INTRODUCTION

One of the most interesting companies on today’s world energy stage is Gazprom. In 2005, Alexander Medvedev – one of its public top-managers – stated the company’s strategy for the upcoming decade is not only being a gas giant, which it was already but “to become the largest energy company in the world” (Gazprom 2006). Quite an ambitious goal, to which Gazprom started moving quickly ever since.

Relatively young Russian companies have launched a massive offensive of mergers and acquisitions in the markets that have long been dominated by European and US capital. While in the CIS and Eastern Europe, their interest and financial successes have been seen as quite reasonable, given the long standing tradition, proximity, and ties that has been developed during the post WWII era. Western European heartland countries, such as France, Italy, UK, and others have long been seen as a last resort of true capitalism with Western-originated money.

As it looks now, this is not true anymore. The last 5 years have seen a dramatic rise of Chinese, Indian and Russian capital movement into Western Europe and North America, not only in terms of goods and services, but what is more important, in terms of acquiring US, EU-rooted, large, and long-established corporations.

Gazprom strategy has evolved significantly over the last decade. The main difference has been visible particularly during the Vladimir Putin administration when Gazprom was first, secured as a state-controlled company and given the monopoly to manage all gas transmission networks, and second, when it has been destined to perform with the mainline political line, which has been concerted by the state administration. As a result, Gazprom moved from a prominent gas supplier to a key global energy market player which has visible support from the state. Gazprom Expansion Into EU Utilities Sector Russian Oil and Gas Industry

Rank Company Market

Cap

(USD)

Proved

Crude Oil

Reserves

Proved

Gas

Reserves

1 Gazprom $348 billion 5.9 bln barrels 18,200 bln cubic

meters

2 Rosneft $73 billion 15.9 bln barrels 701 bln cubic

meters

3 Lukoil $65 billion 15.7 bln barrels 765 bln cubic

meters

4 Surgutneftegas $36 billion Does not disclose

reserves

--

5 TNK-BP Holding $28 billion 10.3 bln barrels --

6 Gazprom Neft $28 billion 6.9 bln barrels --

7 Novatek $15 billion -- 690 bln cubic

meters

8 Tatneft $10 billion 5.9 bln barrels 37.4 bln cubic

meters

History

1989-1992: Inception

A separate Soviet gas industry was created in 1943. Large natural gas reserves discovered in Siberia and the Ural and Volga regions in the 1970s and 1980s enabled the Soviet Union to become a major gas producer. Gas exploration, development, and distribution were centralized in the Ministry of Gas Industry, which was created in 1965.

In August 1989, under the leadership of the Minister of Gas Industry Viktor Chernomyrdin, the Ministry of Gas Industry transformed itself into State Gas Concern Gazprom, which became the country's first state-corporate enterprise. The company was still controlled by the state, but now the control was exercised through shares of stock, 100% of which were owned by the state.

When the Soviet Union dissolved in late 1991, assets of the former Soviet state in the gas sector were transferred to newly created national companies such as Ukrgazprom and Turkmengazprom.

Gazprom kept assets located in the territory of Russia, and was able to secure monopoly in the gas sector. Assets in the oil industry, on the other hand, were divided among several companies.

1993-1997: Privatization

Gazprom's political influence increased significantly after the new Russian President Boris Yeltsin appointed the company's chairman Chernomyrdin as his Prime Minister in December 1992. Rem Viakhirevtook Chernomyrdin's place as Chairman both of the Board of Directors and of the Managing Committee.

The new government was eager to introduce economic reforms and began to privatize Gazprom. Following the Decree of the President of the Russian Federation of November 5, 1992 and the Resolution of the Council of Ministers of the Russian Federation of February 17, 1993, the organization became a joint-stock company and started to distribute shares under the voucher method: every Russian citizen receivedvouchers to purchase shares of formerly state-owned companies. By 1994, 33% of the Gazprom's shares had been bought by 747,000 members of the public, mostly in exchange for the vouchers. 15% of the stock was also purchased and allocated to Gazprom employees. The state retained 40% of the shares, but the amount was gradually lowered to 38%. Trading of Gazprom's shares was heavily regulated, and the by-laws of the company prohibited foreigners from owning more than nine percent of the shares.

Gazprom slowly established credibility in the western capital markets with an offering of one percent of its equity to foreigners in October 1996 in the form of Global Depository Receipts and a successful largebond issue of US$2.5 billion in 1997.

1998-2000: Tax evasion and asset-stripping

As the Prime Minister of Russia, Chernomyrdin was able to ensure that the state did not closely regulate Gazprom. As a result, the company was able to evade taxes on a large scale, and the state received little money in the form of dividends. The management and board members launched a massive asset-stripping, and Gazprom's property was parceled out to them and their relatives. Some of the largest stripped assets were transferred to the controversial gas-trading company Itera. Chernomyrdin and Gazprom's CEO Rem Viakhirev were leading figures in the process.

In March 1998, for reasons unrelated to Gazprom, Yeltsin fired Chernomyrdin from his position as Prime Minister. On 30 June 1998 Chernomyrdin returned to the company as the chairman of the board of directors.

2000-2003: The Putin reforms

Gazprom's situation changed abruptly in June 2000, when Vladimir Putin became the President of Russia. Putin launched a campaign to rein in the oligarchs and, per his policy of the so-called national champions, to establish state control in strategic companies.[10] He launched an attack against what he saw as mismanagement and personal pilfering of state assets. After coming to power, Putin immediately fired Chernomyrdin from his position as the chairman of the company's board and used the stock owned by the state to vote out Vyakhirev. The two men were replaced by Dmitry Medvedev andAlexei Miller, who had previously worked with Putin in Saint Petersburg. Putin's actions were aided by shareholder activism of Hermitage CEO William Browder and former Russian finance minister Boris Fyodorov. Miller and Medvedev were assigned the task of stopping the asset-stripping, but also to regain lost possessions. By denying Itera access to Gazprom's pipelines, Miller almost forced Itera to declare bankruptcy. As a result, Itera's management agreed to sell the stolen assets back to Gazprom.

2005-2006: Establishment of government control

In June 2005, Gazprombank, Gazpromivest Holding, Gazfond and Gazprom Finance B. V., subsidiaries of Gazprom, agreed to sell a 10.7399% share to the state-owned company Rosneftegaz for $7 billion, at what some western analysts viewed as an undervalued price. The sale was to be completed by 25 December 2005, which, combined with the 38% share of the State Property Committee, gave the Russian government control over the company.

As the Russian state had now acquired a controlling share, the 20% restriction on foreign investment in Gazprom was lifted, and the company became fully open to foreign investors.

On 20 July 2006, the Federal Law "On Gas Export" granting Gazprom exclusive right to export natural gas was published, and hence came into force. It was almost unanimously approved by the State Duma on 5 July, by the upper house, the Federation Council on 7 July and signed into law by President Vladimir Putin 

2007 and later

On 4 September 2012, the European Commission said it had launched an anti-trust case against Gazprom. The Brussels-based competition watchdog said it opened the formal legal probe based on "concerns that Gazprom may be abusing its dominant market position in upstream gas supply markets."

Gazprom’s role in the economy of specified country

European Union’s strategy over gas has been shaped significantly by the recent gas conflicts, which took place in 2005 and 2006 between Gazprom and several neighboring countries – Ukraine and Byelorussia, that have – since the dissolution of the Soviet Union in 1991 – long enjoyed heavily subsidized gas prices. The most important thing is the fact that these two countries serve as key transit states for Gazprom gas and during the dispute; several Western European countries were impacted. This raised serious concerns in the EU regarding security of supply and stability of gas shipping from Gazprom. The main accent of following debate has been to alleviate dependency on Gazprom and Russian gas by promoting alternative routes of gas pipelines as well as looking to alternative sources of energy.

The aim of this paper is to first, outline the major trends and facts in Gazprom movement from a supplier company to energy multinational, which seeks to establish European presence not only in terms of long-term gas supply contracts, but expanding its ownership to downstream assets such as the distribution networks, electricity generating utilities, et cetera. Secondly, I would like to explore the general reaction and response from EU companies, authorities, and general business media and public towards such a movement.

It has, for a long time, been a tradition that EU and US business to seek targets in other countries. We are now seeing a returning movement towards large-scale investors from resource-rich regions coming to developed markets, such as EU, willing not only to buy, but also to establish a long term business and gain direct customers for their products. Gazprom may serve as quite an outstanding example of such strategy, supported by the originating state.

Gazprom is a global energy company. Its major business lines are geological exploration, production, transportation, storage,processing and sales of gas, gas condensate and oil, as well as generation and marketing of heat and electric power.

Gazprom views its mission in reliable, efficient and balanced supply of natural gas, other energy resources and their derivatives to consumers.

Gazprom holds the world’s largest natural gas reserves. The Company’s share in the global and Russian gas reserves makes up 18 and 70 per cent respectively. Gazprom accounts for 15 and 78 per cent of the global and Russian gas output accordingly. At present, the Company actively implements large-scale projects aimed at exploiting gas resources of the Yamal Peninsula, Arctic Shelf, Eastern Siberia and the Far East, as well as hydrocarbons exploration and production projects abroad.

Gazprom is a reliable supplier of gas to Russian and foreign consumers. The Company owns the world’s largest gas transmission network – the Unified Gas Supply System of Russia with the total length of over 161 thousand kilometers.

Gazprom sells more than half of overall produced gas to Russian consumers and exports gas to more than 30 countries within and beyond the former Soviet Union.

Gazprom is the only producer and exporter of liquefied natural gas in Russia. The Company’s share in the global LNGoutput stands at 5 per cent.

The Company is among Russia’s five largest oil producers and it is the largest owner of power generating assets in the country. These assets account for 17 per cent of the total installed capacity of the national energy system.

Gazprom pursues the strategic objective of establishing itself as a leader among global energy companies by entering new markets, diversifying its activities and ensuring reliable supplies.

Yamal megaproject

The Yamal Peninsula is a strategic oil- and gasbearing region of Russia. Commercial development of fields onshore and offshore Yamal is crucial for securing Russia's gas production build-up beyond 2010.

Bovanenkovo

Projected gas production from Bovanenkovo is at 115 bcmpa to be increased to 140 bcmpa in the long-term. In order to deliver the extracted gas to the Unified Gas Supply System of Russia, it is necessary to build a 2,451-km-long gas transmission network including a new 1,100-km-long gas transmission corridor between Bovanenkovo and Ukhta.

