Speech by Alexey Miller at the General Shareholders Meeting

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

Gazprom’s New Routes

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 subsidiary companies in 2011: 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 2011;
  • the annual accounting statements of Gazprom;
  • the distribution of profit;
  • the amount of remuneration for the Board of Directors and the Audit Commission Members;
  • the proposals by the Board of Directors on the amount of, time for and form of the dividend payment.

It is proposed that PricewaterhouseCoopers Audit – the winner of the open tender – be approved as the auditor.

Esteemed shareholders!

In 2011 Gazprom achieved the impressive results, today we can say with confidence that the new prospects for our business are opening before us on a global scale.

According to the results of the preceding year, Gazprom showed the record financial results: proceeds of the parent company exceeded RUB 3.5 trillion, 23 per cent more than in 2010. The parent company’s net profit (used to calculate dividends) grew 2.4 times versus last year to nearly RUB 880 billion. For the first time ever Gazprom Group’s net profit surpassed RUB 1 trillion. For the second year in a row we find ourselves on top of the world in terms of net profit among not only oil and gas companies, but also all other companies in the world!

During the reporting period Gazprom implemented major projects for the production base and transmission facilities expansion.

During the reporting period Gazprom implemented major projects for the production base and transmission facilities expansion.

A revolutionary new and one of the world’s largest gas production centers was set up on the basis of Yamal resources. Preparations have been completed to put the Bovanenkovo field onstream. Thus, Gazprom will move to a new output level and fully offset a natural decrease in gas production from the Cenomanian deposits of the Urengoyskoye, Yamburgskoye and Medvezhye gas fields. The Bovanenkovo field reserves equal 4.9 trillion cubic meters, the projected gas output – 115 billion cubic meters a year to be increased to 140 billion cubic meters in the future. The volume of gas produced from just one of our fields is comparable to the total amount of shale gas produced throughout the USA.

Bovanenkovo is the backbone of the new gas production center in Western Siberia. Yamal gas is our present-day reality and our future!

Bovanenkovo is the backbone of the new gas production center in Western Siberia. Yamal gas is our present-day reality and our future!

The first string of a new generation Bovanenkovo – Ukhta gas transmission system is ready to be fed with gas. The distinguishing feature of the gas trunkline is a unique combination of technological parameters. The gas pipeline is designed for the operating pressure of 11.8 MPa, made of unique 1,420 millimeter high-strength pipes with 33.4 millimeter wall thickness. Commercial-scale production and application of such pipes is unprecedented in the world.

Gazprom’s innovative technologies have more than doubled the gas pipeline throughput and ensured cost-effectiveness of the project.

Gazprom’s innovative technologies have more than doubled the gas pipeline throughput and ensured cost-effectiveness of the project.

In the future the Yamal gas transmission system will become a key element of the Unified Gas Supply System and will convey more than 300 billion cubic meters of gas a year from Yamal fields. We believe this is the main challenge for Gazprom – to successfully implement such large-scale and high-technology projects. No doubt we can do it, because we are a modern and innovative company!

Gazprom managed to successfully tackle the challenge of efficient operation of the gas fields located in the traditional Nadym-Pur-Taz region owing to involvement of deeper deposits. Thus, gas and gas condensate production from the Apt-Albian deposits of the Medvezhye field was launched last year as well as infrastructure facilities to produce gas and gas condensate from the Valanginian deposits of the Zapolyarnoye field were brought onstream. First Turonian gas was produced from the Yuzhno-Russkoye field and fed into the Unified Gas Supply System of Russia. We can responsibly say that in 2011 Gazprom reached new technological horizons!

The resource potential of Gazprom Group guarantees sustainable development of our business. In 2011 the gas reserves growth was most impressive over the last decade and reached the record of 720 billion cubic meters, 40 per cent above the production level, owing to geological exploration operations. The reserve replenishment ratio went up to 1.4.

Gazprom continues diversifying its markets and production areas. Geological exploration projects are being carried out in multiple countries of the world including Algeria, Libya, Bolivia, Venezuela, Vietnam, Iraq, Cuba, Serbia, Equatorial Guinea and Central Asian countries.

The current value of Gazprom’s audited reserves grew to USD 300 billion, a 11 per cent rise versus last year.

Esteemed shareholders!

