blue fuel #17 | december 2012 | vol. 5 | issue 4

Gazprom Group’s Export Strategy: Basic Principles and Adjustment

Gazprom Export Global NewsletterDecember 2012 | Vol. 5 | Issue 4

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Page 5

Gazprom Successfully Completes the World’s First LNG Shipment Through the Northern Sea Route

The Nord Stream Pipeline System is Fully Operational

© Gazprom Export

www.gazpromexport.com | [email protected] +7 (499) 503-61-61 | [email protected]

BLUE FUEL

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BLUE FUELGazprom Export Global Newsletter

Publishers Contact Info:www.gazpromexport.com | [email protected] +7 (499) 503-61-61 | [email protected]

To Our Readers .......................................................................Pg. 4

Gazprom Group’s Export Strategy: Basic Principles and Adjustment .............................................Pg. 5

Gazprom: In Harmony with Nature ...........................................Pg. 7 Price of Flexibility: The Difference Between Long-Term Contract and Hub Pricing ........................................................Pg. 9

South Stream: The Journey Begins ......................................Pg. 12

New Long-Term Russian Gas Supply Contract Signed with Bulgaria ...............................................Pg. 13

The Nord Stream Pipeline System is Fully Operational .........Pg. 14

The Turonian Era .....................................................................Pg. 15

Natural Gas Takes to the Road ..............................................Pg. 17

Gazprom Energy Gains Customers’ Confidence in Germany .........................................................Pg. 19

Gazprom Successfully Completes the World’s First LNG Shipment Through the Northern Sea Route .................Pg. 21

Gazprom Marketing & Trading Singapore and KOGAS Sign Mid-Term LNG Agreement ..............................Pg. 22

Gazprom Marketing & Trading Singapore signs Carbon Credits Agreement with Electricite du Laos ..............Pg. 22

Italy: Between Russian Gas and the New National Energy Strategy ...............................................Pg. 23

Photo Wheel ...........................................................................Pg. 25

John Forté & Friends: Four-City Tour in Europe ..................Pg. 26

Awe-inspiring Concert "Rachmaninoff Gala" Moved Polish Audience ..........................................................Pg. 27

In this issueDecember 2012 | Vol. 5 | Issue 4


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Gazprom continues its journey towards the strategic goal of covering the entire value chain in the gas business. In this vein, Gazprom has agreed on an asset swap with the German industry leader BASF with the aim to assume a 100% stake in Wingas and selected sister companies that are active in gas trade, storage and North Sea upstream activities. Wingas’ transport business will not be part of the deal. They remain a joint holding of BASF/Wintershall and Gazprom.

BASF and Gazprom have enjoyed a trustful partnership for more than 20 years, and this move is a logical next step for Gazprom. It follows the commitment of significant financial resources to the German gas transport and storage infrastructure over the last few years.

Through the agreement, two additional blocks of the Achimov formation of the Urengoi natural gas and condensate field in Western Siberia will be developed jointly with BASF. Wintershall will receive 25% plus one share of blocks IV and V in the Achimov formation, together with the option to increase the share in the two gas and condensate deposits to 50%. According to the development plan, blocks IV and V have total hydrocarbon resources of 274 bcm of natural gas and 74 mmt of condensate. This is equivalent to a total of 2.4 billion barrels of oil.

The asset swap therefore is a win-win situation for BASF and Gazprom, increasing the performance potential of both companies. Gazprom not only gains better access to gas marketing in Western Europe, thereby extending its position in the gas value chain, but also will be able to count on the services of the highly competent Wingas management team and its devoted employees in the future, as they become part of the Gazprom family. We see significant synergies on the market side between the Wingas and the other existing Gazprom businesses in Europe, and all Wingas employees will have opportunities to develop within the new organization.

Wingas on the other hand now has a strong partner on its side with great ambitions in the mid- and downstream sector in Europe. We plan to continue to grow the business of gas sales and storage in Europe and especially in Germany. To that end, we will draw on the competence and engagement of Wingas employees. Against the backdrop of the German "Energiewende," more gas will be needed. Natural gas is the cleanest fossil fuel with the lowest carbon foot print. The "energy transformation" will not succeed without gas and its manifold uses as "bridging technology." Together we will meet this growing demand.

