Speech by Alexey Miller, Chairman of the Gazprom Management Committee at the annual General Shareholders Meeting

Speech by Alexey Miller, Chairman of the Gazprom Management Committee at the annual General Shareholders Meeting

The Year 2009: a Time of Challenges and Opportunities

Esteemed shareholders, colleagues and partners!

On behalf of the Management Committee of Open Joint Stock Company Gazprom, and my personal behalf, I welcome you to the annual General Shareholders Meeting.

You have been given detailed materials about the activities of Gazprom and its subsidiaries in 2009: the annual report, the accounting statements, the conclusion of the Audit Commission, the auditor’s report and other materials.

It is proposed that the Shareholders Meeting approve:

  • the annual report of Gazprom for 2009;
  • the annual accounting statements of Gazprom for 2009;
  • distribution of profits, and the proposals of the Board of Directors about the size, schedule and form of dividend payouts for 2009.

It is also proposed that we approve changes in the Gazprom Charter and General Shareholders Meeting Provision, the amount of remuneration to the members of the Board of Directors and the members of the Audit Commission. The amounts of the remuneration are given in the materials that were presented to you.

It is proposed that PricewaterhouseCoopers Audit (ZAO) – the winner of the open contest among audit companies – be approved as the auditor for performing the obligatory annual audit of Gazprom’s accounting statements.

Esteemed shareholders!

Last year set before us the tasks of finding immediate responses to a whole range of challenges. Gazprom had to act taking into account the rapidly changing situation amid the global financial and economic crisis that peaked in the first half of last year. For Gazprom, the major external factor was a decline in our consumers’ demand and hence – a substantial reduction of the cash flow. Moreover, the global financial markets were actually closed in the first half of 2009.

Gazprom had to take drastic measures to maintain the stability of its activities and the ability to implement strategic projects.

Making every single challenge of the time an opportunity to develop the Company – that is how Gazprom’s task for last year may be formulated.

Back in late 2008 Gazprom developed its performance strategy under the crisis conditions, approved urgent cost optimization measures for 2009 and devised a plan to implement these measures. We realized that first of all we needed to secure a sufficient amount of liquidity to go on with our projects.

The crisis predetermined in many respects the features of the budgeting and investment processes in 2009 but didn’t disturb their consistency. The anti-crisis measures first of all included maximally detailed ranking of investment projects (and their components) by priority, as well as adjustment of their financing criteria. The investment program for 2009 was reduced “in cash” by 17 per cent versus the initial plan. Capital expenditures were cut by 30 per cent. But the reduction didn’t affect the Company’s major projects. Such an effect was achieved to a larger extent due to the tightening of our contractor-related procurement policy in view of the overall crisis situation.

Last year Gazprom applied new approaches to managing major projects. This enables us to scrupulously monitor the fund spending process and timely adjust the scope of investments. So, the crisis year 2009 was for us a time for approbating new efficient approaches to the implementation of investment projects that we will adhere to in the future.

Last year Gazprom continued enhancing the efficiency of free cash and debt portfolio management. We took measures resulting in a reduction of the overall debt beginning from the second half of 2009. As at the year end the debt decreased by RUB 136 billion compared to the third quarter. The downward debt trend persists this year as well.

Let us take a look at how the sustainability measures stepped by Gazprom under the crisis conditions have contributed to the progress in our main business activities and what new plans we can make for implementing the chosen strategy.

Esteemed shareholders!

In 2009 we continued the work aimed at building up our resources. Gazprom is the owner of the world’s richest natural gas reserves: in A+B+C1 categories they are estimated at 33.6 trillion cubic meters, which is around 70 per cent of Russia’s explored gas reserves and around one fifth of the world gas reserves!

For the fifth year in a row Gazprom has secured gas reserves replacement ahead of schedule. Based on the results of 2009 the ratio of reserves added through geological exploration amounted to 101.5 per cent.

Last year Gazprom obtained seven subsurface use licenses, including in eastern Russia. Last September we completed the deal to acquire a 51 per cent stake in SeverEnergia as part of the option agreement. I would like to highlight this project as an example of a partnership with foreign companies in the upstream sector. Such an approach enables, on the one hand, to accelerate the monetization of Gazprom’s reserves and, on the other hand, to gain access to new assets and new markets. This model will be applied on a broader basis.

