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Gazprom 2015: sustainable course

June 30, 2016

Speech by Alexey Miller, Chairman of the Gazprom Management Committee, at the annual General Shareholders Meeting of Gazprom

Dear shareholders,

Extensive materials prepared for the annual General Shareholders Meeting on Gazprom’s performance in 2015 include the Annual Report, the Accounting (Financial) Statements, the Audit Commission’s Report, and other documents.

It is proposed that the Shareholders Meeting approve:

  • the 2015 Annual Report of Gazprom;
  • the 2015 Annual Accounting (Financial) Statements of Gazprom; and
  • the allocation of profit and the proposals by the Board of Directors on the amount, period and form of the dividend payout based on the results of 2015.

The Meeting is also proposed to approve the Company’s Auditor, the remuneration for the Board of Directors and Audit Commission Members, and the election of the Board of Directors and the Audit Commission Members.

You can find the draft decisions on these issues in the ballots and the additional information in the materials you received.

Dear shareholders,

The Board of Directors recommended approving the proposal to pay out RUB 7.89 per share in annual dividends based on Gazprom's operating results in 2015. This figure is 9.6 per cent higher than last year’s. This recommendation provides for an optimal balance between dividends and investments in business development and is in line with our obligations to act in the interests of the shareholders.

Dear shareholders,

In 2015, Gazprom demonstrated that it was able to achieve good results even with low hydrocarbon prices. The Company managed to keep a fast pace in implementing production programs. We strengthened our resource base and ramped up our production capacities. We increased gas exports to Europe and oil production volumes. We confirmed the financial sustainability of our business and continued to work on large-scale projects.

  • In 2015, Gazprom Group’s revenue grew by 8.6 per cent.
  • Net revenue from gas sales was up by 14.8 per cent.
  • Net revenue from gas sales to Europe and other countries jumped by 23.6 per cent.
  • Gazprom Group’s profit attributable to Gazprom’s shareholders rose to RUB 787 billion.

Gazprom is among the world’s top oil and gas companies in terms of key financial indicators, such as EBITDA and net profit.

Gazprom is among the world’s top oil and gas companies.

Amidst tough market conditions, Gazprom pursued a conservative financial policy, which allowed us to maintain a sound financial position, a reasonable debt load, and a substantial liquidity cushion.

Gazprom’s capital investments were fully financed by its operating cash flow for the tenth successive year. Tight control over the costs enabled us to further develop the value chain at every stage and generate free cash flow even under worsening external conditions.

While many foreign companies cancelled new projects in 2015, Gazprom managed to keep the same level of financing for all of its priority investment projects.

Gazprom is the backbone of the national economy.

In its activities Gazprom aims both to achieve corporate objectives and contribute to the social and economic development of Russia. Gazprom is the backbone of the national economy. If the recommendation of the Board of Directors on the dividend payout for 2015 is approved, Gazprom’s dividends will be the highest among public Russian companies in terms of absolute value and budget receipts.

Dear shareholders,

Gazprom’s sustainability is based on gas and oil reserves. We have a constantly expanding resource base.

In 2015, geological exploration in Russia resulted in the discovery of two new fields, namely Padinskoye in the Yamal-Nenets Autonomous Area and Naryksko-Ostashkinskoye in the Kemerovo Region. There were considerable additions to gas reserves at the Yuzhno-Kirinskoye and Chayandinskoye fields.

In 2015, the reserve replacement ratio stood at 1.27 for natural gas and at 1.62 for liquid hydrocarbons.

Every year since 2005, Gazprom has ensured that its natural gas reserves replenishment exceeds its production rates.

Every year since 2005, Gazprom has ensured that its natural gas reserves replenishment exceeds its production rates.

Expanding its geographical reach, in 2015 Gazprom was engaged in the prospecting, exploration and development of the fields located in Algeria, Bolivia, Kyrgyzstan, Serbia, Tajikistan, and Vietnam. 2015 saw the discovery of the Than Bien field offshore Vietnam. Gazprom Neft Group continued the systematic development of its projects in Iraq, Serbia, and Venezuela.