The year of 2011 was the turning point in development of Russia’s Arctic shelf. The first offshore ice-resistant stationary platform was constructed, towed and installed at the Prirazlomnoye oil field. Oil production from the Prirazlomnoye field marked the launch of hydrocarbons production from the Arctic shelf.

The Shtokman field development will be the next milestone on the Arctic shelf. A new interaction format for the project developers will be approved in the coming days.

No doubt, the biggest achievement in 2011 was implementation of Nord Stream, the most important European gas transmission project. When it was commissioned, the Unified Gas Transmission System of Russia and the gas transmission system of Europe were directly linked for the first time ever.

All production goals were achieved, including construction of the offshore gas pipeline section and expansion of the relevant onshore infrastructure in Russia – construction of the Gryazovets – Vyborg gas pipeline and the unique Portovaya compressor station, the world’s most powerful one.

Commercial gas supplies to consumers via the first string have already started; the second string will become operational this autumn ahead of schedule. Everyone remembers well that we had problems with our main transit route last winter again, which reiterated the need to speed up the work on new gas export corridors.

We made important steps in promoting the South Stream project: the Shareholder Agreement was signed for the offshore section, the Consolidated Feasibility Study was approved, the permit was obtained for the South Stream gas pipeline construction via the exclusive economic zone of Turkey. The first element of the project – Banatski Dvor UGS facility, one of the largest underground gas storage facilities in Southeastern Europe – was put into operation in 2011. Construction of the South Stream gas pipeline with the maximum gas throughput of 63 billion cubic meters a year will start in December 2012.

Nord Stream and South Stream together with simultaneous development of Russia’s gas transmission system is the major contribution made by Gazprom towards expanding the international system for consumers’ access to hydrocarbon resources and strengthening the energy safety on the continent.

This holds true for the agreement on acquiring full ownership of Beltransgaz as well. Now Gazprom is the owner of all gas mains running via Belarus. A rise in gas transit volumes has already reflected this fact. The decisions made together with the Belarusian party enable reliable, smooth and efficient gas supplies and serve as an example of mutual interest in developing the gas industries of both countries.

Esteemed shareholders!

The Eastern Gas Program reached a new stage. The first startup complex of the Sakhalin – Khabarovsk – Vladivostok gas transmission system (GTS) was put onstream. The GTS is the key element of the Unified Gas Supply System of Russia being shaped in the East of the country. The GTS launch created conditions for large-scale gasification of the Far Eastern regions and gas supplies to Asia-Pacific countries. Joint efforts with our Japanese partners and South Korean companies are in full swing, negotiations go on with China.

Gazprom keeps pursuing the stated objective on shaping a strong resource base in Eastern Russia. The investment rationale for the Chayandinskoye field development in Yakutia and construction of appropriate gas transmission capacities will be finished in mid-August. We are planning to commission a new LNG plant in Vladivostok between 2016 and 2017, we are deliberating on other LNG capacities construction in this region.

Esteemed shareholders!

The financial results of our activity in the domestic market prove the strategic vision of the Russian market is correct. It is a prioritized sector for Gazprom. It will gain weight in our commercial indicators every year. The investments in gas transmission projects for supplying the domestic markets (those within the Common Economic Space) are considerably lower than for supplying consumers in Europe. The amount of supplies is twice as much as for the European market. The principle of equal profitability compared to gas export will come into effect in Russia, but a little while later than planned. The domestic market has the biggest growth potential in the medium term.

Gazprom is expanding the scale of the Russian Regions Gasification Program. In the recent seven years the Company’s investments in building inter-settlement gas pipelines have surpassed RUB 146 billion. Nowadays, the average gasification level in Russia is above 63 per cent. Obviously, this work will only gather pace and we will closely cooperate with regional authorities while doing it. The practice of using regional synchronization schedules has proven its efficiency and will be maintained.

This year the Company has allocated a record amount of investments for gasification of 69 Russian regions – almost RUB 38 billion versus RUB 29 billion in the last year. We have reached a new quality level with the Gasification Program and this calls for new approaches to its implementation. In this context, general gas supply schemes and regional gasification programs are being updated with due account, among other things, for methane use as a motor fuel. We may say that the NGV Fuel Development Program will be a part of the Gasification Program.

Control of air pollution by motor vehicles is a challenge faced by the entire society. Our Company’s objective to expand the NGV fuel sales market to the extent possible helps tackle this challenge. Natural gas is a most eco-friendly fuel for vehicles. It is a core and profitable business for us. Deployment of a gas filling stations network is becoming an important line of our business.

