Discrepancies of 2004 Financial Report of Gazprom (Corrected on October 20, 2005)

• Consolidated financial report of Gazprom for 2004 shows unusual results for Q4-2004:

  • From Q3 to Q4, gas production increased by 13.5%, while the reported gas production expense dropped 3.6% (Figure 1).

  • From Q3 to Q4, gas delivery by Gazprom pipeline showed a growth of 50.4%, while the reported transmission expense increased just by 4.1% (Figure 2) and fuel gas expense went up 1.5% (Figure 3).

    • In our earlier comments, there were misprints in transmission expense values for Q2- and Q3-2004. We apologize for the mistake. The reported transmission expense performance is not that bad, but it still looks unusual.

  • Note that the decline of fuel gas expense in Q3-2004 does not make sense if the production and transmission expense numbers are correct.

    • Gazprom reported increase of both production and transmission expenses in Q3-2004.

    • Fuel gas is accounted at cost, so its expense curve should follow the pattern of production and transmission expenses.

Figure 1

Figure 2

_{Source: Financial reports of Gazprom}

Figure 3

• In Q4-2003 and previous years, all named expenses showed normal seasonal growth.

• Gazprom costs are affected by seasonal character of gas production and sales.

  • Production expense, transmission expense and cost of fuel gas (gas burned at compressor stations) are lower in summer and higher in winter.

• The costs are also strongly affected by internal transfer prices (prices used for transactions within the company) set by Gazprom management.

• According to quarterly financial reports, the change in expenses by segment is primarily due to changes in internal transfer prices.

  • It is unlikely that the monopoly cut down its internal tariffs in Q4-2004.

  • There is no explanation in the 2004 report.

• From Q3 to Q4-2004, combined production and transmission costs increased just by 1%. The phenomenon of flat costs under growing volumes of production and sales is reported for the first time in Gazprom history.

  • Gazprom may have reported altered annual expenses attempting to lower its record rate of cost growth.

    • The altered numbers came into contradiction with the expense numbers published in earlier quarterly reports.

• Note that from Q3 to Q4-2004, all reported expense items (labor, materials, electricity, depreciation and other) increased.

  • In this context, the reported decline of production expense and marginally increased transmission expense looks like data falsification.

• Apparently, the reported labor expense is also wrong (Figure 4).

  • From 2003 to 2004, the reported number of full-time employees increased from from 354 to 392 thousand.

  • According to Gazprom, the average monthly wage of the company increased 27%.

  • However, the reported labor expense of Q4-2004 is about the same as in Q4-2003.

  • Note that RF State Department of Statistics reported the average wage of Russian gas industry in 2004 at RUR 33,747.2 ($1,216) a month.

  • Gazprom reported its 2004 average wage at RUR 25,700 ($926) a month.

  • Gazprom employs more than 99% of workforce of Russian gas industry.

  • In 2005, RF State Department of Statistics discontinued monthly reports of average wage in gas industry.

Figure 4

Figure 5

_{Source: Financial reports of Gazprom}

_{Source: Financial reports of Gazprom}

• The reported electricity expense looks incorrect as well (Figure 5).

  • The consumption of bought electricity in 2004 is about the same as in 2003.

  • The electricity tariffs of 2004 were higher than in 2003.

  • Reported electricity expense in Q4-2004 is lower than in Q4-2003, which is very unlikely.

• Apparently, reported expenses of Gazprom are incorrect.

  • Do shareholders care about it?

• We will give more details in the first issue of Russian Gas Quarterly to be released soon.