Dear shareholders,

Thanks to its gas output, Gazprom managed to fully supply domestic consumers and meet the greatly increased European demands for Russian gas. In 2015, we extracted 418.5 billion cubic meters of gas, including 8.4 billion cubic meters of associated petroleum gas.

In 2015, Gazprom extracted 418.5 billion cubic meters of gas, including 8.4 billion cubic meters of associated petroleum gas.

This figure reflects the current market conditions rather than our potential, which is much greater. The true indicator of Gazprom’s performance is the ability to promptly respond to changing demand.

The reliable operation of Russia’s gas network during the winter peaks in consumption is Gazprom’s strategic objective, which sets certain requirements to production and transportation companies. In 2015, the maximum daily gas output by Gazprom Group was 1 billion 556 million cubic meters. The potential of Gazprom’s annual production exceeds the actual production volumes by more than 150 billion cubic meters of gas.

The reliable operation of Russia’s gas network during the winter peaks in consumption is Gazprom’s strategic objective.

If necessary, we can build up our production in a short time. This is one of Gazprom’s competitive advantages in the domestic and foreign markets.

In 2015, we took efforts to strengthen this advantage by expanding and modernizing our production capacities. Special emphasis was placed on the fields offshore the Yamal Peninsula and in the northern seas. Gazprom’s gas production centers in Western Siberia are evidently shifting north, moving deeper into the Arctic Circle.

In Yamal Gazprom is developing Bovanenkovskoye, the largest and most promising field in the Peninsula.

In Yamal we are developing Bovanenkovskoye, the largest and most promising field in the Peninsula. In 2015, the field produced 61.9 billion cubic meters of gas, which was 19 billion cubic meters more than in 2014. The aggregate design capacity of three production facilities at the field will make up 115 billion cubic meters per year. It will be enough to cover the gas demand in such countries as Austria, Belgium, France, Romania, and Spain put together.

Dear shareholders,

Pursuant to its strategic development plans, Gazprom is establishing gas production centers in Eastern Siberia and the Russian Far East.

As early as 2018, Gazprom will bring onstream the Chayandinskoye field, the core of the Yakutia production center. In 2015, the Company completed geological exploration in preparing the field for commercial development.

Pursuant to its strategic development plans, Gazprom is establishing gas production centers in Eastern Siberia and the Russian Far East.

The Kovyktinskoye field is the core of the Irkutsk production center. There, the Company is carrying out additional exploration and testing the membrane unit for helium extraction from natural gas. Together with Chayandinskoye, Kovyktinskoye will be a resource base for gas supplies to China via the Power of Siberia gas pipeline. At the same time, we are expanding gas processing capacities and providing those regions with gas.

The fields of the Sakhalin III project, namely Kirinskoye and Yuzhno-Kirinskoye, are key to the Sakhalin production center.

To ensure further production growth at the Kirinskoye field, the Company is constructing new development wells using its own floating drilling rigs, namely Polyarnaya Zvezda and Severnoye Siyaniye. The 7th and 8th exploratory wells were drilled at Yuzhno-Kirinskoye, which gave us additional hydrocarbon reserves.

With the purpose of improving the efficiency of field development in new regions and on the shelf, Gazprom actively employs innovations.

Specifically, the Company implemented Russia’s first subsea well completion project at the Kirinskoye field. A modern technology of hydraulic fracturing without frac balls was introduced at the Priobskoye field. The first domestically produced rotary steerable drill system successfully passed its first test at the Vyngapurovskoye field.

Gazprom’s Innovative Development Program covers the Company’s oil and power businesses.

We also adopt innovations in geological exploration, gas transmission and storage. Gazprom’s Innovative Development Program covering the oil and power businesses enables the Company to retain technological leadership and to generate innovative solutions relevant to the development of the Russian economy.

Dear shareholders,

Today, our oilmen work in the regions traditionally known for their gas industries. We commissioned the unique Arctic Gate oil loading terminal in the Yamal Peninsula. Oil from the Novoportovskoye field owned by Gazprom Neft is shipped via this terminal.

The Arctic Gate project ensures year-round shipments of Yamal oil by sea for the first time in history.

Dear shareholders,

The oil output of Gazprom Group hit a record high of 36 million tons in 2015. The Group’s gas condensate production amounted to 15.3 million tons, which exceeded the last year’s level.

