Speech by Alexey Miller at the annual General Shareholders Meeting

Speech by Alexey Miller, Chairman of the Management Committee, at the annual General Shareholders Meeting of Gazprom, June 27, 2014

Gazprom at the leading edge

Dear shareholders!

In-depth materials regarding Gazprom and its subsidiaries' performance in 2013 are prepared for the General Shareholders Meeting, including the Annual Report, the Accounting Statements, the Audit Commission's Report, the Auditor's Report and other materials.

It is proposed that the Shareholders Meeting approve:

  • the 2013 Annual Report of Gazprom;
  • the 2013 Annual Accounting Statements;
  • the distribution of profit and the proposals by the Board of Directors on the amount of, time for and form of the dividend payout in 2013.

The Meeting is proposed to approve transactions of corporate interest, including those to be potentially executed in future during the usual course of business.

It is also proposed that the Meeting approve Gazprom's guarantees to South Stream Transport under the obligations of Gazprom Export within the agreement on gas transmission via the South Stream gas pipeline and on the creation of enabling conditions for efficient financing of the South Stream project.

The approval of the Company's Auditor, remuneration for the Board of Directors and Audit Commission Members, election of the Board of Directors and the Audit Commission Members are also on the agenda of the Meeting.

Draft decisions concerning these issues are contained in the ballots; additional information may be found in the materials for the shareholders.

Dear shareholders!

In 2013 we achieved excellent results. The behavior of Gazprom's main indicators demonstrates stability and reliability of the Company's business. The most important result of the year – a progress in the strategy aimed at promoting our leadership in the energy industry. We obtained a record-breaking level of gas supply to Europe. We became the leaders in developing hydrocarbon reserves of the Russian Arctic. We pioneered subsea gas production in Russia. Gazprom Group ranked first around the globe in terms of heat production. In the reporting year Gazprom took the lead among global companies by EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) results.

In 2013 we were improving business management and were taking steps to boost its efficiency, which allowed us to successfully close the reporting period, despite the complicated situation in the global, European and Russian economies. Gazprom demonstrated the financial indicator growth. Sales revenues grew by 4.9 per cent and net profit – by 8.8 per cent.

Last year's financial results enable us to increase the dividend amount. Following Gazprom's 2013 operating results, the Board of Directors proposed the dividend payout in the amount of RUB 7.2 per share, which exceeds last year's level by over 20 per cent!

Dear shareholders!

Only the companies capable of maintaining their endowment with reserves may be a success in the energy business. Gazprom is a successful Company of the kind. In the reporting year we made every effort to keep pursuing our strategy of leadership in replenishing and expanding the resource base.

In 2013 the reserve buildup through geological exploration totaled: 646.9 billion cubic meters of natural gas, 50.3 million tons of gas condensate and oil. The natural gas reserves recovery ratio stood at 1.33, condensate – 0.51, oil – 1.33.

In 2013 we obtained 17 licenses for blocks offshore the Kara, Barents, Chukchi and East Siberian Seas. In-place and forecast resources of these fields amount to 17.3 trillion cubic meters of natural gas and 1.3 billion tons of liquid hydrocarbons.

In this way, by the year-end Gazprom Group's commercial hydrocarbon reserves in Russia totaled 35 trillion 669 billion cubic meters of natural gas, 1 billion 381 million tons of gas condensate and 1 billion 815 million tons of oil.

Gazprom is the leader among global oil and gas companies in terms of proven natural gas reserves. Gazprom Group's share in the global and Russian gas reserves makes up 17 and 72 per cent respectively.

Dear shareholders!

In 2013 we produced 487.4 billion cubic meters of gas in Russia. Moreover, Gazprom's annual production capacities account for 617 billion cubic meters of gas. This is our reserve that will allow us to go on with our market diversification strategy.

We created a totally new gas production center in Yamal. New growth opportunities were made available once we tapped its resources. In 2013 we boosted production at the Bovanenkovskoye field from 4.9 to 22.8 billion cubic meters of gas. Together with bringing the Zapolyarnoye field to its full capacity, it enables us to offset a production decline in mature fields.

The existing backup in production capacities allows us managing seasonal peak loads on the gas supply system. During the last winter period the historical maximum of daily withdrawal rate – 1.79 billion cubic meters – was recorded within the UGSS. In the same period a new deliverability record was set in the entire history of domestic UGS facility operation – 725.2 million cubic meters a day.

The growth trend in seasonal peak consumption has been observed for several years already. That is why our actions aimed at building up gas production and UGS performance are indispensable for fulfilling the Company's mission, which is uninterrupted gas supply to consumers in Russia and abroad.

Speaking of financial results, it's worth mentioning that a comprehensive unit treating gas from the Valanginian deposits of the Zapolyarnoye field was brought to its design capacity. In 2013 it ensured a substantial growth in gas condensate production – 14 per cent up to 14.7 million tons.