Eastern Gas Program

The September 2007 Order by the Russian Federation Industry and Energy Ministry approved the state-run Development Program for an integrated gas production, transportation and supply system in Eastern Siberia and the Far East, taking into account potential gas exports to China and other Asia-Pacific countries (Eastern Gas Program). Gazprom was appointed by the Russian Federation Government as the Program execution coordinator.

Pursuant to the Eastern Gas Program it is planned to establish gas production centers in the Krasnoyarsk Krai, the Irkutsk Oblast, the Republic of Sakha (Yakutia), the Sakhalin Oblast and the Kamchatka Krai. The Program stipulates that simultaneously with gas production centers and the unified gas transmission system formation, gas processing and gas chemical industries will be developed including the capacities for helium and liquefied natural gas (LNG) production.

Chayandinskoye

Yakutia’s in-place and forecast gas resources are estimated at 10.4 trillion cubic meters.

The Chayanda field’s C1+C2 reserves make up 1.3 trillion cubic meters of gas and 79.1 million tons of oil and condensate. In accordance with the Russian Federation

Government Directive of April 16, 2008 Gazprom was entitled to the subsurface license for the Chayanda field.

Irkutsk gas production center

Agreement of Cooperation between Gazprom and the Irkutsk Oblast Government was signed in October 2010, the Accord on Gasification – in December 2009.

The General Scheme for gas supply and gasification of the Irkutsk Oblast was approved by the Directive of the Irkutsk Oblast Government in 2005 and updated in 2009. Natural gas will play an important role in the socioeconomic development of these regions due to gasification of population centers as well as creation of modern gas processing and gas chemical facilities.

Kamchatka

Considerable gas resources are found offshore Western Kamchatka. In June 2009 pursuant to the decision by the Russian Federation Government, Gazprom was granted the subsurface license for the Zapadno-Kamchatsky offshore prospect in the Sea of Okhotsk. Between 2009 and 2011 the offshore reserves increment is projected to average 200 billion cubic meters of natural gas.

Sakhalin II

Sakhalin Energy recognises its responsibility to the communities and environment in which it works. Sakhalin Energy is working with communities, governments and independent experts, to achieve a balance between social, economic and environmental factors that will benefit all those who have a stake in the Sakhalin II Project: the Russian Federation, its people, Sakhalin II customers and shareholders.

Sakhalin III

The Sakhalin Island shelf is best prepared for gas production and supply to consumers in Russia’s Far East.

The Sakhalin III project will become one of the basic sources of gas supply. Gazprom holds licenses for three blocks within the project: Kirinsky, Ayashsky and Vostochno-Odoptinsky (licenses granted in 2009 pursuant to the Russian Federation Government Directive), and for the Kirinskoye gas and condensate field (license granted in 2008 pursuant to the Russian Federation Government Directive).

Achimov deposits

The Achimov deposits lie at depths of nearly 4,000 meters and feature a more complex geological structure as compared to the Cenomanian (1,100–1,700 meters of depth) and the Valanginian (1,700–3,200 meters) deposits. Besides, the Achimov deposits are featured with abnormally high formation pressure (over 600 Ata) and heavy paraffins presence.

In 2008 Achimgaz brought the block into pilot operation.

In 2009 Gazprom launched a stand-alone project for gas production from the Achimov deposits – comprehensive gas treatment unit No.22 (CGTU-22) was put into service at the second pilot block of the Achimov deposits in the Urengoy oil, gas and condensate field.

Algeria

Gazprom’s development strategy as of a global energy company is targeted at building the entire gas chain from hydrocarbon production to marketing on the new markets relying on the production capacities located beyond Russia.

Bolivia

In February 2007 Gazprom and the Bolivian state-owned petroleum company YPFB signed the Memorandum of Understanding. The Memorandum stipulates promoting cooperation in the Bolivian hydrocarbon exploration and development sector, exploring the possibility to join infrastructure projects including LNG production, as well as the possibility to upgrade qualifications and train oil and gas sector specialists.

India

The Indian Oil and Gas Corporation (ONGC Group) is the largest state company in terms of hydrocarbon proven reserves and production. The Gas Authority of India Limited (GAIL) is the leading gas transmission and distribution company.

Iraq

First production from the field is scheduled for 2013. By 2017 the output is expected to reach 170 thousand barrels of oil per day (about 8.5 million tons per year). It will be maintained at this level for 7 years. In total, it is planned to drill 17 production and 5 injection wells in the field.

Legal basis and participants: Agreement between the Russian Federation and the Republic of Kazakhstan on the demarcation of the seabed in the northern part of the Caspian Sea for the purpose of exercising sovereign rights to use mineral resources dated July 6, 1998 (the Agreement) and Protocol to the Agreement dated May 13, 2002, which established general principles for the demarcation of the seabed of the Caspian Sea and the development of the adjacent sea fields and geological structures including the geological structure Tsentralnaya.

Kyrgyzstan

Creation of a basis (resource base) for the operation of a Russian Kyrgyz joint venture that is being established.Carrying out geologic exploration work at oil-and-gas promising areas VostochnyMaylisu IV and Kugart in the Republic of Kyrgyzstan.

Libya

Project purpose and description: Search, exploration, production, and sales of hydrocarbons at licensed areas № 19 and № 64 and within concessions C96 and C97 in Libya.

Prirazlomnoye oil field

The Prirazlomnoye oil field is located in the Barents Sea offshore. The license to explore and produce hydrocarbons in the Prirazlomnoye field is owned by Gazprom neft shelf (former Sevmorneftegaz), a wholly-owned subsidiary of Gazprom.

Russian continental shelf

The initial aggregate hydrocarbon resources of the Russian continental shelf make up some 100 billion tons of fuel equivalent, of which 80 per cent is gas. The bulk of the hydrocarbon resources (around 70 per cent) are concentrated in the Barents, Pechora, Kara Seas and the Sea of Okhotsk, with gas and condensate prevailing in the Barents and Kara Seas, oil – in the Pechora Sea, oil and gas – in the Sea of Okhotsk.

Serbia

Gazprom Group is successfully implementing a number of gas and oil projects in Serbia. Besides, consideration is being given to creating gas-fired power generating capacities in the country.

Jointly with Gazprom, Serbia is actually evolving as a major European center for natural gas transit and storage and a prominent producer of refined products. This offers new opportunities to Serbia to boost its national economy growth and transform itself into a major player in the European energy market.Shtokman

The Shtokman gas and condensate field development project is of strategic significance for Gazprom. The field will become a resource base for Russian pipeline gas as well as liquefied natural gas (LNG) exports to the Atlantic Basin markets.

Tajikistan

In 2003 Gazprom and the Government of the Republic of Tajikistan signed a 25-year Strategic Cooperation Agreement.

In 2006 the Memorandum of Intent was inked to set up a joint venture between Russia and Tajikistan, and in 2008 – Agreement on the general principles of geological survey at the promising oil and gas areas in Tajikistan.

Uzbekistan

Project purpose and description: Search, exploration, and production of hydrocarbons in the Ustyurt region of the Republic of Uzbekistan. After completing its geologic exploration work, Gazprom (that holds licenses for the use of mineral resources valid for five years) enjoys exclusive right to negotiate with the Republic of Uzbekistan with regard to the development of the discovered fields based on Production sharing agreements.

Venezuela

Gazprom performs its activity in Venezuela within the Memorandum of Understanding signed with PdVSA in January 2005. The document envisages Gazprom's possible participation in joint oil and gas projects with PdVSA.

Vietnam

Currently, Vietgazprom continues geological exploration on the continental shelf of Vietnam.

In April 2012 Gazprom and Petrovietnam signed an agreement on Gazprom involvement in the development project for blocks 05.2 and 05.3 offshore Vietnam in the South China Sea. The document stipulates that Gazprom will obtain a 49 per cent stake in the Production Sharing Agreements that set forth the conditions required for implementing the project. The Russian party in this project will be represented by Gazprom EP International.

Yuzhno-Russkoye

The Yuzhno-Russkoye field is an example of efficient Russian-German partnership aimed at providing stable energy security in Europe. The project execution based on asset swap and entire chain development from production to final consumer will strengthen Gazprom positions as a global player on the energy market.

Zapolyarnoye

On the 19th of december, the 3rd gas complex treatment unit (UKPG – 3S) was launched at the Senoman reservoir of the Zapolyarnoye oil and gas condensate field. At present, the UKPG-3S serves 24 wells producing 20 million cubic meters of natural gas per day. By the yearend, the UKPG-3S is expected to provide production of up to 200 million cubic meters of gas. In the first quarter of 2004, daily gas production will attain some 60 million cubic meters.

Structure of Gazprom

Oil business development strategyThe oil business development strategy stipulates that annual production will reach 100 million tons of oil equivalent and refining capacities will grow to 70 million tons by 2020. The 2020 production level will be reached through stagewise involvement of all the explored fields of Gazprom Neft (including the company’s 50 per cent stake in Slavneft and Tomskneft) in the production process, expansion of the resource base through commissioning of oil fields assigned to other companies of Gazprom Group as well as acquisition of new licenses. Gazprom Neft is determined to intensely expand its presence in the production and refining segments abroad to raise the share of foreign production activities in its portfolio to 10 per cent by 2020.

Oil and gas production strategyBy 2020 Gazprom is planning to produce 640 to 660 billion cubic meters a year, provided that there is solvent gas demand in the domestic market and favorable conditions in the foreign market.

With more than 70 per cent of the total Russian reserves, the Yamal-Nenets Autonomous District will remain the key gas producing region of the country within the specified period of time, while the Yamal Peninsula and the Russian northern seas will be long-term development targets

Reserves buildup strategySince 2005 Gazprom steadily replenished its annual production volumes and built up its reserves through geological exploration.

Acceleration of Gazprom’s exploration activities aims to further develop the mineral and raw material base in the main gas production regions and its shaping on Yamal, the continental shelf, in Eastern Siberia and the Far East.

Exploration is mostly concentrated in the Nadym-Pur-Taz region (including the Ob and Taz Bays), the Yamal Peninsula, in the Pechora and Kara Seas, the Komi Republic, the Krasnoyarsk Territory, the Irkutsk Region, the Republic of Sakha (Yakutia), on the Sakhalin Island shelf and in other regions with the subsequent acquisition of licenses for the discovered fields development.

