskoye oil, gas and condensate field (Yamal-

Gazprom Group’s gas production by Russian Federal Districts

17%

Gazprom’s share in global gas production

Nenets Autonomous Okrug) was brought into pilot commercial operation. The development period is 43 years, with around 200 billion m3 of gas and 40 million t of condensate slated to be produced.

URALS FDVOLGA FD

SOUTHERN FD

NORTHWEST FD

YAMBURGSKOYEMEDVEZHYEZAPOLYARNOYEURENGOYSKOYEKOMSOMOLSKOYEYUZHNO-RUSSKOYE

ORENBURGSKOYE

93.17%3.4%

2.4%

0.47%

ASTRAKHANSKOYE SIBERIAN FD

0.54%

FAR EASTERN FD0.005%

26


Projected annual output – around 8.3 billion m3 of gas and 2.8 million t of condensate.

A key element for increasing the utilization efficiency of the existing resource base is the implementation of the Comprehensive Upgrading and Modernization Program for Gas Production Facilities up to 2010.

Under the Program most of investments are channeled in upgrading:

technological equipment of primary facilities; automation systems;

Exploiting gas resources and shaping a gas transmission system in eastern Russia

YURUBCHENO-TOKHOMSKOYERESERVES: 700 BILLION M3

SOBINSKO-PAIGINSKOYERESERVES: 170 BILLION M3

KOVYKTINSKOYE RESERVES: 2,000 BILLION M3

CHAYANDINSKOYE RESERVES: 1,240 BILLION M3

SAKHALIN I–II RESERVES: 900 BILLION M3

SAKHALIN OFFSHORE PROSPECTS

1

2

5

6

3

4

Gas pipelines in operation

Pipeline gas deliveries

Gas pipelinesunder construction

Projected gas processing plants and gas-chemical facilities

R U S S I A

M O N G O L I A

K A Z A K H S T A N

C H I N A

C H I N A

D P R K

J A P A N

SKOVORODINO

CHITA

ULAN-BATOR

ASTANAIRKUTSK

NOVOSIBIRSKKRASNOYARSK

BOGUCHANY

PROSKOKOVO

NOVOKUZNETSKABAKAN

BALAGANSK

NIZHNAYAPOYMA

BARNAUL

TOMSK

NIZHNEVARTOVSK

URENGOY

OMSK

TYUMEN

VLADIVOSTOK

ТОKYO

KHABAROVSK

KOMSOMOLSK-ON-AMUR

BLAGOVESHCHENSK

DALNERECHENSK

BIROBIDZHAN

KORSAKOV

BIYSK

GORNO-ALTAISK

OKHA

TO KOREA AND ASIA-PACIFIC

TO CHINATO CHINA

TO CHINA

TO ASIA-PACIFIC

MalositinskoyeUGS Facility

1 2

3

4

5

6

4. Production

27

power, heat and water supply systems, purification facilities.

In the course of the Program execution an annual production decline in Gazprom’s conventional fields will decrease about threefold.

What are Gazprom’s production plans?OAO Gazprom plans to boost gas production to 650-670 billion m3 by 2020.

Up to 2010 scheduled gas production rates will be maintained through the development of existing and new fields in the Nadym-Pur-Taz region: the

Yuzhno-Russkoye field, Neocomian deposits in the Zapolyarnoye and Pestsovoye fields, Kharvutinskaya area in the Yamburgskoye field, Achimov deposits in the Urengoyskoye field. Field development in the said region proves economically viable due to the proximity to the existing gas transportation infrastructure.

After 2010 there are projections to exploit new strategic gas production provinces on the Yamal Peninsula, in the Barents Sea offshore, Ob and Taz Bays, Eastern Siberia and the Far East. Field development in these hard-to-reach regions with harsh climatic conditions will require already in the near future making considerable investments due to the need

Gas pipelines in operation

Pipeline gas deliveries

Gas pipelinesunder construction

Projected gas processing plants and gas-chemical facilities

R U S S I A

M O N G O L I A

K A Z A K H S T A N

C H I N A

C H I N A

D P R K

J A P A N

SKOVORODINO

CHITA

ULAN-BATOR

ASTANAIRKUTSK

NOVOSIBIRSKKRASNOYARSK

BOGUCHANY

PROSKOKOVO

NOVOKUZNETSKABAKAN

BALAGANSK

NIZHNAYAPOYMA

BARNAUL

TOMSK

NIZHNEVARTOVSK

URENGOY

OMSK

TYUMEN

VLADIVOSTOK

ТОKYO

KHABAROVSK

KOMSOMOLSK-ON-AMUR

BLAGOVESHCHENSK

DALNERECHENSK

BIROBIDZHAN

KORSAKOV

BIYSK

GORNO-ALTAISK

OKHA

TO KOREA AND ASIA-PACIFIC

TO CHINATO CHINA

TO CHINA

TO ASIA-PACIFIC

MalositinskoyeUGS Facility

1 2

3

4

5

6

28


of meeting complex technological challenges during drilling, taking environmental actions, laying pipelines and communication lines. However, according to estimations, investments will pay off.

Gazprom’s strategy for promising fields hinges on the economic viability determined by synchronized development of gas production capacities along with its transportation, advanced processing and storage options.

Is there any progress with Gazprom’s project aimed at comprehensive development of Yamal Peninsula fields?In December 2008 Gazprom started implementing the Comprehensive Development Program for the Yamal Peninsula Onshore and Offshore Fields (Yamal megaproject): the first joint of the Bovanenkovo – Ukhta gas trunkline system was welded and the drilling of the first production well in the Bovanenkovskoye field was initiated.

The Yamal Peninsula is the Company’s strategic gas production province. It is one of the most promising oil and gas bearing areas in Western Siberia. Exploitation of Yamal’s resources is the largest energy project in the modern history of Russia, which is unparalleled in terms of complexity. By its scale and significance the project is identical to the development of fields in Western Siberia in the 1970s. It lays the foundation necessary for gas production growth in Russia. Commercial development of Yamal’s fields will enable to bring annual gas production on the Peninsula to 310-360 billion m3 by 2030.

11 gas and 15 oil, gas and condensate fields were discovered on the Yamal Peninsula and in adjacent offshore areas. The explored reserves of the largest fields in the region – Bovanenkovskoye, Kharasaveyskoye, Severo-Tambeyskoye, Kruzenshternskoye (with development licenses held by Gazprom Group) – average 7.3 trillion m3 of gas, 119.1 million t of condensate and 4.7 million t of oil.

The first step in the practical implementation of the Yamal megaproject is the development of the largest

gas field on the Peninsula – Bovanenkovskoye. The explored and preliminarily estimated reserves of this field amount to 4.9 trillion m3. Projected gas production is 115 billion m3 per annum, to be increased to 140 billion m3 per annum in the long term. The Bovanenkovskoye field is planned to be brought onstream in 2012.

In 2008 construction work was underway on the top priority project facilities including the Obskaya – Bovanenkovo railroad.

Construction began on a submerged crossing across the Baidarata Bay, which is the most complex segment of the Bovanenkovo – Ukhta gas trunkline system. Pipeline laying in such harsh natural and climatic conditions is unique both in Russia and worldwide.

What foreign companies will be Gazprom’s project partners in the Russian upstream sector? What for and on what basis is it done?Gazprom’s strategy to invite partners to develop hydrocarbon reserves is aimed at efficiently extracting resources under complex geologic conditions and implies swapping assets on a parity basis within the framework of the task to expand Gazprom’s business geography and types.

Such an approach is for instance applied to the development of the Yuzhno-Russkoye oil and gas field. In the Russian-German OAO Severneftegazprom joint venture – license owner for Yuzhno-Russkoye

– Gazprom owns a 50% stake plus six ordinary registered shares and Germany’s BASF SE and E.ON AG – each a 25% stake minus three ordinary registered shares and three preference non-voting shares. In exchange for the German companies’ participation in Severneftegazprom Gazprom holds a 50% minus one share in WINGAS joint venture and will obtain a 49% stake in ZAO Gerosgaz.

Yuzhno-Russkoye’s reserves exceed 1 trillion m3, which is, given the present-day volumes of annual

4. Production

29

gas supply from Russia to Germany, commensurate with exports for 17 years ahead. In December 2007 the field was brought into commercial operation and will produce 25 billion m3 of gas per annum as soon as full capacity is reached.

Gazprom already has the practical experience of executing hydrocarbon development projects – OOO Achimgaz joint venture (owned on a par by Gazprom and Wintershall) is engaged in the development project for the Achimov deposits in the Urengoyskoye field.

In February 2008 OAO Gazprom, France’s Total and Norway’s StatoilHydro entered into the Shareholders Agreement to set up Shtokman Development AG, a Special Purpose Company, for designing, developing, constructing, financing and operating infrastructure facilities as part of stage one of the Shtokman gas and condensate field development. Gazprom holds 51% of the shares in Shtokman Development AG, Total – 25%, StatoilHydro – 24%.

Shtokman Development AG will own the infrastructure as part of stage one of the Shtokman gas and condensate field project for a period of 25 years from the moment the field is brought onstream. Upon finalization of operations within stage one of the Shtokman field the companies will hand their shares over to Gazprom.

Gazprom is active in promoting cooperation with foreign companies within the Sakhalin II project. In pursuance of the Protocol signed in December 2006 by OAO Gazprom, Shell, Mitsui and Mitsubishi Corporation, Gazprom joined Sakhalin Energy Investment Company (Sakhalin II operator) as the main shareholder.

Gazprom purchased a 50% stake plus one share in Sakhalin Energy for USD 7.45 billion. To execute the deal each of Sakhalin Energy’s shareholders decreased its stake by 50% with recompense to be allocated on a pro rata basis. The shares purchase/sale agreement was signed in April 2007. At present,

Sakhalin Energy’s shareholding is split as follows: Gazprom – 50% plus one share, Shell – 27.5%, Mitsui – 12.5%, Mitsubishi – 10%.

In December 2008 the Sakhalin II project started exporting crude oil on a year-round basis and on February 18, 2009, Russia’s first LNG plant was taken into operation. Its full capacity (9.6 million t annually) is planned to be reached in 2011. The entire output is contracted under long-term arrangements (for 20 and more years). Around 65% of the Sakhalin LNG will be supplied to customers in Japan. The rest is intended for consumers in South Korea and North America.

The first carrier with Sakhalin LNG arrived in Japan in April 2009.

Thus, the world’s largest integrated Sakhalin II oil and gas project, which embraces the development of two offshore oil and gas fields north-east of the Sakhalin Island (Piltun-Astokhskoye and Lunskoye), production and transportation of oil and gas through trans-Sakhalin pipelines, production of LNG as well as export of hydrocarbons, was taken into full-scale commercial operation.

How is Gazprom Group’s liquid hydrocarbon production progressing?The oil business development is a strategic objective of Gazprom on its way towards a global energy company.

Gazprom Group’s oil production hinges on Gazprom neft. Its acquisition in October 2005 made Gazprom Group Russia’s fifth-largest business in terms of oil output. Based on the 2008 results, 32 million t of oil and 10.9 million t of gas condensate were produced.

At present, Gazprom Group’s overall liquid hydrocarbon reserves make up 2.6 billion t, which in future enables to achieve output rates commensurate with figures recorded by the leading oil companies.

30


In compliance with the Gazprom oil business strategy approved by the Board of Directors, Gazprom Group intends to progressively expand operations in the liquid hydrocarbon production, transportation and processing sectors, and plans to increase annual oil output to 90-100 million t by 2020. It is also projected to boost proven oil reserves by 2,200 million t.

The production plan contemplated for 2020 envisages gradually bringing onstream all OAO Gazprom neft’s

explored oil fields (with account of 50% of the shares in ОАО NGK Slavneft and OAO Tomskneft), expanding the resource base by bringing onstream oil fields owned by other companies of the Group as well as acquiring new licenses.

What is Gazprom’s attitude towards coalbed methane projects?Coalbed methane (CBM) extraction is viewed as a major area of the strategy aimed at enlarging the resource base of OAO Gazprom and will result, in

PRIGORODNOYE

LNG PlantOil ExportTerminal

OnshoreProcessingFacility

LunskayaPlatform

NOGLIKI

NYSH

PА-B Platform

PА-А PlatformMolikpaq

PILTUN

I

II

III

S E A O F O K H O T S K

S E A O F O K H O T S K

S E AO F J A P A N

P A C I F I CO C E A NT A T A R S T R A I T

YUZHNO-SAKHALINSK

ILYINSKY

OKHANIKOLAEVSK-ON-AMUR

NYSHNOGLIKI

BOATASINO

ALEXANDROVSK-SAKHALINSKY

S A K H A L I NI S L A N D

Gas CompressionStation No. 2

Oil BoosterStation No. 2

PILTUN

I

II

IIIPRIGORODNOYE

4. Production

31

essence, in the creation of a new CBM industry in Russia. In addition, commercial introduction of Russian CBM production technologies will minimize accidents at coal mines and considerably improve the environmental situation.

According to tentative estimates, potential CBM resources in Russia are commensurate with conventional natural gas reserves and amount to 50 trillion m3. The Kuzbass region, where potential methane resources reach 13 trillion m3, is nowadays considered to be the most suitable site for commercial production. The concentration of methane in individual areas of Kuzbass is comparable to the amount of natural gas in northern Tyumen Oblast. The advantages of Kuzbass by geological and upstream characteristics as well as existing gas infrastructure and consumers located at a distance of just 15-150 km predetermine the economic viability of commercial methane production in Kuzbass.

Since 2003 Gazprom has been carrying out experimental operations to approbate CBM extraction technologies. According to provisional estimates, potential annual production from the existing license

block could amount to 5 billion m3 over 2010 to 2012 and to 20 billion m3 after 2020.

In 2005 OAO Gazprom established a scientific testing range for the development of CBM production technologies at the Taldinskaya area of Kuzbass, where four pilot wells are currently in trial operation.

The studies performed at the testing range are primarily targeted at converting methane resources into reserves of commercial categories at top priority areas of Kuzbass as well as laying the geological & geophysical and technical foundation for a commercial production project.

In order to push forward CBM projects Gazprom acquired 100% of the shares in OOO Geologopromyslovaya Kompaniya Kuznetsk (OOO GPK Kuznetsk) that holds licenses to prospect for, explore and produce CBM and other hydrocarbons within the bounds of the South Kuzbass group of coal fields with methane resources estimated at 6.1 trillion m3.

At present, the work is underway on the innovative Coalbed Methane project that contemplates taking a set of actions for preparing pilot gas production from top priority blocks and areas in Kuzbass.

32


33

TransmissionChapter 5The Unified Gas Supply System (UGSS) of Russia:

159.5 thousand km of gas trunklines and branches

219 pipeline compressor stations with a 42.0 million kW capacity

25 underground gas storage facilities

Average transmission distance through UGSS:

In Russia – 2,901 kmFor export – 3,322 km

Olkhovskaya compressor station in Volgograd Oblast

34


complex comprising gas extraction, processing, transmission, storage and distribution facilities UGSS assures a continuous cycle of gas supply from the wellhead to the end user.

