ALEXANDER ANANENKOV, DEPUTY CHAIRMAN OF GAZPROM’S MANAGEMENT COMMITTEE: ALL GAS PRODUCTION, TRANSMISSION AND TRADING SUBSIDIARIES WILL REMAIN UNDER GAZPROM’S 100% OWNERSHIP

14 April 2004
Izvestia

In 2002, Gazprom’s executives informed of their categorically being objected towards reforming the Gas Concern in the way UES (Unified Energy System) of Russia was. The Concern’s top management received Vladimir Putin’s backing, who promised not to dismember Gazprom. But investors reproached Gazprom for its non-transparent business and excessive amount of non-core assets. Gazprom’s leadership announced, in response, its own restructuring process being in line with the existing vertically integrated structure. In March 2004, Alexey Miller, Gazprom’s Management Committee Chairman maintained that the 1st stage of restructuring was over and the company was switching to the 2nd stage. Alexander Ananenkov, Deputy Chairman of Gazprom’s Management Committee has disclosed the gist of the 2nd phase of intra-corporate reforms to Olga Gubenko, reporter with the Finansoviye Izvestia newspaper.

-Gazprom’s leadership objects towards dividing the company into separate businesses, ie towards executing the restructuring plan brought forward by the Economic Development and Trade Ministry. What is Gazprom’s top managers’ understanding of intra-corporate reforming plan then?

-Our actions are aiming to promote Gazprom’s effective development as a vertically integrated company. The governance system reform being in progress is expected to result in full financial transparency of our various businesses but all the gas production, transmission and trading affiliates will still be Gazprom’s wholly-owned subsidiaries. This move will guarantee solidification of a vertically integrated structure, enhance the Gazprom Group’s transparency and sustainability and allow us to make a more effective use of cost management system.

-A month ago Alexey Miller announced the initiation of the 2nd stage of Gazprom’s restructuring. For how long has the 1st stage been going on and have there been so far any changes within the company?

-Gazprom has so far been for several (roughly 3) years conducting intra-corporate reforms aiming to enhance the parent company’s business efficiency. Major challenges of the 1st stage have already been met: the governance structure has been improved, responsibilities clearly identified, regulations developed and budget planning system introduced.

-According to Gazprom’s CEO, the subsidiaries dealing with all intra-corporate businesses will be unbundled within the 2nd phase of reforms. What is the concept here?

-The 2nd phase of intra-corporate reforms pursues the objective of enhancing Gazprom’s operating efficiency as a vertically integrated company carrying on activities along the entire gas chain, including gas exploration, infrastructure construction, production, processing, transmission, underground storage and marketing. The crucial task here is to optimize the core business management structure at the subsidiaries’ level.

Each subsidiary must run its core business, fulfill one function and not squander resources to related and sometimes non-core activities. We want all the core businesses to be consolidated within separate companies, achieving, thus, full transparency of financial flows.

-Some time ago the Economic Development and Trade Ministry proposed to found an integrated gas transmission firm based on Gazprom’s 17 gas transmission subsidiaries. Do you still keep this proposal in mind?

-There’s, indeed, been a proposal to set up one gas transmission subsidiary instead of the existing 17. But we should scrupulously think through several options to come up with an optimum model in the end. Let us judge by key objectives of said reforms. We can single out, at least, 3 of those: enhancing the entire gas transmission network efficiency, attracting finance for the network upgrading and establishing prerequisites for the transparent gas transmission tariff setting. As a result, the whole gas industry will obtain an opportunity to enter a qualitatively new stage of development. The Government does not doubt it, either.

Based on the above-mentioned, we’re working through 3 options: conserving the existing quantity of gas transmission subsidiaries, setting up 1 or 3 new gas transmission businesses.

-Have you already come up with a certain plan on gas transmission subsidiaries’ restructuring? What will be Gazprom’s leadership’s 1st step in this direction?

- We’re planning, for instance, to hand over the existing gas distribution grids owned by gas transmission subsidiaries to Regiongazholding. This move will allow us to raise, in particular, the reliability of gas deliveries to consumers. In addition, the gas main infrastructure maintenance agencies must be “taken out” of gas transmission firms with the view of potential foundation of independent legal entities that will participate in contests awarding contracts to render respective services to gas transmission companies. Besides that, we consider it as indispensable to single out social facilities.

As a consequence, we’ll have non-operational expenses cut and our subsidiaries’ costs transparent, that is to say, we’ll know exactly, how much is spent on transmission, storage, repairs, maintenance and social needs.

-Will all this make an impact on gas transmission tariffs?

-On having transparent gas transmission expenses, we’ll create conditions for setting economically substantiated transportation tariffs. Thus, we’ll lay foundations for switching from the wholesale gas price to gas transmission tariff regulation.

-Gazprom has recently stated to establish soon a wholly-owned petroleum company. Is this step being made within the 2nd stage of intra-corporate restructuring, as well?

-Yes, it is. Before this year-end, we intend to found an oil production subsidiary to be initially wholly-owned by Gazprom and be later on transformed into an independent firm. This strategy is fully congruous with the 2nd phase of restructuring challenges and will allow us to enhance the efficiency and transparency of control over this sector.

At present, Gazprom’s gas production units are being involved not only in the development of gas & condensate but oil & gas and oil fields, as well. In the nearest future, Gazprom’s oil recovery will grow due to commissioning the Prirazlomnoye, Novoportovskoye, Tazovskoye and other oil and oil & gas fields. The oil field development techniques and technologies radically differ from the gas and condensate field development methods. And, therefore, we believe that by separating oil production from the hydrocarbon extraction process, we’ll achieve substantial technological and economic progress.

-Alexey Miller commissioned Gazprom’s top management to finalize the 2nd stage of restructuring-oriented paperwork process until year-end 2004. Does it mean the 2nd stage of Gazprom’s intra-corporate reforms will start in 2005?

-Undoubtedly. First structural changes will be made at the start of the forthcoming year, with some elements related to the intra-corporate governance structure improvement to be introduced this year already.