Gas purchases in Central Asian countries

Strategy

Natural gas from Central Asia is a crucial element in shaping Gazprom's resource base meeting the demands of Russia, the CIS and European countries.

Gazprom's strategy for Central Asia stipulates reinforcing the Company's positions in this region. This will allow retaining and expanding the share of Russian gas in the conventional European market, adequately responding to potential demand growth in the CIS countries, diversifying Gazprom's export portfolio in terms of the marketing geography, minimizing the investment burden as well as optimizing gas flows through the Unified Gas Supply System which was created, inter alia, with due regard of Central Asian sources.

Development

As part of the cooperation with Central Asian countries Gazprom is intent on contributing at best to the exploitation of gas resources and improvement of the gas transmission infrastructure in the region.

Gazprom is implementing the Top Priority Activity Program aimed at upgrading and expanding the Central Asia – Center (CAC) gas transmission system.

The CAC upgrading and expansion activities will be stepped up in two stages. Stage one is mainly related to the expansion of the system capacities in Uzbekistan. This will enable to convey around 55 billion cubic meters of Central Asian gas. At stage two it is projected to continue reconstructing the existing gas transmission system and start building the Pre-Caspian gas pipeline with 40 billion cubic meters in annual throughput.

Gazprom has launched a number of joint investment projects in Central Asian republics with regard to the restoration and development of gas facilities.

In particular, an agreement was entered into to rehabilitate gas production from the Shakhpakhty field under the PSA terms; the work is underway on the geological survey of subsurface resources in the Ustyurt region of the Republic of Uzbekistan. The Agreement on the general principles of geological survey of subsurface resources was signed with the Government of Tajikistan for the Rengan, Sargazon, Sarykamysh and Western Shaambary oil and gas prospects. In Kyrgyzia Gazprom obtained two subsurface use licenses for the Kugart and Eastern Mailu-Suu IV areas.

Volumes

In 2008 Gazprom Group acquired 66.1 billion cubic meters of Central Asian gas including 42.3 billion cubic meters of Turkmen gas, 14.2 billion cubic meters of Uzbek gas and 9.6 billion cubic meters of Kazakh gas. Central Asian gas was primarily supplied to Ukraine and Transcaucasian republics.

Cooperation with Central Asian countries

For the purpose of enhancing the reliability and economic viability of gas supplies to the domestic and international market Gazprom has established a sound legal framework of bilateral strategic cooperation with Central Asian countries in the gas sector. This legal framework enables to produce, process, transport and market Central Asian gas on the basis of an integrated export channel.

At present, cooperation agreements are in-place with Kazakhstan, Kyrgyzia, Tajikistan, Turkmenistan and Uzbekistan.

Cooperation with Kazakhstan

In June 2002 Gazprom and National Company KazMunayGas established on a par and registered in the Republic of Kazakhstan a 50/50 joint venture, KazRosGaz, for purchasing and marketing natural gas, processing it at gas plants in Russia and running other businesses.

In September 2006 the Gazprom Board of Directors approved setting up on a par with KazMunayGas a Russia-Kazakhstan joint venture based on the processing capacities of the Orenburg Gas Processing Plant (GPP).

In June 2007 Gazprom and National Company KazMunayGas entered into the Agreement on the major principles for the setting up of and participation in the joint venture based on the Orenburg GPP. The core business activity of the joint venture will be processing services for hydrocarbon feedstock from the Orenburg Oblast and the Karachaganak field on a processing fee basis.

On December 20, 2007 the Governments of Russia, Kazakhstan and Turkmenistan entered into the Agreement on the Pre-Caspian gas pipeline construction for the purpose of transporting natural gas from fields in the Caspian Sea and other locations in Turkmenistan and the Republic of Kazakhstan to the Russian Federation.

TsentrCaspneftegaz, a joint venture between Gazprom and Lukoil, performs geological exploration activities in the Tsentralnaya structure, Caspian Sea. Gazprom and Lukoil addressed National Company KazMunayGas with the proposal to create a joint venture that would act as the project operator for the structure.

Cooperation with Kyrgyzia

In May 2003 Gazprom and the Government of the Kyrgyz Republic signed the long-term Cooperation Agreement in the gas industry for a term of 25 years.

In January 2006 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. For the purpose of laying the basis for the activities of the joint venture in May 2007 Gazprom and the Government of the Kyrgyz Republic signed the Agreement on the common principles for the geological survey of subsurface resources, as part of which Gazprom obtained in February 2008 two subsurface use licenses for Kugart and Eastern Mailu-Suu IV areas.

In 2006 Gazprom neft registered in Kyrgyzia its subsidiary company Gazprom neft Asia. As of today, the company is largest operator in Kyrgyzia on the wholesale and retail markets of petroleum products and liquefied hydrocarbon gas.

