Speech by Alexey Miller at annual General Shareholders Meeting of Gazprom

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

The Power of Growth

Dear shareholders!

In-depth materials regarding Gazprom and its subsidiaries’ performance in 2014 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 2014 Annual Report of Gazprom;
  • the 2014 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 2014.

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

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 2014 Gazprom laid the basis for a new bound forward:

  • we expanded our resource base;
  • built up our production capacities;
  • maintained the lead in the Russian and global gas industry;
  • boosted our share in the European market;
  • made a crucial breakthrough to the Asian market.

Gazprom continues progressively improving its financial performance. Thus, an average annual growth of Gazprom’s EBITDA has equaled 15 per cent in the US dollar equivalent over the recent ten years, while an average growth of this indicator among 10 global public oil & gas majors equaled only 2 per cent. In 2014 Gazprom made it to the top three companies in terms of EBITDA. In the reporting year it reached some USD 52 billion, which is equivalent to RUB 2 trillion.

Gazprom continues progressively improving its financial performance.

At the same time, sales revenues grew by 6.5 per cent as compared to the last year and exceeded USD 147 billion or RUB 5.6 trillion. An upward trend in sales revenues allows Gazprom to secure high volumes of operational cash flow which fully covers our capital investments.

Gazprom is a financially sound Company. In terms of correlation between the loan capital and equity capital, we meet the target outlined in the corporate system of strategic objectives with a certain margin. With the permissible level being 40 per cent, it equals only 23.4 per cent.

Based on the 2014 operating results, the Board of Directors proposed the dividend payout in the amount of RUB 7.2 per share – just the same as last year. In this way we allot about 90 per cent of net profit under the Russian Accounting Standards to dividend payouts.

This decision made by the Board of Directors shows the Company’s commitment to the policy of paying out steady dividends. It allows Gazprom to keep the lead among Russian oil & gas companies in terms of the total dividend amount and dividend payments into the Russian budget.

Dear shareholders!

Our confidence in the future is underpinned by a very notable factor, which is a continuously growing resource base. As of late 2014, Gazprom’s explored natural gas and liquid hydrocarbons reserves (Russian classification) amounted to 36.1 trillion cubic meters and 3.3 billion tons accordingly.

Gazprom’s resource base is steadily growing due to a well-chosen strategy and a high quality of geological exploration activities. Since 2001 we have discovered 40 new fields and 90 new deposits. In the reporting year these included the Vostochno-Imbinskoye gas field and 30 deposits, the largest one of which is located in the Jurassic deposits of the Pestsovoye field.

Gazprom’s resource base is steadily growing due to a well-chosen strategy and a high quality of geological exploration activities.

In 2014 due to geological exploration activities the gas replenishment coefficient hit the record level of 1.86, while the liquid hydrocarbon (condensate and oil) replenishment coefficient amounted to three (3.0).

Dear shareholders!

In the reporting period the volume of gas production by Gazprom Group covered our consumers’ demand to the full. In 2014 Gazprom produced 443.9 billion cubic meters of gas – less than in 2013. A drop in production volumes was caused by a warm winter of 2013/2014, abnormally warm autumn and early winter of 2014 as well as a decline in gas demand in the CIS and beyond. However, this year’s trends confirm our forecasts: gas demand will be growing, and Gazprom is ready for it.

Providing the country with fuel and smoothly passing through winter peak consumption periods in all circumstances and under any conditions is a high mission of Gazprom, and we successfully perform it by producing gas and oil, constructing gas pipelines and underground gas storage facilities.

In 2014 maximum daily deliverability during peak consumption periods reached 1 billion 648 million cubic meters. In February 2014 the historical maximum of daily gas supply to consumers – 1 billion 790 million cubic meters – was recorded within the UGSS area. But presently our actual production capabilities reach 617 billion cubic meters of gas a year.

Providing the country with fuel and smoothly passing through winter peak consumption periods in all circumstances and under any conditions is a high mission of Gazprom, and we successfully perform it.

