Leadership and Efficiency

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.

It is proposed that the Shareholders Meeting approve:

• the annual report for 2012;
• the annual accounting statements;
• the distribution of profit and the proposals by the Board of Directors on the amount of, time for and form of the dividend payment.

It is also proposed that the Shareholders Meeting approve the amount of remuneration for the Board of Directors and the Audit Commission Members. All this information is in the materials that have been given to you.

It is proposed that PricewaterhouseCoopers Audit – the winner of an open tender procedure – be approved as the auditor for performing the obligatory annual audit of Gazprom's accounting statements.

Esteemed shareholders!

The 2012 operating results proved once again the soundness of our strategic course aimed at strengthening our positions as a vertically integrated energy company engaged in hydrocarbon production and processing, gas, oil and derivatives transportation and supply, heat and electricity generation.

Gazprom's proceeds from sales in 2012 grew by 3.5 per cent versus the previous year, and Gazprom Group's consolidated proceeds increased by 5.6 per cent. The dividends for the shareholders will be substantial – 25.5 per cent of the net profit under the Russian Accounting Standards, around RUB 142 billion in total or RUB 5.99 per share.

Esteemed shareholders!

In 2012 we built up our production, processing and generating capacities, we implemented new transportation and production projects and entered new sales markets.

Comparing the targets and the results of our 2012 activities with the processes in the global energy industry, we are once again convinced that our approaches have been chosen correctly:

• our business strategy always hinges on the well-founded energy industry development forecasts and the balance-based approaches;
• relationships with our consumers are built on the principles that make it possible to know for sure when, in what amount and at what price our products will be supplied.

The fundamental advantages of Gazprom are profound vertical integration of the Company, a long-standing experience of work with international partners, a long-term contract portfolio and a beneficial geographical location between Europe and Asia.

Aspiring to solidify its leading positions in the world energy industry, Gazprom will further build up its competitive advantages.

• it is, first of all, the prolific raw material and production base;
• it is the unparalleled Unified Gas Supply System of Russia permitting to respond quickly to changes in demand and to guarantee gas supplies to consumers in Russia and abroad.

Esteemed shareholders!

We are consistent in reaching our targets when developing the raw material base. The year 2012 was not an exception.

Pursuant to our policy, the reserve replacement ratio should always be greater than one. And according to the 2012 results, this strategically important indicator has been achieved. Gazprom Group's ABC1 gas, gas condensate and oil reserves in Russia grew by 573 billion cubic meters, over 21 million tons and over 55 million tons accordingly.

Owning 18 per cent of the world and 72 per cent of the Russian reserves, we are the unconditional leader in terms of commercial gas reserves among the global oil and gas companies. The current value of these reserves is USD 280 billion.

Russiahas sufficient hydrocarbon resources in order for us to further develop our production activities using conventional technologies. In this context, shale bed methane production is economically senseless. Only gas from the Kuzbass coal beds is of practical interest for the Company. Gazprom is already implementing there an innovative production project with the use of its own technology.

The key event in our 2012 upstream activities was the commissioning of a new potent gas production center in Russia's Yamal Peninsula. The Bovanenkovskoye field with an annual capacity of 115 billion cubic meters of gas and the first string of the Bovanenkovo – Ukhta gas pipeline system that is over 1,260 kilometers long were brought onstream there.

Bringing the Yamal center into operation pursues two objectives: firstly, to make up for a natural decline in production in the old gas producing regions and, secondly, to strengthen the resource base for entering new sales markets.

Upon commissioning of the Bovanenkovskoye field, our upstream capacities exceeded 600 billion cubic meters per year. We are fully ready to meet considerable extra demand or, if necessary, to replace products that are exported by our competitors to international markets.

Yamal saw the development and introduction of innovative solutions permitting to increase the qualitative and technical characteristics of equipment. Unrivalled large-diameter pipes with a working pressure of 120 Ata (a record high for onshore gas pipelines) were designed in Russia for conveying gas from the Bovanenkovskoye field.

Another crucial result achieved in 2012 was bringing the Zapolyarnoye field to its full capacity. The second comprehensive Valanginian gas treatment unit with an annual capacity of 10 billion cubic meters and 75 wells were commissioned at the Zapolyarnoye field. The capacities for gas production from the Cenomanian deposits were boosted as well. As a result, the peak annual productivity of Russian fields – 130 billion cubic meters – was achieved. It is the absolute record for Russia.