Thanks to centralized management, considerable ramification and parallel transmission routes,

How is gas transported in Russia? What is the Unified Gas Supply System of Russia?Natural gas produced in Russia is pumped into gas trunklines integrated within the Unified Gas Supply System (UGSS) of Russia. UGSS is the largest gas transmission system in the world and represents a unique technological

Gas transmission networks in the CIS and Europe

F A R O EI S L A N D S

S H E T L A N DI S L A N D S

O R K N E Y I S L A N D S

S W E D E N

N O R W A Y

I R E L A N D

U KD E N M A R K

P O R T U G A L

S P A I N

M O R O C C OA L G E R I A

B A L E A R I CI S L A N D S

C O R S I C A

S A R D I N I A

F R A N C E

N E T H E R L A N D S

G E R M A N YB E L G I U M

L U X E M B U R G

S W I T Z E R L A N D

P O L A N D

C Z E C HR E P U B L I C

S L O V A K I AA U S T R I A

H U N G A R YS L O V E N I A

C R O A T I A

BOSNIA AND HERZEGOVINA

M O N T E N E G R O

S E R B I A

M A C E D O N I A

A L B A N I A

G R E E C E

I T A L Y

R O M A N I A

B U L G A R I A

F I N L A N D

E S T O N I A

L A T V I A

L I T H U A N I A

B E L A R U S

U K R A I N E

M O L D O V A

T U R K E Y

R U S S I A NF E D E R A T I O N

G E O R G I AA Z E R B A I J A N

A R M E N I A

I R A NA F G H A N I S T A N


U Z B E K I S T A N

K A Z A K H S T A N

S O U T H O S S E T I AA B K H A Z I A

A T L A N T I C O C E A N

N O R T HS E A

B A L T I CS E A

B a y o fB i s c a y

B A R E N T SS E A

W H I T ES E A

L a k eL a d o g a

L a k eO n e g a

A R A LS E A

C A S P I A NS E A

B L A C K S E A

A Z O VS E A

A E G E A NS E A

T Y R R H E N I A NS E A

A D R I A T I CS E A

M E D I T E R R A N E A N S E A

5. Transmission

35

UGSS has a substantial margin of reliability and is able to uninterruptedly supply gas even during seasonal peak demand. The length of UGSS is 159.5 thousand km.

For gas transmission, 219 compressor stations and gas pumping units with a total capacity of

42.0 million kW are used. The Unified Gas Supply System of Russia is owned by Gazprom.

The year 2008 saw the commissioning of 1,381 km of gas trunklines and branches as well as seven linear compressor stations with a total capacity of 528 MW.

F A R O EI S L A N D S

S H E T L A N DI S L A N D S

O R K N E Y I S L A N D S

S W E D E N

N O R W A Y

I R E L A N D

U KD E N M A R K

P O R T U G A L

S P A I N

M O R O C C OA L G E R I A

B A L E A R I CI S L A N D S

C O R S I C A

S A R D I N I A

F R A N C E


G E R M A N YB E L G I U M

L U X E M B U R G


P O L A N D


S L O V A K I AA U S T R I A

H U N G A R YS L O V E N I A

C R O A T I A


M O N T E N E G R O

S E R B I A

M A C E D O N I A

A L B A N I A

G R E E C E

I T A L Y

R O M A N I A

B U L G A R I A

F I N L A N D

E S T O N I A

L A T V I A

L I T H U A N I A

B E L A R U S

U K R A I N E

M O L D O V A

T U R K E Y

R U S S I A NF E D E R A T I O N

G E O R G I AA Z E R B A I J A N

A R M E N I A

I R A NA F G H A N I S T A N


U Z B E K I S T A N

K A Z A K H S T A N


A T L A N T I C O C E A N

N O R T HS E A

B A L T I CS E A

B a y o fB i s c a y

B A R E N T SS E A

W H I T ES E A

L a k eL a d o g a

L a k eO n e g a

A R A LS E A

C A S P I A NS E A

B L A C K S E A

A Z O VS E A

A E G E A NS E A

T Y R R H E N I A NS E A

A D R I A T I CS E A

M E D I T E R R A N E A N S E A

36


As a result of repair and technical condition improvement operations the number of gas pipeline breakdowns reduced considerably versus 2002 (32 breakdowns) and stabilized over the last three years at the level of 17-20 breakdowns annually (0.11-0.13 breakdowns per 1,000 km).

Fewer breakdowns stem directly from the use of progressive gas transmission system inspection methods and scheduled preventive maintenance operations, which enable to detect efficiently worn-out sections and aged equipment.

What is the throughput capacity of UGSS? Is it necessary to boost the throughput?The Unified Gas Supply System is currently at the superior limit of its capacity. In 2008 Gazprom extracted 549.7 billion m3 of natural gas. Taking account of gas injected by independent and Central Asian producers, a total of 714.3 billion m3 was fed into UGSS.

The UGSS throughout capacity needs to be built up as Gazprom and other companies plan to boost gas production. For instance, the Energy Strategy of Russia sets out that by 2020 independent producers will extract up to 170 billion m3 of gas. This will enable to meet demand of solvent Russian consumers and ensure compliance with Russia’s international obligations in the natural gas supply sector, but, on the other hand, will substantially increase the gas transmission system loading.

Is it true that Gazprom does not grant other producers access to the Unified Gas Supply System of Russia?No, it is not. Gazprom approves all requests by independent gas producers seeking access to the Unified Gas Supply System (UGSS), unless access cannot be granted for purely technical reasons. The main reason – limited capacity in the gas transmission system. Interaction between Gazprom and other players of the gas market is fully in line with the Federal Law “On Gas Supply in the Russian

42.6%22.3%

10.8%24.3%

– 10 years and less

– from 11 to 20 years

– from 21 to 33 years

– above 33 years

Gas trunkline structure by lifespan

How is the gas pipeline operational reliability ensured?In the 1970s and 1980s, when the gas transmission system was built, Gazprom provided it with a substantial reliability margin. Sustainable operation of gas mains is secured through up-to-date inspection, preventive maintenance and repair methods.

Gazprom successfully implements the Comprehensive Upgrading and Modernization Program for Gas Transmission Facilities for the period between 2007 and 2010. Under the Program it is planned to modernize or replace over 500 gas pumping units, upgrade about 5 thousand km of gas pipelines and some 300 gas distribution stations. This will make it possible to boost the gas trunkline system throughput by 32 billion m3 and simultaneously save 3.5 billion m3

of gas year-on-year during transmission.

In 2008 Gazprom allocated around RUB 35.8 billion for upgrading and modernizing the gas transmission system.

5. Transmission

37

Federation”, which sets the terms and conditions for granting access to free transmission capacity in UGSS as well as gives Gazprom the discretion to grant or deny access, provided that access cannot be unreasonably denied.

Gazprom grants independent gas producers access to the gas transmission system if:

there is pipe capacity available for the period when the producer intends to supply gas;

their gas meets the required quality level and technical specifications;

the producer has the pipe capacity to funnel gas into UGSS, and pipeline bends to deliver from UGSS to consumers, all fitted with gas testing and flow control facilities.

The requirements for gas funneled into the system, and the terms and conditions of access to gas mains are governed by law.

In order to simplify access to its gas transmission system, Gazprom improves the Provision governing the preparation and issuance of permits to independent entities seeking access to the gas transmission system of ОАО Gazprom.

ОАО Gazprom first opened up its gas transmission system to independent gas producers in 1998.

What is the current gas transmission rate for Gazprom and independent gas producers? Who is responsible for setting this rate?For independent producers, the rate of gas transmission via the trunklines of ОАО Gazprom is set by the Russian Federation Federal Service for Tariffs (FST).

Independent producers’ gas conveyed through Gazprom’s gas transmission system

Years 2000 2001 2002 2003 2004 2005 2006 2007 2008

Transmission volume, billion m3 106.2 92.4 103.6 95.4 99.9 114.9 115.0 119.8 111.2

Before August 1, 2006 a single rate was per 1,000 m3/100 km. From August 1, 2006 there is a new differentiated rate setting methodology, under which the rate is formed from two components: a charge for shipping 1,000 m3 per 100 km and a charge for using gas mains (RUB per 1,000 m3), which is approved depending on gas entry and exit points in the gas transmission system. Existing rates were approved by the December 24, 2008 Order No. 404-e/12 of the Russian Federation FST.

What are underground gas storage facilities needed for?Underground gas storage facilities (UGSs) are an integral part of the Unified Gas Supply System of Russia and are situated in the primary gas consumption regions. UGSs help smooth out seasonal fluctuations of gas demand, reduce peak loads in UGSS and provide better flexibility and reliability of gas supply. The network of UGSs supplies Russian consumers with up to 20% of overall gas during a heating season and up to 30% during sharp cold spells.

There are 25 underground gas storage facilities in the Russian Federation with a total active capacity of 65.2 billion m3.

Expansion of UGS capacities is a strategic objective of Gazprom. Creation of UGSs for smoothing out seasonal fluctuations is 5-7 times less expensive than construction of corresponding backup extraction and transmission facilities.

To raise the flexibility and ensure the optimum loading of the system Gazprom expands UGS capacities. In May 2007, upon completion of upgrading operations, stage one has been commissioned for the

38


Kanchurinsko-Musinsky Underground Gas Storage Complex in the Republic of Bashkortostan.

Three new underground gas storage sites are currently under construction in Russia: an aquifer facility with the Udmurtsky Reserving Complex and salt cavern facilities with the Kaliningradskoye and Volgogradskoye UGSs. The Volgogradskoye UGS site will be Europe’s largest and Russia’s first salt cavern underground gas depot with a working gas volume of 800 million m3 and daily send-out capacity of 70 million m3.

Gazprom also uses UGS facilities in Austria, Germany, the UK, Latvia and builds new storage capacities. July 2007 saw the commissioning of stage one for the Haidach UGS facility (Austria) – a joint project of Gazprom, WINGAS and Austria’s RAG.

On April 30, 2008 OAO Gazprom and Germany’s Verbundnetz Gas (VNG) signed the Agreement of Cooperation in the underground gas storage sector. According to the document the parties will construct

a new UGS facility near Bernburg (Saxony-Anhalt, Germany). By the time the construction is completed, the UGS active capacity will amount to 510 million m3 of gas.

In addition, in late 2008 state run Srbijagas and OOO Gazprom export signed the Memorandum of Understanding to perform a feasibility study for the Banatski Dvor UGS facility (Serbia) for adopting an investment decision and to identify the principles for further cooperation.

The relevant documents were signed on joint development of gas storage projects in the Netherlands, Hungary, Czech Republic. Further development options are under review for the Russian underground gas storage system in European countries including in Germany, Italy, the UK, Bulgaria, Slovakia.

Total active capacity of Russian UGSs, billion m3:

2000 – 57.8 billion m3; 2008 – 65.2 billion m3.

39

Chapter 6Gas and Liquid Hydrocarbons Processing

Omsk Refinery

What is produced by Gazprom Group from extracted raw materials? And by what companies?Gazprom Group’s processing segment is made up of gas and gas condensate processing plants, refining capacities of Gazprom neft and companies of OAO Salavatnefteorgsintez.

In the gas processing sector Gazprom Group’s aggregate capacities amount to 52.5 billion m3

of natural gas and 28.8 million t of unstable gas condensate and oil per annum. Gas is processed at six plants: Orenburg Helium Plant, Astrakhan, Orenburg and Sosnogorsk Gas Processing Plants, Surgut Condensate Stabilization Plant, Urengoy Condensate Treatment Center, with the three last-mentioned being part of OOO Gazprom pererabotka.

Gazprom Group’s processing capacities in 2008:

natural gas – 52.5 billion m3 per annumunstable gas condensate and oil – 60.2 million t per annumincluding Gazprom neft – 31.4 million t per annum

Processed in 2008: natural and associated gas – 33.3 billion m3 per annumunstable gas condensate and oil – 40.1 million t per annum

40


Oil refining in Gazprom Group is performed by companies of Gazprom neft. The primary company is Omsk Refinery (installed capacity – 19.5 million t per annum), which is one of the largest and most advanced businesses in Russia’s refining sector. The implementation of the Omsk Refinery development program will enable to enhance the quality of its motor gasoline and diesel fuels to the Euro 3 and Euro 4 standards.

Gazprom neft also controls 38.8% of the voting stock in OAO Moscow Refinery (installed capacity

– 12.15 million t per annum) and a 50% stake in OAO NGK Slavneft owning two refineries: Yaroslavnefteorgsintez (installed capacity – 15.2 million t) and D.I. Mendeleyev Yaroslavl Refinery (0.3 million t). Gazprom neft has therefore access to their refining capacities.

In December 2008 Gazprom Group integrated the companies of OAO Salavatnefteorgsintez –a leader in Russia’s gas- and petrochemical industry. A controlling stake in OAO Salavatnefteorgsintez was acquired by OOO Gazprom pererabotka.

Layout of hydrocarbon feedstock processing and oil & gas chemicals companies

B E L A R U S

U K R A I N E

R U S S I A

C A S P I A N S E A

MOSCOW

TVER

TULA

YAROSLAVL

NIZHNY NOVGOROD

VORONEZH

ASTRAKHAN

SAMARA

ORENBURG

KAZANPERM

SALAVAT

TCHAIKOVSKY

YEKATERINBURG

TYUMEN

OMSK

SOSNOGORSK

SURGUT

NOVI SADPANCEVO

BELGRADE

URENGOY

SARANSK

Moscow Refinery

Yaroslavnefteorgsintez

Yaroslavl Refinery

Omsk RefineryAstrakhan Gas Processing Plant

OrenburgGas Processing Plant

Novoishimbaisky Gas Processing Plant

Condensate Treatment Plant

Sosnogorsk Gas Processing Plant

Condensate Stabilization Plant

Helium Plant

Monomer PlantChemical Plant

Gas�Chemical Plant

K A Z A K H S T A N

S E R B I A

R O M A N I A

Gas processing plants/facilities

Refineries OAO Salavatnefteorgsintezchemical plants

Salavatnefteorgsintez is a unique production facility embracing the full cycle of hydrocarbon feedstock processing, petrochemistry, fertilizer production. The company’s oil and gas condensate processing capacities account for around 7 million t and the range of turned out products is in excess of 140 items. The companies of Salavatnefteorgsintez are linked by raw material, transport and product flows with gas producing and processing subsidiaries of Gazprom.

Gazprom’s gas-chemical sector undergoes expansion as part of the creation of the Novy Urengoy Gas Chemicals Facility, which is planned to produce inter alia 400 thousand t of low density polyethylene per annum after the annual processing of 1.4 million t of gases produced as associated products at the Urengoy Condensate Treatment Plant.

What products are turned out in Gazprom’s processing sector?In 2008 Gazprom’s companies processed 33.3 billion m3

of natural and associated gas, 40.1 million t of oil and unstable gas condensate.

6. Gas and Liquid Hydrocarbons Processing

41

2007 2008

Gas processing and producing subsidiaries of OAO Gazprom

Stable gas condensate and oil, thousand t 3,653.0 3,413.8

Dry gas, billion m3 26.5 26.5Liquefied hydrocarbon gases, thousand t 2,109.8 2,037.2Motor gasoline, thousand t 2,141.8 2,132.3Diesel fuel, thousand t 1,429.3 1,394.1Fuel oil, thousand t 394.2 389.7Jet fuel, thousand t 133.9 161.4Helium, thousand m3 4,874.0 5,037.9Odorant, thousand t 2.8 3.0Natural gas liquids, fluoroplastic packing material, thousand t

587.5 554.6

Ethane, thousand t 238.4 327.2Technical carbon, thousand t 35.4 30.4Pentane-hexane fraction, thousand t 102.6 111.0Sulfur, thousand t 5,370.1 5,319.8Gazprom neft GroupMotor gasoline, thousand t 5,376.9 5,473.9Industrial naphtha, thousand t 1,735.0 1,914.0

Diesel fuel, thousand t 8,081.4 9,012.5

Jet fuel, thousand t 1,810.3 1,805.9

Fuel oil, thousand t 5,259.7 5,748.8Oils, thousand t 346.4 328.3Liquefied hydrocarbon gases, thousand t 566.1 563.8

Derivatives, petro- and gas chemicals production by Gazprom Group(tolling not included)

What are the prospects for associated petroleum gas (APG) utilization in Gazprom?In 2008 Gazprom started performing research aimed at developing the Comprehensive Program for APG Utilization in OAO Gazprom System to 2020 and further to 2030. As a result, in 2008 the Company prepared the Formation and Development Concept for the above Program, which defines the prospects for the said activities to 2030, as well as the Paramount Actions securing a no less than 95% increase in APG utilization at Gazprom Group’s fields by 2011.

