The Board of Directors’ meeting is underway at the Gazprom Headquarters.

The Board of Directors has heard a report on the Gazprom mid- and long-term domestic market operations taking account of independent producers and Central Asia’s gas.

Reference:

At present, natural gas consumption rates in Russia substantially exceed the level fixed in the Energy Strategy of Russia up to 2020. The highest increase in gas consumption has been recorded in the power generation, household sector and developed industry branches, particularly in the Central, Ural and Southern Federal Districts.

As of today, Russia has the following natural gas demand structure:

• power generation – 39%;
• industry – 30.2%;
• residential sector – 20.3%;
• others – 10.5%.

The regulated wholesale natural gas price behavior prevents Gazprom from ensuring returns on domestic gas sales, doesn’t stimulate consumers to save gas and energy as well as reduce the share of gas in the primary energy mix, and doesn’t allow to create required financial resources to invest in the development and modernization of domestic gas extraction and transmission facilities.

Higher gas demand from Russian consumers may be achieved by maintaining the existing gas price behavior in the internal market and gasifying new regions.

In accordance with synchronized commissioning schedules for new capacities within gasification programs for over 50 constituents of the Federation, some 9.5 bcm of gas (including about 4.5 bcm for the residential sector) is projected to be allocated between 2005 and 2007.

The share of gas is on a continuous rise in the fuel mix of the electricity and heat generation sector. Projected gas demand from energy companies in existing conditions will require boosting gas supplies by 28 bcm by 2010, as compared with anticipated consumption rates in 2006.

The reliability of gas supply to Russian consumers is linked with further development of Russia’s two-sector wholesale market structure along with a phased reduction of the regulated and expansion of the non-regulated sectors.

The November 30, 2006 Resolution by the RF Government to switch over by 2011 to gas deliveries under long-term five-year contracts with industrial consumers, power generation companies inclusive, at prices oriented towards an equilibrium of returns on domestic and foreign gas sales will enable to bring gas prices to a level ensuring interfuel competition and instigate consumers to start actively implementing gas and energy saving measures.

The move may result in gas consumption forecasts for Russia considerably changing in the downward direction. Higher domestic consumption in the RF will be driven primarily by bigger gas demand from the residential sector in the regions of the Unified Gas Supply System of Russia route as well as by socioeconomic development of Eastern Siberia and the Far East.