We also moved to a new technological level in the Zapolyarnoye field. The Zapolyarnaya main compressor station with a capacity of 354 MW is not only the most powerful station of this kind in Russia. It also uses state-of-the-art gas pumping facilities with centrifugal rotor boosters suspended magnetically.

In 2012 Gazprom Group produced 487 billion cubic meters of gas. The gas production rates were reduced due to changes in consumption and demand. Our market-based approach to operations means that we are always ready for a reduction as well as an increase in demand for natural gas, including during the most difficult periods of peak loads.

In the autumn-winter 2012/2013 Gazprom Group's daily gas production reached 1 billion 658 million cubic meters, which is 50 million cubic meters more than in the previous autumn-winter period. It is the world record of daily production in the gas industry.

Esteemed shareholders!

The year 2012 will go down in the history of the national energy industry as the time of the key decisions on the gas industry establishment in Eastern Russia. Under the Eastern Gas Program we started building the essential facilities that would lay a powerful foundation for further socioeconomic development of the Russian East.

Eastern Siberia and the Far East occupy more than a half of Russia's territory. The initial in-place gas reserves in Eastern Russia exceed 50 trillion cubic meters onshore and 14 trillion cubic meters offshore. At the same time, the region has not been sufficiently explored yet: 7 per cent – onshore and 6 per cent – offshore. That's why new hydrocarbon treasures that would give energy to Russia and Asia-Pacific may be found here.

When executing the Eastern Gas Program in 2012, Gazprom started creating gas production centers in Yakutia and Irkutsk as well as developing a relevant center in Sakhalin. The Power of Siberia gas pipeline system will become their 'transmission backbone'.

In 2012 the Company made investment decisions on the projects aimed at pre-developing the Chayandinskoye field and constructing the Power of Siberia gas pipeline as well as gas processing facilities.

The Eastern Gas Program execution is of historical significance as this program is an instrument for Russia to become a part of the main process ongoing in the global energy industry of the 21st century – the process of shifting the world energy trade and consumption centers to Asia-Pacific.

Esteemed shareholders!

Last year we made crucial steps in our consistent efforts to conquer the shelf. In 2012, as part of the Sakhalin III project, Gazprom started building production wells at the Kirinskoye gas and condensate field located offshore the Sakhalin Island. When developing offshore production, we primarily rely on our own experience and our own technological 'know-how', thus feeling more confident in executing such projects. Already this year the Kirinskoye field will be brought into commercial operation.

The Prirazlomnaya ice-resistant stationary platform became our flagship in northern seas. The platform is located at the Prirazlomnoye field in the Pechora Sea and is fully prepared for oil drilling purposes. Geological exploration is also underway across licensed areas in other Arctic seas as well as offshore Sakhalin and Kamchatka.

Esteemed shareholders!

Despite the rapid growth and technological progress of the gas industry, the world economy continues generating high demand and prices for oil and other liquid hydrocarbons. For instance, in 2012 the average price of URALS oil increased versus 2011 to USD 110.4 per barrel.

The world prices of liquid hydrocarbons – if converted to energy units – are significantly higher than the prices of gas. That's why we develop the oil business so as to enhance our financial performance to the benefit of the Company's shareholders and investors.

Gazprom Neft is the oil production backbone within Gazprom Group. Last year the company proved its high efficiency once again. Gazprom Neft's consolidated oil production totaled 50.8 million tons in 2012. Due to the use of new technologies, the company became the Russian oil industry leader in terms of hydrocarbon extraction and processing rates. Production of oil derivatives grew by 7 per cent to 41 million tons. Sales of oil derivatives (jet fuel, oil and lubricants) via premium distribution channels are also up, for instance, through the Gazprom Neft owned filling station network and bunkering.

The reporting year saw the commencement of oil production at the Vostochno-Messoyakhskoye field. The first oil was produced from the Novoportovskoye field. The upstream sector was further developed in the Orenburg Region.

When developing the liquid hydrocarbons production, we make efforts aimed at enhancing the sustainable use of extracted resources and improving the utilization of associated petroleum gas (APG). In 2012 the utilization of APG amounted to nearly 70 per cent across Gazprom Group. We have set ourselves the target to bring the APG utilization rate to no less than 95 per cent.

We are also active in developing hydrocarbon exploration and production abroad.