Gazprom Neft Group accounts for the bulk of oil production with over 34 million tons.

Gazprom Neft is improving its performance through the Technology Strategy that includes nine long-term programs in priority business areas. By advancing its technologies the company enhanced, inter alia, the efficiency of its exploration drilling to 90 per cent in 2015.

Thanks to a large-scale program for the modernization of refinery assets, gasoline and diesel fuel produced by Gazprom Neft’s refineries comply with Euro 5, the most stringent ecological standard. Now, the company is implementing projects aimed at improving the production efficiency of its facilities, increasing the depth of feedstock refining, and producing light-oil products. The company increased its share in the domestic markets of jet fuel, lubricants, bitumen, and bunker fuel.

Feedstock processing is one of Gazprom's business priorities.

Feedstock processing is one of our business priorities. In 2015, the volume of natural and associated gas processed by Gazprom Group grew by 2.3 per cent. The level of beneficial use of associated gas from Gazprom’s fields reached 95.6 per cent.

Dear shareholders,

Gazprom Group’s gas transmission system is a unique technological complex that serves as the basis for the Unified Gas Supply System. In 2015, we commissioned over 770 kilometers of gas trunklines and branches, as well as four compressor stations.

In 2015, Gazprom commissioned over 770 kilometers of gas trunklines and branches, as well as four compressor stations.

Throughout 2015, we continued to expand the ultramodern gas transmission corridor for gas delivery from the Yamal gas production center to western and central Russian regions, as well as for the future Nord Stream 2 gas pipeline. We carried on with the construction of the Bovanenkovo – Ukhta 2 trunkline. The trunkline uses cutting-edge technologies that dramatically reduce gas transmission costs. We are constructing it using unique Russian-made pipes with a diameter of 1,420 millimeters and a working pressure of 120 atm. We will build the linear section of the pipeline to completion in 2016.

Gazprom will build the linear section of the Bovanenkovo – Ukhta 2 trunkline to completion in 2016.

For the purposes of building such trunklines and executing ambitious projects, we deepen our cooperation with domestic equipment manufacturers within import substitution projects. For many years, Gazprom has systematically substituted imported products with their domestic equivalents. As a result, Russian-made equipment currently accounts for about 95 per cent of Gazprom Group’s overall procurements. Meanwhile, domestically produced pipes make up 99.96 per cent of our pipelines and will soon reach 100 per cent.

Russian-made equipment currently accounts for about 95 per cent of Gazprom Group’s overall procurements.

In eastern Russia, in parallel with the establishment of production capacities in the Yakutia gas production center, the construction of the Power of Siberia gas trunkline has been underway since September 2014. The trunkline is crucial to the gas industry of Eastern Siberia and Russia’s Far East.

Underground gas storage facilities are an integral part of the Unified Gas Supply System. In 2015, Russia’s underground gas storage infrastructure turned 60 years old. In the heating season, UGS facilities provide for up to 40 per cent of Gazprom’s overall gas supplies every day.

By the 2015/2016 withdrawal season, the working gas capacity of Russian UGS facilities totaled 72 billion cubic meters.

By the 2015/2016 withdrawal season, the working gas capacity of Russian UGS facilities totaled 72 billion cubic meters. The potential maximum daily deliverability reached a record level of 789.9 million cubic meters.

In order to ensure reliable exports, Gazprom Group uses underground storage capacities in Austria, Germany, the Netherlands, and Serbia, as a co-investor or owner. In 2015, a new UGS facility was built to completion in the Czech Republic.

As for the former Soviet Union (FSU), Gazprom expanded and reconstructed UGS facilities in Belarus and Armenia.

Dear shareholders,

As a vertically-integrated company that takes a comprehensive approach to natural gas production, storage, transmission and marketing, we can easily adapt to changing demand.

In 2015, the domestic demand for natural gas declined by 3.1 per cent. Gazprom sold 221.2 billion cubic meters of gas in the Russian market. Consumer supplies accounted for nearly a quarter of our sales.

In 2015, Gazprom sold 221.2 billion cubic meters of gas in the Russian market.