Gazprom aspires to offer equity investors the perfect mix of capital growth and solid yields. This acquisition significantly enhances Gazprom’s current downstream marketing, trading and physical delivery businesses, all of which have demonstrated successful organic growth over the past decade. Once the acquisition is completed, Gazprom’s European and global trading capabilities will have gained significantly in terms of capacity and liquidity which will provide the capability to profitably take advantage of global volatility. These capabilities will help Gazprom develop its global delivery portfolio and develop significant new income streams.

We signed a binding MoU and both partners are strongly committed to execute the transaction. Once the deal has been approved by the relevant authorities, the transaction is to be completed by the end of 2013.

To Our Readers

BLUE FUELDecember 2012 | Vol. 5 | Issue 4


www.gazpromexport.com | [email protected] | +7 (499) 503-61-61 | [email protected] 5

Recently, the European Commission launched an investigation against Gazprom Group and some of its partners. Frankly, this makes you wonder if Brussels wants to receive Russian gas in growing volumes. Europe will need these volumes because, according to consensus forecast, Europe’s gas needs by 2030 will exceed existing levels and reach 140 bcm of additional imported gas.

Perhaps it will be possible to meet these needs through development of shale gas, but I would not like to jump to conclusions on this matter. After all, the accumulated experience of the gas industry shows that time, and sometimes considerable time, is required to explore shale gas and then commission it. In this sense, 2030 for us is, if not tomorrow, then certainly after tomorrow. Moreover, one should take into consideration the fact that not a single shale gas project in the densely populated Europe has yet been started; there is no single opinion about shale gas itself. In any case, the cost of shale will be much higher than that of conventional gas. The Russian "blue fuel" will remain competitive. Even in the U.S., under favorable geological, legal and other conditions, the cost of shale gas on the average is twice higher than the price at which it is sold there.

One of the requirements demanded from us by the European Commission is to abandon the pegging of long-term contracts to the price of petroleum products. Yet, this type of contract is not our invention. It was invented by the Dutch about 40 years ago, and since then, an overwhelming majority of gas exporters have been using this model successfully. I will always emphasize that the pegging of long-term contracts to the price of petroleum products is beneficial both to sellers and to buyers of our very specific product. It ensures stable and predictable prices. However, it does not exclude the possibility of adapting contracts

to changing market conditions, and most importantly, it balances the interests of sellers and buyers.

It seems Brussels intends to change the proven pricing principles. I believe that replacing the established and proven reliable mechanism with pegging contract, for example, to the insufficiently independent, flexible and liquid spot market is dangerous. Such attempts may negatively affect reliability of supplies.

In connection with the investigation, we assured the European Commission that Gazprom Group would fully cooperate with European authorities. However, we do not intend to ignore our own corporate interests. A constructive approach to solving any problems will benefit both parties.

The European Commission’s misunderstanding, or rather, reserved attitude towards another European project – the South Stream gas pipeline – is, to put it mildly, not constructive. South Stream would increase the reliability and flexibility of natural gas supplies to Europe, and would also create an infrastructure that will connect European consumers with world’s largest gas fields located in Russia. This project will eliminate dependency on natural cataclysm, technical failures or other accidents. Increased demand during severe winter colds or the recent explosions on the gas pipeline from Iran to Turkey show how important the diversification of routes to ensure uninterrupted blue fuel deliveries is.

Europe needs to preserve what has been created by joint efforts. Its transformation into an attractive market for investment, particularly in the sphere of energy infrastructure is vital now more than ever. However, many in Europe are too carried away with the idea of transitioning to renewable energy, shifting their priorities and striving to achieve the desired goal at any cost. This and the lingering uncertainty in regulation undermine the intention of investors to invest in the European energy market. Rather than stimulate capital investments, the EU is preventing their growth, creating more and more new bureaucratic barriers.

Governments around the world are now viewing infrastructure projects as a way to combating economic crisis. The South Stream project could be the biggest investment for all participating countries. In Serbia and Hungary, the project is already underway. It is close to being started in Bulgaria, while

Gazprom Group’s Export Strategy: Basic Principles and Adjustment Excerpts from a speech delivered by Alexander Medvedev, Director General of Gazprom Export, at the "Gas of Russia-2012 Forum"

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some other countries are considering the possibility of more active participation in it.