In 2012, as part of gas exploration projects across the Group's licensed areas abroad, the Company carried out operations in Vietnam, Algeria and Tajikistan. Seismic surveys were conducted in Serbia and Hungary. The work is performed with the use of cutting-edge, including home-grown, technologies.

In a number of projects we have achieved record-high indicators. For instance, the 6,450-meter-deep exploratory well No. 1 at the Shakhrinav structure is one of the deepest in Asia.

The reporting period also saw joint activities aimed at oil prospecting and exploration abroad in such countries as Iraq, Venezuela and Cuba.

Gazprom Group is also involved in international production projects. In 2012 Serbia's NIS, a member of Gazprom Group, produced 1.2 million tons of oil and 600 million cubic meters of gas. Gazprom participates in joint production projects in Iraq, Venezuela and the UK.

Esteemed shareholders!

Transmission is an essential business activity for any vertically integrated company. In 2012 the length of gas pipelines and branches owned by Gazprom and its subsidiaries dealing with gas transmission was extended for over 3 thousand kilometers and totaled 168.3 thousand kilometers across Russia.

Two key vectors may be highlighted in the development of our gas transmission system: from Bovanenkovo to Vyborg – in the north, from Sakhalin to Khabarovsk via Vladivostok – in the east. An increase in the throughput of the gas transmission system (GTS) is driven by the market demand and the corresponding production level.

The GTS capacity growth is mainly linked to the Bovanenkovskoye field that was brought onstream in parallel with the following transmission systems: the Bovanenkovo – Ukhta and Ukhta – Torzhok (linear section) gas pipelines, the SRTO – Torzhok gas pipeline and the second string of the Gryazovets – Vyborg gas pipeline.

In 2012 Gazprom's gas transmission system in Russia was fed with 666.2 billion cubic meters of gas. A part of this gas – 96 billion cubic meters – was pumped by companies outside Gazprom Group. This is 14 billion cubic meters more than last year. In such a way, we extended the use of Gazprom's GTS by independent natural gas producers.

Gazprom Group's main gas transmission asset abroad is Beltransgaz, presently – Gazprom Transgaz Belarus. The company is successfully integrated into Gazprom's gas transmission system. As a result, we have secured the shortest and the most cost-effective route to Europe and therefore increased the reliability and sustainability of onshore supplies to European markets.

In 2012 over 64.5 billion cubic meters of gas was supplied into the Belarusian gas transmission system, of which 44.3 billion cubic meters was meant for consumers in other countries importing our products.

Thus, the Yamal – Europe-2 gas pipeline may be objectively considered as the expansion of onshore routes to the West with a view to increase the reliability of gas supplies. We are currently discussing the need and possibilities for its construction with our foreign partners and consumers.

Esteemed shareholders!

The reliability of gas supplies to Russian consumers is secured by a manifold network of underground storage facilities (UGS). In Russia Gazprom Group operates 21 UGS facilities at 25 storage sites.

The underground gas storage network supplies Russian consumers with up to 20 per cent of gas during the heating season, while in cold snaps our UGS facilities provided over 38 per cent of gas consumed in Russia.

The record daily withdrawal rate was reached on December 20, 2012 – 670.7 million cubic meters of gas. It is a new world record of daily UGS deliverability.

Esteemed shareholders!

The principal export item of Gazprom Group is natural gas, with Europe remaining the major market.

In 2012 we sold 151 billion cubic meters of natural gas beyond the FSU, including 139 billion cubic meters under long-term contracts. The earnings (net of customs duties) exceeded RUB 1.5 trillion.

Germany, Turkey, Italy and France were the major importers of our gas.

2012 was not an easy year for the European energy industry. The slowdown in economic growth within the EU caused a temporary decline in demand for energy. But starting with the second half of 2012 we have observed an increase in the share of our products in the European market, and this process is still underway this year.

Based on the results of the first half of 2013, our exports to Europe grew by 10 per cent, exceeding on certain days in June the last year's level by 1.5 times. At the same time, the first quarter supplies of other exporters decreased drastically: from Algeria – by 10 per cent, Libya – by 12.9 per cent, Qatar – by 42.3 per cent. It is noteworthy that the additional gas demand in Europe caused by the shortfall in LNG supplies is met through our long-term oil-indexed contracts.