OAO Gazprom neft has developed and implements the mid-term investment program for 2008-2010 targeted at APG conservation. The most significant project of the Program is the construction together with OAO Sibur Holding of a 1 billion m3/yr gas plant for processing APG from the Yuzhno-Priobskoye oil field.

Does Gazprom have processing companies abroad?Yes, it does. In February 2009 OAO Gazprom neft completed the deal to acquire a controlling stake

42


in Serbia’s Naftna Industrija Srbije (NIS) that comprises two refineries at Pancevo and Novi

Sad with a total capacity of 7.3 million t of oil per annum.

APG utilization by Gazprom Group

2007 2008APG volume, billion m3 6.9 6.5 including Gazprom neft 4.9 4.6APG utilization, % 49.5 57.8 including Gazprom neft 35.7 46.8

43

Chapter 7Gazprom on Russian Market

In 2008 Gazprom allocated over RUB 24 billion for gasification purposes

300.8 billion m3 in 2001298.0 billion m3 in 2002309.1 billion m3 in 2003305.7 billion m3 in 2004307.0 billion m3 in 2005 316.3 billion m3 in 2006307.0 billion m3 in 2007 287.0 billion m3 in 2008

Gasification level in the Russian Federation:

53% in 2005 62% in 2008

How much gas does Gazprom annually supply to companies and the population in Russia?In 2008 Gazprom’s companies supplied Russian consumers with 287 billion m3 of gas.

How does Gazprom decide on how much gas is to be supplied to this or that consumer?When planning gas deliveries to consumers Gazprom relies on its Gas Resource Allocation Provision and takes into consideration gas exports and production by independent companies.

In accordance with this Provision, OOO Mezh-regiongaz – the major gas trading company in Gazprom Group – collects consumer requests for gas deliveries over next year. Gas is allocated based on these data.

44


6.5% 10.7%1.6% 16.8%

24.9%

7.0%

32.5%

– Power generation

– Metallurgy

– Agrochemistry

– Cement industry

– Household utilities

– Population

– Others

Gazprom’s gas sales to consumer groups in 2008

At the same time, consideration is given to whether consumers have fulfilled their gas payment obligations for previous years. If necessary, Gazprom provides solvent customers with extra gas volumes with due regard of available technical capacity in UGSS and existing international and domestic commitments.

In addition, gas is supplied to new consumers. To secure gas supply, a new consumer is required to file a form, attach detailed spreadsheets showing the consumer’s heat and fuel needs, and a report from a transportation organization confirming it has the facilities and capacity to supply the gas. The permit to use gas is issued with account of resource availability in Russia’s regions, optimal pipe flow requirements and economic feasibility of using gas as fuel.

At the same time, account is taken of whether consumers have fulfilled their gas payment commitments in previous years. If necessary, Gazprom provides solvent customers with extra gas volumes with due regard of available technical capacity in UGSS and existing international and domestic commitments.

At what prices does Gazprom sell gas to Russian consumers? How are these prices set?In Russia wholesale prices of gas extracted and supplied by OAO Gazprom and its affiliates are annually set by the state represented by the Federal Service for Tariffs.

The final wholesale gas price includes the following regulated components:

wholesale gas price; tariffs for gas transportation through gas

distribution networks; fees for supply and sales services.

Gazprom receives its revenues from gas sales at the regulated wholesale price. Revenues of gas distribution companies conveying gas by gas

100

200

300

400

500

600

2006 2007 20082004 2005

463 485514

545575

Length of gas distribution pipelines maintained by subsidiary and affiliated gas distribution

companies of Gazprom, thousand km

7. Gazprom on Russian Market

45

distribution networks are formed through regulated transport tariffs. Regional gas sales companies receive fees for providing supply and sales services.

The average wholesale price of gas sold to industrial consumers in 2008 was RUB 1,699.2 per 1,000 m3

(net of VAT) and the average wholesale price of gas intended to be sold to the population – RUB 1,288.8 per 1,000 m3.

The prices for 2009 have been introduced by the December 24, 2008 Order No. 413-e/11 of the Russian Federation Federal Service for Tariffs. These prices are differentiated by 60 price zones. The Order provides for the following schedule of quarterly gas price increase in 2009: by 5% from January 1, by 7% from April 1; by 7% from July 1 and by 6.2% from October 1, all of which will provide for an average annual increase in prices of 15.9 %. In 2010 regulated wholesale natural gas prices are scheduled to be increased by 13% from January 1 and by another 13% from July 1. From 2011 and onwards, natural gas prices are to be determined based on equal yield of gas supplies to the foreign and domestic markets. However, prices may be increased by not more than 40% in 2011.

Retail gas prices for the population are set by respective regional authorities of the Russian Federation.

Gas pricing for the population has its features, in particular privileged consumer categories. If there are

no gas meters in apartments, charges are calculated on the basis of existing standards.

In 2007, in order to notify the gas market players about the formation principles for wholesale gas prices to be introduced in 2011, FST of Russia calculates indicative gas prices under a preset formula that is aimed at meeting the principle of equal yield of gas supplies to the foreign and domestic markets. The indicative prices for 2007-2008 exceeded the average regulated prices on an average by 2.2-2.9 fold.

Indicator2007 2008

IIIQ IVQ IQ IIQ IIIQ IVQ

Average wholesale gas price calculated under an equal yield formula, RUB/1,000 m3

3,982 3,878 3,758 3,837 4,281 4,844

Average regulated wholesale price, RUB/1,000 m3 1,355 1,357 1,699 1,695 1,697 1,697

Equal yield price vs regulated price, fold

2.94 2.86 2.21 2.26 2.52 2.85

Regulated vs indicative wholesale gas prices

Fuel consumption by Russian thermal power plants, %

2.1%

25.1% 72.2%

0.6%

– Natural gas

– Coal

– Fuel oil

– Others

46


Gas in Russia is the cheapest and hence the most widely used fuel. The share of gas in the primary energy mix of the Russian economy exceeds 50% and in the fuel balance of thermal power plants accounts for over 70%. Russia’s top-heavy fuel balance threatens national energy security; with gas being as cheap as it is, the other fuel alternatives such as black oil, peat and coal tend to stagnate. Cheap gas calls for careful utilization of this non-renewable natural resource.

Regulated gas prices are nowadays artificially restricted and prevent from recovering gas production, transportation and marketing costs. Such prices not only hinder the development of the gas industry but also hamper the formation of an efficient structure of the Russian economy. Subsidized in effect by Gazprom, companies have no stimuli to cut operating expenses due to cheap energy supplies. Cheap gas made the introduction of energy conservation technologies and new eco-friendly fuels non-competitive. The Russian economy is presently the most gas-consuming economy in the world. Unlike in many industrial countries where gas is mostly consumed by households, in Russia gas is primarily supplied to power generating companies and metallurgical and chemical enterprises.

Moreover, deliveries of cheap gas to Russian export-oriented producers can be viewed upon as unjustified export subsidies. Effectively subsidizing whole industries of the Russian economy, Gazprom ends up experiencing investment difficulties when implementing new large-scale field development projects, upgrading capacities and constructing new gas pipelines.

Such a situation can hardly be characterized as normal. Given this circumstance, in recent years the Russian Federation Government has been pursuing the policy of systematically increasing gas prices to an economically substantiated level as well as has been expanding the opportunities of applying the market based pricing practice.

What is the Russian gas market structure?The Russian gas market is divided into a regulated and a non-regulated sector.

The regulated market segment currently dominates. The Government regulates:

wholesale natural gas prices, which apply to OAO Gazprom and its affiliated companies’ sales of natural gas in the domestic market;

tariffs for the services provided to independent producers related to natural gas transportation through gas trunklines and those related to natural gas transportation through gas distribution networks;

fees charged for supply and sales services.

Independent producers sell their gas at non-regulated prices, but altogether they only meet around one fourth of Russia’s blue fuel demand. At the same time, the Government stopped regulating the prices of alternative fuels, notably coal and fuel oil, in the early 1990s.

Since 2006 the Russian Federation Government has been taking measures to develop the Russian natural gas market based on market principles. In particular, it determined the dynamics for the change in the regulated wholesale natural gas prices and envisaged bringing them up to a level that would provide for equal yield of gas supplies to the foreign and domestic market using the market based pricing formula.

On May 28, 2007 the Russian Federation Government approved the Directive No. 333 “On Improving State Regulation of Gas Prices”, which stipulates introducing a new pricing mechanism for gas supplied by Gazprom. This mechanism contemplates setting a regulated price ceiling (minimum and maximum price levels) for different consumer categories. Fixed gas prices set by FST of Russia are identified as the minimum price levels. The maximum price levels are set on the basis of


47

regulated fixed prices to be increased by 60% in 2007, by 50% in 2008, by 40% from January 1, 2009, by 30% from July 1, 2009, by 20% from January 1, 2010 and by 10% from January 1, 2010. The right to determine gas prices within these limits is granted to suppliers and buyers. This pricing procedure is applied to new consumers that sign their first supply contract after July 1, 2007 as well as to the volumes of natural gas to be supplied in excess of those stipulated in contracts. In 2008 Gazprom’s natural gas sales to such consumer groups amounted to 15.9 billion m3. The actual wholesale price was higher than the regulated price for industrial consumers by an average 40%, while the maximum permissible limit was 50%.

Long-term gas supply contracts play a crucial role in the Russian gas market development. In the course of its 2008 contractual campaign, OAO Gazprom signed 66 thousand long-term contracts with companies in the power sector and other industries with the supply due in 2008-2012 for a total of 185 billion m3 of gas, which is more than 80% of the total volume of gas consumed by the industries. The contracts call for the transfer of the consumers to make settlements with Gazprom at non-regulated prices when the Russian Federation Government adopts the appropriate regulation.

Practice shows that long-term contracts are mutually beneficial both for suppliers and prominent gas consumers.

Consumers

Gas market operation scheme in the Russian Federation

OAO Gazprom Oil companiesIndependentproducers

Mezhregiongaz

Localgas sales

near productionsites

Gas sold at regulated prices Gas sold at free market prices

Non�regulated sectorRegulated sector

Sector of gas salesat FST of Russia

set pricesin the regionswith standardincome yield

Structuresoperating via gas

exchangetechnologies

50 regionaltrading companies

48


The market based pricing method prescribed in the contracts will allow, as compared to the current regulated method, for more flexibility in adjusting prices to gas consumption levels by different industries and seasonal fluctuations, as well as permit consideration, as may be agreed with certain consumers, of such factors as changes in prices in the case of suspended supplies and fluctuations in gas withdrawal during a day, a week, etc.

The balance of interests of natural gas consumers and producers in Russia will be achieved in the process of wider application of market based gas pricing methods during state regulation of tariffs for gas transportation services.

The world gas market development experience shows that long-term contracts can steadily guarantee gas deliveries to the consumer and investments

necessary for the gas industry development to the producer. A further 20% of gas should be sold under yearly contracts. The remaining 10% - via a gas exchange, in cases when the consumer needs extra gas volumes in excess of the limit set in long-term or yearly contracts.

How are natural gas exchange technologies used in Russia?The application of stock exchange quotations as market price indicators is one of the main features of a civilized gas market. Practice shows that for exchange prices to become the benchmark for contract prices, 5%-10% of the industry output should be traded via an electronic platform.

In 2007-2008 the Russian gas market players gained the necessary experience in using modern gas exchange technologies at an electronic trading

Trade dynamics at the electronic trading platform (ETP)

100

200

300

400

500

600

700

500

1 000

1 500

2 000

2 500

3 000

3 500

14.1

2.07

15.0

1.08

15.0

2.08

17.0

3.08

15.0

4.08

15.0

5.08

17.0

6.08

15.0

7.08

14.0

8.08

for A

ugus

t

for S

epte

mbe

r

for O

ctob

er

for D

ecem

ber

15.0

9.08

15.1

0.08

17.1

1.08

– Gas volume at month-ahead trading sessions

million m3 RUB/1,000 m3

– Weighted average gas price at gas distribution stations, RUB/1,000 m3

– Weighted average gas price at balancing points, RUB/1,000 m3

– Gas volume at ten days-ahead trading sessions

– Gas volume at day-ahead trading sessions


49

platform (ETP) of OOO Mezhregiongaz – a trading company of Gazprom.

In effect, ETP was the first step toward setting up a natural gas exchange in Russia.

During experimental gas sales via ETP in 2007 and 2008 Gazprom Group and independent producers sold 7.04 billion m3 and 6.09 billion m3 of free priced gas respectively. The bulk of the gas – over 55% in 2007 and 86% in 2008 – was purchased by energy utilities.

The trading sessions recorded relatively stable price indicators – the weighted average price of gas sold via ETP exceeded the regulated wholesale prices by an average of 36.9% in 2007 and 38% in 2008.

Given the experience gained at ETP, exchange trading in natural gas is planned to be arranged in Russia on a permanent basis.

What are Gazprom’s gasification efforts in Russia?Gasification of Russia is the major goal of Gazprom. As a result of the Company’s consistent actions, over less than 5 years the average gasification level of the Russian Federation has reached 62%. In cities and towns the gasification level has increased by 6% and in rural areas – by 8%.

During 2005-2007 the gasification process was underway in 58 constituents of the Russian

Federation and due to its significance was assigned the top priority national project status. Over the three-year period more than RUB 43 billion was channeled for the gasification program execution.

As a result, 543 facilities were built; the total length of new gas distribution networks amounted to 8,400 km; nearly 1,200 settlements, 4.4 million apartments and houses (3 million in cities and towns and 1.4 million in rural areas) were connected to UGSS of Russia. 23,500 household utilities along with around 5,000 rural boiler houses and 570 agricultural companies were converted to natural gas. All this made it possible to raise the gasification level in Russia to 67% in cities and towns and 44% in rural areas.

In 2008 the gasification program embraced as many as 64 constituents of the Russian Federation. Construction was completed on 153 inter-settlement gas pipelines with a total length of 2,700 km. Gazprom’s investments were RUB 24.18 billion. 2.5 thousand km of street distribution grids were connected to inter-settlement gas pipelines, around 60 thousand households and 300 boiler houses were supplied with gas.

In 2009 RUB 18.5 billion of investments are earmarked for gasification activities in 69 constituents of the Russian Federation.

A well adjusted system of interaction between OAO Gazprom and Russia’s regional authorities

2004 2005 2006 2007 2008

Number of apartments and households supplied with gas (natural and liquefied) by Gazprom, million units

25.1 25.6 26.1 25.9 26.1

Number of household utilities supplied with gas (natural and liquefied) by Gazprom, thousand units

149.2 159.8 173.4 181.8 191.8

Number of industrial companies supplied with gas (natural) by Gazprom, thousand units

13.7 14.6 15.9 16.2 17.1

Gas supplies to Russia’s household sector

50


contributes to the successful implementation of the gasification program. This system hinges on cooperation agreements that were in force with 78 constituents of the Russian Federation in 2008.

