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September 10, 2003

Gazprom comes out in favor of dynamic development of market relations in the gas industry

Speaking at the Round Table “The outlooks of the oil and gas sector development in Russia and CIS”, arranged in the frames of the Euromoney Investment Forum “Russia and CIS 2003: economic objectives of the XXI century”, Elena Karpel, Head of Department for Economic Expert Analysis and Pricing, explained the Company’s view of the Russian gas market development to the investment community.

As E.Karpel said, Gazprom is interested in developing high-grade domestic gas market targeted at creating necessary predictable financial and economic prerequisites for functioning of all the market participants – both gas producers and consumers. The market should be formed through step-by-step deregulation of the existing economic relations, transition from the state-regulated prices for gas to tariff regulation in the originally monopoly sphere – gas transportation.

According to E.Karpel, the Russian market should be developed through evolutionary transformations, but not by radical breaking of the steadily functioning United Gas Transmission System. As far as the market competition is concerned, it should be initiated, first of all, by increasing the share of gas production by independent producers. Moreover, as gas prices will reach an economically feasible level, gas producers from the Republics of Central Asia as well as producers of other fuels – coal and oil fuel - will be able to enter the Russian market.

“We are standing for establishing equal relations with independent producers. Business terms and conditions should be the same for all producers, i.e. equal rights – equal responsibilities. The same relates to gas pricing, pipeline access rules and taxation. All producers should be equally empowered to participate in gas exports, assuming equal responsibility for secure gas supply to domestic consumers – first of all, the population which receives natural gas from Gazprom at prices 43% lower than independent producers get for their gas on the internal market.

On condition of equal contribution to the development of the United Gas Transmission System, all contributors should enjoy equal opportunity to use UGTS capacity”, - noted Elena Karpel.

Independent producers haven’t got any problems with the access to Gazprom’s gas mains. All gas produced by the Russian independent companies is delivered to the consumers.

Gazprom takes measures to improve the transparency of transport tariffs formation. For several decades, Gazprom has kept separate accounts for separate businesses, and transmission costs are transparent for the State. Nevertheless, Gazprom intends to further restructure its subsidiary transportation companies through detaching gas production and processing business, capital construction, etc., into separate legal entities so that the financial reports of gas transmission companies represented only expenses and profits related to commodity transport operations.

The key element of the gas market restructuring is gas price liberalization based on demand and supply. At the same time, Gazprom clearly understands that customers require an adaptation period for introduction of energy saving technologies, development of an efficient system for subsidizing socially susceptible layers of population and creation of market infrastructure. That’s why a double-sector market will hold out in Russia for the next 5-6 years: regulated gas market and liberalized gas market. Only gradual reduction in the regulated market segment and simultaneous matching of prices in the both market segments could prevent destabilization of the economic and social development of the country and raise the investment potential of the industry.

The model suggested by the Head of the Department for transition to market relations in the gas industry includes 3 stages.

According to E. Karpel, a certain volume of gas produced by Gazprom should be brought to the market, where independent producers operate now, to receive adequate responses to the market valuation of gas and to elaborate market mechanisms.

At the second stage, the liberalized gas market sector should be expanded and a competition in gas delivery offers between Gazprom and independent producers, and between imported gas and alternative energy sources should be initiated. All consumers, except for population, should receive gas at this stage at prices set up based on the supply and demand balance.

And, at the final stage, a dynamically developing, completely liberalized gas market will be formed with blanket transportation tariff regulated by the State.

The present pattern of the gas market development, according to E. Karpel, is in absolute conformity with the Energy strategy of Russia for the period up to 2020.

In addition, E. Karpel informed the participants of the investment Forum on the measures undertaken by Gazprom to improve the transparency of the corporate business and its efficiency, to optimize the corporate assets structure and to improve corporate governance efficiency.





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