The Gazprom Management Committee took notice of the information on developing the Russian gas market and enhancing the payment discipline.

It was noted that over several years the regulated prices for gas supplied by Gazprom to the domestic market had not secured enough investments needed for developing and upgrading gas production storage and transmission facilities. In addition, new approaches to gas taxation complicate the matter as they anticipate an annual increase in severance tax as well as property tax for gas transmission networks incorporated in Russia's Unified Gas Supply System.

As a result, the economic efficiency of domestic gas supplies falls to its critical level. Taking into account the cross-subsidization process as well as cross-subsidization of population by industrial customers, the gas price does not ensure the business effectiveness of gas supplies in the majority of Russian regions.

Growing arrears for gas supplies became another pressing issue for the domestic market. The 2012 results show that the biggest non-payers are housing and utilities companies, the population and power generating companies.

Moreover, for Russian consumers the colliding norms of the effective regulation are one of the reasons for emerging and growing arrears for gas supplies. Thus, law enforcement actions applied to non-payers become ineffective. In order to solve this issue, it is necessary to introduce a strong regulatory mechanism securing gas supplies alongside with timely payments.

The specialized structural units were tasked to continue their efforts aimed at reducing arrears for gas supplies, and to prepare and submit in the second quarter of 2013 some proposals on improving Russia's effective regulation concerning the gas supply payment mode.

The Gazprom Board of Directors will address the issues surrounding the Russian market development and discuss measures aimed at enhancing the payment discipline at the meeting scheduled for April 2013.

Background

Gazprom is the largest supplier of gas to the Russian market, covering over 70 per cent of total gas supplies. Over the last ten years the average gas consumption has increased to 2–3 per cent per year. This process is generally linked with the commissioning of new power generating facilities and upgrading the other ones as well as implementing the gasification program and entering the new gas markets in Eastern Siberia and the Far East.

To date, Russian gas market comprises regulated and deregulated sectors. Gazprom is almost a sole supplier to the regulated sector. Among all types of fuel, the Government regulates only prices for natural gas produced by Gazprom Group and supplied to Russian consumers.

Gasification of Russian regions is one of Gazprom's business priorities aimed at the domestic market development. Between 2005 and 2012 the Company allocated some RUB 180 billion for gasification purposes. In addition, over RUB 100 billion was channeled to the construction of gas branches and gas distribution stations that were an integral part of the gasification process. Over eight years Gazprom has built 1,527 inter-settlement gas pipelines totaling over 21.8 thousand kilometers in length and gasified more than 600 thousand apartments and households as well as 3,623 boiler houses located in 2,753 population centers. At the same time, the gasification program results show that the unprecedented number of Russian constituents – 15 – has not fulfilled their obligations to prepare consumers for gas supplies.

Gazprom promotes natural gas use as a motor fuel. This is another Company's priority aimed at the domestic market development. To date, Gazprom has made up a list of 21 pilot investment projects on construction of compressed natural gas (CNG) filling stations in 10 Russian regions, with a view to complete scheduled works between 2013 and 2014. The Company has identified 55 second-priority projects on developing CNG filling network in 26 regions. A relevant decision on projects implementation will be adopted by the Company in 2014 and will be based on the results of the investment rationale.

Russian consumers' indebtedness for the supplied gas amounted to RUB 143 billion by January 1, 2013.