In Gazprom Group the responsibility for the operating efficiency of gas distribution infrastructure and the

reliability of gas deliveries to consumers is vested in OAO Gazpromregiongaz that integrates and controls the activities of around 200 gas distribution companies. The existing vertically integrated management system enables to pursue a unified technical and tariff policy in the gas distribution sector.

51

Chapter 8Gazprom on Foreign Markets

Germany is the largest buyer of Russian gas

How much gas does Gazprom sell abroad? What is the share of export in Gazprom’s overall sales?In 2008 Gazprom sold abroad 280.9 billion m3

of natural gas. Deliveries to Russian consumers amounted to 287.0 billion m3. It is not difficult to figure out that the volumes of gas sold abroad account for almost half of Gazprom’s marketable gas.

How much does Gazprom annually earn on gas sales abroad?In 2008 Gazprom’s earnings from gas exports beyond the FSU (excluding excise tax and customs duties) were RUB 1,430.5 billion, 63.8% up versus 2007. Earnings from gas sales to the CIS and Baltic States were RUB 356.5 billion, 32.2% up versus 2007.

Sales to Europe in 2008 184.4 billion m3 of gas

Sales to the CIS and Baltic States in 2008 96.5 billion m3 of gas

Earnings from gas sales to Europe in 2008 RUB 1,430.5 billion

Earnings from gas sales to the CIS and Baltic States in 2008 RUB 356.5 billion

52


Gas sales to Europe in 2008, billion m3

In 2008 Gazprom sold 1,884.4 billion m3 to Western Europe: deliveries grew by 9.4% versus 2007. As of today, the largest buyers of the Russian blue fuel are Germany, Turkey and Italy.

In 2008 gas sales to the CIS and Baltic States accounted for 96.5 billion m3. The biggest gas volumes are delivered to Ukraine, Belarus and Kazakhstan. Gazprom plans to expand the geography of supplies and have a stronger hold on the markets in Europe and Asia-Pacific.

What countries does Gazprom supply gas to?Gazprom is one of the primary suppliers of natural gas to European consumers and accounts for roughly one third of aggregate gas imports to Western Europe. Export deliveries of gas from Russia began in the mid-1940s. In 1968 gas deliveries were launched to Western Europe under a contract with Austria’s OMV. Today Russian gas is supplied to 31 countries inside and outside the FSU.

Country Sales volume Country Sales volume

Germany 38.0 Finland 4.8Turkey 23.8 Romania 4.2Italy 22.4 Bulgaria 2.9UK 20.9 Greece 2.8France 10.9 Serbia 2.2Hungary 8.9 Croatia 1.2Czech Republic 8.0 Slovenia 0.6Poland 7.9 Bosnia and Herzegovina 0.3Netherlands 6.7 Switzerland 0.3Slovakia 6.2 Macedonia 0.1Austria 5.8

50.54%Russia

16.27%CIS

0.72%Baltic States

32.47%beyond FSU

Gazprom Group’s gas sales structure in 2008 Gas sales to the CIS and Baltic States in 2008, billion m3

Country Sales volume

Ukraine 56.2Belarus 21.1

Kazakhstan 9.6

Lithuania 2.8Moldova 2.7Armenia 2.1

Latvia 0.7

Georgia 0.7Estonia 0.6

8. Gazprom on Foreign Markets

53

What are Gazprom’s international partners?Gazprom’s key international partners are: E.ON, Wintershall, Verbundnetz Gas and Siemens (Germany); Gaz de France and Total (France); Eni (Italy); Botas (Turkey); Fortum (Finland); Gasunie (Netherlands); DONG (Denmark); Statoil Hydro (Norway); OMV (Austria); CNPC and PetroChina (China); GAIL (India); PdVSA (Venezuela); MOL (Hungary); PGNiG (Poland); Kogas (Korea) and transnational Shell.

Under what terms and conditions does Gazprom export gas?Gazprom exports gas to Central and Western Europe mainly under long-term, up to 25-year agreements concluded as a rule based on intergovernmental agreements.

32.7%

0.56%

Purchased from Gazprom Group

in 2008over 184.4 BILLION M3

Gazprom’sreserves

33.1 TRILLION M3

Gasconsumption

in Europe, 2008 550.6 BILLION

M3

RUB 1,430.5 BILLIONRUB 1,430.5 BILLION

Gazprom’s share in the European gas market, 2008

50

100

150

200

250

300

2006 2007 20082004 2005

153.2 156.1 161.5 168.5184.4

65.776.6

101.0 100.996.5

– CIS and Baltic States – beyond FSU

Gazprom’s export deliveries, billion m3

54


Long-term arrangements are the basis for steady and reliable gas supplies. Only long-term deals can guarantee the producer and exporter returns on multibillion dollar investments in major gas export projects, and assure steady and uninterrupted gas deliveries for the importer in the long term.

Long-term agreements with the key customers typically contain a “take or pay” provision, meaning that the customer agrees to pay for a certain minimum amount of gas even when a lesser amount was physically used. For prominent gas suppliers, such as Gazprom, this is an indispensable guarantee of the buyer’s responsibility.

Do Gazprom’s export prices differ from those for the domestic gas consumers?Yes, they do. Export supplies are significantly more expensive. In 2008 Russian blue fuel was supplied to Western Europe at the prices 4.7 times higher then those for Russian consumers, and to the CIS and Baltic States – 2.2 times higher.

How are Russian gas prices set for CIS countries?In 2006 Gazprom completed a transition to the market based price setting principles for gas consumers in all of the CIS and Baltic countries. As a result, gas prices for the CIS region have grown two-threefold and are gradually reaching European levels. At the same time, when building price offers for each country, consideration is given to a degree of its integration with Gazprom’s gas business. Special attention is paid to developing market based cooperation with the major countries transiting Russian gas to Europe – Ukraine and Belarus. At present, there is a clear differentiation between contracts for gas supply to Ukraine and contracts for gas transit via its territory. The market principles of relationships are fixed in a five-year gas supply and transit contract signed with Belarus.

The transparency of Gazprom’s relationships with transit countries is beneficial to all parties and

indispensable for securing the reliability of Russian blue fuel deliveries to European consumers.

What is the reason for a high end-consumer gas price in Europe? Does Gazprom have opportunities to sell gas to end consumers abroad?The price level for European consumers depends to a considerable extent on the cost of gas transportation services. Gazprom sells its gas at the border of the importing country to local distributors, who then supply it to consumers. The end-consumer price includes the cost of gas transportation via low pressure pipelines, the maintenance of which is several times more expensive than in Russia, and taxes.

Gazprom’s marketing policy provides for optimizing the costs of gas transit to Western Europe and gaining access to the end consumer. For this purpose, the Company is activating various forms of participation in the European gas distribution business.

For instance, back in 1993 Gazprom and Wintershall established the joint venture – WINGAS – owning around 2,000 km of pipelines in Germany and Europe’s largest Rehden underground gas storage facility (over 4 billion m3). Gazprom presently owns 50% minus one share in this joint venture. Thus, with an interest in WINGAS, Gazprom effectively owns a stake in Germany’s gas transmission networks.

Under the agreement with ENI, Gazprom export, a subsidiary of Gazprom, was entitled to independently sell over 3 billion m3 of gas on the Italian market.

Average gas sales price (net of VAT, excise tax and customs duties),

RUB per 1,000 m3

2007 2008

Russia 1,301.1 1,652.8Beyond FSU 5,181.9 7,757.0

CIS and Baltic States 2,672.9 3,693.9

8. Gazprom on Foreign Markets

55

Gazprom holds an equity stake in Estonia’s Eesti Gaas, Latvia’s Latvijas Gaze and Lithuania’s Lietuvos Dujos. Thanks to Gazprom’s participation in the management of gas companies in the Baltic States, its presence in these gas markets has become more solid.

Gazprom’s strategy of gaining access to the end consumer is spreading to the CIS market. ZAO ArmRosgazprom is supplying gas to the Armenian market and selling it to each and every category of end consumers. In 2008 the company supplied 2.1 billion m3

of gas that is 11.2% more than in 2007. Since April 1, 2008 a subsidiary called Gazprom sbyt Ukraina has been directly supplying gas to industrial consumers in Ukraine. In 2008 3.3 billion m3 was supplied.

What impact does the European gas market liberalization have on Gazprom’s export policy?The Company’s international business activities are carried out in full compliance with the legislation in force in the countries of Gazprom Group’s operation. Recent changes in the European Union legislation aimed at liberalization of the gas market influenced both organizational issues of the business activities and contracts for gas supply to the EU member states. Executing the new regulations Gazprom’s companies removed the restrictions imposed on reselling the Russian blue fuel from the contracts.

Liberalization of the European gas market implies spot trading development. Taking it into consideration,

WINGAS’ gas transmission system

G E R M A N Y

P O L A N D

C Z E C H R E P U B L I C

A U S T R I A

F R A N C E


B E L G I U M

AMSTERDAMBERLIN

N O R T HS E A

B A L T I CS E A

BRUSSELS

PRAGUE

PARIS

VIENNA

HAMBURG

ESSEN

MUNICH

ZURICH

STRASBOURG

FRANKFURT

56


Gazprom via Gazprom Marketing & Trading sold 7.3 billion m3 of gas in 2008 on the trading floors of the UK, Belgium, the Netherlands, and France which is around 9% more than in 2007.

Supporting the EU efforts to shape a single European energy market, Gazprom believes – and major European energy companies share this opinion – that the basic architecture should be comprised of long-term agreements for blue fuel supply.

European importers are committed to their long-term agreements with Gazprom. Gaz de France has renewed its gas import contract until 2030. E.ON Ruhrgas (Germany) – until 2035, Wintershall (Germany) – until 2030, Gasum (Finland) – until 2025, RWE Transgas (Czech Republic) – until 2035, ENI (Italy) – until 2035. Contract extensions until 2027 and new arrangements were agreed on with Austria’s EconGas, GWH and Centrex. Contracts were concluded with Romania’s Conef Energy for 2010-2030, Switzerland’s WIEE for 2013-2030, Germany’s WIEH up to 2027, and Czech Republic’s Vemex for the period till 2013.

Gazprom keeps in sight the legislative initiatives under consideration in the EU and constantly takes part in discussing the issues that may have a negative impact on the natural gas market and impair the conditions for all the players. In particular, the proposal to prohibit natural gas suppliers from investing in big gas transportation projects causes concern. This may lead to underfunding and an increase in transportation costs.

What place does liquefied natural gas hold in Gazprom’s export strategy?As for new markets, OAO Gazprom’s marketing strategy provides for increasing supplies of both pipeline gas and LNG. Gazprom Group has been consolidating its positions on the LNG market since 2005 within spot and swap deals effectuated by Gazprom Marketing & Trading. The total volume of LNG sales on a spot deal basis from 2005 to 2008 reached 1.2 million t (1.7 billion m3).

Taking the increased scope of LNG trade and marine freight into consideration, a special subsidiary company, Gazprom Global LNG, was established in August 2008 to do the LNG business.

In order to be an early entrant into the LNG market, OAO Gazprom has studied the opportunities of taking part in the existing LNG projects by means of acquisition or asset swap. In 2007 Gazprom became one of the Sakhalin II project participants. Within the project Russia’s first LNG plant was put into operation in February 2009. Under long-term agreements the entire output of the plant is to be supplied to consumers in Japan, South Korea and North America. The first LNG carrier from Sakhalin arrived in Japan in April 2009.

In addition, agreements for LNG supply from Sakhalin were signed with Shell Eastern Trading LTD and Gazprom Global LNG in April 2009. Pursuant to these agreements, Sakhalin Energy will supply some 1 million t of LNG per year to each of the purchasers over 2009-2028. At the same time, a 20-year agreement was signed by Gazprom to supply an equivalent volume of pipeline gas to Shell in Europe. The agreement will allow to consolidate Shell’s positions on the European gas market and the ones of Gazprom on the US market due to the fact that Shell, in return, will entitle Gazprom’s subsidiaries to utilize regasification facilities at the Energia Costa Azul LNG terminal (Baja California, Mexico), as well as gas transmission facilities ensuring gas supply to the South California market.

100

200

300

400

500

2006 2007 20082005

113

303 311

454

Amount of LNG deals effectuated by Gazprom Group, thousand t

57

Chapter 9International Projects

SAIPEM 7000 pipelaying vessel to be used within the South Stream project

What gas transmission projects is Gazprom developing in Europe?

Yamal – Europe gas pipelineThe transnational Yamal – Europe gas pipeline runs across four countries: Russia, Belarus, Poland and Germany. The current overall length of the pipeline exceeds 2,000 km. There are 14 compressor stations operational, of which three are in Russia, five – in Belarus, five – in Poland and one – in Germany.

The gas pipeline construction began in 1994 close to the German and Polish borders, and first sections of the pipeline were brought online as early as in 1996.

The German end of the project was overseen by WINGAS, a joint venture between Gazprom and Wintershall. Russian gas arrives at the Malnow

Projects aimed at developing the transnational Eurasian gas transmission system:

Yamal – Europe gas pipelineBlue Stream gas pipelineNord Stream gas pipeline South Stream gas pipelinePre-Caspian gas pipeline

International projects aimed at developing offshore hydrocarbon fields:

Venezuela Vietnam India Libya

58


Yamal – Europe gas pipeline

R U S S I AN O R W A Y

S E R B I A

R O M A N I A

M O L D O V A

ARMENIA

B U L G A R I A

G R E E C E

P O R T U G A L

S P A I N

F R A N C E

I T A L Y

A L G E R I AT U N I S I A

T U R K E Y

IRAQI R A N

K A Z A K H S T A N

UZBEKISTAN

TURKMENISTANGEORGIA

SOUTH OSSETIAABKHAZIA

AZERBAIJAN

S W E D E N

F I N L A N D

IRELAND

UK

D E N M A R K

E S T O N I A

L A T V I A

L I T H U A N I A

B E L A R U S

U K R A I N E

G E R M A N YP O L A N D


L U X E M B U R G


B E L G I U M


S L O V E N I A

M O N T E N E G R O

M A C E D O N I A

A L B A N I A


M O R O C C O

S L O V A K I A

A U S T R I A

H U N G A R Y

C R O A T I A

9. International Projects

59

compressor station in the vicinity of the German-Polish border.

The Polish section of the pipe was built by EuRoPol GAZ, a joint venture where Gazprom and the Polish PGNiG are in property.

Gazprom has become the sole investor of construction work on Yamal – Europe’s Belarusian part commenced in 1997. Today, there are five compressor stations up and running – Nesvizhskaya, Krupskaya, Slonimskaya, Minskaya and Orshanskaya. Upon commissioning of the last one in 2006, Yamal – Europe reached full capacity – 33 billion m3 per annum.

Blue Stream gas pipelineThe purpose of the Blue Stream gas main is to directly supply Russian gas to Turkey and bypass transit countries. The 1,213-km-long gas pipeline consists of an overland and a submerged section. It starts in the vicinity of Izobilnoye, Stavropol Krai and ends in Ankara, Turkey.

The submerged section of Blue Steam is unique in design and construction. The submerged pipeline rests on the bottom of the Black Sea at a depth of down to 2,150 m, i.e. 30% deeper than every known underwater pipeline in the world. Construction was impeded by the unfavorable landscape of the bottom and by the aggressive ground environment saturated with hydrogen sulfide. The submerged section of the pipeline is 393 km long.

The pipeline was completed in December 2002. In February 2003 commercial gas started flowing through the pipeline.