Indigenous gas production in Europe declines steadily and LNG producers prefer premium markets in Asia-Pacific. In spring this situation affected the UK, where the swing in free prices caused by interruptions in gas supplies reached the levels exceeding Gazprom's export prices twofold.

LNG supplies to Europe turned out to be considerably lower as compared to forecasts, which led to the reduction of Europe's share in the global LNG imports from 28 per cent in 2009 to 21 per cent in 2012. It is an indicator of the increasing role of pipeline gas in the European market and the appearance of substantial extra market niches for Gazprom in the LNG sector.

Europeneeds predictable volumes of gas at predictable prices. This makes Russian gas ever more attractive. For example, in the course of the current year our gas supplies to Italy grew three-fold as compared to the same period in 2012. The track-record of Gazprom's export supplies enables us to forecast in 2013 that the total gas sales in Europe and Turkey will exceed 160 billion cubic meters.

In the mid- and long term the share of Gazprom's gas in the EU's gas imports will still exceed two-thirds.

The strategy providing for the direct outreach to consumers and the mitigation of transit risks is the cornerstone of our determination in implementing the Nord Stream and South Stream export gas pipeline projects.

In 2012 we completed the construction of Nord Stream's second string. It is a fundamentally new gas pipeline running on the seabed so as to directly connect Gazprom's gas transmission system with European consumers. The gas pipeline construction and operation is the result of our strategy aimed at diversifying the supply routes and increasing their reliability. Our foreign partners are eager to explore possibilities for further expansion of the Nord Stream project.

The South Stream project is the continuation of Gazprom's export strategy southwards. In 2012 we started its execution. The first joint of the offshore gas pipeline bordering on the Russian onshore gas pipeline section was welded at the Russkaya compressor station on the Black Sea coast. The project is progressing in full compliance with the schedule.

Underground gas storage facilities are the efficient means for maintaining the reliability of gas exports. Located in close proximity to gas pipelines and our sales regions, the UGS facilities operated by Gazprom jointly with foreign partners help to ease the tension of peak load periods and optimize supplies.

The Rehden, Haidach and Katharina UGS facilities are aimed at supplying gas to consumers in Germany and Austria and ensure reliable gas deliveries to Slovenia, Hungary, Slovakia and Italy.

The Banatski Dvor UGS facility project with a working gas volume of 450 million cubic meters is underway in Serbia. This UGS facility secures the reliability of natural gas exports to Hungary, Serbia, Bosnia & Herzegovina.

The work on the construction of underground storage facilities in Europe will continue. For instance, by 2014 it is planned to build the Bergermeer UGS facility in the Netherlands, which may become the largest one in Western Europe. This UGS facility is located in a strategic area and has a considerable working gas volume, of which Gazprom plans to get 1.9 billion cubic meters.

Esteemed shareholders!

Pursuing our leadership strategy in the global energy industry, Gazprom diversifies markets and builds up its activities in regional and global energy trading.

Our endeavors aimed at boosting cooperation with Asia-Pacific will be especially important in this context. It is in Asia-Pacific that the highest growth of energy demand is projected and it is there that we plan to direct our primary efforts for expanding our export markets.

We will build up our presence in Asia-Pacific by boosting domestic LNG production in the first place. LNG makes it possible to sell products to ultimate consumers avoiding transit countries. It also permits to flexibly use marketable volumes for the purpose of benefiting from the market conditions and gaining arbitrage profit in the spot market.

Gazprom already operates the Sakhalin II project, which surpassed its nominal capacity and produced more than 10 million tons of liquefied gas in 2012.

Gazprom implements new projects.

In 2012 an Investment Rationale was carried out and a final investment decision was made for the LNG plant near Vladivostok. The project stipulates building a plant with an annual capacity of 10 million tons of LNG, to be possibly increased to 15 million tons. The first process train is to be put onstream in 2018. Gas from the Sakhalin, Yakutia and Irkutsk gas production centers will be the resource base for the LNG plant.

It can be said with certainty that the project is highly competitive, taking into account the estimated cost of LNG and the short distance of its transportation from the future plant in Vladivostok to target markets.

The Baltic LNG project is in full swing. An Investment Rationale and a comprehensive Action Plan are at the initial stage, a feasibility study of possible construction options is in progress.

In 2012 we enriched our experience in the LNG market through swap deals and other transactions. Gazprom Group sold 22 LNG cargoes with a total volume of 1,440 million tons. Nowadays we supply liquefied natural gas to 10 countries worldwide. LNG supplies from the Sakhalin II project and our LNG supplies as part of trading operations currently amount to 5 per cent of the global market.