At the same time, there are ongoing preparations to start construction of the offshore section of the pipeline. Unlike other players in the energy market, we do not require subsidies, we are only asking for a level playing field. Starting the South Stream construction, we look forward to a fair approach by EU authorities. It is necessary for this approach to be transparent, non-discriminatory, and acceptable to all parties. It should be based on common rules. This would help attract investment in the development of European energy infrastructure and strengthen Europe’s position as Gazprom’s key partner and main market amid rising demand for energy around the world.

Diversification is a multi-faceted concept. It involves not only the search for new markets, laying of new pipelines and construction of terminals for receiving and processing of LNG. It also involves searching for new areas of application of natural gas. In addition to power generation, the use of gas as a motor fuel has a promising future.

We are conducting this work simultaneously in several regions – both in Europe and in Asia – although such work is specific in each individual case. In Europe, calculations connected with transition of road transport to use of liquefied natural gas look very promising. LNG can be used for refueling heavy trucks and buses. Trucks can consume up to 200 to 300 kg of LNG per day. In other words, it is enough to find one company that operates 20 to 40 trucks and is ready to transfer to using LNG – and this will lead to sales of several mcm of gas a year. Moreover, introduction of gas as a motor fuel can achieve about 20% reduction in the cost of fuel.

Gazprom plans to develop low-capacity LNG transport capable of competing with diesel fuel transport. With one tank of LNG (about 250 kg), a truck can travel a distance of 700 km or even more, thus making LNG suitable

for use in long-distance transport. According to our calculations, in terms of, let’s say the Netherlands, located in the heart of Europe, the use of LNG would cost $14 per mBtu, which is by 20% lower compared to diesel.

The environmental aspect is also important in this respect. The Euro 6 fuel standard will be adopted in Europe in the near future. It is possible that this can lead to problems for some diesel engines, and even for those that can be brought to these standards. Introduction of the Euro 6 standard means an automatic increase in the price of truck. Consequently, the competitiveness of gas trucks will increase, while automakers will need just 2 years to put production of gas trucks complying with the Euro 6 standard on the flow.

Introduction of motor fuel will require a significant increase in gas supply. Even if 10% of the existing 12 million trucks are switched to gas, an additional 80 bcm of gas – about half of our annual supplies to Europe – will be needed.

There is another problem that needs to be solved. For now, there are only two places in Europe, where one can "pack up" large volumes of LNG in small "portions" – Zeebrugge and Barcelona. Nevertheless, Gazprom has plans to create its own low-capacity LNG production. At the same time, there is only about 2% of ethane in Russian gas, which is safe for engines – there may be fluctuations in the ethane content of the gas of some other producers.

Asia has its own specificity. Natural gas here is becoming the preferred fuel in this region. Suffice it to say that China is today the world leader in the use of natural gas engines in cars. However, the prospects of LNG as a fuel for ships, especially given the huge role of maritime transport in the region, also are especially great. Gazprom Group’s building up of its LNG production capacity in the region will ensure the possibility of effective participation in these processes.

Gazprom Group’s Export Strategy: Basic Principles and AdjustmentContinued from page 5




Fuel and energy companies are traditionally perceived by the public in all countries as companies that pollute the environment the most. At the same time, the most innovative environmentally sound technologies are developed and applied in this sphere of business and it is precisely fuel and energy companies that carry out large-scale investments in environmental protection.

As the world’s largest energy company, Gazprom consistently pursues the policy of making its operations environmentally friendlier, it develops and implements innovative technologies for energy production from natural gas and its efficient use by consumers. Almost from the moment of its foundation, Gazprom has been the most technologically and environmentally advanced company in Russia. There are many reasons to this.

The company immediately began working with European partners, and this, of course, entails different approaches and other requirements for organization and conduct of business activities than other Soviet and later Russian companies. It suffices to note that Gazprom’s very basic product – methane – provides conditions for improving the ecological compatibility of the heat and power industry, because the use of methane in the place of coal, black oil or diesel fuel can help resolve the most urgent environmental problems of the fuel and energy sector at the present stage – because natural gas contributes to significantly fewer emissions.