In 2008 Blue Stream transmitted some 10 billion m3 of gas. In 2010 Blue Stream is planned to reach full capacity – 16 billion m3 per annum.

South Stream gas pipelineSouth Stream is a new promising project of Gazprom and ENI (Italy). In January 2008 Gazprom and ENI

R U S S I AN O R W A Y

S E R B I A

R O M A N I A

M O L D O V A

ARMENIA

B U L G A R I A

G R E E C E

P O R T U G A L

S P A I N

F R A N C E

I T A L Y

A L G E R I AT U N I S I A

T U R K E Y

IRAQI R A N

K A Z A K H S T A N

UZBEKISTAN

TURKMENISTANGEORGIA

SOUTH OSSETIAABKHAZIA

AZERBAIJAN

S W E D E N

F I N L A N D

IRELAND

UK

D E N M A R K

E S T O N I A

L A T V I A

L I T H U A N I A

B E L A R U S

U K R A I N E

G E R M A N YP O L A N D


L U X E M B U R G


B E L G I U M


S L O V E N I A

M O N T E N E G R O

M A C E D O N I A

A L B A N I A


M O R O C C O

S L O V A K I A

A U S T R I A

H U N G A R Y

C R O A T I A

60


set up a special purpose entity, South Stream AG, to carry out marketing research and compile a feasibility study of the South Stream project.

A submerged section of the South Stream pipeline will run across the Black Sea from the Russian coast (Beregovaya compressor station) to the Bulgarian coast. The total length of the section will be around 900 km, and the total depth – over 2,000 m. Further pipeline route will run through the Bulgarian territory. Maximum throughput capacity of South Stream will make up 63 billion m3 per annum.

In 2008-2009 intergovernmental cooperation agreements were signed with Bulgaria, Hungary, Greece and Serbia in order to construct pipeline sections in the respective European countries within the South Stream project. During the project implementation Gazprom and ENI will apply their experience gained in laying the submerged section of the Blue Stream gas pipeline across the Black Sea and utilize up-to-date technologies complying with the most stringent environmental requirements.

Nord Stream gas pipelineIn 2005 Gazprom set about building the Nord Stream gas pipeline (initially – North European Gas Pipeline). The pipeline across the Baltic Sea towards Western Europe constitutes a fundamentally new export route for Russian gas to European customers. With no transit countries on its way, the new transnational gas main is distinguished by low country risk and transit costs, while assuring more reliable export supply.

The project is crucial to diversify export routes and directly link the gas transmission pipelines of Russia with the European gas network.

Nord Stream will stretch some 1,200 km across the Baltic Sea from the Portovaya Bay (Vyborg) to the German coast (Greifswald).

Being constructed by Gazprom on its own, the overland section will connect Nord Stream to UGSS.

The first joint of the Gryazovets – Vyborg overland section was welded in December 2005. The submerged

Blue Stream gas pipeline

B L A C K S E A

CASPIANSEA

B U L G A R I A

G R E E C E

R O M A N I A

S E R B I A

K A Z A K H S T A N

G E O R G I A

P O L A N D

H U N G A R Y

A Z E R B A I J A N

R U S S I A

U K R A I N E

T U R K E Y


Beregovaya CS

STAVROPOL

SAMSUN

ANKARA

BLUESTREAM

SOUTHSTREAMNorthwards

Southwards


61

section will be built by Gazprom together with its foreign partners and contractors. OAO Gazprom teamed up with BASF SE (Wintershall), E.ON AG (E.ON Ruhrgas) and N.V. Nederlandse Gasunie to implement the Nord Stream project. The partner stakes in Nord Stream AG – operator of the project – are split as follows:

OAO Gazprom – 51%; Wintershall and E.ON Ruhrgas – 20% each; Gasunie – 9%.

Representing critical significance for Europe, the Nord Stream project has been given by the European Union the Trans-European Gas Network status. The Russian blue fuel to be carried by the pipeline could be transported from Germany to Denmark, the Netherlands, Belgium, the UK and France.

The major gas customers of the first pipeline string will be as follows: WINGAS (9 billion m3), Gazprom Marketing & Trading (4 billion m3), E.ON Ruhrgas (4 billion m3), Gaz de France (2.5 billion m3) and DONG Energy (1 billion m3).

The final technical concept for the project was adopted in October 2006.

Stage 1 of project implementation is currently underway – the construction of one string with a throughput capacity of some 27.5 billion m3 per annum. With the construction of the second string Nord Stream’s throughput capacity will double to 55 billion m3 per annum.

The first string is planned for commissioning in 2011, the second one – in 2012. The budget of the Nord Stream project amounts to EUR 7.4 billion.

In 2007-2009 Nord Stream AG held a bidding process for the supply of large diameter pipes to construct the first string of the gas pipeline, manufacturing of reinforced concrete coatings and rendering of pipe laying services. Field studies were performed, detailed environmental impact assessment of the gas main being built was prepared. Public consultations on the impact assessment reports are ongoing. They are to be held until mid-2009. The

Nord Stream gas pipeline

K A Z A K H S T A N

R U S S I A

BELARUSPOLANDGERMANY

NORWAY

SWEDEN

FINLAND

UK

FRANCECZECH

REPUBLIC

AUSTRIASLOVAKIA

ITALYHUNGARY

ROMANIA

ESTONIA

VYBORG

GRYAZOVETS

GREIFSWALD

LATVIA

LITHUANIA

U K R A I N E

MOSCOW

62


active phase of the pipeline construction is to start before April 2010.

Representing significance for entire Europe and constantly attracting public interest, the Nord Stream project implementation is covered by mass media in detail. Complete information on the project may be found at www.nord-stream.com.

Why does Gazprom purchase gas in Central Asia? Will Gazprom produce gas in Central Asia? How is Central Asian gas transported?As the groundwork for sustainable gas supply at the required level, Gazprom is looking to tap into new fields in various regions, for example, the Yamal Peninsula and the Arctic seas offshore. All these areas have exceptionally challenging climatic and geological conditions. Gas will cost much more to extract there compared to other regions.

Therefore, Gazprom is seeking to add natural gas of Central Asian origin to its export portfolio in order to enhance the effectiveness of trading operations.

In 2008 Gazprom transited over 61 billion m3 of gas originating in Central Asia.

Cooperation between Gazprom and Central Asian gas producers began in 2001 and now covers: gas purchases and transit across the territory of Central Asia countries, exploration and production, gas processing at Russian facilities as well as fuel and energy infrastructure creation and acquisition in Central Asia.

So far, Gazprom has formed the strongest partnership in the region with Kazakhstan’s National Holding Company АО NK KazMunayGas. Under the Intergovernmental Gas Deal signed by Russia and Kazakhstan on November 28, 2001, Gazprom and KazMunayGas established in June 2002 a 50/50 joint venture, KazRosGaz, to market Kazakh gas internationally. In November 2005 OAO Gazprom and AO Intergas Central Asia (a gas transporting

subsidiary of KazMunayGas) signed a set of medium-term contracts for the transportation of Russian and Central Asian natural gas through the Kazakh territory from 2006 to 2010. The contracts provide for utilization of the Central Asia – Center (CAC) and Bukhara – Urals gas transportation systems.

In July 2006 Kazakh and Russian Presidents signed the Joint Declaration to promote the long-term cooperation when processing and marketing gas from the Karachaganak gas and condensate field. Within the scope of the Declaration, OAO Gazprom and AO National Company KazMunayGas entered on June 1, 2007 into the Agreement on the Major Creation and Operation Principles for a Joint Venture on the Platform of the Orenburg Gas Processing Plant (Orenburg GPP). The joint venture will be focused on providing processing services for hydrocarbon feedstock of the Orenburg Oblast and Karachaganak field on a processing fee basis. Creating the joint venture on the platform of the Orenburg GPP and boosting Karachaganak gas processing volumes to 15 billion m3 will help secure the full loading of GPP’s all existing and newly upgraded capacities in the long run. The bulk of the processed gas will be destined for Kazakhstan’s internal market and the remaining part – for export purposes.

In 2002 Gazprom signed the Strategic Agreement with Uzbekistan’s National Holding Group Uzbekneftegaz to become partners in the gas industry. The Agreement provides for long-term purchases of Uzbek gas from 2003 to 2012. In summer 2003 the Uzbek Government appointed Gazprom as export operator for all Uzbek gas exports.

In September 2005 OAO Gazprom and AK Uztransgaz (a sub-holding company of Uzbekneftegaz) signed the medium-term Agreement to transport natural gas through Uzbekistan from 2006 to 2010. The Agreement was signed with a view to transporting Turkmen gas via the CAC gas transmission systems and Bukhara – Urals pipeline, both of them crossing the territory of Uzbekistan.


63

A pilot project for Gazprom in Uzbekistan’s upstream sector was rehabilitation of gas production from the Shakhpakhty field. The cooperation in this area is progressing under the Production Sharing Agreement terms. A further stage of cooperation may see the development of a bigger gas exploration and extraction project for Uzbekistan’s Ustyurt region.

In April 2003 Russian President Vladimir Putin and his Turkmen counterpart Saparmurat Niyazov signed the 25-year Agreement for Russia and Turkmenistan to partner up in the gas industry, effective from January 1, 2004 to December 31, 2028. The companies in charge of putting the Agreement into action are OAO Gazprom and Turkmenistan’s national gas trader Turkmenneftegaz. Gazprom export and Turkmenneftegaz followed up with a long-term contract, spanning the same time period, for Turkmenistan to supply natural gas to Russia.

In May 2003 OAO Gazprom and the Government of the Kyrgyz Republic signed the long-term Agreement of Cooperation in the Gas Industry for the period of 25 years.

In January 2006 OAO Gazprom and the Government of the Kyrgyz Republic signed the Memorandum of Intent for the establishment of a Russian-Kyrgyz joint venture in the oil and gas industry.

In May 2007 OAO Gazprom and the Government of the Kyrgyz Republic signed the Agreement on the Common Principles for the Geologic Survey of Subsoil Resources in order to lay the cornerstone for the joint venture operation. In 2008 under the Agreement the Company was granted licenses for geological survey of Kugart and Eastern Mailu-Suu IV areas. In July 2008 the Stepwise Program for Geological Survey of Subsurface Resources in the

Central Asia – Center gas transmission system

ПОРТУГА

ЛИ

Я

ТУНИС

И С П А Н И Я

ВЕЛИКОБРИТАНИЯ

Р О С СИ

Я

ИРЛАНДИЯ

ФРАНЦИЯ

ИТАЛИЯ

А Л Ж И Р

Т У Р Ц И Я

У К Р А И Н А

ГЕРМАНИЯ

ШВ

ЕЦ

ИЯ

НО

РВ

ЕГ

ИЯ

ПОЛЬ

ША

Ф

ИН

ЛЯН

ДИ

Я

ГР

ЕЦИ Я

БОЛ ГАРИЯ

Б Е ЛАРУ

С Ь

ЛА Т ВИЯЛИТ ВА

ЭСТОНИЯ

Р УМЫНИЯ

ЧЕХИЯ

В ЕН Г РИЯ

А ВС Т РИЯ

Г РУ ЗИЯ

ЮГОСЛАВИ Я

I R A QСИРИЯ

ХО

Р В А ТИЯ

K A Z A K H S T A N

K Y R G Y Z S T A N

U Z B E K I S T A N


I R A N A F G H A N I S T A N

A Z E R B A I J A N

T A J I K I S T A N

ЧЕ РНОЕМОР Е

ARALSEA

CASPIANSEA

64


said areas was approved and in December 2008 Gazprom accomplished geological survey work.

Cooperation between the Government of the Republic of Tajikistan and OAO Gazprom is regulated by the long-term (till 2028) Agreement on Strategic Cooperation in the Gas Industry of May 15, 2003.

In June 2008 the Agreement on the General Principles of Geological Survey of Oil and Gas Prospects in the Republic of Tajikistan (Rengan, Sargazon, Sarykamysh, Zapadny Shaambary) was signed. ZAO Gazprom zarubezhneftegaz is the Gazprom subsidiary operating the Company’s projects in Tajikistan. In early 2009 seismic exploration ceased at the Sargazon prospect and commenced at the Sarykamysh prospect in June 2009.

Thus, today there is a strong contractual and legal framework for the strategic cooperation with all of the countries in the region.

Central Asian gas is delivered to consumers via a system of transit pipelines named Central Asia – Center (CAC), built in 1967-1985 through Turkmenistan, Uzbekistan and Kazakhstan up to the Alexandrov Gai compressor station in the Saratov Oblast.

Additional opportunities to transport natural gas from fields in the Caspian Sea and other locations in Turkmenistan and Kazakhstan to Russia are provided by the Pre-Caspian gas pipeline. The Agreement on the general cooperation principles for construction of the pipeline was signed by OAO Gazprom, AO NK KazMunayGas and State Concern Turkmengaz in September 2008.

The Pre-Caspian pipeline will run from the Belek compressor station in Turkmenistan along the Caspian Sea shore through Kazakhstan to Russia’s Alexandrov Gai compressor station. The total length of the gas main will be around 1,700 km, of which over 500 km will run through the territory of Turkmenistan and some 1,200 km – through Kazakhstan.

The assumed volume of gas transportation through Kazakhstan’s section of the Pre-Caspian pipeline will make up to 40 billion m3 per annum.

What are the international hydrocarbon extraction projects that Gazprom takes part in?As of December 31, 2008 Gazprom Group held 19 subsoil licenses for prospecting, exploration and production of hydrocarbon feedstock abroad, including five licenses for geological survey, exploration and production, and 14 ones – for geological survey of subsoil resources.

Offshore prospecting in IndiaIn late 2000 Gazprom, the Indian Government and Gas Authority of India Ltd (GAIL) entered into the Production Sharing Agreement (PSA) on block 26 in the Bay of Bengal.

The block is located within India’s continental shelf and belongs to the Bengal Petroleum Basin. The block area is 10,425 km2, water depth – 40 to 150 m, prospective oil and gas horizons depth – up to 6,500 m. The area is geologically challenging.

ZAO Gazprom zarubezhneftegaz acts as Gazprom’s agent in implementing the Agreement.

Within stages one and two of the Minimum Exploration Work Program for block 26 two prospecting wells were drilled. Seismic prospecting is underway so far, and in autumn 2009 an exploration and appraisal well is planned to be drilled with a target depth of 5,000 m.

Offshore prospecting in VietnamCurrently, Vietgazprom, a joint operating company set up by Gazprom and Vietnam Oil & Gas Corporation Petrovietnam pursuant to the Contract dated September 11, 2000, is performing prospecting activities on block 112 offshore the Socialist Republic of Vietnam. The Contract contemplates searching for, exploring, producing and marketing hydrocarbons.


65

In August 2007 a commercial gas inflow was reported during the first exploration well testing in Bao Wang as part of the prospecting activities on block 112 offshore Vietnam in the Gulf of Bac Bo. The discovered field contains gas condensate.

In May 2008 Gazprom and Petrovietnam signed the Agreement for Further Cooperation providing for geological exploration and further development of blocks 129, 130, 131, 132 offshore Vietnam. Vietgazprom will be the project operator to develop the blocks.

Offshore prospecting in VenezuelaIn September 2005 Gazprom won the tender to explore and develop two areas of offshore gas fields (Urumaco I and Urumaco II) as part of stage A of the Rafael Urdaneta project. The project deals with gas reserves of 736 billion m3 divided among 29 blocks.

The Government of Venezuela issued 30-year licenses for Gazprom to explore and develop natural gas fields.

