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

Gazprom: New Horizons

Esteemed shareholders, colleagues and partners!

On behalf of the Management Committee of Open Joint Stock Company Gazprom, and my personal behalf, I welcome you to the annual General Shareholders Meeting.

You have been given detailed materials about the activities of Gazprom and its subsidiaries in 2010: the annual report, the accounting statements, the conclusion of the Audit Commission, the auditor’s report and other materials.

It is proposed that the Shareholders Meeting approve:

• the annual report of Gazprom for 2010;
• the annual accounting statements of Gazprom;
• distribution of profits, and the proposals by the Board of Directors on the amount of, time for and form of the dividend payment based on the 2010 operating results.

It is also proposed that we approve the amount of remuneration to the members of the Board of Directors and the members of the Audit Commission. The amounts of the remuneration are given in the materials that were presented to you.

It is proposed that PricewaterhouseCoopers Audit (ZAO) – the winner of the open tender among audit companies – be approved as the auditor for performing the obligatory annual audit of Gazprom’s accounting statements.

Esteemed shareholders!

In 2010 Gazprom was supplying Russian and foreign consumers with natural gas, other energy resources and their derivatives in a sustained manner. We have proven in practice that Gazprom is not only a reliable energy supplier, but also an important structure ensuring market stability and predictability.

Gazprom maintained growth in production indicators over 2010 and is recovering steadily to the pre-crisis level. In 2010 we produced additional 57 million tons of fuel equivalent versus 2009. The output of natural gas, our main product, grew by more than 47 billion cubic meters to 508.6 billion cubic meters. Oil production rose by 4 million tons versus 2009.

Positive shifts in production are accompanied by the positive financial dynamics which ranks with those of the world’s most successful gas companies.

Gazprom’s net sales and profit from sales rose by 16 per cent and 49 per cent accordingly versus 2009.

Gazprom Group’s consolidated sales grew by 17.4 per cent and surpassed RUB 3.660 trillion in 2010. The Group’s net profit totaled RUB 776 billion (22.4 per cent increase).

Based on the 2010 operating results, the Board of Directors recommends paying out RUB 3.85 per share in dividends to shareholders, which constitutes 25 per cent of Gazprom’s net profit in 2010 and represents a 61 per cent increase in dividend payments versus 2009. This is the maximum amount of dividends in the entire history of the Company.

Esteemed shareholders!

Recovery of the macroeconomic environment in Europe and other regions offers the opportunities for further growth in export. The first months of 2011 clearly demonstrate that. In the first half of the year gas supplies beyond Russia increased by 26.6 billion cubic meters or 26 per cent versus last year.

The new and extremely significant factors boosting the international gas marketing are currently as follows:

• revision of nuclear power energy programs;
• decline of indigenous gas production in Europe;
• re-estimation of political risks associated with individual suppliers;
• reduction of subsidies for energy alternatives in the European Union;
• intensified growth of energy demand in Asia and domestic markets of gas exporting countries.

Energy markets are experiencing really drastic changes. As the current situation makes the Third Energy Package look outdated, it opens up new horizons for Gazprom. We are confident of our abilities.

The feedstock base is the backbone of Gazprom’s success. Neither economic collapses nor innovative gas technologies can eliminate the fundamental factor of our competitive ability in the long-term: Gazprom has been and remains the global leader in gas production and natural gas reserves. Gazprom accounts for around 15 per cent of the global gas production. Gazprom possesses 18 per cent of the global gas reserves. Gazprom Group’s explored reserves are estimated at 33.1 trillion cubic meters.

Gazprom again demonstrated the outrunning growth of the resource base in 2010. The amount of natural gas reserves added through geological exploration amounted to 547.7 billion cubic meters surpassing the produced amount by some 40 billion cubic meters.

Great efforts have been taken lately on streamlining the geological exploration system in Gazprom. Structural changes are underway – the Company is consolidating its onshore exploration activities performed in Russia and abroad. The cost management system in exploration has been improved, exploration efficiency indicators are introduced with due consideration for the value of growing physical reserves, their commercial value, role and place in ensuring the mid-term and long-term gas balance.

Esteemed shareholders!