Gazprom places a focus on geological exploration outside Russia. In 2009 prospecting activities in Uzbekistan resulted in the discovery of a new gas field – Dzel; the Bao Den gas and condensate field was discovered offshore Vietnam. Geological exploration was also performed in India, Venezuela, Libya, Algeria, Kyrgyzstan and Tajikistan. Similar activities within oil projects are underway in Cuba, Venezuela, Libya, Equatorial Guinea and Iraq.

Esteemed shareholders!

Our operations are market-oriented, we produce as much gas as requested by our customers. In 2009 Gazprom Group produced 461.5 billion cubic meters of natural and associated gas. This is 16 per cent down versus 2008.

In the first half of 2009 Gazprom limited gas production in response to the changing demand in the financial and economic crisis environment. However, from mid-2009 demand and subsequently production started to restore. Beginning in November the average daily gas production surpassed the 2008 levels. This trend also continued in the first quarter of 2010. Despite a certain slowdown in the second quarter in view of a complicated situation in the real sector of South and Southeast Europe’s economy, our goal for 2010 is to recover two thirds of the last year’s decline. This goal persists. We are positive that in future the Russian gas demand growth is inevitable.

Based on the above, we endorsed the 2011–2013 gas balance where gas production for 2013 is projected at 565.5 billion cubic meters. This figure exceeds the 2008 pre-crisis level. Moreover, it is a record for Gazprom over the past 13 years!

In order to meet prospective gas demand Gazprom allocated significant funds for top-priority gas production projects even in the crisis year 2009. We redistributed resources and placed the focus on the key construction targets.

In 2009 Gazprom kept executing the Yamal megaproject. The first step on the way of its practical implementation is the development of the largest gas field – Bovanenkovo.

Having earmarked the bulk of upstream investments for the Bovanenkovo field pre-development, in parallel we adjusted our plans for its startup in accordance with the demand trends.

The year 2009 saw intensive development of eastern Russia, in particular, pre-development of fields in Kamchatka. Gazprom also concentrated on the activities in the Arctic shelf, including the Shtokman project, as well as in the traditional production areas.

Furthermore, last year Gazprom launched its first stand-alone project for gas production from the Achimov deposits in the Urengoy oil, gas and condensate field, which are characterized by a much more complex geological structure than the traditionally developed Cenomanian and Valanginian deposits.

Esteemed shareholders!

Our world’s largest gas transmission system with the length of more than 160 thousand kilometers enables to meet the demand of both Russian and foreign consumers as well as to secure the highest levels of gas supply flexibility and reliability.

In 2009, owing to a slump in gas demand on Gazprom’s key markets and a decrease in production, the volumes of gas injected into the Unified Gas Supply System of Russia reduced by more than 100 billion cubic meters down to 589.7 billion cubic meters. At the same time, gas transmission by non-Gazprom Group companies decreased almost twofold down to 60 billion cubic meters.

Despite the foregoing, Gazprom continues developing and upgrading its gas transmission system. Up to 2030 an advanced gas transmission system between Bovanenkovo and Ukhta is planned to be built using unique and unparalleled domestic pipes that are designed for the 120 atmospheres pressure and can be operated in the harsh climatic conditions of the Far North. The total length of new pipelines to be used for Yamal gas transmission will exceed 2.5 thousand kilometers. The new gas transmission system will convey gas from the Yamal Peninsula fields in the amount surpassing 300 billion cubic meters annually. In future this system will become a key element of the Unified Gas Supply System!

When executing the Yamal project we introduce state-of-the-art innovations at gas transmission facilities. It should be noted that Gazprom is a leader among Russian energy companies in terms of the amount of finance channeled in research and development activities. Last year Gazprom spent RUB 7.4 billion for these purposes, 50 per cent more than in 2008.

In 2009 the work continued on the construction of the Gryazovets – Vyborg gas pipeline intended for feeding gas to the Nord Stream gas pipeline and providing gas supplies to consumers in Russia’s Northwest region. Over 600 kilometers of a 900-kilometer-long route are constructed to date.

The gas transmission routes diversification is a key direction of Gazprom’s strategy.

Our vision in this area is shared by our foreign partners. As an economically efficient company Gazprom assumes that gas should be sold first and then produced and conveyed, and therefore the implementation of projects is linked to the confirmed prospective demand for gas.

