Business process for investment projects
The establishment of Gazprom's status as a leader among global energy companies cannot be achieved without a well-functioning and up-to-date planning process.
Gazprom's development strategy outlines the top-priority areas and objects of investment, which includes investing into capacities for gas production, transportation, processing and storage to ensure their development in the most efficient and integrated manner possible. The strategy also provides for the adjustment of the amounts of planned investments into the development of natural gas production and transportation facilities in response to short-term and medium-term changes in the environment of both Russian and foreign markets.
Long-term planning at Gazprom is based on a system of Strategic Performance Targets (SPTs) balanced with regard to types of activities and serving as quantitative indicators of Gazprom's objectives aimed at achieving its strategic goals.
Gazprom's strategic planning system uses a two-tier SPT system. The list of Tier 1 SPTs was approved by Decision of the Gazprom Board of Directors No. 756 dated September 28, 2005, and comprises the following targets:
- economic profit growth;
- return on equity;
- equity/debt ratio;
- gas production and sales volumes;
- total gas reserves;
- reserve replacement ratio.
The reference values for Tier 1 SPTs are set by the Gazprom Board of Directors for the end of a ten-year planning period. Tier 2 SPTs give a detailed description of Tier 1 SPTs for areas and types of activities, establishing objectives for production, marketing, economics, in-house processes, innovations, and human resources.
In line with the Gazprom Planning Procedure Based on Strategic Performance Targets approved by Resolution of the Gazprom Management Committee No. 34 dated June 26, 2006, and with the purpose of achieving the established SPTs, Gazprom's Development Program for 10 years (gas business) (hereinafter the “Program”) is drafted on an annual basis, outlining several development scenarios for the Company.
The Program includes a list of top-priority projects, forecasts for the commissioning of production capacities and corresponding capital investments, and the main production, financial and economic indicators pertaining to Gazprom's development in each scenario.
During the drafting of the Program, the list of top-priority investment projects is drawn up in the course of selecting the baseline scenario of the Company's development. The main criterion for selecting the baseline scenario and the corresponding investment portfolio, provided that Tier 1 SPTs are achieved and the funding opportunities are available, is the generation of the maximum possible net present value characterizing the total economic effect for Gazprom at large.
In the course of investment activities and drafting of the investment program, investment projects at Gazprom are ranked in accordance with the approved Methodology of Ranking Top-Priority Investment Projects for a 10-Year Period.
The aim of the Methodology is to formalize the approach to selecting investment projects to be included into the Development Program.
The Methodology describes the goals of top-priority investment projects, the objectives of Gazprom's investment activities, the concept of a top-priority investment project, and the principles of categorizing top-priority investment projects for the long term by priority groups.
The primary goals of the top-priority investment projects are as follows:
- providing required amounts of gas supplies to consumers in Russia and abroad;
- boosting the Company's value for shareholders;
- reaching the established Tier 1 SPTs;
- increasing the profitability of core activities, including through cost optimization;
- diversifying sales markets, routes and methods of transportation and processing of gas and liquid hydrocarbons;
- improving the environmental safety of the Company's activities.
In its investment activities, Gazprom is transitioning to more efficient forms of securing financing for projects, for instance project financing. The principles of project financing enable the Company to share investment risks with other investors and optimize the long-term borrowing program, which takes into account the implementation of Gazprom's major projects.
Gazprom has in place the Investment Commission, which is a permanent collective body.
Its goal is to increase the quality of the investment programs being prepared and the efficiency of the investment activities of the Company and its subsidiaries, as well as to ensure a comprehensive approach to and coordination of the activities carried out by structural units when preparing proposals to be considered by the Chairman of the Management Committee, the Management Committee, and the Board of Directors in relation to the Program of Pre-Investment Studies, the Company's Investment Program, and the Investment Programs developed by subsidiaries for the Company's core lines of business.
The main objectives include the formation of consensual proposals regarding:
- the content and performance targets of investment programs;
- further implementation (including transition to subsequent implementation stages), suspension or withdrawal of investment projects;
- adjustment of approved investment programs in line with the results yielded by the monitoring of their implementation.
The Investment Commission delivers agreed draft investment programs to be submitted to the Chairman of the Management Committee in order for them to be provided for consideration by the Management Committee and the Board of Directors of Gazprom.