Gazprom Group’s capital investments in gas exploration and production comprised RUB 202.4 billion in 2010. Major investment targets in gas production included:

• the Bovanenkovo field pre-development (drilling of production wells and installation of comprehensive gas treatment unit equipment), further construction of the Obskaya-Bovanenkovo railroad to ensure year-round procurement operations, transportation of personnel and outbound of liquid components);
• pre-development of gas condensate deposits in the Zapolyarnoye field;
• bringing the Yuzhno-Russkoye field to the design capacity;
• maintaining the current production levels at conventional fields;
• pre-development of Kamchatka fields.

The required levels of gas production will be secured in the mid term through expanded pre-development of existing fields and launch of production in new fields of the Nadym-Pur-Taz region and the Yamal Peninsula.

The strategic vision and our business plans are based on the potential of the Shtokman field, gas resources of Eastern Siberia, the Far East and offshore areas of the Ob and Taz Bays. We are planning to create new large gas production centers in the mentioned regions.

Gazprom is gradually developing its oil business. Total oil production has grown to 52.6 million tons. We are planning to continue increasing production, refining, and sales of oil and petrochemicals. It will be achieved through creation of a new production center in the northern part of the Yamal-Nenets Autonomous Okrug; pre-development of the Novoportovskoye field and the Messoyakhskaya group of fields; boosting production from conventional fields, and acquisition of new assets.

Gazprom views development of hydrocarbon reserves on the Russian continental shelf as a strategic activity.

In 2010 the bulk of offshore operations were carried out during the Kirinskoye field predevelopment within the Sakhalin III project. Geological and geophysical research was carried out in the Ob and Taz Bays, offshore the Yamal and in the Sea of Okhotsk.

Gazprom develops new production guidelines and technologies that offer additional opportunities for the resource base diversification.

In 2010 Gazprom opened a new page in the history of the domestic gas industry – the first Russian coalbed methane production facility was launched at the Taldinskoye field within the Kuzbass Methane project. The produced methane is used for power generation and as a motor fuel. Tests have proved technological efficiency and economic viability of coalbed methane production in Russia using domestic technologies. It should be noted that these technologies are similar to those used in shale gas production. Gazprom considers coalbed gas and shale gas as supplements to the conventional “blue fuel”. Their production may grow, but they will anyway remain the fuel for local consumption.

Being a global energy company, Gazprom develops hydrocarbon fields abroad.

Hydrocarbon reserves have been discovered within our licensed blocks in Algeria. Commercial gas inflow was reported during exploration drilling in Uzbekistan.

Gazprom signed production sharing agreements with Equatorial Guinea and a contract to develop an oil field in Iraq as well as reached agreements with foreign partners enabling to expand Gazprom’s participation in developing hydrocarbons in Latin America.

Independent experts annually confirm the high quality of Gazprom’s resource base. International audit of Gazprom Group’s hydrocarbon reserves estimated their present value at USD 269.6 billion (nearly 12 per cent above the last-year estimate).

Gazprom owns the world’s largest gas transmission system (GTS). Gazprom’s GTS is a key element of the system for natural gas supply to consumers in Europe and the entire Eurasian space.

Some 661 billion cubic meters of gas were fed to the gas pipelines of Gazprom’s Unified Gas Supply System in Russia. Companies outside Gazprom Group delivered 72.6 billion cubic meters of gas. Gazprom provided gas transmission services to 23 independent companies.

In the reporting period 1,340 kilometers of gas trunklines and laterals as well as a linear compressor station with the capacity of 64 MW were put into operation in Russia.

Implementing the Eastern Gas Program, Gazprom became the driver of socioeconomic development of the regions in that part of our country.

Commissioning of the Sobolevo – Petropavlovsk-Kamchatsky gas pipeline was a milestone of 2011.

The Sakhalin – Khabarovsk – Vladivostok GTS is a top-priority facility of the Eastern Gas Program. Its launch is scheduled for September 2011. The gas pipeline will be the backbone of the Unified Gas Supply System in Eastern Russia. It will satisfy gas demand of Russian consumers in eastern regions of the country and will create the basis for gas supplies to the global market.