Gazprom also performs geological exploration in Central and Southeastern Asia, Africa and Latin America. Pursuing the strategy of global presence in the world oil and gas market, the Company seeks to participate in hydrocarbons exploration,production, transportation and marketing projects in third countries via competitions, bidding procedures and asset swap 

Functions and Business Activities of Gazprom

functions

Gas, Power & Derivatives

The Gas, Power and Derivatives team supports Gazprom and third-parties, providing traded market

expertise for natural gas, electricity and commodities and related financial instruments in Europe,

North America and Asia. We provide an extensive and innovative suite of services to enable our

customers to access to market prices, secure cash-flows for their assets and manage their commodity

price risks.

Oil & LPG

GM&T’s Oil & LPG trading activities allow the Gazprom group to generate additional value from its

core assets. These activities have expanded rapidly into new geographies, commodities and products

to build a robust and sustainable business.

LNG

Our global presence means we are able to deliver LNG from our main production zones to customers

internationally, complementing Gazprom’s pipeline network to provide flexible, secure supplies of gas.

The LNG part of our business is responsible for all aspects of the marketing, trading and shipping of

LNG for the Gazprom group. Working with affiliates in Moscow, Singapore and Houston, the LNG

business trades single and multi cargo deals, arranges transportation, structures complex

transactions, develops new markets and optimises Gazprom’s LNG portfolio on a global basis.

Shipping & logistics

Shipping & Logistics is a unified global business unit that provides safe, competitive and reliable

shipping and cargo management for the multi-commodity trading activities of the GM&T group. The

team consists of experienced shipping and cargo professionals, managing both liquids and dry bulk

cargo operations from our offices in Singapore and London. This business also includes Gas for

Transport which focuses on projects including small scale LNG and LNG bunkering.

Retail

Operating under the Gazprom Energy brand, GM&T delivers world-class, innovative power and gas

solutions for industrial and commercial customers that some of the larger players struggle to match.

We have developed a pan-European “best in class” retail offering through controlled growth. Gazprom

Energy prides itself on its sophisticated client offering, delivering more control of energy usage

through a bespoke package.

Support Functions

Business Capability

The Business Capability Department’s (BCDs) main objectives are to plan, deliver and improve

operational efficiency across GM&T. BCD works with business units and support functions on

activities ranging from coordinating the operational plans that align with our strategy, to working with

commercial areas (developing platforms for enhanced trading success)and reviewing our processes

and policies. Business capability is focused on driving improvements that bring value to GM&Ts

bottom line.

Commercial Analytics

Commercial Analytics provides a centre of excellence for analytical support across all commercial

business units. Analysis takes several different, but related forms including quantitative analysis

(modeling), structuring and pricing, asset valuation, and market analysis. Our customers include

origination, structured trading, gas and power trading, LNG, Carbon, Retail, Oil, Strategy, GPG, Risk

and Finance.

Finance

The Finance Function’s role is to provide independent control around the trading business, to process

transactions in a timely, efficient manner and provide management information and statutory

reporting. These key responsibilities are delivered through the core Finance Teams within Financial

Operations and Financial Reporting.

Financial Reporting.

The role of the Financial Reporting team is to prepare timely and accurate information on the

performance of the business, in accordance with IFRS. The team is responsible for statutory and

management reporting for the GM&T Group, for a variety of stakeholders, both internal and external.

Financial Operations.

Home to Accounts Payable and Settlements, the Accounts Payable Team are responsible for

processing payments to our Suppliers in line with Gazprom’s policies and procedures. While the

Settlements Team are responsible for ensuring that the billions of pounds of energy bought and sold

is accurately confirmed, validated, invoiced and settled according to the individual contract terms in

place.

IT

The GM&T IT Department delivers sustainable IT solutions that enable the business to exceed

performance targets. Offering bespoke development capability, commercial expertise, 24-hour

support and enterprise program delivery, GM&T IT works to deliver world-class capabilities across the

business.

Risk

The role of the Risk Department is to develop and implement the most reliable policies, processes

and tools required to manage all risks associated with the fast-paced growth strategy of the GM&T

group while delivering on ambitious targets.

Product Control

Product Control is responsible for the production and validation of all daily P&L, position and exposure

reports, the validation of month and year-end results at a gross margin level. They review and validate

new products and markets from a valuation and reporting perspective.

Credit

The Credit team is responsible for assessing and monitoring counterparty creditworthiness and other

credit-related risks faced by the business including sovereign or transaction structure risks. This

involves analysingeach counterparty, considering any credit risk mitigations, together with reporting

credit exposure on a counterparty and portfolio basis. The team is also actively involved in the

negotiation of master agreements and other trading documentation, and the issuing of credit support

for transactions.

Strategy and Economics Department

The Strategy and Economics Department supports the strategic growth of GM&T, and the Gazprom

group, through analysis and advice to commercial Business Units on the development of energy

markets and implications for GM&T’s long-term strategy. The department analyses long-term market

fundamentals, market structure and regulatory change in order to support strategy development and

specific commercial projects including business case development, appraisal and asset/project

evaluation.

Macro Analytics

Macro Analytics has two main functions: long term fundamental modelling of gas and power markets

and asset/project evaluation. Long term fundamental modelling considers the possible evolution and

changing dynamics of global gas, power and other energy markets to produce long-term forward price

curves and scenarios. Asset/project evaluation uses these views to evaluate large-scale deals and

transactions (for example power stations, gas storage sites). Macro Analytics collaborates and gains

input from a large number of the teams within GM&T and GGLNG as well as interacting with other

companies in the wider Gazprom group, including: Gazprom OAO, Gazprom Export, Gazprom

Energoholding and Gazprom Germania.

Regulatory Affairs

As energy markets liberalise, regulation plays a key part in ensuring that competition can develop.

Regulatory Affairs looks at market design, third party access to networks (pipes and wires) and

regulation of supply to consumers. The team at GM&T and Gazprom Energy cover a wide variety of

areas within the regulatory sphere to ensure GM&T's Business units have the support and analysis

required to succeed and grow. Some of the key areas of work include:

Highlighting and providing specific analysis of upcoming regulatory changes and how they will impact specific business units

Identifying commercial opportunities that occur within regulation which GM&T can exploit Ad hoc strategic and front-office business development requests where regulation has an impact Engaging with EU and national policy makers and regulators to shape and influence market design

to GM&T’s advantage Ensuring that compulsory regulatory filings are submitted to regulators across the countries GM&T

operates in.

Tax

The Tax Department proactively manages and minimizes the group’s tax affairs through efficient and

effective tax planning and robust compliance. A close working relationship with front office ensures

tax is always at the heart of the commercial operations. The Tax Management team ensures delivery

of the tax operating model and implementation of the tax strategy, while the Tax Advisory and

Planning team optimises business transactions and seeks to achieve the lowest sustainable effective

rate of tax. The Tax Compliance and Projects team is responsible for all tax reporting, compliance and

special projects.

Treasury, and Corporate Funding

The Treasury Credit and Funding (TCF) Department supports the GM&T Group by maintaining

financial liquidity, managing credit risk and securing funding.

Treasury

GM&T’s Treasury function is responsible for managing all aspects of financial liquidity across the

GM&T Group from long term forecasting to the final payment or receipt of funds. This function

consists of two teams - the Treasury Cash Management team which is responsible for the global

payments process and the Treasury Liquidity team, which is responsible for cash forecasting process.

Treasury monitors carry out capital utilisation against plans for each Business Unit. Treasury is

heavily involved in the annual planning process (Bluebird), working closely with various teams to

develop GMT Group’s Funding Strategy.

Funding

The Funding team is primarily responsible for securing funding and facilities to support GM&T’s

expanding global business as well as overseeing GM&T Group relationships with banks.

Business Activities:

GAZPROM Schweiz AG’s role within the GAZPROM group of companies is to procure natural gas from Central Asia. The region comprising Kazakhstan, Uzbekistan, and Turkmenistan has natural gas reserves of up to 12 Tm³, representing 6 % of the world’s known natural gas reserves. Around one third of the natural gas produced in these countries is exported. The GAZPROM Group, which purchases almost 40 Gm³ of this gas annually, is one of the largest and most important buyers of natural gas from this region.

GAZPROM Schweiz AG is responsible for transporting the natural gas from Central Asia to Europe, where it is then sold. Over 90 % of the natural gas produced is sold to other GAZPROM Group companies. GAZPROM Schweiz AG sells the remaining gas directly to its own buyers in Central Asia and Europe. For example, in southern Kazakhstan, GAZPROM Schweiz AG supplies natural gas to the local gas provider.

In addition to purchasing Central Asian gas, GAZPROM Schweiz AG is increasingly focusing on celling natural gas in South-East Europe. It entered a new market segment in this region, the chemical industry.

GAZPROM Schweiz AG’s business activities are supported through collaborations and investments where necessary; this includes a shareholding in Uzbek natural gas producer Gissarneftgaz and, on the sales side, in utility companies in Austria, Italy, and Serbia.

Present Position and Trend of Business (import / export) with India

Chennai/New Delhi: The Russian government-owned OAO Gazprom is in talks with Indian Oil Corp. Ltd (IOC) for acquiring a stake in the 5 million tonnes per annum (mtpa) liquefied natural gas (LNG) terminal planned at Ennore near Chennai.

Gazprom, the world’s largest explorer of natural gas, is interested in the `4,320 crore terminal that is to be developed as a joint venture between IOC and Tamil Nadu Industrial Development Corp. Ltd (TIDCO).

“Talks are on between Gazprom and IOC for a stake in the Ennore LNG terminal. Gazprom is setting up a huge liquefaction facility at Sakhalin. It wants a gasification facility in India to cater to the growing demand here,” said a person aware of the development who spoke on condition of anonymity.

The terminal is planned at Ennore Port in Tiruvallur district of Tamil Nadu. IOC plans to invest `56,200 crore during the 12th plan (2012-17), of which `3,592 crore is earmarked for diversification.

IOC chairman and managing director R.S. Butola said he was not aware of Gazprom’s interest but didn’t rule out a partnership. “It hasn’t come to our level. We are talking to Gazprom for sourcing LNG for the Ennore project. We are open to partnerships. Whether it will be Gazprom or others has to be decided.”

