• Compared with Q1-2004, Gazprom has reduced the export duty payment rate by 1.2%. In absolute terms, it means savings of $90 million in Q1-2005. Apparently, Gazprom reduced export duty on transit payment gas.

• The surprising and unbelievable drop of total production expense in Q4-2004 means that the production cost per 1000 cub m (mcm) has suddenly declined by over 15%. However, in Q1-2005 the production cost per mcm was reported at about the level of Q3-2004.

  • There is no explanation of the decline of production expense in Q4-2004.

  • We believe there is a technical mistake in Gazprom's financial report for Q3-2004.

• The 22% increase of total production expense from Q4-2004 to Q1-2005 is caused mainly by the rise of mineral production tax from RUR107/mcm to RUR135/mcm (Figure 1). The new rate became effective on January 1, 2005. Note that from January 1, 2006, the tax rate will be raised to RUR147/mcm.

Figure 1

Figure 2

_{Source: Financial reports of Gazprom}

Figure 3

Figure 4

• Apparently, Gazprom uses a simplified approach to the calculation of transmission expenses (Figure 2). The reported expenses do not reflect seasonal swing as they should and had before.

  • Total depreciation expense of Gazprom does reflect seasonal swing (Figure 3).

  • Depreciation of transmission assets represents over 60% of the total depreciation of Gazprom, so it should affect the total transmission expense.

• From Q4-2004 to Q1-2005, fuel gas expense increased by 49% (Figure 4).

  • In the same time, combined production and transmission expenses increased by 9%.

  • Fuel gas expense (or total cost of gas used at compressor stations) is calculated at the delivery cost of gas, which depends on production and transmission cost.

  • Apparently, Gazprom has increased its internal transfer price of gas.

• The reported staff cost is still lower than expected (Figure 5).

  • Gazprom wages follow the trend of Russia's wages and Gazprom personnel is growing.

Figure 5

Figure 6

_{Source: Financial reports of Gazprom}

• The reported electricity expense also looks low (Figure 6).

• It looks like Gazprom lacks attention to expense reports.

  • It may be a small issue when the export price of gas is that high and continues to grow.