Gazprom applying efficient cost management system to investment program
The Gazprom Board of Directors took note of the information regarding the Company's pricing policy for the procurement of goods, works and services as part of the investment program execution, including pricing and further price monitoring.
Comprehensive control over expenses allows Gazprom to reduce significantly investment costs based on available financial capabilities of Company
The meeting noted that over the last two years Gazprom had fundamentally restructured the investment project design system and changed the basic principles for developing investment programs. An efficient long-term tool for cost management was designed. It ensures end-to-end control over all types of costs – from creating the demand for goods (works or services) to the actual execution of the agreement by each contractor. This enables the Company to plan more precisely and to significantly optimize the investments.
The costs are controlled step by step: during the investment planning, purchase pricing, procurement process and investment project execution.
The permanent Gazprom Investment Commission is responsible for the first stage. Its establishing in 2012 was a crucial milestone in the investment process restructuring. While working out the draft Investment Program, the Commission thoroughly analyses investment needs relying on a comprehensive evaluation of the investment projects and their ranking by priority, availability and a number of other factors. In fact, the Investment Commission acts as a large filter for identifying the most profitable investment projects, each having the maximum allowable limit of financing.
With a view to balance the items of the investment program, Gazprom took great efforts to stipulate new concepts for quoting and fixing investment costs. These concepts enable to define the reasonable amount of capital investments needed for the prioritized projects and the projects for maintaining the existing capacities.
Substantial savings are obtained due to setting the economically viable ceiling prices for goods (works, services). The Company adheres to the policy of restraining the prices for materials and equipment as well as for construction and installation works. These types of goods (works, services) account for the bulk of expenses in the investment activity. In recent years the growth of prices, at which Gazprom annually buys relevant materials and equipment is at least 20 per cent less than the prices predicted for manufacturers by the Russian Ministry of the Economic Development.
In 2013 some inventories, such as oilfield equipment, shut-off valves, gas compressor components were procured at 2008 prices. At the same time, prices for machinery grew by 1.3 times during six years, according to the Russian Ministry of Economic Development. Prices of high-tech machinery didn't exceed a 20 per cent rise compare to 2008.
Another important area of investment optimization is an active tendering while selecting suppliers and contractors. Thus, 22,173 contracts totaling RUB 914.8 billion were entered in 2013 based on bidding. The economic benefit (the difference between the lump-sum of marginal prices and that of signed contracts, including bidding costs) amounted to RUB 43.1 billion.
Applying the pricing formula for pipes contributed significantly to the overall savings of Gazprom. Hence, in 2013 Gazprom purchased large diameter pipes based on pricing formula 17 per cent discounted versus 2008 price. At the same time, according to the Russian Ministry of the Economic Development, the prices of metallurgy goods and readymade steel goods, including large diameter pipes, increased by 1.15 times during that period.
At the final stage Gazprom strictly controls the investment projects value through fixing agreed prices. A clear and strict adherence to contracts is continuously supervised, compliance with the time-schedule and other contract provisions are randomly monitored.
Comprehensive control over expenses, including new approaches to the investment program development allowed Gazprom to reduce significantly the investment costs based on the available financial capabilities of the Company. Ready to go the extra mile, Gazprom will proceed with enhancing the cost management system, including bidding procedure.