It is no secret that Germany and other European countries have radically improved the environmental situation in their territories using natural gas as an energy source in large-scale energy production, industry and everyday life. It is known that Moscow remains in the list of Russian cities with high air pollution from large motor transport loads. However, few people reflect on the fact that the transition of all Mosenergo facilities to the use of natural gas in the late 90’s actually saved Moscow from imminent ecological disaster back then. Air pollution at

the capital city is now again almost at a critical level, and the most effective means of ensuring a favorable city environment at the present stage is to use methane as a motor fuel for transportation.

In the coming years, the large-scale program of gasification of Eastern Siberia and the Far East will impact notably on huge territories, including those with a unique nature, such as Kamchatka, Sakhalin, Baikal zone, among others. This ecological impact is much more perceptible than the outcome of the air protection measures of all environmental programs combined. One can say that there is a real improvement in the environment there where gas is now being used.

Gazprom is one of the first Russian companies to adopt its own environmental policy in 1995, and has been implementing it consecutively. Now the company’s Management Committee and the Board of Directors have approved the third version of the Environmental Policy that meets the present-day realities and priorities. Efficient use of resources is one of the key aspects of implementation of our policy. Long before tasks on ensuring energy conservation and efficiency were brought to the state level, Gazprom adopted and implemented three energy conservation programs from 1991, which gave a significant environmental effect. According to international ratings, in terms of energy efficiency and ecological compatibility of its activities, Gazprom is ahead of most energy giants in the world today.

Gazprom’s Management Committee and Board of Directors consider environmental issues at their meetings two to three times a year. We have the largest environmental service created among fuel and energy companies. About 2,000 highly qualified ecologists work at our company’s subsidiaries, institutes, laboratories, etc. We are the only company in the world that has its own corporate environmental inspection and inspection for monitoring the efficient use of gas. All our investment projects are designed to meet the most advanced technological solutions or as they say now, the "best available technologies", and then they undergo departmental environmental review (even those, which, by law, are not subject to environmental review). Gazprom is the only company with a special body – the Coordinating Committee for Environmental Protection and Energy Efficiency – under the leadership of the Deputy Chairman of the company’s Management Committee, responsible for the company’s main production activities. The Coordinating Committee includes two Deputy Chairmen of the

Gazprom: In Harmony with Nature By Professor Alexander Ishkov, Deputy Head of Gas Transportation, Underground Storage and Utilization Department and Head of Energy Conservation and Ecology Directorate, Gazprom

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Management Committee and most heads of the main departments.

That is probably why Gazprom has every reason to be a leader in the field of production ecologization and environment improvement in Russia in general. Particular attention is paid to Gazprom’s projects in other countries. Environmental safety is the first priority in these projects. An example is the Nord Stream project. The scale of ecological research in the design and environmental monitoring during construction and operation is unique in the world in the construction of offshore pipelines.

Next year will mark the anniversary (150th birthday) of the outstanding Soviet scientist Vladimir Vernadsky. He was the author of the basic ideas of modern environmental goals of humanity. He created the noosphere theory (the harmony of human activity and nature) about what the society has to come to in order for man, as a biological species, not to disappear on our fragile planet. These ideas are the basis of Gazprom’s Environmental Policy adopted by the company’s Management Committee and Board of Directors.

Gazprom’s environmental events in 2013 will be held in the framework of the Year of the Environment. The motto of our Year of the Environment is "Gazprom – in harmony with nature". Scheduled work on project implementation in compliance with the most stringent environmental standards will be implemented regardless of this campaign both before and after 2013.

At the same time, we have already prepared a large-scale program of events, which will be implemented not only at our enterprises, but also in all regions where Gazprom is present. The spectrum of planned actions is wide, ranging from introduction of innovative industrial technologies to educational campaigns at childcare institutions.

The program already contains more than 1,200 campaigns for the sum of about 5 billion rubles. I think that these figures will be actually bigger when our enterprises, structures of federal subjects of Russia, and public organizations "begin to enjoy". I would like to

note that Gazprom’s subsidiary companies, regional and municipal authorities, and public organizations are showing great enthusiasm for this event already at the stage of formation of proposals for inclusion in the Program of the Year of the Environment in Gazprom.