In future the production level will be maintained both through the commissioning of new capacities in the Yamal Peninsula and the advancement of the Nadym-Pur-Taz region. We will engage the Achimov deposits of the Urengoyskoye field; the Valanginian deposits of the Pestsovoye field are under development. Our short-, mid- and long-term plans include the gas resource exploitation in the Ob and Taz Bays, offshore the Barents and Kara Seas and the Sea of Okhotsk as well as in Eastern Siberia and the Far East.

Not only do we develop fields. We create gas production centers, where hydrocarbon riches give rise to the regional production and industrial development. In 2014 comprehensive plans were laid out and approved for creating gas production, transmission and processing capacities in the Yakutia and Irkutsk centers. In three years the basic field for the Yakutia center – Chayandinskoye – will be brought onstream on a phased basis. Kovyktinskoye will become the basic field for the Irkutsk center.

No less important are our activities within the Eastern Gas Program on the Pacific Ocean coast, where we develop the capacities of the Sakhalin gas production center. The development priorities here are the fields of the Sakhalin III project. Its gas will form the resource base for the Sakhalin – Khabarovsk – Vladivostok gas transmission system. In October 2014 Gazprom launched the commercial development of the first field within the Sakhalin III project – Kirinskoye.

The gas production center we are advancing in Yamal should be pointed out in particular. There, in severe Arctic latitudes the operations securing a sound future of the Russian gas industry are well underway.

For instance, in December 2014 we commissioned a new gas production facility with an annual capacity of 30 billion cubic meters a year in the Bovanenkovskoye field. Earlier, in 2012 the production facility with an annual capacity of 60 billion cubic meters of gas was launched there. Therefore, the production potential of the Bovanenkovskoye field was boosted to 90 billion cubic meters a year. It is commensurate with the volume of Gazprom’s gas supply last year to the three major international consumers of Russian gas – Germany, Turkey and Italy.

A total of three gas facilities will operate in the field with a total annual capacity of 115 billion cubic meters of gas.

Dear shareholders!

Exploiting the resources of the Arctic is currently among the priorities of Russia’s economic expansion.

Exploiting the resources of the Arctic is currently among the priorities of Russia’s economic expansion. Today Prirazlomnoye is the only field in the Russian Arctic shelf where oil is produced, and it is us – Gazprom – that produce it. Our oil has its own name – Arctic Oil. We became the pioneers of developing the hydrocarbon riches of the Russian Arctic and producing gas in the shelf.

Gazprom actively advances liquid hydrocarbon production. In 2014 Gazprom Group and its affiliated companies boosted oil and gas condensate production to 53.5 million tons and 16.8 million tons respectively. Gas condensate is a premium product as compared to oil due to a low content of heavy impurities. Within three years to come, we plan to build up gas condensate production by more than 10 per cent.

We became the pioneers of developing the hydrocarbon riches of the Russian Arctic and producing gas in the shelf.

It should be mentioned that in 2014 we produced first oil from the Chayandinskoye field, which has a special place in our plans, that’s why it is so important that we have already obtained some practical results here.

Gazprom Neft is a Gazprom Group subsidiary focused on oil production. In 2014 Gazprom Neft boosted oil production and refining, built up its proven reserves as well as enhanced its premium sales of oil products.

It is worth mentioning that Gazprom Neft increased its oil production in mature fields by applying new technologies and involving hard-to-recover reserves.

Gazprom Neft also taps into unconventional reserves, particularly, the Bazhenov formation. Technologies are being tested there. According to estimates, the Bazhenov formation resources exceed the shale oil reserves in North America. Gazprom Neft plans to launch the unconventional resources development in 2018.

Dear shareholders!

Improving the efficiency of feedstock processing and introducing high value added products to the market is among our priorities. That’s why we develop the production capacities, bringing them in line with hydrocarbon production volumes and increasing the recovery of valuable components.

Improving the efficiency of feedstock processing and introducing high value added products to the market is among our priorities.

In 2014 new process trains were commissioned at the Surgut Condensate Stabilization Plant; the plant capacity spiraled up to 14.1 million tons.

With a view to diversify the product range and increase the quality of products, we develop the feedstock recycling facilities in Astrakhan and Salavat. The upgrade of main refineries of Gazprom Neft – the Omsk and Moscow ones – is in progress. We switched to Euro 5 ahead of the schedule outlined in the technical regulation.

