The meeting addressed the issues regarding the application of the Third Energy Package provisions to Lietuvos Dujos, the safety of gas transit across Lithuania as well as the regional gas transmission system development.

In addition, the parties discussed natural gas pricing in Europe and the Baltic region.

Following the meeting, the parties agreed to hold a new meeting soon as well as to formulate a detailed list of issues of concern and to elaborate the Roadmap on cooperation in the gas sector.

Gazprom website Editorial Board

The Management Committee was tasked to proceed with:

• synchronizing the dates of regulated gas price adjustment and those of changes in the tax burden;
• balancing the debt burden of Gazprom and independent gas producers;
• differentiating the severance tax rates on natural gas and condensate in order to create a fair taxation regime for developing new and mature fields;
• resuming the sales of specified amounts of Gazprom's gas using exchange technologies;
• optimizing the costs in operating and investment activities of Gazprom;
• cutting the consumer indebtedness for the supplied gas;
• gradually raising the Russian gas exports within and beyond the FSU.

In November 2011 amendments were made in the Russian Tax Code. They stipulate a gradual increase in the severance tax rate on natural gas from RUB 237 per 1,000 cubic meters in 2011 to RUB 509, 582 and 622 per 1,000 cubic meters in 2012, 2013 and 2014 accordingly. These rates apply only to Gazprom as the owner of the Unified Gas Supply System facilities. For other companies these rates are adjusted through discounts and reach RUB 251, 265 and 278 in 2012, 2013 and 2014 accordingly.

The meeting highlighted that the increased severance tax for Gazprom would result in RUB 440 billion of extra tax payments over the said three-year period of time as compared to 2011.

Gazprom sells some 60 per cent of its commercial gas in the domestic market. At the same time, its gas prices for Russian consumers are regulated by the Government. As these prices are below the economically viable level, domestic gas supplies were unprofitable for Gazprom between 2000 and 2008. Only in 2009 the Company managed to recover its costs and attain minimum sales profitability. Later on, the profit increased, but it is still low and does not allow establishing the sources for reliable development of the Russian gas industry.

According to the Outlook for Socioeconomic Development of Russia for 2012 and the target period of 2013–2014, the increase in wholesale gas prices for Russian consumers from July 1, 2012 will boost Gazprom's revenues by RUB 50 billion, while the rise of the severance tax from January 1, 2012 will result in RUB 114 billion of extra tax payments on gas sales in the domestic market. Therefore, in 2012 the Company will pay to the budget both the entire extra profit gained due to a higher wholesale price in the domestic market and RUB 64 billion from its revenues.

With a view to fulfill the federal objectives on comprehensive development of gas supply to Eastern Siberia and the Far East, Gazprom obtained subsurface use licenses for a number of fields, namely the Chayandinskoye oil, gas and condensate field (Republic of Sakha (Yakutia)), the Kovyktinskoye gas and condensate field (Irkutsk Oblast), the Kirinskoye oil, gas and condensate field (Sakhalin Oblast), and others.

The gas production and transmission infrastructure is created from a scratch on the Far Eastern shelf and in Yakutia, the remoteness of the region leads to high procurement costs and the geological structure is more complex here than in Western Siberia.

Meanwhile, Gazprom has the same operating conditions in the East as oil companies that were entitled by the Government to benefits during the initial period of field development.

Thus, to have a success in Eastern gas projects, it is expedient to provide the Company with benefits comparable with those enjoyed by oil companies. First of all, over the project payback period it is necessary to abolish the severance tax on gas production on the Far Eastern shelf and in Yakutia, to introduce income and property tax benefits, to reduce export customs duties for pipeline gas produced on the shelf and in Yakutia. Besides, reducing or abolishing import customs duties is essential for the equipment and goods having no analogs manufactured in Russia for oil and gas projects in Eastern Russia.

Beltransgaz headquarters

The Management Committee was tasked to continue its efforts within the intergovernmental agreements signed on November 25, 2011 and related to the terms of natural gas supply to the Republic of Belarus and gas transmission via its territory, as well as Beltransgaz operations.

It was noted that Belarus was the second largest sales market for Russian gas among the republics of the former USSR. Based on the results of 2011, the Republic of Belarus was supplied with 20.6 billion cubic meters of gas (29 per cent of total sales in the CIS). Belarus is a strategically important link ensuring Gazprom's export deliveries to Europe: in 2011 the volume of Russian gas transmitted via the Republic amounted to 31.3 billion cubic meters, or 21 per cent of total exports to Europe.