The year 2006 saw the launch of geological prospecting activities to be conducted during four years. Abiding by the Urumaco I and Urumaco II tender requirements, Gazprom established two joint stock companies: UrdanetaGazprom-I SA and UrdanetaGazprom-II SA.

In May 2007, as part of the license conditions, phase one of geological exploration was completed and the decision was taken on exploration wells drilling. Developing the cooperation with Petroleos de Venezuela SA (PdVSA), Gazprom signed the agreements providing for the Company’s participation in the certification and evaluation of

Ayacucho III block reserves (Orinoco Oil Belt), as well as the Memorandum of Understanding on the Blanquilla Este y Tortuga project embracing natural gas exploration and production offshore Venezuela, its supply to the domestic market, as well as liquefaction and export.

LibyaDuring 2006-2007 based on bidding outcomes Gazprom obtained the right to explore and develop hydrocarbons on the promising licensed blocks 19 (Mediterranean offshore) and 64 (300 km south of Tripoli).

In December 2007, following the asset swap deal with BASF, OAO Gazprom acquired a 49% stake in Libya’s oil concessions C 96 and C 97 owned by Wintershall. These concessions are governed by the agreements effective till 2026. The concessions include nine fields with As Sarah as the largest. Current oil production is about 6 million t per annum. Geological exploration is still in progress and work is underway to maintain the current production level at concession C 96 and to boost production at C 97.

As part of its Strategic Cooperation Agreement with Italy’s ENI, Gazprom is negotiating the possibility of swapping assets, including assets in Libya.

AlgeriaIn December 2008 Gazprom Netherlands B.V., a member of Gazprom Group, was announced the winner of the hydrocarbon exploration and development bidding for the onshore El Assel area located in Algeria. Pursuant to provisional estimates, the recoverable oil reserves of the area average 30 million t.

Gazprom is now looking into its potential involvement in oil and gas projects in Bolivia, Egypt and Iran.

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67

Chapter 10 Financial Activities

Daily tax payments of Gazprom’s companies exceed RUB 1.5 billion

What are Gazprom’s annual earnings?In 2008 Gazprom earned RUB 2,507.01 billion (net of VAT).

What was the Company’s operating profit in 2008?In 2008 Gazprom’s operating profit from sales was 35.72%; returns on assets were 2.80% and returns on shareholder equity were 3.62%.

How much does Gazprom pay in taxes?Gazprom is constantly increasing its federal and regional tax payments as required by applicable law. Thus, in 2004 the Company paid RUB 229.7 billion, in 2006 – RUB 494.5 billion and in 2008 – RUB 685.8 billion.

Financial highlights for 2008:

ОАО Gazprom’s earnings (net of VAT, excise and other taxes) RUB 2,507 billion

ОАО Gazprom’s net profit RUB 173 billion

ОАО Gazprom’s profit per share RUB 7.31

ОАО Gazprom’s capital investments (net of VAT)RUB 264 billion

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infrastructure development at the Zapolyarnoye, Novoportovskoye and Yen-Yakhinskoye fields.

additional infrastructure development at the Yuzhno-Russkoye field;

Capital investments of Gazprom Group in oil exploration and production in 2008 totaled RUB 72.6 billion (RUB 56.4 billion in 2007).

In oil production the major investees during 2008 were the Priobskoye and Ety-Purovskoye fields owned by Gazprom neft.

Capital investments of Gazprom Group in gas transportation increased by 28.8% versus 2007 and totaled RUB 227.5 billion. With due regard of the ongoing crisis in the world economy, top priority was assigned to the Pochinki – Gryazovets, Gryazovets – Vyborg, Nord Stream gas pipelines construction and the expansion of the Urengoy gas transit hub.

The major projects planned for commissioning after 2010 are as follows:

the Bovanenkovo – Ukhta and Ukhta – Torzhok gas main systems for gas transportation from the Yamal Peninsula fields;

the Murmansk – Volkhov gas pipeline for gas transportation from the Shtokman field to the Northwest region of Russia;

the South Stream gas pipeline.

In 2008 Gazprom allocated around RUB 35.8 billion for upgrading and modernizing the gas transmission system.

Capital investments of Gazprom Group in gas processing in 2008 increased by RUB 14.0 billion (45.5%) versus 2007 and totaled RUB 44.9 billion.

How does Gazprom spend its money?While running their business, Gazprom’s member companies consume over 600 thousand types of goods and resources, with big finance required for

Gazprom Group’s tax payments, RUB billion

What does Gazprom spend money on?Gazprom commits multibillion investments into the core assets, securing, thus, operational reliability for the huge production and technology complex and dynamic development of the Company. Neither the current production programs, nor the strategic projects are feasible without an active investment policy.

Capital investments of Gazprom Group in gas exploration and production in 2008 reached RUB 219.8 billion, i.e. 43.4% higher versus 2007. Major investment targets in gas production were:

infrastructure development at the Bovanen-kovskoye, Shtokman and Prirazlomnoye fields;

infrastructure development at the second exploration area of the Achimov deposits of the Urengoyskoye field;

infrastructure development at the Zapadno-Pestsovaya and Kharvutinskaya areas of the Yamburgskoye oil, gas and condensate field;

50

150

200

100

250

350

300

450

400

500

550

650

700

600

2004 2005 20082006

349.2

229.7

494.5

685.8

2007

505.2

10. Financial Activities

69

their procurement. It is obvious that the final results of Gazprom’s operations directly depend on the procurement policy efficiency.

The lineup of products is roughly the same for various gas industry companies. In such a situation, in order to avoid potential supplier dictated prices, the bulk of goods and resources should be acquired via an integrated channel. In Gazprom Group these functions are discharged by a specialized subsidiary company – OOO Gazprom komplektatsiya. It is inexpedient, however, to vest this structure with 100% of the procurement responsibilities, since each member company has a specific field of action. Moreover, subsidiaries may have unforeseen needs in this or that product (for instance, in case of emergency), which have to be met in a very prompt manner. That is why, around 80% of Gazprom Group’s current procurement

requirements are satisfied via Gazprom komplektatsiya, with the rest acquired by subsidiaries independently.

In 2004 OAO Gazprom Board of Directors endorsed the Order Placement Guidelines for the supply of goods, execution of works and rendering of services for OAO Gazprom and its subsidiaries’ needs predominantly on a competitive basis. In compliance with this Provision, tender procedures are organized by the Contest Commission and the Tender Committee of Gazprom or contest commissions and tender subdivisions of Gazprom’s subsidiaries.

Tender advisories are published at www.zakupki.gov.ru Website, in the Tenders sections of Gazprom’s Website (www.gazprom.com) and in print media.

While in 2004 only 3% of overall procurement was by tender, this figure increased to 30% in 2005. In 2008 competitive procurement reached some 81%.

Another crucial fact is that in its procurement policy Gazprom has long been geared to domestic manufacturers. The share of foreign products in Gazprom komplektatsiya’s purchases is on a continuous decline: while in 2002 the purchases from beyond the former Soviet Union accounted for 17.9% of the overall procurement, in 2008 this figure shrank to 3%. Today Gazprom acquires abroad only unique and unrivalled in Russia products. Such an approach is favored by Russian manufactures. For instance, Russia’s leading machine-building companies supply Gazprom with gas pumping units at a far lower price than for customers abroad.

The tender system development allowed to save the Company’s costs: in 2006 – by 5.3%, in 2007 – by 3.9%, in 2008 – by 3.2%. Costs for Gazprom investment program targets reduced by 5.1%, 3.8% and 2.6%, respectively.

In recent years Gazprom has been actively developing the practice of tender-based awarding of construction

RUB 674.11billion

– Gas production

– Oil and gas condensate production

– Gas transportation

– Processing

– Gas sales

– Miscellaneous

11.02

5.15

6.65

32.67

33.75 10.76

Gazprom Group’s capital investments structure in 2008 by sectors of activity, %

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contracts. Starting from 2010 contract awarding to construction companies on the tender basis is planned to be increased to at least 90% for new facilities.

It is important to note that focusing on Gazprom’s promising projects Russia develops new production capacity and enhances production technology. For instance, Gazprom’s needs in qualitative large diameter pipes have stimulated their manufacture at Russia’s largest pipe plants. It wouldn’t be an exaggeration to say that Gazprom’s product orders represent effective investment demand in the domestic industry.

Isn’t Gazprom’s debt burden too big?Gazprom Group’s net debt at the end of 2008 slightly exceeded RUB 1 trillion. Although this figure might seem impressive, it is in fact nothing special for international energy companies.

First of all, repayment is spaced out many years ahead. Second, no company ever engages in large-scale projects entirely on its own. Both domestic and Western lenders lend eagerly to Gazprom. No pragmatic international lender would give the Company a cent if they had the slightest doubt about its trustworthiness. Successful placement of Gazprom’s Eurobonds amounting to USD 2.25 billion in April 2009 under the credit resource deficit conditions became a noticeable event on the world’s financial markets.

Even in case of significant deterioration in the energy market behavior the most reputable international rating agencies left Gazprom’s ratings at the investment level. Thus, the market was clearly informed of Gazprom’s steady financial standing.

– Long-term credits – Long-term loans – Long-term credits and loans

as of December 31,2007

20.13 28.56

51.31

as of December 31,2008

21.98 20.59

57.43

Gazprom’s debt structure by types of borrowings, %

Rating agency Rating ForecastStandard&Poors ВВВ negativeMoody’s Ваа1 stableFitch Ratings ВВВ negative

OAO Gazprom’s credit ratings as of June 1, 2009

10. Financial Activities

71

2006 2007 2008

Actual profits 28.6 38.0 36.7includingwith no regard to deals within the Group 9.4 31.0 34.5

out of them:sales of assets in the form of shares (stakes) 5.4 27.0 20.3sales of other securities, as well as movable and immovable assets

4.0 4.0 14.2

Is it true that many of Gazprom’s member companies have no relation to its core business?Today Gazprom’s policy is to stay focused on its core business, i.e. to extract, deliver, store and process hydrocarbons, and develop the electric power generation industry. However, Gazprom does own assets that are unrelated to its main business.

Such assets were chiefly amassed in the 1990s, when many Russian consumers practiced non-cash payments for gas such as offset schemes, securities or other “monetary equivalents”. As a result, Gazprom

has accumulated quite a lot of irrelevant assets it is currently looking to get rid of.

According to the 2008 results, Gazprom earned RUB 36.7 billion on non-core asset sales (RUB 34.5 billion with no regard to deals effectuated within the Group).

The bulk of funds were received from sales of media assets owned by OAO Gazprom and its subsidiary companies (under the contracts effectuated earlier) – RUB 17.0 billion, as well as from sales of major construction assets owned by OAO Gazprom – RUB 8.5 billion.

Profits from sales of non-core assets, RUB billion

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73

Chapter 11Gazprom in Power Industry

Combined Heat and Power Plant No. 21, OAO Mosenergo

Gazprom’s major energy assets:

OAO Mosenergo

OAO OGK-2

OAO OGK-6

Gazprom’s investments in power generation between 2009 and 2013 –

RUB 250 billion

Why is Gazprom taking part in power generation business?In order to become a world’s leading energy company, Gazprom is to span the entire production chain – from the wellhead to the end-user – primary energy carriers and a wide range of end products including electricity.

Gas and power generation business mergers represent a trend nowadays observed all over the world. For instance, the merger between E.ON (energy) and Ruhrgas (gas) in Europe resulted in a considerable synergizing effect. Direct involvement of Gazprom being a prominent energy resource supplier in

74


centralization of power capacities to decrease costs and provide for continuous power supply to the subsidiary facilities engaged in hydrocarbon production, transportation and processing.

What assets does Gazprom own in Russia’s power industry?In 2007-2008, as a result of the electric power industry reform in Russia and participation in additional share issue by power generating companies, Gazprom Group substantially achieved its strategic goals to enter the electric power generation business. The Group consolidated controlling stakes in OAO Mosenergo, OAO Second Generating Company of Wholesale Electricity Market (OGK-2) and OAO Sixth Generating Company of Wholesale Electricity Market (OGK-6). In addition, Gazprom Group holds a 28.7% stake in OAO Territorial Generating Company – 1 (TGC-1).

OAO OGK-2 and OAO OGK-6 comprise major federal power stations located in various regions of Russia. ОАО TGC-1 is the third biggest territorial generating company in Russia in terms of installed capacity (6,278 MW as of December 31, 2008). The company is carrying out its activities in Russia’s Northwest region with an actively growing consumption level.

Generating assets of Gazprom Group are located in rapidly developing regions with solvent consumers’ demand which guarantees demand for electric and heat power.

electric power generation and distribution projects will eventually enable to normalize Russia’s fuel balance, elaborate and implement effective schemes for balanced consumption of coal and gas, thus, preventing from wasteful consumption of blue fuel. It is also important that Gazprom’s participation in energy business will allow the Corporation to enjoy significant economic benefits owing to the introduction of the most efficient schemes of energy supply to production companies of the Group.

Gazprom’s conversion into a global, vertically integrated energy company with significant energy assets is needed not only by the Company itself, but by the shareholders as well. Strengthening the Company’s positions in the electric power industry will allow Gazprom to further enhance the appeal of its shares on the market.

What areas of the power sector is Gazprom operating in?In 2007 OAO Gazprom’s Board of Directors approved the Company’s Power Generation Strategy. The following measures are planned for its implementation:

acquisition of generating and distributing companies that will develop in a competitive environment;

construction of coal-fired power generation facilities in the regions with a big share of natural gas in the fuel balance;

creation of new efficient capacities and upgrade of the existing ones to decrease the energy intensity of power generation;

Major electric power generation assets of Gazprom Group (as of December 12, 2008, OAO OGK-2 and OAO OGK-6 data was collected starting from the second half of 2008)

Generating companies

Capacity, MW

Electric power generation in 2008,

billion kWh

Heat power generation in 2008,

million Gcal

OAO Mosenergo 12,000 64.2 62.4OAO OGK-2 8,695 24.9 1.2OAO OGK-6 9,052 19.5 2.2

11. Gazprom in Power Industry

75

At the end of 2008 the Group became Russia’s largest in electric power generation and distribution and the second largest in heat power generation.

What is the structure of Gazprom Group’s energy assets?Gazprom’s energy assets are consolidated on the books of a specialized subsidiary company – OOO Gazprom energoholding. This enables to create an effective management system based on unified corporate standards. Gazprom energoholding is responsible for Gazprom’s power generation strategy development (fuel supplies, electric and heat power marketing, adding new power generation capacities, etc.). The company is also cooperating with state authorities in order to elaborate a common stance on the principle matters.

There are two specialized companies operating to optimize the activities related to the acquisition of electric power on the wholesale market and its delivery to Gazprom Group members: OOO Gazprom energo (network operator) and OAO Mezhregionsbyt (energy distributor).

The power supply facilities of Gazprom Group’s gas production and gas transportation companies were leased out to the network operating subsidiary (except for the facilities that are part of UGSS). Currently, OOO Gazprom energo is operating 16 thousand facilities in 43 constituents of the Russian Federation.

OAO Mezhregionsbyt is represented in 25 constituents of the Russian Federation. The company is one of the biggest energy traders in Russia with over 85 billion kWh sold both on the wholesale and retail electric power markets in 2008.

Heat power business of Gazprom Group is concentrated in a special-purpose holding – OAO Mezhregionteploenergo. The holding is comprised by 23 regional companies dealing with heat power generation and transmission, hot water supply, as well as executing investment projects in heat power industry of 21 Russian Federation constituents.