In the European part of the country Gazprom is implementing a series of projects to ensure reliability and increase gas supplies to domestic and foreign consumers. The projects include:

• the Gryazovets – Vyborg gas pipeline aimed at delivering gas into Nord Stream and supplying it to consumers in Northwestern Russia;
• the Pochinki – Gryazovets gas pipeline aimed at boosting gas supplies to consumers in central and northwestern regions as well as gas transmission via the Nord Stream gas pipeline;
• the Bovanenkovo – Ukhta and Ukhta – Torzhok gas pipelines intended to feed gas from the Yamal Peninsula;
• the Northern Tyumen Regions – Torzhok gas pipeline.

Gazprom’s capital investments in gas transmission grew by 75.9 per cent to RUB 407.6 billion in 2010 versus 2009.

Esteemed shareholders!

The amount and targets of our investments are closely pegged to future gas supplies. Our production and transportation projects are synchronized by capacity and schedules. And the total investments that will exceed RUB 1 trillion this year are absolutely justified!

They are determined by existing supply commitments in Russia and abroad, the location of available reserves, and the necessity to reconstruct and retrofit the infrastructure built yet in the Soviet times.

Gazprom is a long-term business and we have a long-term strategy. Actually, we are currently creating yet another and new Gazprom! It is not just a schema. Creation of a new gas production center in Yamal and the Arctic shelf is comparable to the Soviet-era development of the giant Urengoy, Medvezhye and Yamburg fields… The scope and, primarily, the significance of our projects in Eastern Russia make one recollect the times when the Urengoy – Pomary – Uzhgorod gas pipeline was built. At present, fundamentally new gas provinces are being developed and principally new and immense markets are being shaped.

Underground gas storage facilities are a guarantee of uninterrupted supplies during winter periods. The total working gas volume of 25 underground gas storage (UGS) facilities in Russia comprises 65.4 billion cubic meters. In 2010, 40.8 billion cubic meters of gas were withdrawn from Gazprom Group’s UGS facilities in Russia, while the demanded maximum daily send-out made up 579.5 million cubic meters. The aim is to urgently increase the send-out of Russian UGS facilities to ensure sufficient flexibility of supplies during cold snaps.

Gazprom utilizes UGS capacities in several European countries: Austria, France, Germany, Latvia and the UK.

From 2006 to 2010 Gazprom’s working gas volume in European gas storages rose from 1.4 to 2.5 billion cubic meters, and the daily send-out – from 18.2 to 30 million cubic meters. In 2010 Gazprom Group’s capital investments in underground gas storage amounted to RUB 17.4 billion (against mere RUB 9.5 billion in 2009).

Today we are implementing several projects that will allow Gazprom to significantly increase European gas storage capacities and to bring the working gas volume to more than 5 billion cubic meters by 2015. This will significantly strengthen our positions in the European markets and will offer our customers more flexible supply terms.

Our activities in the field of LNG production help us expand and diversify the transportation routes for our products.

In 2010 the LNG plant built as part of the Sakhalin II project reached the designed capacity of 9.6 million tons a year. The bulk of LNG volumes (close to 60 per cent) were supplied to Japan. Gas from Sakhalin is also delivered to South Korea, India and China.

Intense talks on new long-term contracts are currently underway with the above mentioned countries. This is the issue that one can hardly overestimate. We are creating new markets for Gazprom that will provide for an increase in gas export by at least 1.5 times, balance our portfolio of contracts, and ensure a steady currency inflow for decades ahead.

There is no doubt the beginning of gas deliveries to China along the “western route” will become a new reference point in the history of the Russian Unified Gas Supply System development.

Esteemed shareholders!

In the European market, which is a key export market for Gazprom, the demand continued to recover after the crisis even faster than the optimists could expect. In 2010 an absolute record of gas consumption was hit in Europe. Russian gas supplies increased to such countries as the Czech Republic, Poland and Serbia where Russian gas import significantly exceeded the pre-crisis level. The markets of France and Germany demonstrate a steady growth in gas import from Russia.

At the end of 2010 the share of Gazprom in the European market was 23 per cent (the share of Norway – 19 per cent, Algeria – 10 per cent, Qatar – 6 per cent).