Our goal is to account for around 15 per cent of the global LNG market.

In the reporting year we solidified the contractual framework of this type of activity by entering into contracts for LNG supply to India and the Republic of Korea. For instance, an agreement with India provides for annually supplying 2.5 million tons of Russian LNG during 20 years and ensures our entry into one of most fast-growing Asia-Pacific markets.

LNG as a form of hydrocarbon feedstock trade and delivery doesn't limit us by only one region. For instance, small-scale LNG may be traded well in Europe, where a new impetus was given to natural gas use as a motor fuel as a result of the vehicle emission restrictions set by the EU. Gazprom is going to expand its presence in the European and Asian NGV sectors.

Esteemed shareholders!

The Russian Federation is the top-priority market for Gazprom, which is the largest national gas supplier accounting for more than 70 per cent of total gas deliveries. In 2012 Gazprom Group supplied Russian consumers with 249.7 billion cubic meters of gas from its own resources and thus fully met domestic demand.

Gazprom Group's proceeds from gas sales in the domestic market grew by 2.4 per cent versus 2011 to RUB 740 billion. Gazprom secures energy supplies to Russia's primary industries, such as power generation, metallurgy, agrochemistry and cement industry.

In 2012 we made a number of decisions aimed at establishing in Russia another large gas consuming sector represented by motor vehicles.

The conversion of Russian motor vehicles to natural gas will have a significant economic, social and environmental effect. The use of natural gas in engines also means cheaper road transportation and lower shipping costs in all sectors of the economy. It also implies fewer environmental impacts in cities and towns.

Broad use of gas in vehicles has a huge potential for Gazprom's business, primarily in the context of expanding the market for our products.

We plan to step up efforts aimed at rapidly extending the CNG filling network.

This activity will be financed as part of the Russian Regions Gasification Program. In 2013 fund allocations to investment projects for building NGV refueling stations under the Program will make up RUB 1 billion.

In 2012 our investments in the gasification of Russian regions hit a record of around RUB 34 billion. Pipeline gas for the first time came to 429 population centers, which means that at least one gasified locality appeared in Russia each day.

Gazprom implements the large-scale project for building the Southern Corridor gas transmission system in order to supply gas to Russia's central and southern regions as well as feed gas into South Stream. The project covers eight Russian constituent entities. At present, the gas pipeline route is being determined and engineering survey is in progress. The work is advancing in strict compliance with the schedule and the preset deadlines are being met.

Esteemed shareholders!

Processing is a crucial activity contributing to the diversification of Gazprom's business and boosting the efficiency of natural resource use as well as the output of high value added products. Therefore, we increase investments in the processing sector. In the reporting year the Group's investments in processing rose by 15.5 per cent versus the previous year.

We implement the program for the upgrade, retrofitting and construction of new capacities with the view to improve environmental performance and achieve higher efficiency in hydrocarbon processing. At the same time, we promote and encourage the introduction of innovative technologies.

Esteemed shareholders!

Gazprom Group holds leading positions in the Russian power market. Gazprom's share in the domestic electricity and heat generation reached almost 17 and 8 per cent accordingly.

The Group's total installed capacity of marketable power generation was 38 GW as of late 2012. At the same time, natural gas accounting for 79 per cent in the fuel balance of all power plants is the fuel of choice.

Gazprom's power generation strategy is aimed at building up production capacities and increasing their efficiency.

In 2012 the Company completed a number of unique projects. A 800 MW combined cycle gas turbine unit was commissioned at the Kirishi State District Power Plant. It is the largest heat generating facility that has been commissioned in Russia over the last 30 years and it is the most powerful generating unit in the country today. Gazprom is the most efficient investor in the power industry.

We have completely fulfilled the plan for bringing the Olympic power facilities into operation. Two combined cycle gas turbine units with a capacity of 180 MW each have been built at the Adler Thermal Power Plant that will supply electricity to Sochi's Olympic venues.

Esteemed shareholders!

The results of our performance in 2012 showed that Gazprom has a considerable reliability margin and sufficient flexibility due to a coherent and persistent strategy.

We always use our potential for the benefit of our shareholders, while taking into consideration the interests of millions of Russian citizens. We continue our progressive advance toward the intended objectives.