On May 15, 2008, Gazprom published the Russian version of its Quarterly Statement for Q1-2008, which contains the 2007 Financial Report prepared in accordance with the Russian Accounting Standards (RAS). In the following tables, the unit costs and prices per 1000 cubic meters (mcm) are calculated by dividing the reported costs and revenues by the corresponding reported volumes of gas sales. Note that financial reports prepared in accordance with RAS differ to a significant extent from those prepared in accordance with International Financial Reporting Standards (IFRS).

Table 1. Comparison of Selected Unit Costs and Prices

(*) Annual change.  (**) Net of VAT and customs duties.

Source: Gazprom.

• Some ruble and dollar values show opposite trends because the corresponding prices and tariffs are set in US dollars.

  • For example, the decline of the ruble transportation cost of gas exported to the FSU takes place because the Russian transit tariff for Central Asian gas is set in US dollars.

  • In 2007, the nominal value of US dollar against Russian ruble has dropped by 6.25% (by the average annual exchange rate).

• In 2007, Gazprom's sales of gas in Russia became profitable again (calculated in accordance with RAS).

• In 2007, Gazprom was exporting more expensive gas to Europe and selling less expensive gas to Russian customers.

  • More expensive gas is bought from gas processing plants and independent producers.

  • In 2006, Gazprom was selling more expensive gas to Russian consumers. At the briefing of June 28, 2007, Gazprom explained that the cost of stripped gas is high and all this gas is consumed in Russia close to gas processing plants.

  •  Interestingly, in the period before September 9, 2001, when stripped gas had been exempt from excise tax, while natural gas export was subject to a 30% excise tax, Gazprom showed all its stripped gas as shipped to export markets. Gazprom has managed to prove it in the arbitration court.

• The report indicates a decline of the profitability of gas operations of Gazprom. The drop is caused mainly by the sharp growth of the cost of gas purchased for exports to Europe (40% in rubles and 49% in US dollars).

• The cost of gas purchased for exports to the FSU reflects the growth of price of Central Asian gas.

Table 2. Dynamics of the Purchased Cost of Gas Sold in Russia, FSU and Europe

Source: Gazprom.

It is also worth noting the following statements of the report.

• In Europe, the supply of gas exceeds the demand. Gazprom considers the risk of the continuation of this situation.

• EU Directives aimed at better transparency of costs in transmission, distribution and storage of gas are listed among the risks of Gazprom.

• Gazprom agreed to pay the "European price" for gas from Kazakhstan, Uzbekistan and Turkmenistan from 2009. Nevertheless, Gazprom still believes that the Energy Charter Treaty and third party's access to the transit of Central Asian gas to Europe can increase competition and negatively affect the long-term contract of Gazprom in Europe.

• Based on the outdated plan of the Russian government to increase the domestic price of gas by a maximum of 27% a year, Gazprom calculates its profitability of the domestic sales of gas in 2010 at 24%.

  • The updated governmental plan assumes the 30% price growth in 2010 and 40% after that. Huge profits of Gazprom will be provided by the increased costs of all Russian gas consumers.

  • Gazprom mentions another "special gift" from the Russian government that introduced 0% tax rate for the dividend income received by Russian companies from January 1, 2008.

Mikhail Korchemkin, CEO

May 16, 2008