Dear shareholders!

Gazprom spearheaded the Russian Arctic shelf development and subsea gas production in the Russian Federation.

In 2013 we launched Russia's first subsea production system in the Kirinskoye field, the Sea of Okhotsk, which makes it possible to produce gas without offshore platforms or other above-water facilities. Once the nominal capacity is reached, the field will produce 5.5 billion cubic meters of gas a year.

Following the strategy of expanding its geographic reach, in 2013 Gazprom started oil production from the Prirazlomnoye field in the Pechora Sea. In the Prirazlomnoye field we extract oil from a stationary platform installed in the pack ice. This is the first pioneer project for hydrocarbon resource exploitation in the Russian Arctic.

By commencing the commercial development of the Prirazlomnoye field, we set up another oil and gas production center – the Arctic one!

We also apply innovative production methods when developing hardly-accessible deposits in traditional oil and gas production regions, first of all, at fields with declining production. In the reporting year Gazprom Group continued developing the Achimov deposits of the Urengoyskoye field, pilot production from the Turonian deposit in the Yuzhno-Russkoye field and implementation of the Cenomanian project in the Medvezhye field.

Gazprom's capital investments into gas production totaled RUB 190.6 billion in 2013. This figure reflects, inter alia, the Company's efforts aimed at cost reduction and efficient use of financial resources.

Dear shareholders!

Gazprom Group is involved in 35 international projects for hydrocarbon exploration and production. In this manner we consolidate Gazprom's global status, enjoy the international division of labor and share experience.

In 2013 our subsidiary companies conducted geological exploration in Tajikistan, Serbia, Romania, Hungary and Algeria. We operated in the North Sea and in Vietnam, where Gazprom joined the relevant hydrocarbon production projects in October 2013.

In 2013 the portfolio of Gazprom Group's international projects was replenished with assets in Bolivia and Iraq. In addition, during the reporting year we signed an asset swap deal and obtained a 50 per cent stake in oil and gas exploration and production project in the North Sea.

Dear shareholders!

Gazprom operates a gas transmission system (GTS) unparalleled in size and quality. We consider Gazprom's GTS to be the means of meeting the interests of our shareholders and investors in terms of boosting the sales volumes and efficiency. The GTS ensures highly reliable and uninterrupted supplies and, thereby, increases Gazprom's attractiveness as a partner in energy projects. The size of our GTS is not irrelevant in this context. In the reporting year it conveyed 659 billion cubic meters of gas in Russia. This is more than annual gas consumption in the entire Europe!

In 2013 we went on effectively cooperating with the Government of the Republic of Belarus. Our subsidiary company Gazprom Transgaz Belarus undergoes successful development within Gazprom Group. We build up the efficiency and reliability of this transmission corridor leading to the European market.

Offshore transboundary pipeline systems constructed and operated with the participation of Gazprom Group are our special gas transmission assets. These are Blue Stream and Nord Stream. In 2013 they secured some 23 per cent of supplies under long-term contracts. Once South Stream is commissioned, the offshore gas pipelines will secure two-thirds of export supplies!

Dear shareholders!

Underground gas storage (UGS) secures sustainable supplies of our products and helps increase the economic efficiency of customer relations in Russia and abroad. Therefore, we act persistently and systematically to expand the existing UGS network.

By the 2013–2014 withdrawal season, the working gas capacity and the operating gas reserve was increased by more than 2 billion cubic meters in Russian UGS facilities as compared to the previous season. In this way, the operating gas reserve amounted to 69 billion cubic meters. This figure exceeds the annual gas consumption of such country as France.

Gazprom takes efforts aimed at improving UGS construction techniques. For instance, the first stage of Kaliningradskoye, the only Russian gas storage built in a salt cavern, was put onstream in 2013, thereby strengthening the energy security of the Kaliningrad Region.

The UGS sector is also materially important for our export operations. Amidst the persisting transit risks, the UGS facilities located near our foreign consumers make it possible to offset seasonal demand fluctuations and reduce the hazard of failures in gas transmission systems owned by foreign operators. Gazprom Group has access to European gas storage capacities in Austria, the UK, Germany, Serbia and Latvia. By the beginning of the 2013 winter season, Gazprom's UGS capacities in Europe amounted to 4.1 billion cubic meters, the daily sendout – to 51 million cubic meters.

Dear shareholders!

Being the main natural gas supplier to the Russian Federation, Gazprom pursues the mission of a guarantor of Russia's energy security and stable energy supply to the national economy. In parallel, we set the task of improving our production and marketing performance in the domestic market.