Members of the Board of Directors underlined that participation of Russia and the Republic of Belarus in the Customs Union and their entrance into the Common Economic Space since 2012, had opened new horizons for the integration of both countries' economies, ensured a high level of coordination and additional opportunities for even more promising economic development.

The cooperation between Russia and the Republic of Belarus in the gas sector may be a good example of that. A switch to a new strategic level of the relationships in that sector gave the Republic of Belarus an opportunity to purchase gas nowadays and in the long term under the reasonable price for the country. Increasing Gazprom's stake in Beltransgaz to 100 per cent allowed solving a number of issues for both parties: providing effective integration of the Russian and Belarusian gas transmission systems, reducing transit risks in the Republic, giving additional guarantees for gas sales in the receptive market over a long period. Joining Beltransgaz also allowed Gazprom to play an active role in the gas infrastructure development in the Republic of Belarus – which is very important for its synchronization with the Company's facilities development in Russia.

Nowadays, Gazprom successfully implements a number of measures in the production, marketing, financial and economic activities of Beltransgaz, with a view to improve the company's efficiency. Inter alia, it is currently planning to audit the technical state of Beltransgaz-owned fixed assets and to elaborate some proposals on improving gas transmission and underground storage facilities, to prepare the company's development programs for three-year and ten-year periods, as well as the General Scheme of Gas Supply to the Republic of Belarus. In addition, the Beltransgaz corporate governance issues are now in focus, the documents required to rename the company as Gazprom Transgaz Belarus have been prepared. The main actions aimed to increase the operating efficiency of Beltransgaz will be taken before the end of 2012.

Shareholders meeting of Gazprom to take place on June 29

A list of persons entitled to take part in the Shareholders Meeting will be drawn up on the basis of the Gazprom Register of Shareholders as at the end of the business day on May 10, 2012.

The Board of Directors approved the lists of nominees for the Gazprom Board of Directors and the Audit Commission, to be voted for at the Shareholders Meeting.

The Board of Directors put the following items on the Shareholders Meeting agenda:

• approval of the Company’s Annual Report;
• approval of the Company’s annual Accounting Statements including the Profit and Loss Statement (Profit and Loss Accounts);
• approval of the Company’s profit distribution based on the results of 2011;
• on the amount, terms and form of the dividends payment based on the results of 2011;
• on the remuneration payment to the Board of Directors (Supervisory Council) Members (non-government officials) for their duties on the Board in the amount prescribed by the Company’s regulatory documents;
• election of the Company’s Board of Directors (Supervisory Council) Members;
• election of the Company’s Audit Commission Members;
• approval of the Company’s Auditor;
• on the remuneration of the Company’s Audit Commission Members.

The parties addressed technical capabilities and prospects of Montenegro to join the South Stream project that was a desirable goal of the country according to the announcement it had made in the end of the previous year. A decision was taken to elaborate the feasibility study for the gas lateral construction to Montenegro as part of the South Stream project.

Gazprom Group’s net profit expected to grow 25 per cent in 2011

Domestic gas consumption grew as well. Among the gas consumption leaders were the following sectors: agrochemistry – 1.9 billion cubic meter growth (almost 9 per cent) to 22.8 billion cubic meters, and cement industry – 0.6 billion cubic meter growth (almost 8 per cent) to 8.3 billion cubic meters. Power generating companies increased their gas purchases by 4.8 billion cubic meters to 168.1 billion cubic meters, with a 3.4 billion cubic meter increase from Gazprom’s gas transmission system that gave a total of 154.1 billion cubic meters.

More gas was supplied beyond the FSU. In 2011 supplies reached 150 billion cubic meters and surpassed the same figure of 2010 (138.6 billion cubic meters) by 11.4 billion cubic meters (8.2 per cent).

Gas supplies within the FSU grew by 3.08 billion cubic meters and totaled 71.1 billion cubic meters.

By the 2011–2012 heating season startup Gazprom raised the productivity of its underground gas storage (UGS) facilities to record heights. The maximum daily deliverability stood at 647.7 million cubic meters of gas by the start of the withdrawal season. Between December and February gas consumers may receive an average daily amount of up to 522.1 million cubic meters of gas. The operating gas reserve in the amount of 65.2 billion cubic meters (1.2 billion cubic meters up as compared to the previous year) was formed. This is a record high amount over the entire history of the domestic gas industry.

According to preliminary data, in 2011 Gazprom Group produced 32.28 million tons of oil (0.27 million tons more versus 2010) and 12.07 million tons of condensate (0.78 million tons or 6.9 per cent more versus 2010).

The Company’s forecasts say that Gazprom Group’s financial results – proceeds from sales, currency receipts, EBITDA and net profit – will be record high in 2011 over the entire corporate history.