How is Gazprom’s energy business developing?Gazprom Group’s energy business is primarily related to the execution of investment programs in the electric and heat power generation industry.

Between 2009 and 2013 Gazprom plans to invest RUB 250 billion for the power sector development.

In 2008 Gazprom’s companies accounted for 90% of the generating capacity construction in Russia.

ОАО Mosenergo accomplished phase three of the investment program – commissioning of three power stations based on combined-cycle power plants with the capacity of 420-450 MW. The investments exceeded RUB 23 billion in 2008. Within 2009 another combined-cycle power plant is planned for commissioning with a capacity of 420 MW at the Combined Heat and Power Plant – 26 (CHPP-26). Thus, a total increase in the capacity in the Moscow region by the end of 2009 will exceed 1,700 MW.

In line with the joint investment program of the Russian power generating companies of the Group, the total capacity of the facilities to be commissioned before 2015 is estimated at 7 GW. In addition, the investment program of OAO TGC-1 provides for commissioning over 2 GW.

In 2008 Gazprom Group launched the second power generating unit construction with a capacity of 450 MW at the Kaliningrad CHPP-2. The facility will be commissioned in 2010. It is also planned to construct a power station with a capacity of 360 MW in Adler and commission it in 2012.

Investment programs in the heat power generation industry are focused on three key areas: firstly, integrated modernization and upgrading of the existing systems for heat supply to settlements; secondly, construction of heat supply facilities for new community areas and thirdly, creation of energy sources for industrial consumers.

During five years the amount of investments allocated for the reconstruction and construction of heat

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power facilities, as well as integrated modernization of heat supply systems in populated areas totaled RUB 21 billion. Investment projects implementation resulted in the construction and modernization of 212 boiler houses, 67 central heat supply stations and 527 km of heat supply networks in Saint Petersburg, Republic of Tatarstan, as well as Vologda, Leningrad, Moscow, Oryol, Pskov, Samara and Tver Oblasts.

Is Gazprom participating in energy projects abroad?Gazprom’s marketing strategy provides for developing electric power generation business internationally. Among the top priority European markets are Germany, Italy, the UK and Turkey. In this regard Gazprom is considering various combined-cycle electric power stations acquisition and/or construction projects in these countries. In particular, the Memorandum of Understanding was signed with E.ON AG in 2008 to construct a 1,200-MW combined-cycle power plant in Lubmin (Germany).

Via Gazprom Marketing & Trading Gazprom effectuates electric power deals on foreign trading

platforms. In 2008 the total amount of electric power sales increased 2.9-fold (by 15 billion kWh) versus 2007 and totaled 23 billion kWh.

Gazprom is participating in the investment project aimed at constructing a new power generating unit with a capacity of 320 MW at the Kaunas HPP. Investment appeal of this project is stipulated by the assumed termination of the Ignalina Nuclear Power Plant in 2010 resulting in a forecasted deficit in electric power in the Baltic region. Construction of a new power plant generating unit will be carried out by a separate company with Gazprom’s stake of at least 51%.

The Razdan 5 project being executed by Gazprom provides for accomplishing the fifth power generating unit at the Razdan HPP (Armenia) with state-of-the-art gas turbines increasing the capacity to 480 MW. Upon the commissioning of the power generating unit Gazprom Group will capture a considerable share on the electric power generation market of the Republic of Armenia and gain the opportunity to increase electric power supplies to neighboring countries.

R U S S I A

L I T H U A N I A

U K R A I N E

K A Z A K H S T A N

M O N G O L I A

B E L A R U SP O L A N D

L A T V I A

R U S S I A

A R M E N I A

G E O R G I A

T U R K E Y

БОЛ ГА РИЯ

OAO Mosenergo OAO OGK-2 OAO OGK-6 Facilities under construction

ST. PETERSBURG

PSKOV

MOSCOW

RYAZAN

ROSTOV�ON�DON

ASTRAKHAN

ORENBURG

VOLOGDA

YEKATERINBURG SURGUT

VILNIUS

KALININGRAD

KRASNOYARSKGYUMRI

YEREVAN

CHELYABINSK

STAVROPOL

TUAPSEADLER

Kaunas HPP

Pskov CHPP

Kirishi CHPP

Cherepovets CHPP

CHPP�24

Ryazan CHPP

Stavropol CHPP

Troitsk CHPP

Serov CHPP

Surgut CHPP�1

Krasnoyarsk CHPP�2 Razdan HPP

Power generating companies of Gazprom Group in Russia and abroad

77

Chapter 12Ecology and Energy Conservation

Environmental protection is a priority task for OAO Gazprom when building and operating production facilities

To what extent does Gazprom adhere to the commonly accepted principles of nature conservation and environmental protection?Gazprom runs business in compliance with the environmental legislation of the Russian Federation, the commonly accepted international principles and the OAO Gazprom Environmental Policy.

Environmental impact mitigation and natural resource conservation is a mainstay of OAO Gazprom’s environmental activities. This is confirmed by the fact that despite the annually increasing scope of operations, OAO Gazprom subsidiary companies’

In 2008 Gazprom spent over RUB 22 billion to protect the environment

In 2008 Gazprom Group saved 2.8 million t of fuel equivalent

78


environmental impacts remain stably low and keep reducing by a number of indicators.

In 2008 Gazprom Group continued upgrading and modernizing industrial facilities in line with the environmental legislation requirements.

In particular, the solutions aimed at decreasing the level of compressor station noise were implemented, as well as at reducing the pollutants emission into the atmosphere by means of a reduction in gas consumption for technological needs. In addition, construction of new sewage treatment facilities was carried out, as well as modernization and upgrading of the existing ones.

In 2008 state inspections didn’t find any significant violations of Russia’s environmental legislation by Gazprom Group member companies. The claims submitted in 2007 by the Russian Ministry of Natural Resources and Ecology in relation to the Sakhalin II project implementation, have been removed, the Environmental Action Plan has been fulfilled. No significant penal sanctions were imposed by environmental authorities with regard to the project in 2008.

In 2008 the OAO Gazprom Environmental Policy and List of High-Priority Activities Related to Environmental Protection were approved for the period up to 2010. The Environmental Policy implementation should result in cost reduction, an increase in the resource utilization efficiency, minimization of specific indicators of negative environmental impacts and optimization of the corporate environmental management system.

Independent audit of Gazprom’s environmental management system confirmed that OAO Gazprom and it’s subsidiaries were performing large-scale work aiming to meet the environmental requirements and were allocating significant financial resources and possess relevant highly qualified personnel for these purposes. According to the audit results, a plan for further environmental management system upgrading was offered. Subsequently, the plan will be certificated for compliance with the requirements of ISO14001 international standard. In 2009 the respective work is continued within a special-purpose corporate working group.

How much does Gazprom spend on environmental protection?In 2008 Gazprom spent over RUB 22 billion to protect the environment.

Fuel and energy resources saved by Gazprom Group in various types of activity in 2008

Business activity Natural gas, million m3

Electric power, thousand kWh

Heat power, Gcal

Gas, gas condensate and oil production

260.1 2,888.9 8,441.9

Gas transportation 2,035.5 208,950.2 112,836.0Underground gas storage 13.5 970.8 719.6Gas, gas condensate and oil processing

39.6 9,988.4 35,761.0

Drilling and capital repairs of wells 0.2 14,635.3 11,816.4Gas distribution 3.4 7,284.0 3,634.0Non-core operations 5.1 6,037.1 31,140.9Total 2,357.4 250,754.7 204,349.7

Total, thousand t of fuel equivalent 2,687.5 81.5 29.3

12. Ecology and Energy Conservation

79

The bulk of the environmental expenses are anticipated by OAO Gazprom during the execution of specific projects. As a rule, these are the expenses arising from the application of advanced technologies enabling to reduce negative environmental impacts.

In 2008 capital investments in nature conservation were in excess of RUB 3.5 billion. The capital repair of the fixed assets used for environmental measures was funded with over RUB 1.4 billion. Operating expenses on environmental protection amounted to RUB 17.1 billion. Environmental pollution charges totaled RUB 2.6 billion.

What are Gazprom’s energy conservation initiatives?The general aim of Gazprom’s energy conservation policy is to reduce the level of gas losses and gas consumption driven by technological needs, improve the condition and optimize the operating regimes of technological facilities, introduce new energy saving technologies.

In 2008 Gazprom’s total saving of fuel and energy resources amounted to 2.8 million t of fuel equivalent while implementing the corporate Energy Saving Program for 2007-2010.

The level of associated petroleum gas (APG) utilization by Gazprom Group increased in 2008 by 8% and amounted to 57.8% or 3.7 billion m3 in kind.

In 2008 OAO Gazprom’s Board of Directors approved the Development Strategy for Gazprom’s gas chemical and gas processing facilities, aimed at increasing the extraction level of valuable components of natural gas and associated petroleum gas, as well as at their processing into a highly liquid product with a high added value.

Gazprom is developing international cooperation in energy saving. In November 2008 the Company signed the Memorandum of Understanding with E.ON Ruhrgas to set up a joint venture to deal with energy saving and efficient energy consumption. The

joint venture will focus on executing projects aimed at applying advanced energy saving technologies including renewable energy sources and on consulting major European customers on the matters related to efficient resource consumption.

Does Gazprom have an environmental alternative to motor gasoline?Natural gas represents the most acceptable alternative to oil fuels by the economic, resource and environmental characteristics. Utilizing compressed (pressurized) and liquefied natural gas as engine fuel enables to significantly enhance the economic efficiency of motor and railway transport operation and to mitigate their environmental impacts.

At present, the Russian fleet of natural gas vehicles is estimated at about 103 thousand units with 5.5%

80

100

120

140

160

180

200

220

240

260

280

300

320

2004 2005 2006 2007 20082003200220012000

84

105115

140

173

237

286

319 321

Marketing of gas as a vehicle fuel, million m3

80


Comprehensive Development Program for the Natural Gas Filling Network and Natural Gas Vehicles for the period from 2007 through 2015. Under the Program, in 2007-2015 it is planned to commission 200 new CNG filling stations and 90 mobile fuellers in 47 constituents of the Russian Federation.

By 2015 the Program implementation will enable to double the Russian fleet of CNG vehicles, create 1,700 new jobs, substitute with gas around 2.5 million t of oil engine fuel and reduce overall pollutions by 1 million t of fuel equivalent.

owned by Gazprom. There are 226 CNG filling stations operating in 60 constituents of the Russian Federation with an overall annual design capacity of above 2 billion m3. Gazprom owns 198 CNG filling stations.

For over a decade Gazprom has been purposefully working on the promotion of gas fuel in Russia and conversion of various vehicles to natural gas. The Company is an absolute leader on the national gas fuel market stipulating for its sustainable growth.

Following the decision of the Board of Directors, OAO Gazprom has developed the Targeted

81

Chapter 13Social Responsibility

Hockey ground constructed in Nevyansk, Sverdlovsk Oblast

Is Gazprom a socially responsible company?Gazprom’s large-scale activities are of strategic significance for the entire country’s economic expansion and of interest for a huge number of people. This is where a variety of Gazprom Group’s crucial operating principles stem from, namely: pursuing the public interest, maximally contributing to the socioeconomic development of Russian Federation regions, stimulating a favorable business climate throughout the country and supporting worthy labor conditions, social and spiritual welfare of the people.

In this regard, the Company strives to secure the sustainable development of its business, paying

Total number of employees 376.3 thousand people

Daily payments to Russia’s budget over RUB 1.5 billion

Gasification of 300 populated areas per annum

82


great attention to both the economic and social aspects. Gazprom steadily pursues the following social responsibility principles: creating new jobs, implementing social programs for its employees, placing a focus on sponsorship and charity, taking environment and education related actions.

How does Gazprom follow the social responsibility principles in practice?Year-on-year, Gazprom plays a more active role in social support projects by creating new jobs, rendering assistance to economically disadvantageous people, servicemen, veterans and invalids of the Great Patriotic War, implementing social support programs for the inhabitants of the Far North, making investments in new production and social infrastructure facilities construction throughout the Russian Federation. Just like in the past, particular attention is paid to supporting disabled children, orphans and boarding school inmates. The Company annually earmarks funds to build housing, kindergartens, health care centers, etc.

The Company strictly fulfils all its tax commitments, annually replenishing the Russian budget with over RUB 1.5 billion. Furthermore, Gazprom is consistent in gasifying Russian populated areas and yearly bringing the blue fuel to more than 300 new populated areas.

In its sponsorship and charitable activities the Company is oriented towards reviving the spiritual and national values, supporting culture, sports, education and science, contributing to the sci-tech progress as well as promoting a healthy lifestyle.

Gazprom’s Christmas and New Year festivals for children from orphan homes and orphanages of Moscow and the Moscow region have become traditional.

It has been long since Gazprom and the Russian Orthodox Church as well as other confessions started cooperation aimed at reviving the spiritual and religious traditions.

In 2008 Gazprom helped to restore the architectural and cultural monuments such as the New Jerusalem Monastery, the Saint Petersburg Orthodox Academy, the Center of Orthodox Heritage in the Peredelkino village.

Keeping the Russian educational and cultural traditions, OAO Gazprom and its foreign partners ENI and OMV supported a series of concerts, “Masterpieces amid Masterpieces”, held in the State Tretyakov Gallery – musical and poetic performances by the S.V. Rachmaninov Trio, Italian and German musicians, Russian stage directors and artists.

For the purpose of promoting moral and aesthetic development, building corporate culture, the Arts Festival was arranged under the auspices of OAO Gazprom and China National Petroleum Corporation (CNPC).

In 2008 OAO Gazprom provided assistance to such important cultural events as the concert dedicated to S.T. Richter’s anniversary, concerts of V. Spivakov, N. Petrov, O. Borodina and the I. Moiseev Folk Dance Ensemble.

In 2008 Gazprom allocated funds to maintain the Eternal Flame in the hero cities of Tula, Volgograd, Novorossiysk (Russia) and Minsk (Belarus). Assistance was rendered to the Brest Hero Fortress memorial complex (Belarus).

Since 2005 Gazprom has been supporting the corporate “Fakel” Festival aiming at traditions maintenance in multinational Russia, popularization of folk art and development of corporate culture. The amateur teams of Gazprom’s subsidiaries and partners participate in the Festival. In 2007 for the first time the Festival turned into an international event. “Fakel” laureates and Art Festival winners from China National Petroleum Corporation performed successfully in China and in Russia. Over 3 thousand people participated in the Festival in 2007.

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The Company annually holds the “Fakel” Literature Festival aimed at engaging Gazprom’s employees and their families in the process of creating literary compositions in cooperation with professional writers.

Gazprom actively supports further development of the national science and is the founder of various Russian public research institutions and foundations that include the Higher Engineering Council of the Russian Federation, the V.I. Vernadsky Non-Government Ecology Fund and others. The Company takes part in annually awarding the “Global Energy” international prize for breakthrough discoveries, inventions and solutions in the energy industry. Traditionally implemented are various projects with the I.M. Gubkin Russian State University of Oil and Gas to support and further develop higher education in Russia.

Gazprom pays special attention to the development of sports, promotion of a healthy lifestyle and actively interacts with the Russian Federal Agency for Physical Culture and Sports and sports federations.

The Company annually holds summer and winter Spartakiada Games for OAO Gazprom’s subsidiary companies as part of the OAO Gazprom policy for the support of sports and physical training in Russia.

In 2008 Gazprom participated in the organization and helped to hold a lot of mass competitions. Among these were “Ski-Track of Russia”, “Cross-Country Race of the Nations”, “Orange Ball”, “Znamensky Brothers’ Memorial” and others.