The Program is mainly made up of very specific events with visible results, with minimum of conferences, symposia, etc., which often substitute real action. For example, we expect that in 2013, we will plant more than 100,000 trees and shrubs in different regions; clear about 1,000 hectares of coastal strips, forest and urban areas of debris, beautify parks, recreational areas, etc.; and transfer more than 900 cars and buses from use of gasoline and diesel fuel to natural gas.

We are constantly providing assistance to protected natural areas, and we will considerably expand this program in 2013. Plans have been scheduled to help at least 30 specially protected federal and regional areas across the country.

Energy efficiency projects implementation will be the visible results of practical events. Now we are already carrying out the fourth corporate energy efficiency Program. During this time, specific energy consumption for our own needs have been reduced by more than 25%, which has led to a reduction in the emission of harmful substances and greenhouse gases into the atmosphere by over a million tons. In 2013, we will reduce natural gas consumption for our own needs by more than 1.5 bcm and electricity by about 120 million kWh, with a corresponding reduction in the negative impact on the environment. This will be achieved both through introduction of innovative technologies, and largely through the attitude of our employees towards efficient use of resources, and improvement of the overall environmental culture in our daily production activities.

We want people who live there where Gazprom is operating, to see the evident results of the Year of the Environment. This is not a corporate party for the sake of formality, but a serious and important event in our

Gazprom: In Harmony with NatureContinued from page 7




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company, which is not limited to production activities, but also to caring for the nature in Russia, and the health of Russians.

Social and environmental responsibility in Gazprom is not a slogan, but an everyday job. Gazprom annually allocates tens of billions of rubles to regions for conservation of fishery resources in the North, rivers, lakes, etc. For example, in the Altai Republic, Gazprom built a unique museum of indigenous culture and nature of the Altai Mountains. By its unique exposition of the most ancient little-known (and mysterious) civilization of the peoples of this region, this is a museum of world importance. One can cite many examples of specific projects implemented in the regions of Russia that all of our citizens enjoy. I would name our Program for 2013 as "Gazprom for Russia’s Environment".

At Gazprom, we try to ensure that all our employees have the basics of environmental knowledge. In the corporate training institute, there is a big educational program. All Gazprom’s

educational centers also have respective programs for executives and professionals, and for workers of all specialties. Permit me to note that since last year, all employees hired for work at Gazprom not only receive instructions on fire prevention and safety, but also listen to lectures on the environment delivered by experts. You may call this our yet another innovation not present in any other company.

The Year of the Environment at Gazprom is another step towards improving the level of environmental standards of production, and mentality ecologization of businesses and citizens. In the coming years, our Russian society will have to understand why it is necessary to strengthen and expand environmental priorities in socio-economic development. In addition, environmental culture should be the standard of conduct. We must ensure that Russians are a healthy nation, preserving Russia’s unique natural resources.

Since early 2007, the European market has shown a divergence between the oil-linked prices of long-term contracts and prices on the trading hubs. Our analysis shows that these prices do not exist in parallel universes, but rather interact profoundly with each other.

There is an unconfirmed hypothesis that prices at the Continental hubs are purported to represent an accurate valuation of natural gas on the market. Proponents of this view claim that hub prices reflect the underlying supply and demand fundamentals of natural gas; that they are not dependent on the petroleum market; and that they can replace existing oil-indexed price formulas in long-term contracts.

That these statements reflect an underlying misconception is shown by the fact that hub prices are actually derived from the prices of long-term contracts, which are themselves indexed to oil-products. Traditional contracts are the main method of gas delivery to Europe and the price of these contracts provides a ceiling to which hub prices adjust. Therefore, there is a positive correlation between hub prices and the prices of long-term contracts indexed to oil.For example, over the past three years the correlation between NBP and TTF spot prices and the prices of Gazprom Export’s long-term contracts were +0.75 and

+0.79, respectively. In other words, hub prices were closely correlated with contract prices, which were in turn dependent on the price of oil. Hence, hub pricing is not indicative of a surplus or a deficit of gas in the European market since it depends, ultimately, on the level of oil prices. Note that there is no relevant correlation between gas prices at the U.S. Henry Hub – which reflect pure market forces – and oil prices (-0.44).

