In the frames of the existing intra-corporate governance structure improvement Gazprom has completed reorganizing Gazprom-UGS (a wholly owned subsidiary of Gazprom). Gazprom UGS consolidated the Russian UGS facilities, which were earlier affiliated in gas transportation subsidiaries of Gazprom.

The reorganization was completed by merging Gazprom UGS and buffer companies including Gazprom UGS-Krasnodar, Gazprom UGS-Orenburg, Gazprom UGS-Perm, Gazprom UGS-Samara, Gazprom UGS-Saratov, Gazprom UGS-North-West, Gazprom UGS-Stavropol, Gazprom UGS-Tyumen, Gazprom UGS-Ufa set up in the 1st Q of 2007 by unbundling from the Gazprom gas transportation companies.

The UGS asset consolidation into Gazprom-UGS as an integrated company is an important part of the intra-corporate governance structure improvement, which is conducted in the frames of the second stage of the Company’s reform.

The aim of reforming is to increase Gazprom business activity efficiency as a vertically integrated company and to optimize the governing structure of the core business activities at the subsidiary level. Structural changes will result in completing separation and transparency increase of cash flows in production, transportation, processing, storage and marketing of gas and hydrocarbons.

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The basic principle of intra-corporate structure improvement intends to single out Gazprom multi-field companies and optimizing core businesses as separate legal entities of services and social infrastructure.

On March 29, 2006, the Gazprom Board of Directors approved proposals on the reorganization of the subsidiaries where Gazprom is the only stockholder. The reorganization process will result in the foundation of the Gazprom wholly owned subsidiaries (specialized core business companies): Gazprom-UGS, Gazprompererabotka, Gazprompodzemremont-North, Gazprompodzemremont-South, Gazpromtransgaz-Kuban. In addition, Gazprom will become a 100 per cent stockholder in Gazpromtrans.

The reform implementation scheme contemplates reorganizing the existing subsidiaries and includes two stages:

• setting apart of core businesses and assets – non-core businesses and assets of the existing subsidiaries (donor companies) are unbundled into core business legal entities (buffer companies);
• consolidation of core businesses and assets – the unbundled buffer companies are consolidated by business type through their merger to a relevant specialized core business company.

The first stage of reorganization has been completed: non-core businesses and assets of the existing subsidiaries (donor companies) are unbundled into core business legal entities (buffer companies).

There are currently 25 underground gas storage facilities operational in the Russian Federation with 63.5 bcm of commercial gas and up to 608 mln cu m/d of the potential send-out capacity as of the start of a withdrawal period.

In addition, Gazprom stores gas in UGS facilities in Latvia, Germany, Austria and Great Britain.

Gazprom holds shares in companies owning and operating UGS facilities, namely ZAO ArmRosGazprom (Armenia), Latvijas Gaze (Latvia), WINGAS GmbH (Germany) and VNG AG (Germany).

The UGS Development Strategy up to 2030 hinges on the following basic principles:

• maintaining the achieved level of Russian UGS capacities by upgrading and replacing aged and obsolete capacities;
• promptly building up Russia’s UGS daily withdrawal capacity by expanding existing and building new UGS facilities;
• providing UGS capacities for “deficit” regions of the Russian Federation;
• developing at best the UGS system along with UGSS, synchronizing UGS facility and gas trunkline operation regimes;
• expanding the UGS network abroad to store Gazprom’s gas for higher reliability and flexibility of gas exports and bigger presence in the spot market.