We took a firm line during price negotiations with our customers and as a result in 2010 our European market sales increased from USD 42.5 billion to USD 43.9 billion. Gazprom preserved the system of long-term take-or-pay contracts and the pricing system bound to the oil basket. No radical changes in the contractual system are neither expected, nor planned. The structure of the European market itself, build on gas flows is objectively such that the spot market performs an additional, balancing function while the oil-linked contracts serve as natural protection of commercial interests for both the purchaser and the seller.

Gazprom Group continued its activity aimed at increasing gas sales directly to end consumers. In 2010 the aggregate gas sales to end consumers in the UK, France, the Czech Republic and Italy amounted to 4.7 billion cubic meters which exceeds the level of 2009 by 47 per cent.

We can see even now that we can export to Europe and Turkey 155 to 158 billion cubic meters of gas this year and we will set a new record of currency revenues.

The upward trend in supplies, measured in absolute figures, will remain in future, but the share of European markets in the gross revenues of Gazprom will be reduced as a result of emergence of new foreign customers and growth of gas prices in Russia. And this is a conscious element of our strategy.

Restoration of markets and drastic growth of gas demand confirm the correctness of Gazprom’s heading towards an increase in volumes and diversification of routes for gas supplies to Europe.

The reporting period will be specifically marked in the history of cooperation of Gazprom and European partners. In 2010 the Nord Stream project – the world’s longest submerged pipeline – proceeded to practical implementation. The first string of the gas pipeline has been laid on the Baltic Sea bed. Construction of the Portovaya compressor station which is unique in terms of key specifications was commenced. This station will ensure gas transmission via Nord Stream.

In 2010 the number of shareholders increased, making the project pan-European. The French company GDF SUEZ acquired 9 per cent of shares in Nord Stream AG.

Another important gas transmission project – South Stream – is developing rapidly. In 2010 intergovernmental agreements were signed with Croatia and Austria. Gazprom and OMV concluded a Basic Agreement of Cooperation on the South Stream project in Austria.

In June 2010 a Memorandum was signed with French EDF which determined specific steps for its introduction into the construction of the subsea section of South Stream. Joint efforts of energy companies of Russia, Italy and France highlighted once again the all-European scale of the project. At present, Germany has joined the project as well.

In 2010 Gazprom and partners from Hungary, Greece and Bulgaria created joint project companies on a parity basis that will deal with designing, financing, construction and maintenance of the South Stream sections in the relevant host states. In 2010, feasibility studies for construction of the gas pipeline sections in Serbia and Slovenia were completed. In the autumn of 2011 the consolidated feasibility study for the entire project will be completed.

Esteemed shareholders!

The 2010 results show that our traditional division of the export markets into the FSU market and the European market is completely out-of-date. We have a single export market operating on common principles so far. This is a result of the stepwise activities performed by Gazprom and focused on the major gas purchasers in the CIS in order to transfer to the contract prices providing Gazprom with the equal profitability compared to the European markets.

The volumes of gas sold to the FSU showed a 3.7 per cent increase and reached 70.2 billion cubic meters. Net proceeds from gas sales in the region demonstrated an increase of over 20 per cent and amounted to RUB 450 billion considerably exceeding the 2009 level.

Gazprom is the major gas supplier to the Russian market. The market share of Gazprom exceeds 70 per cent. The amount of gas sold by Gazprom Group to Russian consumers (net of consumption for process needs) totaled 262 billion cubic meters of gas in 2010. Proceeds from gas sales reached RUB 614.7 billion exceeding the 2009 level by 24 per cent.

The Russian natural gas market is regarded by Gazprom as most promising in terms of business activity.

The Government of the Russian Federation adopted a Resolution providing for further streamlining of the state regulated gas prices with a view to gradual liberalization. The Resolution envisages a transition period between 2011 and 2014 to create conditions for practical application of the market pricing methods to the gas produced by Gazprom Group. They will be based on the principle of equal profitability between gas supplies to the foreign and domestic markets.

This is a fundamental principle Gazprom adheres and will adhere to in all of its markets whether in Russia, the FSU states, the European countries or the Asia-Pacific region.

