• According to unaudited interim financial statement as of September 30, 2006, Gazprom shows excellent results in sales of liquids (crude oil, condensate and refined products) and moderate ones in sales of natural gas.

• Revenue from sales of liquids in January-September 2006 is up 311% from the same period of 2005 - RUR 474.3 bn (USD 17.7 bn) and RUR 115.3 bn (USD 4.3 bn), respectively.

  • The growth was provided mainly by Sibneft - the newly obtained oil producing asset of Gazprom.

• Net revenue from sales of natural gas in the first nine months of 2006 is up 39% from the same period of 2005 - RUR 1,008.3 bn (USD 37.7 bn) and RUR 723.3 bn (USD 27.0 bn).

  • The growth was mainly provided by the sharp increase of European prices.

  • Increase of revenues from sales to the former Soviet states and to the Russian Federation were the second and third major factors, respectively.

• Total reported revenue is up 75% - from RUR 902.2 bn (USD 33.7 bn) to RUR 1,581.3 bn (USD 59.0 bn).

• Total operating expenses are up 72% - from RUR 587.3 bn (USD 21.9 bn) to RUR 1,012.9 bn (USD 37.8 bn).

• Total transmission expense is up 19% - from RUR 213.3 bn (USD 8.0 bn) to RUR 253.1 bn (USD 9.4 bn).

  • Note that the total transmission expense in Q1-2006 went down while the volume of gas delivered by pipelines increased - this is impossible (Figure 1).

  • The Q3-2006 transmission expense per 1000 cub m (reported expense divided by the reported volume of gas delivered by Gazprom pipelines) is 133% (more than twice) higher than that of Q1-2006.

• As usually, the reported transmission expense is not sensitive to its most important component - depreciation expense (Figure 2).

  • Depreciation expense fluctuates in accordance with the seasonal changes in deliveries and sales of gas.

  • Note that in Q2-2006, the total transmission expense went up while the depreciation expense went down, which is impossible.

• Nine-month gas production expense is up 19% - from RUR 129.3 bn (USD 4.8 bn) to RUR 154.3 bn (USD 5.8 bn).

  • The Q3-2006 production cost per 1000 cub m (reported expense divided by the reported production volume of Gazprom) is 23% up from Q1-2006. There was no change in taxation in this period.

• According to numerous official statements, Gazprom is motivated by profit only.

  • In the first nine month of 2006, RosUkrEnergo reported a loss of USD 532 million.

  • It is unclear why does Gazprom want to keep the broker that loses money?

• According to Gazprom, RosUkrEnergo was created to generate tax-free profit out of Russia and invest it into expansion of pipeline capacity for the transit of Central Asian gas. Gazprom owns 50% of the Swiss firm while the other half is owned by Messrs D.Firtash and D.Fursin.

  • Out of the reported 2005 profit of $755 million, $735 million was paid in dividends.

  • Lucky Messrs Firtash and Fursin got $368 million.

  • We are unaware if the remaining $20 million were invested into expansion of pipeline capacity.

  • In quarterly reports of Gazprom until Q2-2006, RosUkrEnergo was defined as operator of transit of Turkmen gas to Ukraine and investor into gas pipelines required for this transit (see Page 30 of this report - in Russian).

  • From Q3-2006, Gazprom defines RosUkrEnergo AG as transit and storage operator without mentioning its investor's function.

Mikhail Korchemkin, February 15, 2007