In 2013 Gazprom Group sold 243.3 billion cubic meters of gas domestically. We fully complied with our obligations to Russian consumers. At the same time, despite a decline in volumes, the receipts from gas sales grew 4.5 per cent – up to RUB 774 billion. This demonstrates our ability to achieve high performance in severe conditions of weak demand and tough competition.

We operate in the regulated market segment. Therefore, the Russian Government limited the price indexing for natural gas supplied by Gazprom in order to bolster the country's socioeconomic development over 2014 to 2016.

Our strategy of supporting the domestic consumer in the aim of boosting the potential demand growth corresponds with the Government's policy in this sector. Gazprom is a socially responsible company. Socially significant categories of consumers: housing and utility companies, public sector, population take a great share within Gazprom's sales structure.

Gazprom is reinforcing its standing in new regions of the Far East for the purpose of expanding its sales market. The work on shaping gas demand is carried out incessantly in the Kamchatka, Primorye Territories and the Sakhalin Region. The total gas sales in these three federal constituents rose by 28.6 per cent in 2013, a 37.7 per cent increase is expected in 2014.

Gazprom is pushing on with a large-scale gasification program. This project has an immediate impact on the economies of almost all the Russian regions and improves the living conditions of millions of people.

RUB 33.9 billion was allocated for the 2013 Gasification Program, the bulk of the funds were used for the construction of gas distribution networks.

The Program is showing real results: in 2005 the average gasification level in Russia was a little higher than 53 per cent and by 2013 it exceeded 65 per cent. In the rural area the gasification hiked to 25 per cent!

In 2013 the construction of 170 inter-settlement gas pipelines with a total length of 2.5 thousand kilometers was completed in 321 population centers across 41 Russian regions. The pipelines provided the gasification of some 72 thousand households and apartments and the conversion of nearly 400 boiler houses to natural gas.

In 2013 a state-run program for natural gas use as a vehicle fuel was launched in Russia. In fact, it means the evolvement of a new branch of the Russian economy – an NGV segment. By 2020 the annual consumption of compressed natural gas as a vehicle fuel is predicted to grow 30-fold – up to 10 billion cubic meters. Gazprom is intensively engaged in this activity through its special-purpose company Gazprom Gazomotornoye Toplivo – the single operator of the NGV market development.

The Company is committed to securing a significant and sustained growth of compressed and liquefied natural gas sales in the domestic and international NGV markets, while staying focused on creating the NGV infrastructure.

In 2014 the relevant activities are underway in 10 pilot Russian regions, with a total amount of investments exceeding RUB 1 billion. All in all, more than 2,000 gas filling stations will be available in Russia by 2020.

The substitution of conventional fuel in vehicles will permit, on the one hand, to expand the sales market for natural gas and, on the other hand, avoid the tariff growth in public transport, save maintenance costs and improve the ecological situation.

Dear shareholders!

Gazprom supplied Europe and Turkey with 162.7 billion cubic meters of natural gas in 2013 – a record high in the entire history of the Russian and USSR gas industries.

We increased gas supplies to Europe by 16.3 per cent compared to last year. We achieved such a result while other suppliers reduced their deliveries, i.e. Qatar – by 20.7 per cent, Nigeria – by 38 per cent, Algeria – by 19 per cent, the UK – by over than 6 per cent and Norway – by almost 5 per cent. We managed to increase our export supplies, despite a fall in annual European gas consumption, which averaged 1.5 per cent per year during the past three years.

Growing business in declining markets – this is the outcome to be envied by other top energy companies. What is our formula for success? The answer is simple and lies in our commitment to the strategic principles in our relations with business partners and consumers, as well as the right choice of priorities. We took advantage of gas trunklines in addition to a trading system based on long-term contracts. Under the present market conditions, we timely adjusted our contracts while leaving their fundamental principles unchanged, including the linkage to oil prices.

A decline in domestic gas production in European countries and the shift of LNG shipments from Europe to Asia, of course, also stimulated the growth of our own gas supplies. And we were able to seize this opportunity only because we had plenty of resources and transmission capacities.

Our production capacities are in demand this year too. The latest data reveal that our consumers are offtaking the amount of natural gas typical for the winter withdrawal season. We are quite confident to forecast excellent export figures for this year.

Dear shareholders!

In 2013 Gazprom's share in the European market was as follows: over 30 and 64 per cent in terms of gas consumption and import respectively. We have to deliver all the projects aimed at diversifying export routes in order to carry on our mission of being European gas supplier No. 1. The South Stream project underwent some important phases in 2013. The first joint of the Bulgarian section was welded in October and the construction of the Serbian section was launched in November. We completed bidding procedures and selected pipe suppliers for the first two strings of the offshore section. Pipe rolling plants in Russia and Germany are now manufacturing these pipes in a speed-up manner. Pipe laying contracts were signed with Italian and Swiss companies. Deepwater pipe laying operations will start in the Black Sea this autumn. Consumers in Southern and Central Europe are waiting to receive gas via South Stream.