In October 2008 Gazprom and the Republican Government signed the Memorandum of Understanding to develop cooperation within the privatization of a part of the state owned stake in Kyrgyzgaz. The MoU is targeted at fostering the mutually beneficial long-term cooperation in gas transportation and distribution in Kyrgyzia.

Cooperation with Tajikistan

Cooperation between the Government of the Republic of Tajikistan and Gazprom is regulated by the long-term (until 2028) Agreement on Strategic Cooperation in the gas industry, dated May 15, 2003 and the Memorandum of Intent on setting up a joint venture between Russia and Tajikistan, dated March 28, 2006.

Since July 2006 Gazprom has been engaged in activities in order to launch geological exploration in Tajikistan. The identification of commercially attractive hydrocarbon fields will permit to create a resource base for the joint venture's business in the mid-term perspective.

On June 10, 2008 Gazprom and the Government of Tajikistan signed the Agreement on the general principles of geological survey at oil and gas prospects in the Republic of Tajikistan (Rengan, Sargazon, Sarykamysh, Western Shaambary).

Cooperation with Turkmenistan

Russia and Turkmenistan entered into the 25-year Cooperation Agreement in the gas industry on April 10, 2003. Under the Agreement, Gazprom export (Gazprom's wholly owned subsidiary) and Gas Transmission Company Turkmenneftegaz concluded a long-term contract to purchase and sell Turkmen natural gas.

Turkmen gas is supplied through the Central Asia – Center system of transit gas pipelines crossing Uzbekistan, Kazakhstan and Russia. In accordance with inter-governmental agreements Gazprom acts as operator of Turkmen gas transit via Uzbekistan and Kazakhstan.

On December 20, 2007 the Governments of Russia, Kazakhstan and Turkmenistan entered into the Agreement on the Pre-Caspian gas pipeline construction for the purpose of transporting natural gas from fields in the Caspian Sea and other locations in Turkmenistan and the Republic of Kazakhstan to the Russian Federation.

On January 1, 2009 Gazprom agreed on the basic terms and conditions of gas supply from Turkmenistan for 2009 and signed an addendum to the long-term gas purchase and sale contract stipulating the use of a pricing formula based on European gas prices.

Cooperation with Uzbekistan

The Agreement on Strategic Cooperation in the gas industry was entered into by National Holding Company Uzbekneftegaz and Gazprom on December 17, 2002. In particular, the Agreement stipulates long-term purchases of Uzbek gas for the period between 2003 and 2012, Gazprom's participation in natural gas production projects under the PSA terms, as well as cooperation in developing Uzbekistan's gas transmission infrastructure and conveying Central Asian gas via the Republican territory. Cooperation under the PSA terms to rehabilitate gas production from the Shakhpakhty fields is a pilot project. The project related PSA became effective on April 14, 2004.

On February 5, 2005 Gazprom and Uztransgaz (sub-holding of NHC Uzbekneftegaz) signed the mid-term Agreement on natural gas transmission via the Republic of Uzbekistan over 2006 to 2010. The Agreement pursues the objective of transporting Central Asian and, first of all, Turkmen natural gas with the use of the Central Asia – Center (CAC) and Bukhara – Ural gas transmission systems running through the Republic of Uzbekistan.

As part of the January 25, 2006 Agreement signed between Gazprom and NHC Uzbekneftegaz geological survey is underway on subsurface resources in the Ustyurt region, Republic of Uzbekistan.

On January 1, 2009 Gazprom agreed on the terms and conditions of gas supply from Uzbekistan over 2009 and signed an addendum to the Uzbek gas supply contract stipulating a pricing formula based on average European gas prices.

Spot and swap operations on LNG market

Gazprom's marketing strategy for new markets stipulates boosting deliveries of both pipeline gas and LNG (liquefied natural gas). Expansion of Gazprom Group's positions on the LNG market commenced in 2005 as part of spot and swap operations (LNG/pipeline gas) carried out by Gazprom Marketing & Trading. The total volume of LNG sold on the spot basis reached 1.2 million tons (1.7 billion cubic meters) between 2005 and 2008.

In August 2008, taking into account the intensified LNG trade and sea-borne transportation operations, this business was integrated within a separate subsidiary – Gazprom Global LNG Ltd.

To speed up the process of entering the LNG market Gazprom studied possibilities for the participation in existing LNG projects through acquisition or swap operations. In 2007 Gazprom became the majority shareholder in the Sakhalin II project. In December 2008 Sakhalin II started exporting crude oil on the year-round basis from the special-purpose port near Prigorodnoye. In February 2009 Russia's first LNG plant was taken into operation. Its entire output is contracted under long-term arrangements (for 20 years and more) for further supply to consumers in Japan, South Korea and North America. The first carrier with Russian LNG arrived in Japan in April 2009.