In 2014 we boosted oil and unstable gas condensate processing to 68.1 million tons, production of oil derivatives – to 53.6 million tons, liquefied petroleum gases – to 3.4 million tons, helium – to 4 million cubic meters.

Dear shareholders!

The year 2014 turned out to be warm. Monthly average ambient temperatures considerably exceeded the long-term average figures. As a result, aggregate gas consumption in Russia has dropped in 2014. It affected our work in the Russian market.

In 2014 Gazprom Group sold 217.2 billion cubic meters of gas to Russian consumers. It is less than in 2013. Nevertheless, Gazprom’s proceeds from gas sales in the Russian market grew by more than 3 per cent and reached RUB 798.1 billion.

The Russian Regions Gasification Program is one of the prioritized activities in the domestic market.

The Russian Regions Gasification Program is one of the prioritized activities in the domestic market. In 2014 about 30 thousand families in 236 localities got access to the benefits offered by natural gas. Presently, the average gasification level across Russia equals 70.3 per cent in cities & towns and 54.6 per cent in the rural area. Therefore, we have already raised the level of rural gasification higher than the average level across Russia as at the beginning of the Program implementation. But we should go on with these efforts, so in 2015 it is planned to invest over RUB 28.8 billion into the Gasification Program, the same amount as in 2014.

The power sector and households are major gas consumers in Russia. Therefore we are boosting the activities in electricity and heat generation with a view to optimize the use of energy resources and gain the synergy effect.

In 2014 about 30 thousand families in 236 localities got access to the benefits offered by natural gas.

Gazprom Group is already the largest owner of generating assets in Russia. Gazprom’s share in the domestic electricity and heat generation is 15 and 24 per cent accordingly. In the reporting year heat generation came to 125.2 million Gcal and exceeded the indicator of 2013 by 11.3 per cent.

Following the integration of the Moscow-based MOEK to Gazprom Group, the unified control over the city heat supply technology system was recovered in 2014. The transfer of heat load to the more effective capacities provided for saving 203 million cubic meters of gas.

The Gazprom Group’s Investment Program in the power generation sector is the largest in Russia.

The Gazprom Group’s Investment Program in the power generation sector is the largest in Russia. Between 2007 and 2016 the incremental growth of new capacities is expected to reach approximately 9 GW due to the Program implementation. By 2015 we have already put in operation around 6 GW of new capacities.

Today Gazprom is commissioning one more new combined cycle gas turbine unit at CHPP-12 in Moscow.

Telebridge

Alexey Miller: Hello colleagues! Please report on your readiness.

Denis Fyodorov: Good afternoon, dear Mr Miller! Good afternoon, dear shareholders! Denis Fyodorov, Director General of Gazprom Energoholding is reporting.

Now we are at the unit switchboard of CHPP-12, where we are commissioning the new power unit with a nominal capacity of 220 MW. This power unit is the 7th one built by Gazprom in Moscow. While the first four power units were built within the Moscow Automobile Ring Road, three new power units are located in the central part of Moscow to enforce the power supply reliability of consumers living in the city center.

Dear Mr. Miller! Around 80 per cent of this power plant equipment was manufactured in Russia, and we look forward to maximizing the amount of equipment produced in the Russian Federation in future.

Dear Mr. Miller! Please permit me to give the command and bring the unit to its nominal capacity.

Alexey Miller: Start power ascension!

Denis Fyodorov: Dear Mr. Miller! The unit is brought to its nominal capacity.

Alexey Miller: Congratulations on the commissioning of the new power unit and thank you for the good job.

Let us continue the General Shareholders Meeting of Gazprom.

Diversification helps Gazprom extend the scope of its projects and develop businesses on a global scale.

Diversification helps Gazprom extend the scope of its projects and develop businesses on a global scale. In the reporting period Gazprom Group carried out prospecting and exploration activities at fields located in the CIS, Europe, Southeastern Asia, Africa, Middle East and Latin America. As of December 31, 2014, Gazprom had a portfolio of 38 projects on hydrocarbon exploration and production beyond Russia; most important of them are represented in the slide.