This April the first joint of the unique offshore Nord Stream thoroughfare was welded. This gas pipeline is not just a reference standard of successful international cooperation, it is a project of strategic significance for Europe, it is our real contribution in developing the energy sector of the continent. It is a guarantee of the energy security for millions of consumers and their confidence in the future.

Since the previous Shareholders Meeting we have achieved considerable progress with the South Stream project. Intergovernmental agreements of cooperation were signed with the partners from Bulgaria, Hungary, Greece, Serbia, Slovenia and Austria. Four joint project companies were set up. The feasibility study was developed for the South Stream offshore section, the preparation of feasibility studies for the gas pipeline sections in the territory of foreign countries continued according to schedule. Today we can say with confidence that the South Stream project is a success. The momentum has been gained. Gazprom will meticulously adhere to its plan – practical implementation of this transnational gas pipeline project will begin in 2013 and its construction will be completed no later than in 2015.

Gazprom’s efforts to build up underground gas storage capacities are also aimed at enhancing the gas supply reliability. In 2009 the Company operated 25 UGS facilities in Russia with the aggregate working gas volume of 65.2 billion cubic meters. At present, we are building salt cavern UGS facilities in the Volgograd and Kaliningrad Oblasts. The decision has been taken this week to speed up the UGS facility construction in Kaliningrad.

Together with its partners – the leading European energy companies, Gazprom takes active part in expanding UGS capacities on the continent.

At the moment, we are operating Europe’s largest UGS facility, Rehden, located in Germany and Haidach UGS facility in Austria, and are using storage capacities in the UK, Latvia and France.

In 2009 a total of 2.5 billion cubic meters of gas was injected into storage facilities located in the territory of foreign countries, and aggregate gas withdrawals exceeded 3 billion cubic meters.

Given that the UGS issue will be even more topical upon the Nord Stream and South Stream gas pipelines commissioning, Gazprom has already started developing gas storage projects in Serbia, the Netherlands and Germany, and is planning to construct UGS facilities in Hungary and the UK. In addition, we are performing feasibility studies for UGS projects in Italy, Romania, Turkey, Czech Republic, Slovakia and other countries.

All of the above gives us the opportunity to plan that the working gas volume of European UGS facilities with Gazprom’s participation will be in excess of 3.3 billion cubic meters by 2013 and will double to over 6.5 billion cubic meters by 2016 taking into account new storage capacities to be commissioned. At the same time, the daily UGS send-out will surpass 80 million cubic meters of gas by the same timeframe. This is equivalent, for instance, of our daily gas shipments to our largest consumer Turkey during the winter period.

Esteemed shareholders!

A temporary demand drop in Gazprom’s traditional sales markets and rescheduled commissioning of some of our upstream projects gave the Company an opportunity to relocate efforts and resources to the promising and growing Asia-Pacific market. This region plays a key role in diversifying the sources of proceeds from gas exports, further improving the economic efficiency of our marketing activities and assuring the supply flexibility.

For instance, Gazprom increased the financing of the Sakhalin – Khabarovsk – Vladivostok gas pipeline and began constructing it last summer.

Last year Russia started exporting liquefied natural gas for the first time in the national history: Gazprom launched a stand-alone LNG marketing project in Asia-Pacific on the basis of the Sakhalin II gas. Thus, Gazprom Group replenished its portfolio with long-term supply of LNG volumes until 2028.

The commercial talks with CNPC on Russian gas deliveries to China under long-term agreements have progressed significantly. Today we are at a principally new level in the relationships with our Chinese counterparts, our stances on the Russian gas price have come considerably closer, there is a clear understanding of the parties’ interests and a constructive dialogue is underway that will bring tangible results before long, we hope.

Actively moving in the Asian direction, Gazprom has managed to retain its positions in the Company’s traditional European market despite the crisis.

In 2009 Gazprom supplied Europe with 152.8 billion cubic meters of gas, 8.8 per cent less versus 2008, of which 140.65 billion cubic meters was delivered under long-term contracts. Gas demand fell down in Europe but not as much as expected due to the economic crisis. Today we may see an increase in Russian gas consumption by Gazprom’s key European customers such as Germany, France and Poland.