Price differentials are determined by various factors, including the cost of contract flexibility and daily load balancing. Based on that assumption, the empirical price of supply flexibility was calculated. When comparing the prices of long-term contracts and those at trading hubs, the following was considered: after the introduction of regulatory limits on the duration of gas supply contracts to end-users in the period from October 2008 to October 2010, due to unfavorable economic conditions in Europe, consumer demand for gas fell significantly. The significant reduction in gas delivered under short-term (two-year) contracts by the customers of our clients between October 2008 and October 2010 led to a divergence between hub and contract prices, with hub prices

Price of Flexibility: The Difference Between Long-Term Contract and Hub Pricing By Alexey Gnatyuk, Contract Structuring and Pricing Department, Gazprom Export

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Price of Flexibility: The Difference Between Long-Term Contract and Hub PricingContinued from page 9

sometimes only half that of contract prices. This experience has encouraged players to avoid repeating reductions of the same scale. Thus, it has been hypothesized that in the period from 2008-2010 there were two factors present in the European gas market that caused hub prices to be discounted relative to the price of long-term contracts: the cost of contract flexibility and daily load balancing. In 2010-2012, the price of flexibility has been dominant.

Our analysis of price curves shows that the average spread between the prices of long-term contracts and those on Continental trading floors (as represented by the TTF) from 1 October 2008 to 1 October 2010 was about $115 per thousand cubic meters (mcm), and only about $70/mcm from 1 October 2010 to 1 October 2012. These calculations suggest that the value of contract flexibility is approximately $70/mcm and the cost of daily load balancing can be assumed to be $45/mcm. These results are based on calculating the cost of contractual flexibility as the cost of storage, the primary means of achieving flexibility. On the one hand, storage represents an additional cost to the supplier, but on the other it is a cost-saving mechanism for the buyer.

The cost of one full cycle of underground gas storage (UGS) under a typical one-year (or longer) contract was used as an estimate of the premium built into the long-term contract price to account for daily supply flexibility. This cost covers working gas capacity, injection capacity, and send-out capacity. One full cycle of gas storage is defined as the sequence of injection and withdrawal of the maximum volume of working gas. All things being equal, working gas is more expensive if its injection-withdrawal cycle occurs over a shorter period, i.e., multiple cycles are carried out during a year. Therefore, the cost of one storage cycle was defined as the annual cost divided by the number of cycles per year. In this case, the

inventory turnover factor does not matter if it is assumed that each cycle is characterized as being of equal value to the consumer.

In this way, it was calculated that if underground storage is used for daily load balancing, then the average price of daily contract flexibility will be about $64/mcm. In half the cases, the price of flexibility is in the range of $58 to $66/mcm. Obviously, not all spot gas needs storage: a portion of the volumes pass through gas storage while another portion is consumed directly.

Another reason why spot prices are usually lower than contract prices is due to daily load balancing. In case of a short-term gas shortage, given the small difference in price, contractual gas is more attractive than spot volumes. If the buyer is faced with surplus gas and for economic reasons it is unprofitable to send this surplus into storage, the hubs act as a market-balancing instrument by helping to get rid of these excess volumes. The spot market, operating in balancing mode, leads to lower hub prices relative to contract prices.

The real value of contract flexibility is higher due to other factors, such as the use of pricing arbitrage on trading floors. This is possible when the volume of gas delivered under long-term contracts is reduced in favor of purchasing spot gas when hub prices are depressed.

Long-term contracts usually include flexibility for annual delivery volumes and an even greater degree of flexibility for daily deliveries. In these circumstances, the buyer is able to optimize his supply portfolio by attaining a more favorable price. From the point of view of the supplier, contracts with fixed volumes have advantages compared to contracts that guarantee flexibility under the terms of a "take-or-pay" provision. This is especially true in cases where opportunistic-minded consumers reduce off-take to




minimum levels, while not admitting that this flexibility is an option and forces the supplier to bear the additional costs of storage, logistics and other things.

Imagine a situation where the buyer has a portfolio of several contracts, only one of which is flexible, and the remaining contracts have fixed daily and annual off-take volumes. The buyer will off-take the maximum allowed volumes under the fixed contract and reduce consumption to the "take-or-pay" level designated by the flexible contract in order to avoid any fine, even if the first option is more expensive.