In addition to domestic gas deliveries at regulated prices, Gazprom is working on its methods of marketing gas at free prices via the St. Petersburg International Mercantile Exchange. Last year, we sold over 4 billion cubic meters of gas using that platform.

Over the course of 2015, Gazprom’s revenue from gas sales in the FSU added 4.4 per cent, totaling almost RUB 430 billion. The sales in volume terms were lower than in 2014, mostly due to the falling demand in Ukraine.

As for liquid hydrocarbon deliveries to Russia and the FSU, we registered growth in both revenue and volumes. In Russia, our oil and gas condensate sales grew by 12.8 per cent, while FSU exports skyrocketed by 58.3 per cent.

Dear shareholders,

One of the most promising areas in our expanding marketing business is the use of gas as a vehicle fuel. In 2015, the Company sold 7.3 per cent more NGV fuel in Russia than in 2014, with overall sales amounting to 436 million cubic meters.

As of the end of 2015, there were 217 CNG stations in Russia.

Gazprom takes great efforts to develop its own CNG station network. As of the end of 2015, there were 217 CNG stations in Russia; we plan to build 35 new stations and reconstruct another four in 2016.

The number of CNG stations owned by Gazprom and its affiliates in Europe has reached 66 by now, and we expect it to grow further.

2015 marked the tenth year of Gazprom’s large-scale initiative for the gasification of Russian regions. Over those years, we have invested more than RUB 270 billion in the project and built 27,800 kilometers of gas pipelines. We have provided 3,700 localities with natural gas.

Last year, the Company completed the construction of 87 gasification facilities in 34 Russian regions. The average gas penetration level across Russia stood at 66.2 per cent, having grown by 12.9 per cent in ten years. In rural areas, it increased by 21.3 per cent to 56.1 per cent.

Dear shareholders,

Power generation is another business line of strategic importance for Gazprom Group. The Group’s presence in the power industry helps strengthen our business sustainability and yields additional income.

Power generation is another business line of strategic importance for Gazprom Group.

In 2015, despite a drop in the demand for heat and electricity, the aggregate net profit of our core generating companies – Mosenergo, MOEK, TGC-1, and OGK-2 – grew nearly threefold.

Gazprom currently operates the world’s largest centralized heating system. We generated 117 million Gcal of heat in 2015.

2015 saw the commissioning of new combined cycle gas turbine units at CHPP-12 and CHPP-20 in Moscow, as well as at the Serov SDPP in the Sverdlovsk Region. A heavy overhaul project was completed at the Ryazan SDPP. Since 2007, when the Company entered the power industry, Gazprom has put onstream some 7.5 GW of new capacities.

International heat and power generation projects are also in full swing. In 2015, Gazprom and NIS started building a TPP in Pancevo, Serbia. Gazprom Group is ramping up its heat and power sales in international markets. In 2015, the revenue from selling electricity and thermal energy to Europe climbed by 24 per cent.

Today, we are commissioning two power units at the same time: one in Novocherkassk, in southern Russia, and another one in Troitsk, in the Chelyabinsk Region of the Ural District.

Dear shareholders,

Last year, gas production continued to decline in Europe, while the demand for imported gas kept growing. In 2015, Gazprom supplied 159.4 billion cubic meters of gas to Europe, which was 8 per cent higher than in 2014. Our share in Europe’s gas consumption hit a record high with 31 per cent. The Company earned over RUB 2 trillion by selling gas to European countries.

In 2015, Gazprom supplied 159.4 billion cubic meters of gas to Europe, which was 8 per cent higher than in 2014.

The demand for Russian gas is still going up in 2016. According to estimates, in the first half of 2016 the Company’s gas deliveries to Europe added 14.2 per cent, or 10.6 billion cubic meters, against the same period of 2015. Our exports to Germany increased by 1.5 billion cubic meters, to Poland by 1.3 billion, and to France by 1.4 billion.

We expect the demand for imported gas in Europe to grow further. Even today, imported gas accounts for almost 50 per cent of gas consumption in the region. By 2025, Europe will need at least 100 billion cubic meters of additional gas imports per year; it could need 150 billion cubic meters of additional supplies by 2035.

By 2025, Europe will need at least 100 billion cubic meters of additional gas imports per year.