Speaking about our traditional sales markets, I would like to point out the Russian-French cooperation deepening in the energy sector. Gazprom and GDF SUEZ celebrated the 35th anniversary of Russian gas supply to France this March. Our partnership has always been based on the parties’ willingness to build long-term relations centered around the balance of interests between the supplier and the consumer. For several years France has been among top five Russian gas importers. In addition to gas supply, our interaction covers energy saving and energy efficiency, UGS facilities construction and operation, LNG sales and gas liquefaction technologies development, as well as scientific and technical cooperation.

And we keep the pace – last week GDF SUEZ joined Nord Stream as the fifth shareholder in the company operating the project while EDF will join another essential project, South Stream, before the end of 2010. Participation of the French companies in the gas pipelines construction proves their importance for ensuring steady energy supply to Europe.

We are building up our presence in the promising UK market. Having started with 260 million cubic meters, today Gazprom Group supplies the UK with 7.3 billion cubic meters of Russian gas per annum.

To be a target market for Nord Stream in future, the UK will be supplied with around 4 billion cubic meters of gas, which is 7 per cent of the project capacity.

Gas sales to end users are a key business area in the UK market. 1.6 billion cubic meters was supplied there in 2009. Direct gas deliveries to end users are an additional guarantee of Russian gas sales volumes in the liberalized UK market. The advantages of Russian gas were keenly felt by the British in the winter of 2010 when it was Russian gas that enabled to live easily through the cold spells.

We have repeatedly emphasized that the considerable upsurge we expect in European demand for Russian gas is related not only to gas consumption growth in the Old World, but to a dramatic drop in Europe’s indigenous gas production. Natural gas vehicles will become another important factor to influence the European market.

Among the alternatives to gasoline and diesel fuel natural gas is currently the fuel of choice due to its economic and environmental benefits, as well as resource abundance.

By promoting the use of natural gas as a transportation fuel, particularly the gas-to-liquids technology, we will not only increase consumption of our core product, which is natural gas, but reduce the price difference between energy production from gas and oil on a per unit basis.

At present, one calorie produced from gas costs less than the calorie produced from oil. The broad use of gas as a transportation fuel in the European markets will create the preconditions required for making the inter-fuel competition tougher and lead to an increase in the gas price for end users.

Esteemed shareholders!

The beginning of 2010 was marked with a very important event – Gazprom has started buying natural gas from Azerbaijan for the first time ever. According to the mutual agreements Azerbaijan has doubled gas supplies to Russia since this March. The absence of a transmission route to convey Azerbaijani gas to southern Russia and the substitution of Russian gas allow us to make a commercially attractive proposal to Azerbaijan.

Gazprom confirms its readiness to further purchase the gas volumes that our Azerbaijani counterparts can offer. This complies with the terms and conditions of the existing contract, which does not limit the maximum gas purchase volume.

We benefit from our strategic cooperation with the Central Asian states in favorable conditions for the gas purchases and the gas balance optimization. Last year Gazprom entered into the mutually beneficial agreements with Turkmenistan and Uzbekistan, as a result of which Turkmen gas supplies resumed and Uzbek gas purchases more than doubled.

It is necessary to point out the result of the hard work we have carried out in the former Soviet Union markets to shape the market-based interaction principles. Even though we experienced a significant drop by nearly 30 per cent in gas sales to the former Soviet Union states in the crisis year 2009, the proceeds increased 4 per cent to RUB 371.2 billion.

We have recently made significant progress in cooperation with Ukraine – a potential merger between Gazprom and NAK Naftogaz Ukrainy is being discussed. This step is historically predetermined. The gas transmission systems of Gazprom and NAK Naftogaz Ukrainy represent a single complex that can only be operated in close alignment.

Being an element of the global gas market, the Ukrainian gas industry has a future in case it develops jointly with the Russian gas industry. This is the only option that can guarantee the long-term loading of the gas transmission system and prevent the Ukrainian pipe from operating at a loss.

With our Ukrainian counterparts we are currently discussing a range of assets each party could potentially provide to set up a joint venture on a parity basis. This would be the first step on the way to the companies’ merger.

Esteemed shareholders!

The Russian gas market remains most important for Gazprom due to both the gas consumption volumes and the profitability potential. In 2009 Gazprom sold 262.6 billion cubic meters of gas in Russia. The Company managed to increase domestic sales proceeds by 4.3 per cent up to RUB 494.9 billion despite the falling demand.

