Press Conference Background

Press Conference Background

MINERAL AND RAW MATERIAL BASE DEVELOPMENT. GAS PRODUCTION. GAS TRANSMISSION SYSTEM DEVELOPMENT

(June 16, 2008)

MINERAL AND RAW MATERIAL BASE DEVELOPMENT

In 2007 Gazprom Group added through prospecting and exploration 592.1 bcm of natural gas (in 2006 this figure totaled 590.9 bcm). Thus, for the third consecutive year a buildup of the Company’s natural gas reserves has outrun its extraction.

Currently, Gazprom’s license blocks contain over 60 and some 17 per cent of the total Russian and global explored gas reserves respectively. As of December 31, 2007, Gazprom Group’s A+B+C1 (according to the Russian classification) gas reserves amounted to 29.8 tcm.

In 2007 DeGolyer & MacNaughton performed under the PRMS international standards an assessment of Gazprom Group’s (excluding the data on Gazprom Neft) A+B+C1 reserves including 95 per cent of gas stocks, 87 per cent of oil stocks and 90 per cent of gas condensate stocks. According to DeGolyer & MacNaughton’s appraisal, Gazprom’s proven and probable reserves (excluding the data on Gazprom Neft) accounted for 20.82 tcm of gas, 686.1 mln t of gas condensate and 286.9 mln t of oil currently valued at USD 185 bln. At the same time, according to Miller & Lents’ assessment, Gazprom Neft’s proven and probable reserves stood at 22.4 bcm of gas and 845.5 mln t of oil currently valued at USD 45.3 bln.

In 2007 during prospecting activities in its license blocks in Russia Gazprom Group (excluding Gazprom Neft) discovered the Zapadno-Pestsovoye oil and gas condensate field in the Yamal-Nenets Autonomous Okrug (YaNAO) as well as six oil and gas condensate reservoirs in the existing deposits. Moreover, Gazprom Neft Group discovered two new fields: Vorgenskoye oil field and Yuzhno-Karasevskoye gas condensate field in YaNAO as well as 18 new reservoirs.

Along with geological exploration on the territory of the Russian Federation and in the continental shelf of Russia, in 2007 Gazprom continued prospecting for hydrocarbons offshore Vietnam (block 112), India (block 26, Bay of Bengal), Venezuela (blocks 1, 2, Rafael Urdaneta project), Uzbekistan (Ustyurt region blocks). Together with Kazakhstan the Company is carrying out joint activities in the Caspian offshore. There are plans to participate in oil and gas projects in North Africa.

Creating a new industry in Russia – coalbed methane production – is one of the main directions of the Gazprom strategy aimed at expanding the hydrocarbon resource base. In 2007 Gazprom acquired a 54 per cent stake in GPK Kuznetsk, which holds the license for coalbed methane and other hydrocarbons prospecting, exploration and production within the Yuzhno-Kuzbasskaya Group of coal fields containing methane reserves in the amount of 6.1 tcm. In early 2008 Gazprom’s stake in GPK Kuznetsk reached 100 per cent.

GAS PRODUCTION

In 2007 Gazprom Group produced 548.6 bcm. The decline in extraction (1.3 per cent down on 2006) stems from a decrease in the domestic market demand and in Russian exports to European countries driven by the abnormally warm winter 2006-2007.

In 2007 Gazprom Group produced 11.3 mln t of gas condensate, 34 mln t of oil (including Gazprom Neft – 32.7 mln t); this volume is equal to the production level of liquid hydrocarbons in 2006. According to the existing projections of the internal and external markets development and thanks to Gazprom Group’s raw material base, it is planned to boost gas production to 610–615 bcm by 2015 and 650–670 bcm by 2020 (including gas production in the East of Russia).

In October 2007 the Yuzhno-Russkoye field (with more than 1 tcm of reserves), was put into production. It is an important step of Gazprom as part of its strategy targeted at adding production capacities and a considerable foundation for stable and secure gas supply to Russian and foreign customers in the long-term. The field is planned to reach a 25 bcm design capacity in 2009.

In 2008 Gazprom plans to produce 561 bcm of gas.

According to Gazprom’s Investment Program for 2008, the bulk of investments will be used for the pre-development of the Kharvutinskaya area, Yamburgskoye field; pre-development of the Bovanenkovskoye and Kharasaveyskoye fields, including the construction of the Obskaya – Bovanenkovo railway; development of the Yuzhno-Russkoye field as well as development of the Shtokman and Prirazlomnoye fields.

Up to 2010 the gas production level will be maintained through the commissioning of capacities at existing and new sites in the Nadym-Pur-Taz region. Their economic viability is explained by the proximity to the existing gas transmission infrastructure.