2010 demonstrated positive dynamics in the international oil, gas condensate, derivatives and petrochemical markets, therefore, the export prices for certain groups of products reached the pre-crisis level.

Expansion of the filling stations network moved on with the number growing to 1,596 (including 649 filling stations as foreign assets of Gazprom). In 2010 oil product sales at domestic filling stations increased to 3.0 million tons and to 1.8 million tons at the filling stations located abroad.

Gazprom is the major power generation assets holder in the Russian Federation. The aggregate installed capacity of the major generating companies within Gazprom Group in Russia is 37 GW or 17 per cent of the total installed capacity of the Russian energy system.

The objective of our strategy in the energy sector is to maintain and enhance Gazprom’s positions as the leader of the Russian power generation market simultaneously increasing the efficiency indicators to the level of the major international power producers.

Gazprom Group is also engaged in power marketing at the European trading floors and power supplies to the end consumers. The aggregate volume of the operations in 2010 amounted to 35 billion kWh.

Gazprom Group became the largest investor in the Russian power generation sector. Large-scale construction of new facilities in the areas of the steadily growing power demand will go on.

In pursuance of the Russian Government directive, the companies of the Group will commission 9 GW of generating capacities between 2007 and 2016 making 30 per cent of the total obligations under the Capacity Supply Agreements of all the generating companies in Russia.

Thus, taking into account the commissioning of a CCGT-450 unit at the Yuzhnaya CHPP (TGC-1) this April, Gazprom has already inaugurated 2.6 GW of capacities with the bulk of them made up by efficient combined cycle gas turbine units. We have gained good momentum and this year we will construct more than RAO UES of Russia during the entire period of its existence.

Power generation projects in Europe involving Gazprom get the second wind. We are studying a whole range of opportunities for entering the projects that will allow us to create additional demand for our gas and get additional proceeds from the sales of power. The parameters of gas supply contracts as applicable to these projects will be updated taking into account the specific conditions.

Germany is the most attractive market where we are going to take part in construction of the new gas-fired power generation facilities. To have a success in these projects in addition to gas we also have vast experience particularly in the power generation sector. For instance, today we are launching a 420 MW state-of-the-art combined cycle gas turbine unit at CHPP-26 of Mosenergo. Its efficiency ratio may reach 59 per cent in a condensing mode. We have arranged a video link with the dispatch room of CHPP-26.

Kirill Seleznev

Esteemed Mr. Miller! Esteemed Shareholders of Gazprom! Esteemed colleagues! A milestone event will happen today. We are commissioning the most up-to-date and the most efficient 420 MW combined cycle unit. Since 2007 when Gazprom became the major shareholder of Mosenergo, we have commissioned 3 new combined cycle units – a 425 MW unit at CHPP-21 and two 450 MW units at CHPP-27. The new units have one-third lower gas consumption versus the traditional steam plants with the similar capacity. Hazardous emissions are cut down by 30 per cent.

Mr. Miller, power unit No. 8 of CCGT-420 is ready for reaching nominal capacity and connection to the unified energy system of the country.

Alexey Miller

Launch!

Kirill Seleznev

The unit has reached its design capacity!

Alexey Miller

Thank you for good work, colleagues. Good luck to you! Let’s continue the meeting.

Esteemed shareholders!

We are convinced that gas will gain more considerable positions in the global energy balance. The convenience of its use and the environmental friendliness, to our mind, will play the crucial role. Natural gas will be wider used in power generation and as a motor fuel.

Natural gas as the purest hydrocarbon fuel perfectly suits for solving ambitious ecological tasks. Modern NGV transport allows reducing CO2 emissions by 20 to 25 per cent versus similar gasoline-fed transport.

Creation of new gas-fired power generation capacities in Europe is an important activity that will considerably contribute to achieving the environmental protection objectives.

Esteemed shareholders!

In 2003 at the World Gas Conference in Tokyo (Japan), Gazprom announced the beginning of the age of gas. "Natural gas should take the leading position in the world structure of the energy consumption in the coming decades and maintain it till the end of the century," that was a quotation from our keynote address.

Not only producers, but consumers as well, recognize today that the "Golden Age of Gas" is a real fact.

It means new horizons are opening up for Gazprom…