Looking back at 2015, we can see that trunkline gas supplies will be more popular than LNG in Europe. Europe uses barely a quarter of its regasification capacities. Meanwhile, Nord Stream is getting used to a larger extent despite the restrictions imposed by the regulator. In 2015, we used up to 70 per cent of Nord Stream’s capacity. Our supplies to Germany alone exceeded the total of LNG imports to the European Union in 2015.

Europe’s businesses saw the advantages of the direct export route across the Baltic Sea and demonstrated their willingness to use that potential.

In 2015, we signed the Shareholders Agreement with a number of European energy majors – BASF, Engie, OMV, Shell, and Uniper – for the Nord Stream 2 project. The gas pipeline with the annual throughput of 55 billion cubic meters will double our export capacities in the northern corridor. This gas export route is also 1.5 times shorter than the previous ones, as it runs from Yamal fields, to which our main resource base is steadily shifting, to northwestern Europe with its growing demand for Russian gas. Recently, it has been in northwestern Europe where the demand for Russian gas has grown at the quickest pace. It is 1.5–2 times cheaper to convey gas from Yamal to Germany via Nord Stream 2 than via the traditional central corridor, mainly because of the route length and the modern pipelines in the northern corridor.

The forms of our cooperation with our international partners and buyers are also evolving. In 2015, we held our first auction for natural gas supplies to Europe. We sold 1.2 billion cubic meters of gas to 15 parties, including our old and new partners.

In 2015, Gazprom held its first auction for natural gas supplies to Europe.

In the spring of 2016, we held our second auction, this time for the Baltic states. It resulted in contracts being concluded with six parties. We sold over 420 million cubic meters of gas at that auction. We are planning another auction this year, for Western Europe.

Gas auctions proved to be an effective trading tool that could be used in parallel with our long-term contract system. Auctions help us sell additional gas volumes and gain additional income.

Dear shareholders,

Liquefied natural gas is a product that helps us considerably expand our export geography. Sakhalin II, Russia’s first LNG project, is successfully operating; it produced 10.8 million tons of LNG in 2015.

Sakhalin II produced 10.8 million tons of LNG in 2015.

Gazprom will further enhance its LNG portfolio by both developing its production capacities and buying gas from third parties. We have an arrangement with Shell on expanding the Sakhalin II plant. We are also exploring the possibilities for joining efforts in the Baltic LNG project in Ust-Luga. The plant will generate 10 million tons of LNG per year. With these two projects, the amount of LNG produced with the participation of Gazprom will reach 10 per cent of the current global LNG production.

Dear shareholders,

LNG makes an important contribution to expanding our presence in Asia-Pacific. However, pipeline deliveries will be even more important there, primarily in connection with the Agreement for natural gas supplies to China.

China is still the most attractive market for exporters. According to Chinese experts, gas demand in China will exceed 200 billion cubic meters as early as 2016 and will reach up to 300 billion cubic meters per year by 2020.

2015 saw the entry into force of our 30-year Agreement with CNPC for 38 billion cubic meters of gas to be delivered to China every year via the eastern route – the Power of Siberia gas pipeline. Pipe laying works at Power of Siberia’s linear section are on track. After that, we will build the cross-border section under the Amur River.

Also in 2015, we set out to construct the Amur GPP, Russia’s most productive and one of the world’s largest gas processing plants. It will be an essential link in the gas supply chain to China via the eastern route. Using gas from the Yakutia and Irkutsk gas production centers, the Amur GPP will extract helium, ethane, propane, and other valuable chemical substances for the gas industry.

In 2015, Gazprom set out to construct the Amur GPP, Russia’s most productive and one of the world’s largest gas processing plants.

Moreover, Gazprom and CNPC signed the Heads of Agreement for pipeline deliveries of 30 billion cubic meters of gas per year from Russia to China via the western route. We are looking into the possibilities for supplying gas from Russia’s Far East to China as well.

The Russian-Chinese dialogue in the gas sector is crossing into new territory. A few days ago, we signed the Memorandum of Understanding in the field of underground gas storage and gas-fired power generation in China.

To put it short, Gazprom is coming east! And this is why the gas market is growing increasingly global!

Thank you for your attention.

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