Dear shareholders!

Gazprom is successful in operating and developing the world’s most evolved gas transmission network; its geographical coverage and output hit the target of supplying energy to consumers in Russia and abroad.

The underground gas storage network plays an important role here being a key means in smoothing peak loads and handling uneven gas consumption throughout a year. Over 20 per cent of supplies are provided by the UGS network during a heating season.

By the start of 2014–2015 heating season a potential maximum daily deliverability of Gazprom-owned UGS facilities across Russia was pushed to a record of 770.4 million cubic meters of gas – 42.6 million cubic meters more than by the start of the last year’s heating season.

In the mid-term, Gazprom anticipates reaching a daily withdrawal rate of 1 billion cubic meters – it will enable the Company to cut the costs of logistics and the net costs of gas supplies.

Gazprom aims to secure working gas capacities of its UGS facilities abroad at a rate of no less than 5 per cent of the Company’s annual exports.

Gazprom aims to secure working gas capacities of its UGS facilities abroad at a rate of no less than 5 per cent of the Company’s annual exports. The priority is given to UGS facilities where Gazprom has a stake.

Dear shareholders!

The Power of Siberia pipeline is very important for the development of Gazprom Group’s gas transmission network. The project will transform the Russia’s Far East and change the scale of cooperation between Russia and Asia-Pacific. Power of Siberia is more than 3 thousand kilometers long; its export throughput is 38 billion cubic meters of gas a year.

The gas main construction is an integral part of the world’s biggest investment project, which will ensure gas deliveries to the Russian Far East as well as to China.

The gas main construction is an integral part of the world’s biggest investment project, which will ensure gas deliveries to the Russian Far East as well as to China, via the eastern route.

The Yakutia gas production center, main resource base of the project, is shaping up fast. Power of Siberia will provide fuel and feedstock to newly-emerged Russian plants, particularly, to gas processing and helium production facilities to be built in the Amur Region. Ultimately, this would create thousands of new jobs and endorse the economy of Russia’s East.

As for the Power of Siberia project, we took a decision to pay respect to those explorers who had opened up Siberian riches a way back in distant times: compressor stations along the Power of Siberia route would be named after the Cossack explorers of the 17th centuary, i.e. Ivan Rebrov, Pyotr Beketov, Maxim Perfiliev, Ivan Moskvitin, Vasily Poyarkov, Erofey Khabarov and Vasily Kolesnikov.

Dear shareholders!

Power of Siberia will ensure the fulfillment of the contract, which has already become the number one contract in the entire gas industry history. In 2014 Gazprom signed a USD 400 billion contract with Chinese CNPC. According to the contract, Gazprom will supply one trillion cubic meters of natural gas to China over a 30-year period. China is currently among the most advancing markets of the world. Gazprom’s resource base and technological capabilities combined with gas demand of our Chinese partners will produce great results.

The scale of agreements on gas supply to China is measured not only in billions of US dollars and a trillion cubic meters of gas. These contracts will serve as the governing factor that will determine the future of the energy sector both in Asia and in the whole world.

Following the contract on the eastern route, the Heads of Agreement on gas supply to China via the western route was signed in the same year.

It is planned to annually supply 30 billion cubic meters of gas via the western route over a period of 30 year.

The document contains more than ten legally binding articles determining the volumes and terms of supply, the construction time, the minimum output per day and per year and gas quality specifications. It is planned to annually supply 30 billion cubic meters of gas via the western route over a period of 30 year. The gas delivery point is determined as well. This means that the route is taking shape. It also has a name: it will be called Power of Siberia-2.

As part of the western route contract, the first string will be constructed to subsequently increase to three and that will make it possible to build up gas export via the western route to 100 billion cubic meters a year.

In eastern Russia this line of activity will hinge on the Sakhalin II project.

Gazprom’s entry into the Chinese and other Asian markets calls for developing our LNG production and marketing businesses. In eastern Russia this line of activity will hinge on the Sakhalin II project. At the St. Petersburg International Economic Forum we signed a Memorandum with Shell to construct the third process train of the LNG plant within the Sakhalin II project. As a result, the plant capacity will grow 1.5 times – up to 15 million tons a year.