A Gazprom spokesperson declined to comment.

A TIDCO spokesperson said the company wasn’t aware of an approach by Gazprom but added that it was “just an associate partner” and that Indian Oil didn’t have to inform it on “bringing in a new partner for the LNG Terminal at Ennore”.

Indian Oil, the nation’s largest refiner, is diversifying its business as there are limited growth opportunities in the oil retailing business. State-controlled refiners such as IOC continue to sell fuel below cost and are not sure about the extent to which they will be compensated by the government or when.

Natural gas is shipped as a liquid and is reconverted at LNG terminals. India has only two functioning LNG regasification terminals. They are located in Gujarat and are owned by Petronet LNG Ltd and Shell India. IOC in a consortium with GAIL (India) Ltd, Bharat Petroleum Corp. Ltd (BPCL) and Oil and Natural Gas Corp. Ltd (ONGC), already owns a stake in Petronet LNG. India currently has around 16 mtpa of LNG regasification capacity.

The country is facing a fuel scarcity as gas production from the Reliance Industries Ltd’s D6 field has dropped. According to the petroleum ministry, the country’s natural gas production was 130 million standard cubic metres per day (mscmd) of gas in 2011-12, a 9% decline from the previous year

because of falling production of gas in the D6 field. The future for new power projects looks bleak as the projected gas production in the current fiscal is expected to be only 118.3 mscmd.

Gazprom accounts for 17% of the world’s total natural gas reserves and for around 70% of gas reserves in Russia. Gazprom Marketing and Trading Ltd (GM&T), a unit, has been engaged in LNG trading and marketing in Asia Pacific since 2009. It inked an agreement withGAIL for 2.5 million tonnes of LNG supply per annum for 20 years, starting in 2018-19. Last year, GM&T also signed an accord with IOC to supply 2.5 mtpa of LNG for 25 years from its projects such as Sakhalin.

JP Morgan Russia Equity Research in a report dated 8 November based on a conference call wrote, “Gazprom said up to 40% of its domestic contracts with energy and industrial companies expire by year-end and are being renewed right now....Gazprom believes contract enforceability remains low for the monopoly as well as for the independent players (Rosneft, Novatek) due to government’s initiatives during the crisis years, which remain in effect today. We see the high churn ratio of the contracts as an opportunity for the continued market share rebalancing, as Gazprom itself sees its domestic position as domineering.” IOC also recently signed an agreement with Korea Gas Corp. for “joint participation” in areas such as developing “natural gas infrastructure projects and LNG sourcing”.

Gazprom was earlier present in the Indian hydrocarbon space when it was awarded a block along with GAIL in the first new exploration and licensing policy (Nelp) round that was held in 1999. However, the block was eventually surrendered in the backdrop of a dispute between the companies over payments.

IOC operates 10 of India’s 22 refineries and has a 30.8% share of the nation’s 213.18 mtpa refining capacity.

The world’s largest natural-gas exporter, is struggling to get a foothold in the Asian markets leading

global economic growth.

The Russian company’s plan to supply liquefied natural gas to India from 2016, the year the U.S. is

set to start gas exports, is faltering after buyers said they’re looking for cheaper fuel fromNorth

America. Last year, decade-long talks to supply pipeline gas to China foundered over price

disagreements.

An OAO Gazprom sign is seen on display at the company's headquarters in Moscow, Russia.

Photographer: AndreyRudakov/Bloomberg

“Gazprom has a major problem of having a fixed view on what the price of gas should be, irrespective

of market conditions,”Jonathan Stern, chairman and senior research fellow at the Oxford Institute for

Energy Studies, said by e- mail. “If this continues, it will create increasing problems for Russian gas

exports.”

Keen to protect Russia’s position in world gas markets, President-elect Vladimir Putin ordered export

monopoly Gazprom to diversify into Asia and develop an LNG business. The Moscow- based

company cut this year’s target for exports to Europe, which accounts for more than half of Gazprom’s

gas revenue, as the debt crisis holds back economic growth and imports from the Middle East

increase.

Asia accounts for more than 60 percent of global demand for LNG, gas chilled to a liquid for transport

by ship. The region imported 177.7 billion cubic meters of the fuel in 2010, valued at more than $86

billion today, based on data from the U.S. Federal Energy Regulatory Commission. Buyers are turning

to North America, where record production from shale deposits has driven down U.S. prices.

“The global gas market is integrating and that has implications for prices,” ChristofRuehl, BP Plc

(BP/)’s chief economist, said at a conference in Moscow last month.

First Buyer GAIL India Ltd. (GAIL), the country’s largest gas supplier, became the first Asian buyer of

U.S. natural gas in December when it signed a 20-year deal with Cheniere Energy Partners LP

(CQP), which is planning the first U.S. export terminal. The contract, targeting 3.5 million tons a year

starting in 2017, is linked to the day- to-day U.S. benchmark gas prices, which fell to a 10-year low of

$2.21 a million British thermal units in January. It will also include a fixed component.Prices of LNG in

India are at $13.65 a million Btus this year, according to FERC.Gazprom had agreed on preliminary

long-term LNG supply deals last year with GAIL, Petronet LNG Ltd. (PLNG), Gujarat State Petroleum

Corp. (GSPC), and Indian Oil Corp. (IOCL) for a total of as much as 10 million metric tons annually,

with contracts to be signed within six months. In contrast to Cheniere, the Russian supplier ties long-

term prices to oil, a policy some of its European customers are fighting. China has refused to pay

Russia a price on a par with the European level.

Gas Price Negotiations “We have started price negotiations with Gazprom for the LNG we plan to buy

from them,” A.K. Balyan, chief executive officer of Petronet, India’s biggest gas importer, said by

telephone from New Delhi. “We will have to see how it compares with the U.S. and other markets.”

Ventures in Australia and Qatar, the world’s biggest LNG exporter, sell the liquid fuel to Asian buyers

at prices linked to the so-called Japan Crude Cocktail, a 40-year-old index. Transporting gas from the

U.S. would be less expensive than Asian LNG, D.K. Sarraf, managing director ofOil& Natural Gas

(ONGC) Corp.’s overseas unit, ONGC Videsh Ltd., said March 1, as it nears an agreement to buy its

first U.S. shale gas asset.

‘Back Row’India is “not going to be easier,” Valery Nesterov, an analyst at Troika Dialog in Moscow,

said in a phone interview. “You have to beware of the situation developing like with China, where

we’re in the back row with insignificant volumes.”

The signing will happen this year, Gazprom Deputy CEO Alexander Medvedev said in an interview

in New York on Feb. 16. The Indian deal “is in the final stage of preparation” with contract prices

indexed to oil, he said.

Gazprom’s marketing and trading unit wants to gain market share in India because demand may grow

an average 6.5 percent annually, not far off the 7.7 percent forecast in China, according to

the International Energy Agency.

Today, India’s largest supplier is Qatar. The country imports about 25 percent of its gas requirements

as its own output from offshore deposits is declining. Gazprom has supplied occasional cargoes to

India since 2007.

While Gazprom aims to boost its share in Europe’s gas market to 32 percent by 2030 from 27 percent

last year, the European Union has sought to diversify suppliers. With European demand suppressed

because of the economy, Gazprom lowered an export target for this year to 154 billion cubic meters

from 164 billion expected in November.

Sakhalin Plant

The Indian campaign is part of Gazprom’s drive to gain 14 percent of world LNG trade by 2030, a

market that’s set to grow at double the pace of global gas output.

Gazprom exports LNG from its share of the Sakhalin-2 plant off Russia’s Pacific coast, mostly to

Japan and Korea, and buys the fuel from other sources for deliveries to India and other Asian

markets. Its total LNG trade rose 25 percent to 3 billion cubic meters in 2011, a presentation to

investors last month showed. That’s less than Hong Kong’s demand alone in 2010, BP’s Statistical

Review of World Energy shows.

The state-controlled gas producer has yet to make a final decision on adding to its liquefaction

capacity since agreeing to buy control of the Sakhalin-2 venture from Royal Dutch Shell Plc at the end

of 2006.

Gazprom is looking at expanding the Sakhalin plant north of Japan, building a plant in Vladivostok on

the Pacific coast and developing Arctic projects. Until then, the company is boosting global LNG trade

by securing fuel from third parties.

Indian ProspectsGazprom shares have risen 16 percent this year to close at 198.78 rubles in Moscow

today. They fell 11 percent in 2011 as the European debt crisis curbed prospects for demand growth.

Net income probably rose 25 percent last year to almost $40 billion, driven by higher fuel prices, the

company said in February. Gazprom hasn’t reported fourth-quarter earnings yet.

Extraction of gas from shale deposits has allowed the U.S. to overtake Russia as the world’s biggest

producer. The surge in output pushed U.S. prices to a 10-year low and increased availability of the

fuel for export. The trouble for India and other gas buyers may come as U.S. manufacturers lobby to

curb exports and keep prices low.

“Currently it’s cheaper to buy LNG from the U.S.,” Petronet’sBalyan said. “But there’s no LNG there

yet and we don’t know how much export the government will allow.”

Petronet said it’s in discussions with suppliers in the U.S., including Cheniere Energy and Freeport

LNG Development LP. GAIL India is also negotiating its second supply contract, seeking supplies

from a Freeport LNG project scheduled to start in 2016.

To contact the reporter on this story: Anna Shiryaevskaya in Moscow

Crude Oil and Natural Gas Production:

The trend in production of crude oil and natural gas during the period 2004-05 to 2011-12 is in

Table-1 and Graph-1. The crude oil production has remained in the range 33 to 38 MMT during

this period with year to year variations. During the year 2011-12, production for crude oil is

38.09MMT, which is about 1.08% higher than the actual crude oil production of 37.684 MMT

during 2010-11. Natural gas production during 2011-12 was 47.559 BCM against production of

52.219 BCM during 2010-11 which is lower by 8.92% due to lower production from KG D-6

basin.

There were also various reasons like environmental and law and order issue in Assam, power

disturbances in Gujarat, delay in production from well in Andhra Pradesh, and less inputs in a

number of development/side track wells in Mumbai & some constraints were overcome and

higher production is expected during the coming years.