It is to be noted that methane use in motors is not limited to vehicles – it also includes agricultural equipment, locomotives, river and sea vessels.

Esteemed shareholders!

We see an important issue – increased volatility of weather cycles. Anomalously cold winters and hot summers are becoming more usual, thus bringing additional challenges to the power and gas industries especially in the cold peaks of winter. We meet the challenges by using underground gas storage (UGS) facilities.

In 2011 Gazprom was taking intense efforts to develop the UGS system as well as retrofit and expand UGS capacities. The daily deliverability of UGS facilities was increased to the record level of 647.7 million cubic meters of gas as at the withdrawal season startup. The operating gas reserve was stockpiled and reached the maximum amount in the gas industry history – 65.2 billion cubic meters. By developing UGS capacities, we raise the flexibility and reliability of supplies primarily to the domestic market and to European markets as well.

In Europe we are also planning to boost UGS capacities and bring them to 5 billion cubic meters of working gas volume by 2015.

In 2011 Gazprom was one of the two suppliers that built up the volume of export to the European Union amidst the declining gas production in Europe. In 2011 under contracts with Gazprom European consumers purchased 150 billion cubic meters of natural gas, which was 8.2 per cent more than in 2010. Thus, Gazprom increased its European market share by 4 per cent to 27 per cent.

Our top priorities in export markets include ramping up liquefied natural gas (LNG) volumes in Gazprom Group’s marketing portfolio. In 2011 Gazprom’s subsidiaries sold 2.3 million tons of LNG. LNG production within the Sakhalin II project grew to 10.67 million tons.

Gazprom will keep efficiently enforcing the provisions of the Law on Unified Export Channel on the basis of long-term contracts in the long run as regards pipeline gas and LNG supplies. New opportunities are emerging in this market. The LNG demand is increasing in traditional markets: Japan, Korea and Taiwan. New large consumers – India and China – are demonstrating a great potential. LNG markets are expanding in Singapore, Pakistan, Philippines, Thailand and Bangladesh. It is forecasted that traditional LNG exporters – Indonesia, Malaysia and Oman – will provide limited supplies. In the nearest future, Gazprom will become a prominent player in this market.

Esteemed shareholders!

The oil sector is the second-important line of Gazprom’s business. The decision on building a vertically integrated oil business based on Gazprom Neft has been absolutely right. The Company is steadily moving ahead in implementing its strategic plans and has already outperformed some of them. Over the next years Gazprom Neft will be focused on retaining the high rates of hydrocarbons production, development of new areas in Russia and other countries, improving the quality of produced petroleum products and oil refining advancement. The Gazprom Neft gas filling network will be further promoted. We will significantly reinforce our positions in the retail market in Russia and the CIS.

The strategic guidelines for Gazprom Neft development stipulate that by 2020 the company’s annual hydrocarbons output will amount to 100 million tons, the annual oil processing volume – to 70 million tons.

The strategic guidelines for Gazprom Neft development stipulate that by 2020 the company’s annual hydrocarbons output will amount to 100 million tons, the annual oil processing volume – to 70 million tons.

Gazprom retained high investments in the domestic power industry. Gazprom’s shares in domestic heat and power generation currently make up 8 and 17 per cent accordingly.

Gazprom is the largest investor in the power industry. In 2011 the Company built 1.9 GW of combined cycle generating capacities, that was more than RAO UES had built over the entire period of its existence, as we repeatedly highlighted. Gazprom built more during one year only!

The Adler TPP is a landmark facility we are going to commission within the next few months. It is an important energy source for the Olympic venues.

Esteemed shareholders!

Natural gas is firmly establishing itself as the most reliable energy carrier capable of meeting a wide range of global energy challenges. This helps us face the future with confidence and optimism. Gazprom will further maintain its business as market driven. Our underlying principle is that gas should be sold first and only then the infrastructure has to be built and supplies have to be provided. This ensures the necessary stability of our business and security of investments. The results of the last year of 2011 are another proof of this principle. We attained great financial and operating results despite a complicated situation in gas markets.

Based on the 2011 operating results the Gazprom Board of Directors recommends paying out dividends in the amount of RUB 212.4 billion, which is almost RUB 9 per share. The 2011 dividends will break the all-time records and constitute 230 per cent of the last-year level.

Thank you for your attention!