Gazprom Group’s proceeds from sales are forecast to rise by USD 32 billion (or by 27 per cent) to USD 150 billion (USD 118 billion in 2010). At the same time, the currency receipts will grow by some USD 28 billion (or by some 40 per cent) – from USD 70 billion in 2010 to about USD 98 billion in 2011. The EBITDA will surpass the 2010 amount (USD 45 billion) by almost USD 15 billion (or by approximately 33 per cent) and will rise to about USD 60 billion. The net profit will grow by almost USD 40 billion that is almost 25 per cent more as compared to the 2010 figure (USD 32 billion).

The table below presents the unaudited consolidated interim condensed statement of comprehensive income prepared in accordance with IFRS for the nine months ended September 30, 2011 and 2010. All amounts are presented in millions of Russian Rubles.

Sales (net of excise tax, VAT and customs duties) increased by RUB 801,099 million, or 32%, to RUB 3,296,656 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. More detailed information on our sales for the nine months ended September 30, 2011 and 2010 is presented in the table below.

Net sales of gas increased by RUB 491,995 million, or 33%, to RUB 1,987,330 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

For the nine months ended September 30, 2011 net sales of gas to Europe and other countries increased by RUB 258,596 million, or 34%, to RUB 1,026,451 million compared to the nine months ended September 30, 2010. This mainly results from the increase of average realized prices in RUB terms (including customs duties) by 21% which was enhanced by the increase of the volume of gas sold by 8%, or 8.3 bcm.

Net sales of gas to FSU countries increased by RUB 168,538 million, or 58%, to RUB 458,608 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase of sales in this segment is explained by the increase of volumes of gas sold by 33%, or 15.6 bcm, which was enhanced by the increase of the average realized prices in RUB terms (including customs duties, net of VAT) by 15%.

Net sales of gas in the domestic market increased by RUB 64,861 million, or 15%, to RUB 502,271 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This is explained primarily by the increase in the average domestic price for gas established by the Federal Tariffs Service.

Net sales of refined products increased by RUB 213,012 million, or 42%, to RUB 717,723 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase was due to the increase of prices for refined products and increase of volumes sold.

Net electric and heat energy sales increased by RUB 38,097 million, or 19%, to RUB 237,545 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase in electric and heat energy sales is explained by the increase in the tariffs for electric and heat energy and by the increase in volumes.

In the nine months ended September 30, 2011 net sales of crude oil and gas condensate increased by RUB 23,072 million, or 16%, to RUB 164,438 million compared to the nine months ended September 30, 2010. The increase in net sales of crude oil and gas condensate primarily resulted from the Gazprom neft activities: net sales of crude oil increased by RUB 11,693 million, or 10%, to RUB 133,368 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, the increase of net sales of crude oil was mainly caused by the increase in oil prices. Net sales of gas condensate increased by RUB 11,379 million, or 58%, to RUB 31,070 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase of gas condensate sales was primarily due to the increase in the average realized prices and volumes of gas condensate sold.

In the nine months ended September 30, 2011 net gas transportation sales increased by RUB 15,306 million, or 23%, to RUB 82,501 million compared to the nine months ended September 30, 2010. The increase in net gas transportation sales was primarily due to the increase in the tariffs for transportation of gas for independent gas suppliers, and due to the increase in volumes of gas transported for independent gas suppliers.

Operating expenses increased by RUB 392,685 million, or 23%, to RUB 2,119,289 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

The major item in the total amount of operating expenses is «Purchased gas and oil» which increased by RUB 200,381 million. The increase in cost of purchased gas relates to the increase in volumes and increase in prices of gas purchased from third parties within Russian Federation and abroad.

In the nine months ended September 30, 2011 our profit for the period attributable to owners of OAO Gazprom totaled RUB 923,647 million which is RUB 269,926 million, or 41% higher, compared to the nine months ended September 30, 2010.

Our net debt balance (defined as the sum of short-term borrowings, including current portion of long-term borrowings, short-term promissory notes payable, long-term borrowings, long-term promissory notes payable and restructured tax liabilities, net of cash and cash equivalents and balances of cash and cash equivalents restricted as to withdrawal under the terms of certain borrowings and other contractual obligations) increased by RUB 173,413 million, or 20%, from RUB 870,993 million as of December 31, 2010 to RUB 1,044,406 million as of September 30, 2011. This can be explained by the raising of new long-term borrowings, the appreciation of USD and Euro against RUB and the decrease in cash and cash equivalents.

More detailed information on the IFRS consolidated interim condensed financial information for the six months ended September 30, 2011 can be found here.