The Gazprom Board of Directors examined the information on the ways to enhance the Company's investment program efficiency. In particular, the Board addressed Gazprom's efforts aimed at cost reduction, including the progress with the corresponding orders of the Russian Federation President and Government.

The meeting also considered the information on the Guidelines for cost reduction indicator determination for the purchase of goods, work and services per unit, which had been approved by Gazprom.

During the Board of Directors meeting it was noted that Gazprom differed largely from other major Russian and foreign petroleum companies. In particular, Gazprom is the owner of the world's longest gas trunkline system (161.7 thousand kilometers). This means a considerable amount of work to reconstruct, upgrade and maintain it. In addition, the project implementation conditions in Gazprom are more complex than those in the bulk of other companies. Gazprom is engaged in gas production and gas pipelines construction mainly in regions with a rigorous climate. At the same time, gas transmission capacities are often made in regions with poor infrastructure. All the above mentioned issues require considerable capital expenditures.

The meeting participants emphasized that Gazprom was Russia's leading and one of the world's leading petroleum companies in terms of investments. At the same time, the structure of Gazprom's investment program differs significantly from other companies: over 50 per cent of funds are allocated by Gazprom to gas transmission projects which are more expensive than production projects.

Gazprom's investments are highly efficient. It is confirmed by a number of specific indicators.

In particular, Gazprom took the first place among the international oil and gas companies by the capital investments/production volumes indicator in 2010 (USD 61.6 per ton of oil equivalent including the investments in gas transmission projects). This indicator in BP, Chevron, ENI, Shell, Total and ExxonMobil was 2 to 3 times higher, in PetroChina and Petrobras – 4 and 5.7 times higher accordingly. Even greater difference can be mentioned as Gazprom's advantage over foreign and Russian oil and gas companies by the capital investments in exploration and production/production volume indicator.

Moreover, the capital investments/net profit indicator (0.92 in 2010) could be regarded as an evidence of Gazprom's ability to finance the investment program basing on net profit, not on borrowings (few companies can do the same). Apart from Gazprom, only ConocoPhillips and ExxonMobil managed to maintain the same indicator below 1 in 2010.

Thus, Gazprom currently pursues a pro-active and efficient investment policy ensuring the Company's high competitive ability and sustainable development in the long run.

However, the importance of Company's further efforts for boosting the investment program efficiency shall not be diminished.

The Board of Directors has resolved to give priority to the following actions aimed at improving Gazprom's investment program efficiency:

optimize the Company's capacity commissioning schedules;

raise the cost-effectiveness of investment projects through optimization of quality and prices of construction facilities during expert evaluation of the Company's project documentation;

reduce the costs of investment projects through optimization of prices for major procurement items and tender-based purchase of goods, work and services as well as online monitoring of investment projects to qualify the approved technical and economic performance indicators stipulated in the project documentation;

continue the cooperation with federal executive authorities to bring the gas prices to the level that would allow:

finding the internal sources to finance the investments needed for the gas industry operation and development;

ensuring equal profitability of domestic and foreign gas supplies;

wider use of the project financing methods in the Company's investment projects.

The Management Committee was tasked to develop the proposals on including the cost reduction indicator for the purchase of goods, work and services into the system of key efficiency indicators of Gazprom's performance.

Background

In April 2011 the Russian Federation President and Government gave the orders aimed at the decisions made by state corporations and state-owned companies for the annual reduction of costs per unit by at least 10 per cent during three years.