Trading hubs offer no flexibility; they realize only fixed volumes. Supply conditions at hubs are limited exclusively to volumes and the point of delivery. In contrast, with long-term contracts, the buyer is given flexibility in regards to his daily and annual delivery volumes.

Thus, because long-term contracts have the competitive advantage of offering a comprehensive product that includes additional services, gas sold at the hub must be priced cheaper in order to compete.

The European hybrid-pricing model may remain secure over the medium term, as there are sufficient alternative supply sources that provide low hub prices, such as spot LNG supplies, cheap gas from the UK arriving on the Continent through the Interconnector, and gas from storage facilities that was previously purchased at a lower price.

These factors do not represent an exhaustive list of all the objective reasons that explain the positive difference between long-term contract and hub prices. But they should provide some much-needed context to the pricing debate, which until now has not fully reflected all of the market dynamics at work.

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South Stream: The Journey BeginsProgress reports’ chronicle

South Stream gas pipeline construction starts upOn 7 December, Russkaya compressor station site (near Anapa, Krasnodar Territory) hosted the celebrations dedicated to the construction start-up of the South Stream gas pipeline.The celebrations were attended by Vladimir Putin, President of the Russian Federation, and featured representatives from the participating countries, including Alexey Miller, Chairman of the Gazprom Management Committee; Paolo Scaroni, Chief Executive Officer of ENI; Henri Proglio, Chairman and Chief Executive Officer of EDF; Kurt Bock, Chairman of the BASF Board of Executive Directors; Henning Voscherau, Chairman of South Stream Transport Board of Directors; Marcel Kramer, Chief Executive Officer of South Stream Transport; Dusan Bajatovic, Chief Executive Officer of Srbijagas; Marjan Eberlinc, Director General of Plinovodi; Csaba Baji, Chairman and Chief Executive Officer of MVM; and Mihail Andonov, Executive Director of Bulgarian Energy Holding.In the presence of Russian President Vladimir Putin and the high-ranking guests, the gas transportation systems of Russia and Europe were symbolically welded together and inaugurated the launch of the South Stream gas pipeline construction."The start-up of South Stream construction is indeed a historical event. The project embodies the intention of Russia and the countries of Southern and Central Europe to strengthen the partnership in the energy sector and to create a new reliable system of Russian gas supplies to European consumers. South Stream is a comprehensive infrastructure project that gives a powerful impetus to development of the economies in the participating countries," said Alexey Miller.

Final investment decision adopted for South Stream offshore sectionOn 15 November, Milan (Italy) hosted a meeting of the South Stream Transport Board of Directors. The Board which includes representatives from Gazprom, ENI, EDF and BASF discussed the key issues of the South Stream project and adopted the final investment decision for the offshore gas pipeline section."The South Stream project makes a great contribution to ensuring the European energy

security. It allows creating alternative and reliable routes of natural gas supply to our consumers. Let me congratulate everyone on the decision made today by the Board of Directors. It marks the start of the South Stream project realization," said Alexey Miller.The meeting also approved incorporation of South Stream Transport B.V. in Amsterdam (the Netherlands). It was highlighted that the offshore section of South Stream would be built in line with the terms and conditions approved by the Board of Directors in early 2012.

Gazprom and Bulgaria sign final investment decision on South StreamLed by Alexey Miller, Chairman of the Gazprom Management Committee, the Company's delegation paid on 15 November a working visit to the Republic of Bulgaria. Alexey Miller and Mihail Andonov, Executive Director of Bulgarian Energy Holding signed a protocol of the Final Investment Decision on the South Stream gas pipeline construction in the Republic of Bulgaria. The document was inked in the presence of Bulgarian Prime Minister Boyko Borisov.Crucial issues of the cooperation deepening in the gas sector were discussed at meetings with Boyko Borisov, Bulgarian Prime Minister and Delyan Dobrev, Bulgarian Economy, Energy and Tourism Minister.At negotiations with Dimitar Gogov, Executive Director of Bulgargaz the parties discussed conclusion of a new long-term contract for Russian gas supplies to Bulgaria. According to the contract terms and conditions, gas will be delivered by the South Stream gas pipeline."The South Stream project implementation in Bulgaria strengthens our bilateral relations and maintains energy stability throughout Europe. A 538-kilometer section of the gas pipeline will provide Bulgarian consumers with continuous and uninterrupted natural gas supplies over a long term," said Alexey Miller.