The 2009 crisis made significant changes in the plans to reach equal profitability between the domestic and the export gas prices. The Russian Government and Gazprom worked out a reasonable decision to set a transition period from 2011 to 2013.

In this respect I would like to note that it is of utter importance to start using in 2011 the market-based gas price formula, which is to take into account the consumer properties of gas and the inter-fuel competition. It is reasonable to apply discount rates during the transition period, however, the formula-based pricing principle should be used at the moment as an indicator of the real market price for industrial consumers. Let me emphasize that the gas price for Russia’s population will remain non-market, state-regulated and subsidized for a long period of time.

Gazprom goes on implementing the Russian Regions Gasification Program. In 2009 we allocated RUB 19.3 billion for gasification facilities construction in 69 regions of the country. In 2010 Gazprom is planning to invest RUB 25 billion in gasification projects. As a result of the Program execution since 2005 the gasification level increased from 54 to 63 per cent.

Esteemed shareholders!

In 2009 Gazprom started a new stage in its oil business development. Under the agreement with the Italian company Eni, Gazprom increased its shareholding in Gazprom neft to 95.68 per cent by purchasing a 20 per cent stake. This allowed us to initiate consolidation of the oil field development activities within a single subsidiary company. In December 2009 Gazprom made a decision to transfer its subsurface use rights for the Novoportovskoye field and the Vostochny block in the Orenburg field to Gazprom neft.

We are going to significantly improve the efficiency of Gazprom’s oil business activities, which will strengthen the Company’s positions in the energy sector both domestically and globally.

Our oil business strategy remains unchanged: we are going to increase the output to 100 million tons of fuel equivalent by 2020.

Gazprom neft is planning to become a leader among oil producers in the northern Yamal-Nenets Autonomous Okrug and in the Barents Sea shelf, to enhance the operating efficiency on the basis of the available resources and intensively develop international projects so that they could account for approximately 10 per cent of the total hydrocarbon production by 2020.

Gazprom’s support allowed Gazprom neft to gain control over the oil refining assets of the Serbian company NIS, as well as over the Moscow Refinery. As a result, Gazprom Group’s oil refining and gas condensate processing capacities grew 25 per cent up to 75.4 million tons.

Last year Gazprom Group accomplished consolidation of its power generating assets within a specialized company, Gazprom energoholding.

Today we are Russia’s biggest owner of power generating assets.

The installed capacity of Gazprom Group’s assets amounts to 36 GW, which is 16 per cent of the total installed capacity in the domestic power generation industry.

Thus, three years after the Company’s Power Generation Strategy was adopted, Gazprom has become Russia’s biggest owner of generating assets and one of the top ten power producers in the world.

In 2009 Gazprom Group produced 138 billion kWh of electricity and 73 million Gcal of heat, which is 27 and 9 per cent higher versus 2008, accordingly. The aggregate net profit of Gazprom Group’s four generating companies grew 12 times up to RUB 12.4 billion as at year end 2009. The high efficiency of Gazprom’s power generation business is primarily supported by new combined-cycle gas turbine units, as well as combined heat and power plants.

The Company fully performs its obligations in relation to investment programs execution in the power generation sector. Over the recent two years Gazprom commissioned 1.1 GW of new capacities, which is 57 per cent of Russia’s total. In 2010 we are planning to commission nearly 2 GW of new capacities.

Esteemed shareholders!

Gazprom’s sales proceeds slightly reduced in 2009 to RUB 2.487 trillion. The Company’s net profit in 2009 was 3.6 times higher than the 2008 pre-crisis level and amounted to RUB 624.6 billion. Meanwhile, a considerable part of it is formed by the profit, which was received from the growth in the market value of Gazprom’s financial investments (primarily, Gazprom neft’s shares) and was not supported by a real cash flow. Taking the aforesaid into consideration, based on the 2009 operating results the Board of Directors recommends paying out dividends to the shareholders in the amount of RUB 2.39 per share.

Esteemed shareholders!

It was the crisis of 2009 when Gazprom was searching for and making use of new opportunities to develop and be more efficient. We did not retreat from our positions in the core businesses; on the contrary, we reinforced them. We were developing each and every activity area: resource potential, gas production and transmission, as well as power generation and oil businesses. This makes us confident in our efforts and our strategy. We see Gazprom as a leader of the global energy market and pursue a new global development strategy!

Thank you for your attention!

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