South Stream suits the economic interests of all the participating countries and it will be built. Together with our partners, we are making all possible efforts to complete the project on time. First gas will be delivered via South Stream in late 2015.

Dear shareholders!

In 2013 we carried out a lot of activities, which resulted in signing a 30-year contract worth USD 400 billion to supply Russian natural gas to China. This contract is a record setting by its value and scale, and it also reshapes the global market and boosts the Program for Resources Development in Eastern Siberia and the Far East.

The Chayandinskoye field will be developed and the Power of Siberia gas trunkline will be built during the preparations for the contract execution. Upon completion of these projects, the required amount of natural gas will become available to secure export supplies to China and to expand the resource base of LNG projects aiming for fast-growing markets in Asia-Pacific.

Gazprom gradually implements a program for building up LNG production and export. An LNG plant (in operation under the Sakhalin II project, with Gazprom as its majority stakeholder) supplied international markets with 10.8 million tons of LNG in 2013. Gazprom Group strengthens its positions in the international LNG market and builds up its client portfolio, which is a prerequisite for expanding this segment of the gas business.

The final investment decision was taken in 2013 for the Vladivostok LNG project in the Primorye Territory. Moreover, the same year the Memorandum on implementing the Baltic LNG project was signed between Gazprom and the Leningrad Region Government. In 2013 Gazprom Group delivered 59.4 billion cubic meters of natural gas to the CIS worth RUB 423.5 billion.

Reduced gas consumption in Ukraine resulted in fewer natural gas supplies to the CIS in 2013. Unfortunately, the notorious events in Ukraine give us reasons to believe that this trend is likely to continue.

Dear shareholders!

In 2013 Gazprom Neft produced 50.6 million tons of oil, taking into account the volumes extracted by its affiliated businesses. The company's core producing units are developing fields in the Yamal-Nenets and Khanty-Mansiysk Autonomous Areas, the Omsk, Tomsk, Tyumen, Orenburg and Irkutsk Regions as well as the Republic of Sakha (Yakutia).

A subsidiary of Gazprom Neft is engaged in oil exploration and production in Serbia, Angola, Bosnia & Herzegovina and Hungary. Gazprom Neft is also involved in several Production Sharing Agreements and projects for hydrocarbon exploration and production in Iraq and Venezuela.

Gazprom Neft actively uses state-of-the-art production technologies. Over 3 years the share of high-tech wells rose from 4 to 35 per cent of the total wells drilled. The new technologies enabled the company to tap 22 million tons of hardly accessible reserves by the end of 2013.

In 2013 our investments in oil and gas condensate production more than doubled and exceeded RUB 189 billion.

Every year we increase the efficiency of associated petroleum gas use from 59 per cent in 2009 to 82 per cent in 2013. In 2013 Gazprom Group also advanced the refining process. The Omsk Refinery showed 91 per cent of the refining quality – an excellent result for the industry.

In 2013 all the Russian refineries of Gazprom Neft switched to the production of Euro 5 ultra-low-sulfur (ULS) fuels well ahead of the deadlines set by the Russian Government.

Gazprom Group consistently increases the sales of its refined products. Just like in the previous period, the revenues from these operations rose to RUB 1 trillion 350 billion as a result of our goal-oriented efforts aimed at increasing the output of high value added products.

Dear shareholders!

In 2013 Gazprom considerably enhanced its strategic leadership in the Russian power generation industry.

At the beginning of the last year Gazprom Group commissioned the Adler TPP – a new energy heart of Sochi. This brand-new thermal power plant became the core electricity and heat supplier to the main facilities of the Winter Olympic Games. At present, the Adler TPP supplies energy to Sochi.

The year of 2013 saw a milestone event – Moscow United Energy Company (MOEK), the leading infrastructure company of the Russian capital city and its suburbs, joined Gazprom Group. This made Gazprom the largest Russian company in terms of installed thermal capacity – in addition to the national leadership in electricity supplies.

Gazprom Group runs the largest investment program in the Russian power sector. Gazprom Group's generating companies – Mosenergo, TGC-1 and OGK-2 – undertake investment programs for commissioning and upgrading facilities under CSA contracts from 2007.

The installed capacity of our generating assets is 38 GW. The Company accounts for 15 and 22 per cent of the total electricity and heat output nationwide.

Dear shareholders!

The 2013 results brought Gazprom to the leading edge of the global energy sector. We still have a lot to do – adopt cutting-edge technologies, penetrate into new oil and gas production regions and gain access to new markets. We will keep on improving the operating and financial results, diversify our businesses, expand the range of products and develop supply opportunities to serve the interests of our shareholders.

Thank you for your attention!