Gazprom is a permanent sponsor of the Zenit Football Club and Saint Petersburg Open tennis tournament. Every year the Company provides financial support to gymnastics, volleyball and chess competitions.

The Company traditionally supports national sports federations, teams and individual sportsmen (both

professionals and amateurs), as well as sports veterans.

What is the “Gazprom to Children” All-Russia Program?Traditionally paying particular attention to backing Russia’s children and youth, in 2006 Gazprom started implementing a prominent social project, the “Gazprom to Children” Program. In 2007-2008 the Company provided broad financial support as part of the Program.

The Program is targeted at creating an environment for harmonious intellectual, spiritual and physical development of the young generation of Russians, promoting a healthy lifestyle among the Russian youth, engaging the maximally possible number of children and teenagers in sports activities as well as artistic and amateur clubs.

To achieve its goals, Gazprom is resolute to:

build and upgrade sports complexes, multifunctional outdoor sports grounds;

purchase equipment needed by sports, artistic and amateur clubs;

engage highly qualified trainers and instructors for sharing their skills with children and teenagers;

organize festivals and sporting events throughout the country.

The Program execution has already resulted in the commissioning of dozens of new athletics & health complexes and sports grounds built by OAO Gazprom’s subsidiaries in the Republics of Tatarstan, Bashkortostan and Chuvashia, Krasnodar and Altai Krais, Nizhny Novgorod, Kurgan, and Ulyanovsk Oblasts, Khanty-Mansiysk Autonomous District and other constituents of the Russian Federation.

The “Gazprom to Children” Program can be rightfully called an All-Russia project as it covers 65 Russian regions and envisages the commissioning

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of 77 prominent sports facilities and construction of 374 multifunctional children’s sports grounds and 15 modern artificial football stadiums. Thus, Gazprom implements one of the Program’s major goals, i.e. to engage up to 220 thousand children in sports activities.

The “Gazprom to Children” Program also provides for a big scope of work to be done for developing the next generation’s creative potential. Along with holding traditional children’s festivals in Russian regions, there are plans to significantly increase the number of artistic amateur clubs, with up to 120 thousand children to be engaged. Each of them will have an opportunity to check skills within the annual “Fakel” All-Russia Children and Teenagers Festival of amateur creative teams and performers.

In 2008 over RUB 4.5 billion was allotted for the “Gazprom to Children” Program. Out of them RUB 4.3 billion – for the construction and upgrading of sports facilities.

What are Gazprom’s programs to support its personnel?Today, Gazprom employs 376,300 people. The Company pays paramount attention to creating maximally

comfortable labor conditions, providing a variety of social guarantees, benefits and compensations. At the same time, continuous support is given to industry veterans, with a focus placed on improving their living conditions.

The social and labor relationships between employees and administration are governed by the following documents: the General Collective Agreement of OAO Gazprom, its Subsidiary and Associated Companies for 2007 through 2009; general collective agreements of the Company’s subsidiaries; Industry Agreement for the companies engaged in the oil and gas industry as well as in the construction of oil and gas industry facilities in the Russian Federation for 2008 through 2010; Industry Tariff Agreement in the electric power industry of the Russian Federation. The General Collective Agreement affects the interests of 263 thousand employees.

There are a number of other documents with regard to the education (training/retraining) and health care services to employees and their families.

The most important of them is the Provision on the Continuous Corporate Professional Education for Managers and Specialists. Pursuant to this document 155 thousand people received further vocational training in 2008. In addition, Gazprom has

Number of peopleTotal number of workers provided with vocational training, including:

97,222

advanced training 83,146retraining 4,956second (related) vocation 9,120

Total number of managers and specialists provided with vocational training, including:

57,872

advanced training 56,917vocational retraining 955

Total 155,094

Vocational training of Gazprom Group’s personnel in 2008

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adopted: the Provision on the Training of Young Specialists with Higher or Secondary Professional Education and their Internships in OAO Gazprom’s Subsidiaries and Associated Companies, the Provision on Psychological Support in OAO Gazprom, the Provision on Medical Support for OAO Gazprom’s Employees, Retired Pensioners and their Families, etc. A crucial social guarantee is payment of extra pensions by Gazfond Non-State Pension Fund.

Developing new oil & gas fields and constructing gas mains in the Far North, with a view to improve the employees’ operational capabilities and living standards, the Company builds the system of life support, medical and ecological, as well as social and hygienic monitoring for Gazprom Group’s employees and their family members. In order

to enhance the effectiveness and accessibility of medical services, especially in field camps, the Company developed a telemedicine network.

With a view to further improving labor force related work, in 2006 Gazprom developed and endorsed the Personnel Management Policy for OAO Gazprom and its Subsidiary and Associated Companies. The Policy is aimed at establishing an efficient human resources management mechanism based on social partnership.

In order to ensure financial interest of Gazprom’s management staff in the Company’s efficient development, in 2006 Gazprom introduced a financial motivation system for the management of ОАО Gazprom and its major subsidiaries, which includes an annual bonus system and a program for allocating ОАО Gazprom’s shares as a bonus.

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Chapter 14ManagementThe Board of Directors administers general management in the Company, save for those matters that are, under the Federal Companies Act, the prerogative of the General Shareholders Meeting.

The Board of Directors assures the advancement of the goals and vision of the Company as set forth in its Charter.

The principal duties of the Board of Directors are to set the Company’s development strategy so as to maximize capitalization and investment appeal, to determine the Company’s asset management policy and to implement ef ficient controls over the Company’s financial and business per formance.

(From the Provision on the OAO Gazprom Board of Directors)

The Management Committee is a collective executive body that runs the Company on a day-to-day basis.

The Management Committee contributes to the drafting of the Company’s strategies and policies and sees to it that the same are properly implemented; it also oversees compliance with resolutions of the General Shareholders Meeting and the Board of Directors.

The main duties of the Management Committee are to ensure reliable operation of the Unified Gas Supply System (UGSS) and steady gas supply to consumers, to manage the Company’s assets so as to maximize returns, to improve internal controls and risk management, and to advocate the lawful rights and interests of the Company’s shareholders.

(From the Provision on the OAO Gazprom Management Committee)

Viktor A. Zubkov First Deputy Prime Minister of the Russian Federation, Chairman of the Board of Directors, OAO Gazprom

Alexey B. Miller Chairman of the Management Committee, OAO Gazprom

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ALEXEY B. MILLER Chairman of the OAO Gazprom Management Committee

Alexey Miller was born on January 31, 1962 in Leningrad. He graduated from high school in 1979 and became a student of the N.A. Voznesensky Leningrad Finance and Economics Institute.

Upon graduation Alexey Miller was engineer-economist, General Planning Division, LenNIIProekt – Leningrad Civil Construction Research and Design Institute.

Alexey Miller was a post-graduate student at the N.A. Voznesensky Leningrad Finance and Economics Institute from 1986 to 1989, and obtained a PhD (Economics) degree in 1989.

In 1990 Alexey Miller was appointed Researcher, Leningrad Finance and Economics Institute, and then Section Head, Committee on Economic Reform, Leningrad City Council.

From 1991 to 1996 Alexey Miller served with the Committee for External Relations, St. Petersburg Mayor’s Office. He was Head, Markets Monitoring Section, Foreign Economic Relations Department. Later he was appointed Head of the Department and Deputy Chairman of the Committee.

From 1996 to 1999 Alexey Miller was Director, Development and Investments, at the Sea Port of St. Petersburg Open Joint Stock Company.

From 1999 to 2000 he served as General Director, Baltiyskaya Truboprovodnaya Sistema (Baltic Pipeline System).

In 2000 Alexey Miller was appointed Deputy Minister of Energy of the Russian Federation. He has served as Chairman of the Management Committee, OAO Gazprom, since 2001.

Alexey Miller has been awarded with the IV Degree Order for the Outstanding Services to the Fatherland; the Medal of the Outstanding Services to the Fatherland II Degree Order; the II Class Order of the Hungarian Republic Cross for his outstanding services to the energy cooperation; the St. Mesrop Mashtots Order (Republic of Armenia); the Dostyk (Friendship) Order of the II Degree (Republic of Kazakhstan); the Sergiy Radonezhsky II Degree Order of the Russian Orthodox Church; the Patriarchal Merit Certificate.

VIKTOR A. ZUBKOV First Deputy Prime Minister of the Russian Federation, Chairman of the OAO Gazprom Board of Directors

Viktor Zubkov was born on September 15, 1941 in the Arbat village, Kushvinsky District, Sverdlovsk Oblast.

In 1965 he graduated from the Leningrad Agricultural Institute majoring in Economics.

Viktor Zubkov headed a number of agro-industrial enterprises and specialized departments under the Leningrad Oblast authorities.

In 1992 he was appointed Deputy Chairman of the External Relations Committee of the St. Petersburg Mayor Office.

In 1993 he became Deputy Head of the Federal Tax Service – Head of the St. Petersburg State Tax Inspection.

In 1999 Viktor Zubkov was appointed Deputy Minister for Taxes and Fees and Head of the Russian Taxes and Fees Ministry Department in St. Petersburg.

In 2001 he became First Deputy Finance Minister of the Russian Federation and Head of the Russian Financial Monitoring Committee.

Since March 2004 – Head of the Federal Financial Monitoring Service.

On September 14, 2007 Viktor Zubkov was appointed Prime Minister of the Russian Federation by the Presidential Decree.

On May 12, 2008 he became First Deputy Prime Minister of the Russian Federation.

On June 27, 2008 Viktor Zubkov was elected Chairman of the OAO Gazprom Board of Directors.

Viktor Zubkov was awarded a PhD degree in Economics.

Viktor Zubkov is married and has a daughter.

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BOARD OF DIRECTORS

Viktor A. ZUBKOVFIRST DEPUTY PRIME MINISTER OF THE RUSSIAN FEDERATION, CHAIRMAN OF THE BOARD OF DIRECTORS, OAO GAZPROM

Alexey B. MILLERDEPUTY CHAIRMAN OF THE

BOARD OF DIRECTORS, CHAIRMAN OF THE

MANAGEMENT COMMITTEE, OAO GAZPROM

Alexander G. ANANENKOVMEMBER OF THE BOARD OF

DIRECTORS, DEPUTY CHAIRMAN OF THE MANAGEMENT

COMMITTEE, OAO GAZPROM

Burckhard BERGMANNCHAIRMAN OF THE EXECUTIVE

BOARD, E.ON RUHRGAS AG, MEMBER OF THE EXECUTIVE

BOARD, E.ON AG

Farit R. GAZIZULIN Elena E. KARPELHEAD OF THE PRICING AND

ECONOMIC EXPERT ANALYSIS DEPARTMENT, OAO GAZPROM

Elvira S. NABIULLINA ECONOMIC DEVELOPMENT

AND TRADE MINISTER OF THE RUSSIAN FEDERATION

Mikhail L. SEREDADEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE,

HEAD OF THE ADMINISTRATION OF THE MANAGEMENT

COMMITTEE, OAO GAZPROM

Viktor B. KHRISTENKOINDUSTRY AND ENERGY

MINISTER OF THE RUSSIAN FEDERATION

Igor Kh. YUSUFOVSPECIAL ENVOY OF THE RUSSIAN

FEDERATION PRESIDENT FOR INTERNATIONAL ENERGY

COOPERATION, AMBASSADOR AT LARGE OF THE MINISTRY OF

FOREIGN AFFAIRS OF THE RUSSIAN FEDERATION

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Yaroslav Y. GOLKOMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE INVESTMENT AND CONSTRUCTION DEPARTMENT, OAO GAZPROM

MANAGEMENT COMMITTEE

Alexey B. MILLERCHAIRMAN OF THE MANAGEMENT COMMITTEE, OAO GAZPROM

Alexander G. ANANENKOVMEMBER OF THE BOARD OF DIRECTORS, DEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, OAO GAZPROM

Elena A. VASILIEVADEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, CHIEF ACCOUNTANT, OAO GAZPROM

Alexander I. MEDVEDEVDEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, OAO GAZPROM, DIRECTOR GENERAL, OOO GAZPROM EXPORT

Andrey V. KRUGLOVDEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, HEAD OF THE DEPARTMENT OF FINANCE AND ECONOMICS, OAO GAZPROM

Alexander N. KOZLOVDEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, OAO GAZPROM

Valery A. GOLUBEVDEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, OAO GAZPROM

Oleg E. AKSYUTINMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE GAS TRANSPORTATION, UNDERGROUND STORAGE AND UTILIZATION DEPARTMENT, OAO GAZPROM

Sergey F. KHOMYAKOVDEPUTY CHAIRMAN OF THE MANAGEMENT COMMITTEE, DIRECTOR GENERAL OF THE SECURITY SERVICE, OAO GAZPROM

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Olga P. PAVLOVAMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE ASSET MANAGEMENT AND CORPORATE RELATIONS DEPARTMENT, OAO GAZPROM

Vasily G. PODYUKMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE GAS, GAS CONDENSATE AND OIL PRODUCTION DEPARTMENT, OAO GAZPROM

Vlada V. RUSAKOVAMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE STRATEGIC DEVELOPMENT DEPARTMENT, OAO GAZPROM

Kirill G. SELEZNEVMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE DEPARTMENT OF MARKETING, PROCESSING OF GAS AND LIQUID HYDROCARBONS, OAO GAZPROM, DIRECTOR GENERAL, OOO MEZHREGIONGAZ

Igor Y. FYODOROVMEMBER OF THE MANAGEMENT COMMITTEE, OAO GAZPROM, DIRECTOR GENERAL, OOO GAZKOMPLEKTIMPEX

Viktor V. ILYUSHINMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE DEPARTMENT OF RELATIONSHIPS WITH REGIONAL AUTHORITIES OF THE RUSSIAN FEDERATION, OAO GAZPROM

Nikolai N. DUBIKMEMBER OF THE MANAGEMENT COMMITTEE, HEAD OF THE LEGAL DEPARTMENT, OAO GAZPROM

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Information Policy Department

Phone: +7 (495) 719-46-00

Chapter 15Contacts

Contact Information

Full name: Open Joint Stock Company Gazprom

Short name: OAO Gazprom

Location: 16 Nametkina St., Moscow, Russian Federation

Postal address: 16 Nametkina St., 117997, V-420, GSP-7, Moscow

Phone: +7 (495) 719-30-01 (for inquiries)

Fax: +7 (495) 719-83-33

Official website: www.gazprom.com

E-mail: [email protected]

Photos by OOO Gazprom expo (Dmitry Kiselev, Marat Faizrakhmanov), OOO Gazprom dobycha Yamburg (Valentin Bashuk), ITAR-TASS (S. Velichkin, V. Rodionov, A. Panov), OOO Gazprom transgaz Surgut (Vadim Pikhnovsky), OAO Gazprom (Oleg Savchenko). 24.06.2009Based on the materials obtained from the Energy Research Institute (Russian Academy of Sciences), the Statistical Review of World Energy (ВР, June 2008), The 2008 Natural Gas Year in Review (Cedigaz, May 5, 2009), as well as the following journals: Gazprom, Gas Industry, Science and Technology in the Gas Industry, Oil and Gas Vertical.

Shareholder Relations

Contact person: Elena Lobatcheva

Phone: +7 (495) 719-27-86

Fax: +7 (495) 719-39-37


Investor Relations

Contact person: Mikhail Baryshnikov

Phone: +7 (495) 719-44-48

Fax: +7 (495) 719-35-41


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www.gazprom.com

Documents

Gazprom in questions and answears