There are plans to reach full capacity in the Yuzhno-Russkoye field (25 bcm per year), Kharvutinskaya area of the Yamburgskoye field (30 bcm per year), to increase production from the Cenomanian deposits of the Zapolyarnoye field (to 115 bcm per year) and to start developing new fields in the Nadym-Pur-Taz region: Nydinskaya area (2 bcm per year), Zapadno-Pestsovaya area (2 bcm per year), Lower Cretaceous deposits of the Zapolyarnoye field (15 bcm per year), Pestsovoye field (2 bcm per year), Achimov deposits of the Urengoyskoye field (16 bcm per year).

After 2010 there are projections to exploit new strategic gas production provinces on the Yamal Peninsula, in the Barents Sea offshore, Ob and Taz Bays, Eastern Siberia and the Far East.

By 2020 about 50% per cent of Gazprom Group’s gas production will be from new fields.

The development of promising fields is planned with regard of comprehensive synchronized development of gas production, transmission, processing and storage capacities.

GAS TRANSMISSION AND UNDERGROUND GAS STORAGE SYSTEM DEVELOPMENT

The gas transmission system of Gazprom includes a vast network of gas mains, compressor stations and underground gas storage facilities (UGSF). Due to its centralized management, highly ramified structure and availability of parallel transmission routes, Gazprom’s gas transmission system (GTS) has a considerable reliability margin and is able to continuously deliver gas even during seasonal peak demand.

In 2007 Gazprom’s overall capital investments in the GTS reconstruction and technical re-equipment accounted for RUB 39.1 bln. The said work resulted in the annual saving of 276.1 mln cu m of fuel gas and the 508 thousand t decrease in CO2 atmospheric emissions.

In 2007 Gazprom performed diagnostic inspection of 17.2 thousand km of gas pipelines using ILI methods and 20.5 thousand km via electro-metric and inspection & technical investigations. Based on the inspection results capital repair was performed at 2.697 km of gas pipelines and 165 underwater crossings. Repairs were also carried out at 321 gas distribution stations.

The Company initiated the implementation of the Comprehensive Program for the reconstruction and technical re-equipment of GTS facilities between 2007 over 2010, which envisages reconstructing 5 thousand km of gas pipelines, replacing or upgrading more than 500 gas pumping units and reconstructing 300 gas distribution stations. Special emphasis will be put on assuring gas conveyance from the Nadym-Pur-Taz region, including on the gas facilities used for transporting gas of independent producers as well as on the facilities transporting gas from the Yamal Peninsula.

Gazprom continues executing the Energy Saving Program for 2007 through 2010. Over the past fiscal year Gazprom’s subsidiaries entering the Program saved a total of 3.6 mtce (versus projected 2.4 mtce). The bulk of the saving is in long-distance transmission (84.6 per cent) and in gas, condensate and oil production (13.5 per cent).

With the aim of boosting the flexibility and securing an optimum loading of the system Gazprom expands UGS capacities. The work is underway to achieve a 758 mln cu m rate of daily send-out capacity by the withdrawal season 2010-2011. In 2007 the total active UGS capacity has grown to 64.9 bcm, with the peak daily send-out capacity increasing by 8 mln cu m up to 608 mln cu m; the average daily send-out capacity during December-February increasing by 4.4 mln cu m up to 492.4 mln cu m.

At present, Gazprom is implementing the 2005-2010 Work Program for Underground Gas Storage in the Russian Federation stipulating further ramp-up of UGS facilities performance. Gazprom also stores gas in UGS facilities in Latvia, Germany, Austria and the United Kingdom and holds shares in companies owning and operating UGS facilities, namely ArmRosGazprom (Armenia), Latvijas Gaze (Latvia), WINGAZ GmbH (Germany) and VNG AG (Germany).

The Company’s long-term need for new gas transmission capacities is defined by the following aspects:

- duration of their effective loading;

- the need to secure the optimal performance of the existing gas transmission system.

The given approach enables to avoid introduction of redundant capacities, use the Company’s investment resources efficiently and to optimize gas transmission costs.

The expansion of the Urengoy transmission hub and commissioning of the compressor stations along the SRTO – Ural gas pipeline are due before 2010. Over the same period the construction of the SRTO – Torzhok, Pochinki – Gryazovets and Gryazovets – Vyborg pipelines will be continued.

After 2010 introduction of new gas transmission capacities is driven by gas production development in new areas and new directions of gas exports. To secure gas transmission from new gas production provinces Gazprom plans to develop the Bovanenkovo – Ukhta – Torzhok gas trunkline system, construct the Murmansk – Volkhov gas pipeline and pipelines to be connected to fields in the Ob and Taz Bays, etc. With the aim of developing new gas export routes Gazprom is implementing the Nord Stream project, and various scenarios for the construction of the South Stream gas pipeline are under consideration.