Special attention should be paid to the cooperation with Shell. We signed a strategic partnership agreement with this company. The merger of Shell and BG Group will provide additional opportunities for our joint business. We are going to further our cooperation and interact across the entire value chain in the gas sector: from exploration and production to processing and marketing, using asset swap deals. This strategy will ensure a higher margin and distribution of risks for the partners. Gazprom is the leader in gas transmission and Shell – in LNG industry. LNG will help us conquer new markets, inaccessible for pipeline gas, as well as guarantee diversification and flexibility of supplies.

Dear colleagues! Dear shareholders!

Over the last few years Europe has shown a trend to lower gas consumption. Between 2010 and 2014 it declined by nearly 20 per cent.

Meanwhile, our competitors were confronted by a strong decline in gas export to Europe. This affected LNG as well. During this period only Gazprom and Norwegian producers managed to raise their supplies, with Gazprom’s export figures being almost five times higher than those of its Norwegian counterparts.

It is even more impressive that Gazprom’s share in the European market was steadily rising during the last 10 years, while the gas demand continued its downward trend.

It is even more impressive that Gazprom’s share in the European market was steadily rising during the last 10 years, while the gas demand continued its downward trend. Between 2010 and 2014 only, the growth was nearly 7 per cent, and it will carry on like this in the future; ultimately, the business environment will be beneficial for Gazprom regardless the situation in the European and global economies.

The European gas market will be mainly driven by the decreasing domestic gas production. Regardless any outlook for gas demand turning into reality, the ‘missing out’ volumes of domestic gas production should be certainly filled in during the next few years. That is why the overall supply volumes of Russian gas to Europe as well as its share in the European market will keep going up, undoubtedly.

Dear shareholders!

In 2014, the Blue Stream and Nord Stream offshore cross-border pipeline systems ensured about 35 per cent of the total transit volumes to Europe. These trunklines have proven their effectiveness as the most reliable export routes, consistently delivering the contracted gas. They ensure supply security, predictability and confidence in the future for the European energy sector.

In 2014, the Blue Stream and Nord Stream offshore cross-border pipeline systems ensured about 35 per cent of the total transit volumes to Europe.

This is the reason why our foreign partners aspire to broaden cooperation with Russia and Gazprom. The signing of documents stipulating the construction of the third and fourth gas pipeline strings from the Russian coast to the German coast via the Baltic Sea is convincing proof of this. I am referring to the Nord Stream-2 gas pipeline with an annual capacity of 55 billion cubic meters. The agreements between Gazprom, E.On, Shell and OMV are the result of pre-investment and pre-design activities carried out between 2012 and 2014. We also expect our colleagues from BASF/Wintershall to join the project soon.

In the near future we will launch the incorporation of a joint project company. We are going to draw on the best practices of Nord Stream AG, the company that constructed Nord Stream-1 and is now operating it. The successful experience gained in the Baltic Sea will help us minimize costs and construction time. Both strings of Nord Stream-2 will be put into operation until the end of 2019.

Nord Stream-2 will be constructed for new export volumes.

Nord Stream-2 will be constructed for new export volumes. Extra gas transmission facilities along the shortest route connecting gas fields in northern Russia to European markets will provide for higher security and reliability of supplies under new contracts.

The above mentioned refers equally to the TurkStream gas pipeline. In December 2014 Gazprom and Botas signed a Memorandum of Understanding on constructing a gas pipeline across the Black Sea. It is expected that gas from the first string will be supplied to the Turkish market. First gas will be delivered to Turkey in December 2016.

The boost of transportation capacities in the Baltic Sea and construction of TurkStream means enhancing energy security of Europe.

The boost of transportation capacities in the Baltic Sea and construction of TurkStream means diversifying export channels for Russian gas and enhancing energy security of Europe.

Dear shareholders!

The year 2014 results showed us once again that neither economic crises nor challenging foreign policies can interfere with our moving forward campaign.

The year 2014 results showed us once again that neither economic crises nor challenging foreign policies can interfere with our moving forward campaign.

Thank you for your attention.