The Government of India launched the ninth bid round of New Exploration Licensing Policy (NELP-

IX) and fourth round of Coal Bed Methane Policy (CBM-IV) during Oct., 2010 to enhance the

Country’s energy security. In addition, in order to supplement domestic reserves the oil and gas

PSUs have acquired assets abroad, the production of oil and natural gas of ONGC-VIDESH Ltd

during 2011-12 was 8.75 MMT of oil and equivalent gas (MMTOE) from its assets abroad.

% G

row

th

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12*

Year Crude Oil Production(MMT)

% Growth Natural Gas Production(BCM)

% Growth

2004-05 33.981 1.82 31.763 -0.62

2005-06 32.190 -5.27 32.202 1.38

2006-07 33.988 5.59 31.747 -1.412007-08 34.118 0.38 32.417 2.11

2008-09 33.508 -1.79 32.845 1.32

2009-10 33.690 0.54 47.496 44.61

2010-11 37.684 11.86 52.219 9.94

2011-12* 38.090 1.08 47.559 -8.92*Provisional

Percentage Growth in Crude Oil & Natural Gas Production

50.00

40.0044.61

30.00

20.00

10.00

0.00

-10.00

1.82

-0.62

1.38

-5.27

5.59

-1.41

2.111.32

0.38 -1.79

0.54

11.86

9.94

1.08

-8.92

-20.00 Years% growth of Crude Oil Production % Growth of Natural Gas Production

year production change

1980   NA

1981   NA

1982   NA

1983   NA

1984   NA

1985   NA

1986   NA

1987   NA

1988   NA

1989   NA

1990   NA

1991   NA

1992 7,631.93 NA

1993 6,730.00 -11.82 %

1994 6,135.00 -8.84 %

1995 5,995.00 -2.28 %

1996 5,850.00 -2.42 %

1997 5,920.00 1.20 %

1998 5,854.00 -1.11 %

1999 6,078.95 3.84 %

2000 6,479.20 6.58 %

2001 6,917.00 6.76 %

2002 7,408.17 7.10 %

2003 8,132.20 9.77 %

2004 8,804.71 8.27 %

2005 9,043.08 2.71 %

2006 9,247.21 2.26 %

2007 9,437.06 2.05 %

2008 9,356.78 -0.85 %

2009 9,495.37 1.48 %

2010 9,694.11 2.09 %

2011 9,773.52 0.82 %

Growth of Foreign Direct Investment Inflows

To attract foreign investment under P&NG sector various policy initiatives have been taken

during the XIth Five Year Plan. The present Foreign Direct Investment (FDI) policy as brought out by

DIPP on

31.03.2011, for petroleum & natural gas sector, allows 100% automatic route for exploration activities of

Crude Oil and Natural Gas Production Of Russia

oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas,

marketing of natural gas and petroleum products, petroleum product pipelines, natural

gas/pipelines, LNG

Regassification infrastructure, market study and formulation and Petroleum refining in the private sector, subject to the

existing sectoral policy and regulatory framework in the oil marketing sector.

Year-wise FDI inflows under Petroleum & Gas sector is given in Table-7. It may be observed that FDI in petroleum and natural gas has varied considerably over the years that could at least partly due to the bulkiness of investment in the sector. The highest FDI was received in 2011-12 when it reached Rs. 9955 crore contributing almost 6% of total FDI in the economy.

Annual Growth of GazpromYear Annual

Growth 2011

$55,073.20

2010

$45,915.50

2009

$75,002.40

2008

$55,593.50

2007

$36,499.70

2006

$43,665.00

2005

$41,194.40

2004

$51,696.80

2003

$4,694.70

2002

$8,031.80

Years Foreign Direct Investment Annual Growth (%)

All Sector P&NG Sector All Sector P&NG SectorMillion Million Million Million

Rs. US$ Rs. US$ Rs. US$ Rs. US$1 2 3 4 5 6 7 8 9

2004-05 146530 3219 5182 113

2005-06 245840 5540 636 14 67.77 72.10 -87.73 -87.61

2006-07 563900 12492 4010 89 129.38 125.49 530.50 535.71

2007-08 986420 24575 57290 1427 74.93 96.73 1328.68 1503.37

2008-09 1428290 31396 19310 412 44.80 27.76 -66.29 -71.13

2009-10 1231200 25834 13280 266 -13.80 -17.72 -31.23 -35.44

2010-11 973200 21383 25430 556 -20.96 -17.23 91.49 109.02

2011-12* 1651460 35121 99550 2030 69.69 64.25 291.47 265.11

St a t e - w i s e G e ologi ca l S u r v e y s A c hi e v e m e n ts up to 31 . 3 . 201 2 States Geological Surveys

By ONGC By OIL Total

1 2 3 4

Andhra Pradesh

A.N. Islands

Arunachal Pradesh

Assam

Bihar (incl. Jharkhand)

Gujarat (Gulf Of Cambay)

Himachal Pradesh

Jammu & Kashmir

Kerala-Karnataka (incl. Goa)

Madhya Pradesh

Chhattisgarh

Manipur

Meghalaya

Mizoram

Nagaland

Orissa

Rajasthan

Sikkim

Tamil Nadu (Incl. Pondicherry)

Tripura

Uttar Pradesh (incl. Uttarakhand)

West Bengal

Maharrashtra

Eastern offshore

Western offshore

Total

53427 141 53568

6860 14043 20903

3692 - 3692

48073 33725 81798

4035 - 4035

60625 8767 69392

9948 - 9948

22970 - 22970

4000 - 4000

39221 - 39221

5920 - 5920

2781 - 2781

1911 - 1911

6194 1298 7492

6971 - 6971

– 4278 4278

46501 15458 61959

720 - 720

20003 - 20003

21263 - 21263

29797 6223 36020

8808 - 8808

– -

– -

– -

403720 83933 487653

S t a t e - w i s e Pe r Cap it a Sa l e s o f Pe tr o l eu m P r oduc t s

Wo rl d P r o v ed R ese r v es of C r ude Oi l at end 2011

State/UT 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12*

1 3 4 5 6 7 8 9 9

A. States1. Andhra Pradesh 86.4 78.8 84.6 100.9 112.9 113.3 116.6 124.5

2. Arunachal Pradesh 83.6 82.3 81.3 89.3 90.8 110.6 110.8 104.8

3. Assam 50.6 47.7 46.0 48.7 50.9 55.7 56.8 56.7

4. Bihar 26.6 24.4 25.0 28.2 31.5 35.4 37.2 35.9

5. Chhattisgarh 61.5 59.9 62.6 70.1 75.9 77.5 79.6 77.5

6. Delhi 253.5 228.3 260.4 248.2 233.6 237.1 227.5 256.3

7. Goa 743.1 631 651.4 653.5 646.5 633.2 631.9 724.3

8. Gujarat 161.9 135 136.4 138.5 274.1 299.9 275.8 270.2

9. Haryana 188.6 178 193.5 236.2 256.1 304.4 338.6 362.3

10. Himachal Pradesh 92.5 91.8 95.9 110.1 114.2 135.8 145.8 154.4

11. Jammu & Kashmir 74.3 75.1 77.5 84.5 86.0 99.9 96.1 96.1

12. Jharkhand 58.8 54.8 51.0 53.6 57.8 64.5 69.2 68.7

13. Karnataka 102.0 96.6 102.7 112.0 120.1 127.2 131.6 132.1

14. Kerala 112.7 105.6 107.1 113.6 131.3 141.9 143.1 147.9

Year CrudeQty.

62.7 51.9 52.9 54.7 63.4 64.5 70.9 71.6

16. Maharashtra 133.1 128 132.1 145.7 144.4 145.3 147.7 152.1

17. Manipur 42.7 42.1 40.5 47.4 51.8 58.1 42.5 49.6

18. Meghalaya 101.3 98 98.5 108.7 126.6 137.1 151.7 153.8

19. Mizoram 72.2 75.9 73.8 77.3 81.5 85.6 89.6 91.7

20. Nagaland 44.0 40.6 40.3 38.2 39.1 42.8 49.5 59.1

21. Orissa 54.9 51.6 52.2 61.0 66.3 74.6 81.2 79.9

22. Pondicherry 377.0 382.2 422.4 407.0 389.1 431.7 419.2 440.5

23. Punjab 189.0 169.4 179.8 189.1 200.1 219.6 203.7 206.1

24. Rajasthan 96.9 76.1 86.1 93.0 120.2 106.4 108.2 126.3

25. Sikkim 110.0 109 89.2 96.4 112.0 137.1 160.3 153.0

26. Tamilnadu 136.2 129.6 131.0 148.7 163.1 170.0 177.8 175.2

27. Tripura 36.6 37.4 39.0 40.4 45.0 47.8 51.5 50.9

28. Uttar Pradesh 59.5 53.3 50.9 51.4 55.5 58.7 58.8 59.7

29. Uttarakhand 88.7 85.6 92.4 101.0 106.4 121.2 124.7 123.3

30. West Bengal 60.5 55.6 54.5 58.9 59.7 62.3 67.4 64.9

B.Union Territories

1. Chandigarh 245.6 211.4 212.4 189.1 208.4 233.1 231.7 291.0

2. Daman&Diu& 473.3

Dadra&Nagar Haveli 965.0 739.6 636.8 642.5 627.2 763.3 1332.3 833.8

3. Others 228.0 240 273.7 296.2 261.6 266.8 290.6 333.3

Total All India 116.8 111.7 115.5 93.6 106.9 112.5 115.8 116.3

Country/ Region Thousand million

tonnes

Thousand million

barrels

Share

of total

R/P

ratio

1 2 3 4 5

US 3.7 30.9 1.9% 10.8

Canada 28.2 175.2 10.6% *

Mexico 1.6 11.4 0.7% 10.6

Total North America 33.5 217.5 13.2% 41.7

Argentina 0.3 2.5 0.2% 11.4

Brazil 2.2 15.1 0.9% 18.8

Colombia 0.3 2.0 0.1% 5.9

Ecuador 0.9 6.2 0.4% 33.2

Peru 0.2 1.2 0.1% 22.2

Trinidad & Tobago 0.1 0.8 0.1% 16.7

Venezuela 46.3 296.5 17.9% *

Other S. & Cent. America 0.2 1.1 0.1% 22.1

Total S. & Cent. America 50.5 325.4 19.7% *

Azerbaijan 1.0 7.0 0.4% 20.6

Denmark 0.1 0.8 10.0

Italy 0.2 1.4 0.1% 34.3

Kazakhstan 3.9 30.0 1.8% 44.7

Norway 0.8 6.9 0.4% 9.2

Romania 0.1 0.6 18.7

Russian Federation 12.1 88.2 5.3%

23.5Turkmenistan 0.1 0.6 7.6

United Kingdom 0.4 2.8 0.2% 7.0

Uzbekistan 0.1 0.6 18.9

Other Europe & Eurasia 0.3 2.2 0.1% 15.2

Total Europe & Eurasia 19.0 141.1 8.5% 22.3

Iran 20.8 151.2 9.1% 95.8

Iraq 19.3 143.1 8.7% *

Kuwait 14.0 101.5 6.1% 97.0

Oman 0.7 5.5 0.3% 16.9

Qatar 3.2 24.7 1.5% 39.3

Saudi Arabia 36.5 265.4 16.1% 65.2

Syria 0.3 2.5 0.2% 20.6

United Arab Emirates 13.0 97.8 5.9% 80.7

Yemen 0.3 2.7 0.2% 32.0

Other Middle East 0.1 0.7 37.1

Total Middle East 108.2 795.0 48.1% 78.7

Wo rl d P r o v ed C r ude Oi l at end 2011

Country/Region 2004 2005 2006 2007 2008 2009 2010 2011 shareof total

1 2 3 4 5 6 7 8 9 10

Total North America 20503 20698 20821 20964 21086 21127 21008 21382 23.0%

Argentina 623 627 623 634 634 636 640 649 0.7%

Brazil 1915 1916 1916 1935 2045 2093 2093 2116 2.3%

Netherlands Antilles 320 320 320 320 320 320 320 320 0.3%

Venezuela 1284 1291 1294 1303 1303 1303 1303 1303 1.4%

Other S. & Cent. America 2235 2251 2260 2310 2356 2327 2297 2202 2.4%

Total S. & Cent. America 6377 6405 6413 6502 6658 6679 6653 6590 7.1%

Belgium 782 778 774 745 745 823 813 823 0.9%

France 1982 1978 1959 1962 1971 1873 1702 1610 1.7%

Germany 2320 2322 2390 2390 2366 2362 2091 2077 2.2%

Greece 412 418 425 425 425 425 440 498 0.5%

Italy 2497 2515 2526 2497 2396 2396 2396 2331 2.5%

Netherlands 1284 1274 1274 1236 1280 1280 1274 1276 1.4%

Norway 310 310 310 310 310 310 310 310 0.3%

Russian Federation 5327 5392 5471 5484 5405 5382 5491 5663 6.1%Spain 1372 1377 1377 1377 1377 1377 1427 1467 1.6%

Sweden 422 422 422 422 422 422 422 434 0.5%

Turkey 693 613 613 613 613 613 613 613 0.7%

United Kingdom 1848 1819 1836 1819 1827 1757 1757 1757 1.9%

Other Europe & Eurasia 5695 5658 5545 5581 5567 5604 5699 5710 6.1%

Total Europe & Eurasia 24944 24877 24922 24862 24704 24624 24435 24570 26.4%

Iran 1642 1642 1727 1772 1805 1860 1860 1860 2.0%

Iraq 740 743 748 755 744 754 846 924 1.0%

Kuwait 931 931 931 931 931 931 931 931 1.0%

Saudi Arabia 2075 2100 2100 2100 2100 2100 2100 2110 2.3%

United Arab Emirates 620 620 620 625 673 673 673 673 0.7%

Other Middle East 1248 1248 1283 1341 1350 1501 1513 1513 1.6%

Total Middle East 7256 7284 7409 7524 7603 7819 7923 8011 8.6%

Total Africa 3116 3224 3049 3037 3151 3012 3192 3317 3.6%

Australia 763 711 694 733 734 734 740 742 0.8%

China 6603 7165 7865 8399 8722 9479 10302 10834 11.6%

India 2558 2558 2872 2983 2992 3574 3703 3804 4.1%Indonesia 1057 1057 1127 1150 1052 1085 1139 1141 1.2%

Japan 4531 4531 4588 4650 4650 4630 4291 4274 4.6%

Singapore 1255 1255 1255 1255 1385 1385 1385 1395 1.5%

South Korea 2598 2598 2633 2671 2712 2712 2712 2783 3.0%

Taiwan 1159 1159 1140 1197 1197 1197 1197 1197 1.3%

Thailand 1068 1078 1125 1125 1220 1285 1298 1298 1.4%

Other Asia Pacific 1410 1428 1435 1443 1459 1605 1638 1667 1.8%

Total Asia Pacific 23001 23540 24734 25606 26123 27685 28405 29135 31.3%

Total World 85198 86027 87347 88495 89324 90946 91616 93004 100.0%

Present Trade barriers for import / Export of selected goods:

In general, U.S. companies face a number of tariff and non-tariff trade barriers when exporting to Russia. A complaint frequently voiced by U.S. companies is Russia’s complex system of standardization. As explained in detail in the “Standards” section below, Russia’s regime remains extremely complex due to its lack of clarity and transparency, and

overall redundancy. While the system has improved somewhat, U.S. companies are encouraged to obtain appropriate legal advice or assistance from experienced distributors or consultants, as well as the U.S. Commercial Service.

 

Discrimination against foreign providers of non-financial services is, in most cases, not the result of federal law, but stems from abuse of power, sub-national regulations and practices that may violate Russian law. For example, a few foreign service providers have noted that they are forced to pay a range of fees to obtain licenses from local authorities, fees that domestic companies allegedly bypass via bribes.

 

The 1996 federal law “On Banks and Banking Activity” permits foreign banks to establish subsidiaries in Russia. However, Russia does not allow foreign banks to establish branches in Russia. In November 2006, Russia and the U.S. signed their WTO (World Trade Organization) Bilateral Agreement, a major step in Russia’s accession to the WTO. As part of this Agreement, Russia pledged to allow foreign ownership to account for as much as 70% of the country’s total banking sector equity. Previously, Russia had the prerogative to legislate the limit on foreign capital to 50% of total equity. However, at the time the bilateral agreement was signed, foreign equity accounted for 20% of the total. Russia’s pledge essentially “grandfathered” in that 20% and provided new foreign equity the potential to absorb/account for an additional 50% of total banking sector equity.

 

The Central Bank has required new foreign bank subsidiaries to have a minimum of €5 million in capital (the same requirement is applied to domestic banks) and that at least 75% of the bank's employees and 50% of the bank's management board be of Russian nationality if the chairman is not a Russian citizen. Heads of foreign banks' Russian offices are required to be proficient in the Russian language.

 

In the insurance sector, foreign insurance firms are subject to a 49% equity restriction. Foreign firms that were active in Russia when this requirement came into effect, however, were grandfathered and are not subject to the foreign equity limit. Russia also has more generous operating provisions for insurance companies from the European Union, and has been permitting multinational companies to benefit from this more generous treatment provided they conduct their Russian investments via their EU-based offices. Once Russia becomes a WTO member and the United States grants permanent normal trade relations status, U.S. insurance companies will be allowed to operate through subsidiaries, including 100% foreign-owned non-life insurance companies, and will be able to open direct branches at the end of a nine-year transition period. However, as in the banking sector, Russia maintains the discretion to limit foreign sourced charter capital in the insurance sector and if the ratio of foreign sourced to total charter capital in the insurance sector ever exceeds the 50% cap, Russia’s regulators will have the discretion to take certain actions specified in Russia’s WTO commitments.

 

Until Russia’s accession, EU firms will continue to enjoy an advantage over their counterparts from the United States and elsewhere, since they can offer life and mandatory forms of insurance in Russia directly, without the requirement to work through a majority Russian-owned partner. Russian law currently requires that chief executives and chief accountants of foreign insurers operating in Russia be Russian citizens.

 

In the telecommunications sector, the 2004 Law on Communications was amended in July 2006 by the law “on Information, Information Technologies and Information Protection.” The latter law’s impact on competitive alternative telecommunications operators, many of which enjoy large foreign investment, has been substantial, since these companies now fall under tight government regulation. In particular, regulations on interconnection--the process by which alternative operators connect their networks to the Russian public telephone network--place interconnection contracts and fees under the regulatory authority of the Ministry for Information Technologies and Communications. Alternative operators fear that these fees will be raised to subsidize network upgrades of government-owned and ministry-controlled local and long distance operators.

 

There are significant barriers in the provision of satellite telecommunications services in Russia. In particular, satellite regulation is not transparent. The legal requirements and administrative responsibilities associated with the provision of these services appear to be discriminatory, with the Russian government demonstrating a preference for Russian satellite communications systems, which puts competing satellite systems at a disadvantage. Current Russian legislation restricts foreign investment in the aerospace industry to less than 25% of an enterprise.

 

The Land Code that was passed in 2001 allows equal treatment of domestic and foreign entities to buy land and buildings, although purchase of agricultural land by foreigners is still prohibited. Discussion on specific land policy continues, including legislation on transfer of use, but a conclusion has not yet been reached. Foreign entities are restricted from buying land close to federal borders and in areas that the President determines critical to national security.

 

The government enacted the Strategic Sectors Law (SSL) in May 2008. The SSL introduces a list of 42 “strategic” sectors in which purchases of “controlling interests” by foreign investors must be pre-approved by the Russian government. The list of restricted sectors includes: enterprises in the nuclear industry or involved in handling radioactive materials; enterprises involved in work on infectious diseases; arms, munitions, and military equipment production, maintenance, or repair; the aviation and space industries; certain data-transmission (radio, television, telecommunications) infrastructure; production and distribution of encryption technologies and equipment; production and sales of goods and providing services under conditions of a “natural monopoly” (e.g., activities such as operating certain gas networks); newspapers with a circulation of more than one million; and natural resource extraction. Many observers, while welcoming more precision about the rules of the game, have criticized the SSL for being overly broad in the number of sectors it covers, and raised concerns that the approval process will prove to be non-transparent and burdensome.

 

The SSL approval process involves two steps. Initially, the foreign investment must be vetted by the Federal Anti-Monopoly Service (FAS). The FAS must determine whether the proposed investment is subject to the SSL and then recommend to the Government Commission on Control of Foreign Investment in the Russian Federation (“Commission”) whether the investment should be approved. The head of the FAS is appointed by the Prime Minister. The Commission is headed by the Prime Minister and is comprised of Cabinet Ministers with jurisdiction over most of the restricted sectors, as well as the Director of the Federal Security Service (FSB).

 

To date, only two foreign companies have received approval under the SSL: DeBeers (diamond mining) and Alenia Aeronautica (development of Sukhoi Superjet 100). These approvals provide little guidance regarding implementation of the SSL. Both investments were pre-approved by Prime Minister Putin when he was still President and no information about the process was publicized by government authorities.

 

In conjunction with the SSL, amendments to the sub-soil legislation were also passed requiring governmental approval for foreign investment in excess of 10% in companies operating a “strategic” deposit, which includes major oil, gas, and other mineral deposits. Foreign oil and gas companies are concerned about the potential application of these provisions, including how and when the government may declare a given field strategic and what compensation a field licensee may be given under such declarations. The Russian government continues its policy of not entering into any further Production Sharing Agreements (PSAs - designed for energy projects that require high capital expenditures and a long period before profits or significant tax revenues are generated).

 

In July 2008, RAO UES, the electricity holding company that controlled all of Russia’s power assets, with the exception of those connected to nuclear energy, completed its corporate reorganization and ceased to exist. It has

been succeeded by 24 companies: six wholesale private generation companies (“OGK’s”) and 14 “territorial” generation companies (“TGK’s”), the hydroelectric giant RusHydro; a Federal Grid; and a number of distribution operators. Although the unbundling and privatization of RAO UES was initially hailed as a huge success, concerns are growing.

 

As a condition to the generating companies’ spinoffs, investors in the OGK’s and TGK’s agreed to implement plans to modernize and expand their respective electricity infrastructure. These plans were premised on the assumptions of robust economic growth and demand, and access to affordable credit. In light of slowing Russian economic growth and tight financial conditions, these investment obligations have become very expensive. Consequently, a number of investors are backing out of acquisition deals or seeking to renegotiate the terms of their acquisitions with the Russian government. It seems unlikely that modernization and expansion of the sector’s infrastructure – a major purpose of the reorganization – will occur in the near future. Because the restructuring was only completed in July 2008, it is still unclear to what degree the electricity generation market will ultimately be deregulated, and whether it will operate in a transparent and non-discriminatory manner.

 

In aviation, many of the Russian-flagged carriers have aging fleets and use outmoded avionics and engines, but several are seriously considering significant purchases or wet-leases of foreign aircraft in an attempt to be more competitive with Western airlines. Domestic aircraft manufacturers only produce ten planes per year on average and therefore cannot keep up with Russian airlines’ projected demand for 1,500 additional planes in the next twenty years. The airlines hope that Russia's commitment to reduce aircraft tariffs as part of its WTO accession will help them purchase the modern, fuel-efficient aircraft they need to remain competitive with foreign airlines. Current Russian law stipulates preferential treatment (tax holidays, guarantees on investment) for Russian and foreign investors in aviation-related research and manufacturing ventures. However, it limits the share of foreign capital in aviation enterprises to less than 25% and requires that board members and senior management staff be Russian citizens. There is speculation that the 25% limit could be raised or eliminated to make way for further investment. Some observers, however, doubt that recent proposals to raise the limit to 49% would be sufficient to attract foreign capital for Russia’s aircraft industry.

 

The signed bilateral agreement on Russia's accession to the WTO and the corresponding side letter on leased aircraft could yield significant market access opportunities. The side letter on leased aircraft has been in force since November 19, 2006, with narrow body leased aircraft enjoying immediate tariff reductions. Tariffs on wide body aircraft will be reduced from 20% to 7.5% over four years following accession. Tariffs on civil aircraft parts, including engines, will be reduced to an average of 5%. As long as the lease is signed before January 1, 2011, aircraft with less than 50 seats will be charged only 8% and those with 115-160 seats will be charged 10%.

 

The Russian government eliminated the import tariff on small aircraft with up to 19 seats for a period of nine months as of July 16, 2008. According to the Ministry of Transportation, the measure will be extended after nine months. In September 2008, the government announced that the import tariff for aircraft with up to 50 seats would be cancelled as of January 1, 2009, and that import tariffs for aircraft with 115-160 seating capacity would also be temporarily canceled, so long as the aircraft were not more than ten 10 years old and were imported into Russia prior to 2011 under leasing contracts for no longer than five years. Neither of the decrees finalizing these proposals has yet been issued.

 

The import tariff on foreign aircraft with over 300 seats was eliminated for a period of nine months beginning in February 2008. In September 2008, the Russian government recommended permanent cancellation of import duties on aircraft seating more than 300 passengers, but no date has been set yet for this permanent tariff reduction measure to come into effect. U.S. industry reports that illegal logging accounts for as much as 20% to 30% of Russia’s timber harvest. Illegal wood supplies have begun to appear in China, hurting U.S. exports to that market. Illegal

logging continues to increase, particularly in the Far East due to its proximity to China. According to World Wildlife Fund data, the share of unregistered wood to total volume of timber consumption is 53% in the Chita region, 34% in Primorskiy Kray, 33% in Khabarovsk Kray, 17% in Vologda region, and 10% in Krasnoyarsk Kray.

Potential for import / export in India

India invites Russian investors into the oil-and-gas sector

India's Petroleum and Natural Gas Ministry held a presentation of the next stage (the ninth) of  the New Exploration Licensing Programme (NELP-IX) in Moscow on Monday. The Indian delegation was headed up by the Minister of State for Petroleum and Natural Gas, Sri Jitin Prasada.

In his address, Mr. Prasada addressed an appeal to the representatives of Russian oil-and-gas and service companies to take part in the NELP-IX programme. He noted that the Indian government had created the most favourable conditions for investor income.

"The fact that over a period of a few decades, Soviet and Russian specialists have helped to establish the Indian oil-and-gas industry, guarantees an especially favourable relationship with Russian companies", Mr. Prasada remarked.

34 licensed blocks are put forward in the tender, from which 7 are deep-sea, 8 are shallow-water and 19 are located on dry land. Almost all of  the proposed areas are located in the western part of  India and on the western Indian continental shelf. Only four blocks are located in the Indian Ocean, to the east of India in the Andaman Islands region.

The Director General of  the Directorate General for Hydrocarbons for the Indian Government, S. K. Srivastava, gave details concerning the geological construction of  the proposed blocks and regarding the prospects for discovering reservoirs of oil and gas.  At the same time, the Deputy Petroleum and Natural Gas minister, D.N. Narasimha Raju,

told the guests about the innovations which the Indian government had made to the current investment programme. According to him, NELP-IX significantly simplifies the procedure for starting a project, and also provides for considerable investor preferences.

Aleksandr Nikiforov, head of Gazprom's Operator Project Office in India, spoke at the presentation. He talked of  how Gazprom zarubezhneftegaz had gathered operational experience in India. Representatives of  BP, the ONGC and the Confederation of  Investors in India (CII) also talked about the investment climate for guests in the country.

Gazprom zarubezhneftegaz has begun drilling a third exploratoty well in the Bay of Bengal

The joint stock company Gazprom zarubezhneftegaz has begun drilling a third exporatory well, NEC-W-1, in Block 26 in the Bay of Bengal with the Japanese Hakuryu-5 semi-submersible drilling rig to 3,200 metres.

The drilling contract with the Japanese company, Japan Drilling Co. Ltd, was signed in February this year.

Within the context of the drilling programme, it is planned to test eight targets. The duration of the drilling, taking well-testing into account, is expected to amount to 5 months.

A 2D seismic survey was carried out at the end of 2008 - beginning of 2009 over an area of 2,824 linear kilometres for drilling preparation and the identification of drill sites, along with the interpretation and reinterpretation operations of the geophysical information received.

The drilling of the third exploratory well was not initially provided for in the minimal phased programme of exploration works. However, on the request of the Indian party, Gazprom took on the additional obligation of mineral exploration and prospecting in the Bay of Bengal.

The Production Sharing Agreement between the Indian government, Gazprom and the Gas Authority of India for the contractually-agreed sector block NEC-OSN-97/1 (Block No. 26) was signed on 3 October 2000.

The agreement came into effect on 14 November 2000 from the date of the granting of the licence to execute work on Block No. 26. The agreement provides for the construction of 3 sets of gas exploration works over 7 years with subsequent engineering work, and the development of strikes over 20 years.

The management of the PSA is carried out by a Management Committee, formed with 2 representatives from the Indian Government for every one representative from the Contracting Party.

The private joint stock company, Gazprom zarubezhneftegaz, whose interests in India are represented by Gazprom's Project Office, has been appointed as Gazprom's project operator.

Currently, within the scope of Phase I and II, 2D offshore seismic data investigation, processing and interpretation work has been carried out over an area of 2,900 linear kilometres. Based on interpretation of existing and received data, seismofacial zoning has been carried out, a geological geophysical model has been constructed, and sectors for carrying out 3D seismic survey work have been identified.

3D and 2D seismic survey work (530 square kilometres/40 linear kilometres) has been carried out, the results of which have allowed the prospects for oil-and-gas content of previous selections along with the nature of oil-and-gas enrichments to be assessed.

Two exploratory wells have been drilled – GG-1 (to a depth of 2,445 metres) and NEC-FA-5 (to a depth of 4,338 metres).

A seminar of Gazprom Zarubezhneftegaz's legal services

Gazprom Zarubezhneftegaz's legal department held a conference/seminar for staff in the city of Shimla in the Republic of India from 5 to 12 April 2010. The conference covered the issues surrounding the legal support of oil and gas projects in foreign countries.

The delegation of conference participants was headed by the director of the legal department, Elena Litvinov, and the adviser to the CEO of Gazprom zarubezhneftegaz, Valentina Dyuzhenkova.

The chief legal adviser from the foreign economic activity legal support division within the Legal department, Evgeniya Rogulyeva, and the legal adviser from the joint projects division of the offshore fields development Technical and Engineering department for gas, gas condensate and oil production, Ekaterina Saltykova, took part in the conference from Gazprom.

The organisers of the conference were the Head of the Project Office of Gazprom Operator in India Alexander Nikiforov and Deputy Head (Administration) Gleb Fomin.

During the conference, lectures were delivered concerning specific aspects of legislation in conducting oil and gas projects in the Socialist Republic of Vietnam, the Tajikistan and Uzbekistan republics, and the Republic of Kirghizia.

The participants at the conference from Gazprom zarubezhneftegaz gave an analysis of the Company’s legal practice (tax and property disputes) and the characteristics of working with state authorities. Information was presented by a PR specialist from the Public Relations department of Gazprom zarubezhneftegaz concerning the guaranteeing of corporate work through the company's Internet site system, its representative offices, subsidiaries and dependent companies.

The speeches made by the Russian Federation Embassy adviser in the Republic of India, Vasily Glazachev, concerning the characteristics of Russian-Indian financial and economic relations, and the Project Office manager, Alexander Nikiforov, concerning legislation for conducting Production Sharing Agreements in the Republic of India and the practice of adjudication in the British High Court, provoked special interest. In the address by the Project Office manager, particular mention was made of the issues connected with the outcomes of the Case hearing won by Gazprom at the Queen's Bench in London against a drilling contractor in September 2009.

The lectures given by representatives of Gazprom zarubezhneftegaz's partners in India - Venkatesh Prasad 

(presenting the law firm JSA) with a talk concerning the Indian oil and gas sector - and Joseph Lonappan (Marsh India Insurance Brokers Pvt. Ltd.) with a talk concerning liability insurance for carrying out oil and gas projects in the Republic of India - were full of information. The lectures gave rise to a number of questions and detailed discussions. Simultaneous translation was carried out by the Project Office Deputy administrator, Gleb Fomin.

The conference was prepared and conducted at the highest level, and the talks were highly informative and gave rise to lively discussions as a result.

Conclusions and Suggestions

 Both Gazprom itself and the Russian gas sector have recently been subject to processes which may challenge the

state-owned company’s unique status, with all that this implies for such a change in Russia’s economy and politics.

- Gazprom’s assets have formed the basis for the multi-billion fortunes of Putin’s oligarchs: Gennady Timchenko

(Novatek), the brothers Arkady and Boris Rotenberg (involved in the import of pipes and the construction of pipelines,

among other activities), Yuri Kovalchuk (active in the insurance and media sector, among others) and many other

people associated with the current ruling elite. Any further redistribution of the monopolist’s assets is a privilege of the

government. In Russian reality, nobody questions their unwritten right to dispose of the assets of state-owned

enterprises (and in fact not just the state-owned companies, and not only Gazprom), and the gas concern has never

been a strictly commercial undertaking. This current phase in its development differs from the previous ones in terms

of its scale and the provenance of its beneficiaries – their close connection with one key person – the leader of the

elite.

 

- The spectacular growth of Novatek can also be examined in the context of politics. The empire controlled by

Gennady Timchenko, which was created some time ago, has started to develop its gas segment only recently.

Timchenko acquired the most significant and most profitable gas assets from Gazprom in the last three years.

According to numerous analysts, this is one of the most spectacular episodes of the increasingly dynamic process of

transferring assets from state-owned to private companies involving people from various levels of government. The

transfer of assets from Gazprom to private companies registered outside Russia may be a form of safe investment,

representing the current elite’s provisions for the future. It cannot be ruled out that – considering the critical approach

towards Gazprom on foreign markets which see it as a tool of Kremlin policy – the growth of Novatek is a part of

Moscow’s plan to create a new market player and introduce it to the European business as a strong ‘independent’ gas

company which could strengthen Russia’s position on the EU market.

 

- The ever more frequent challenges to Gazprom’s monopolist privileges, in particular the right to dispose of the

domestic pipeline network, may be much more important for the developments in Russia’s key sector. True

liberalisation of access to the gas transportation system would be a breakthrough for the Russian gas market, as it

could initiate a reform of the whole sector. This seems rather unlikely in the immediate future, because the

government – which has adjusted Gazprom’s business model to their needs and purposes – is not interested in truly

weakening the monopolist. The result of the growing need to introduce such a solution will most probably be a half-

measure – perhaps a new legal act which would provide a formal framework for the company's relations with other

entities and prevent it from blocking certain projects (as in the Kovykta case). In the longer term, though, the

liberalisation of access to the monopolist’s network seems unavoidable. The company will gradually lose its share on

the domestic market to the independent producers, which will force the opening up of the network.

 

- In the foreseeable future, the company's monopoly on exports seems less at risk, mainly due to the role of Gazprom

and the export of gas as important tools in maintaining Russia’s influences in Europe and the CIS. In the context of

changes on the European gas market (the oversupply of gas, growing competition between the suppliers, and

diversification of supply routes), and of frequent challenges to Gazprom’s pricing policy by its customers, maintaining

the export monopoly in order to block competition and maximise prices is no longer reasonable, but on the other hand,

the lifting of this monopoly could damage the company's position on the domestic market.

Currently, any exceptions to this rule (as in the case of Novatek) will only be possible at the request of Vladimir Putin,

and only for those selected few companies which are under the government’s strict control. Only a change in the

market situation – a significant increase in the demand for Russian gas which the concern would be unable to cover –

could force liberalisation of the export monopoly, but even so that would not bring about its abolition.

 

- What seems difficult to stop, is the process of other producers pushing the monopolist out of the domestic market.

Had it not been for the crisis which eliminated the threat of a gas shortage in Russia, Gazprom would have had

serious problems covering both domestic and foreign demand. Until the future launch of the Yamal fields, over the

next ten years Russia will barely be able to reach the expected extraction volume without the active participation of

independent companies. Their investments in expanding their production may be profitable when wider access to the

increasingly lucrative domestic market is guaranteed.

 

In the medium term, Gazprom is likely to remain Russia’s main gas supplier; at the end of 2010 it controlled around

70% of the Russian market. The relatively unrestrained development of competition on the ever more lucrative

domestic gas market may suggest that the Kremlin plans to reduce Gazprom’s activity to exports at the expense of the

company's involvement in the domestic market. The monopolist’s own extraction costs are growing so rapidly[15] that

expensive Russian gas can only generate decent revenues on foreign markets. The monopolist may see the domestic

market as its priority (with all the resulting consequences for independent producers) only if there is a collapse in the

exports of Russian gas.

                                                                                                                                   

 

[1]              The difficulties Gazprom is facing in Europe are caused, among other factors, by the financial crisis. Since

2009 the demand for gas has been lower than in previous years, and the volume of Russian gas sales has fallen (from

around 168 billion m3 in 2008 to around 148 billion m3 in 2010). Another reason for this drop is the radical change in

the European gas market: a sudden increase in the supply of LNG and the resulting oversupply of gas, as well as the

attempts made by the EU to reduce its dependence on the Russian supplier (including antitrust regulations concerning

the energy market). For more on this subject, see Ewa Paszyc, ‘Nord and South Stream won’t save Gazprom’, OSW

Commentary, January 2010.

[2]              For example, an improvement in the market situation and a significant increase in demand for gas in

Europe could force measures which could stimulate independent producers (gas companies and oil corporations) to

increase their extraction volume; one such measure could be the liberalisation of access for all gas producers to the

gas transportation system.

[3]              Including Viktor Chernomyrdin, a co-founder of Gazprom, and prime minister of the Russian Federation

from 1992–1998.

[4]              Timchenko’s main asset is the Gunvor company, Russia’s largest oil trading entity (around 40% of the RF’s

exports). In November 2011 Timchenko consolidated 93% of shares in the TransOil company, one of Russia’s largest

freight rail operators (holding 23% of the oil transport market). Timchenko is also a shareholder in Bank Rossiya

(around 10%) and a founder of the St. Petersburg-based judo club Yarva-Neva, whose honorary president is Vladimir

Putin.

[5]              For comparison: Novatek’s extraction volume levels in 2009 and 2010 was 32.8 and 37.8 billion m3

respectively. The company’s development strategy provides the extraction volume to double by 2020, to reach over

100 billion m3.

[6]              Timchenko cooperated with St. Petersburg city hall, among other initiatives, in the controversial ‘Oil for

Food’ programme managed by Putin in the early 1990s. Timchenko’s business partner and co-owner of Novatek

(27.2%) is Leonid Mikhelson.

[7]              the amendments to the Russian Federation’s fiscal law, signed by President Medvedev on 21 July 2011,

also cover the oil and gas deposits on the Black Sea, the Sea of Okhotsk shelf and in the Far North, with state-owned

concerns Rosneft and Gazpromneft holding concessions to exploit them. For the Yamal projects, the zero NDPI rate

will apply until the cumulative extraction reaches 250 billion m3. So far, this only applies to gas used in the production

of LNG. Gazprom has also applied for the tax on extraction carried out as part of its Yamal projects to be lifted.

[8]              EnBW owns 48% of shares in VNG. The control package is owned by EWE.

[9]              Apart from the assets acquired from Gazprom, the Rotenberg brothers own shares in SMP-Bank; control

over a dozen distilleries which are part of Rosspiritprom; co-own Mostotrest, Russia’s largest bridge construction

company; and have won contracts for the construction of toll highways (currently on the Moscow–St. Petersburg

route).

[10]             According to its annual report, as of the end of 2010 the value of assets owned by Bank Rossiya was

267.07 billion roubles, its equity 26.02 billion roubles, and its net profit 1.6 billion roubles.

[11]             Gazprombank was the ‘deposit box’ for assets Gazprom considered as not directly related to the

company’s business profile (which included the control package of the Gazprom-Media holding, Atomstroyeksport,

United Machinebuilding Plants, Sibur), and the direct seller of these assets.

[12]             Gazprom gained full control over the gas transportation system in 1997 by way of compensation for the

obligation to supply cheap gas to the domestic market (at that time, the regulated domestic prices were lower than the

production costs). The current gas prices in Russia are 3 to 5 times higher (depending on the region) than Gazprom’s

own average costs.

[13]             The extraction potential of Russia’s independent gas producers (including oil corporations), which control

around 30% of the country’s gas resources, is estimated at 400–500 billion m3 per year (the actual extraction volume

of independent companies in 2010 was 142 billion m3).

[14]             In March 2011, Vladimir Putin appealed to Gazprom’s governing bodies to lift the ‘take or pay’ rule in

relation to domestic clients, and to eliminate penalties for too low or too high demand compared with the contracted

volume. In October 2011, Putin ordered deputy prime minister Igor Sechin, the government’s energy sector custodian,

to prepare the necessary documentation.

[15]             The quality of Gazprom’s resources is decreasing year on year, and its costs of extracting gas from the

fields in Western Siberia, 60% of which have now been exploited, are on the rise. New projects require massive

investments.