Gazprom and Slovenia sign final investment decision on South StreamOn 13 November, in Moscow the shareholders of South Stream Slovenia LLC signed in the presence of Russian Prime Minister Dmitry Medvedev and Slovenian Prime Minister Janez Jansa a Resolution to adopt the Final Investment Decision on building the Slovenian section



of the South Stream gas pipeline. Gazprom was represented at the event by Alexey Miller, Chairman of the Company’s Management Committee, and the Slovenian party was represented by Marjan Eberlinc, Director General of Plinovodi, and Sara Izernik, Deputy Director General of Plinovodi."The final investment decision we adopted today is another important step to the South Stream project implementation, another stage of our work, aimed at securing natural gas supplies to Europe. Speaking of Slovenia, we have to mention that building a 266 kilometer gas pipeline and two compressor stations in Slovenia will attract great investments, create workplaces and supply the country with additional infrastructure," said Alexey Miller.

Final investment decision approved for South Stream in HungaryOn 31 October, Alexander Medvedev, Deputy Chairman of the Gazprom Management Committee, paid today a working visit to the Republic of Hungary. Leonid Chugunov, Head of the Project Management Department, also joined the trip. As part of the visit a meeting was held with Csaba Baji, Chairman and Chief Executive Officer of MVM. A new shareholders agreement of the South Stream Hungary Zrt. joint project company was signed.Within the signed shareholders agreement the parties approved the final investment decision for building the Hungarian section of the South Stream gas pipeline. The section will be 229 km long.In addition, the Hungarian party announced that the South Stream gas pipeline was granted the status of a national significance project in Hungary."The project for building the South Stream gas pipeline jointly with our Hungarian partners is a crucial element in the new architecture of the European energy security. Such a system is able to ensure uninterrupted gas supplies and provide Hungary with long-term benefits and stability," said Alexander Medvedev."With the Hungarian Government's support, we are committed to increasing energy security and diversifying the routes of

natural gas supply to the European Union. The South Stream project is an important part of our long-term strategy and represents a significant step towards realizing our ambitions on transforming MVM into a successful integrated national energy group with a regional reach and a solid reputation on the market," said Csaba Baji.

Gazprom and Serbia sign final investment decision on South StreamOn 29 October, a Gazprom delegation led by Leonid Chugunov, Head of the Company's Project Management Department paid a working visit today to the Republic of Serbia. As part of the visit the general shareholders meeting took place at South Stream Serbia AG, the joint project company of Gazprom and Srbijagas. The meeting adopted the final investment decision on the South Stream project."A year ago we commissioned South Stream's first facility – the Banatski Dvor underground gas storage that shaved gas consumption peaks in Serbia during anomalously cold weather. Transitioning to the investment stage at the Serbian section, ahead of all the other countries, will provide new opportunities for the national economy growth as well as secure a long-lasting benefit related to our participation in the project. According to provisional estimates, South Stream will create in Serbia approximately 2,200 workplaces and attract up to EUR 1.5 billion of direct investments," said Leonid Chugunov."It is a pleasure to us that the Republic of Serbia is the first South Stream member country to adopt the final investment decision. The project is within the schedule and enjoys full backing of our Government. We will be ready to start preparation operations for South Stream in Serbia soon. It is obvious that South Stream is a project of national significance and we are elaborating a relevant regulation on the project. Moreover, the project will assure energy security and additional budget revenues for Serbia, create the environment for new projects in the energy and chemical industries that will boost the inflow of investments and new jobs creation," said Dusan Bajatovic, Director General of state-owned Srbijagas.


New Long-Term Russian Gas Supply Contract Signed with BulgariaIn Sofia, Bulgaria, in the presence of Boyko Borisov, Prime Minister of Bulgaria; Alexander Medvedev, Deputy Chairman of Gazprom Management Committee; and Dimitar Gogov, Executive Director of Bulgargaz Ead, signed a new long-term contract on Russian natural gas supplies to Bulgaria. The contract was signed on 15 November.

The document stipulates the supply of 2.9 bcm of gas per annum until 2022 along the traditional transportation corridor and along the South Stream pipeline once it is commissioned.

"In this document we have preserved the principle of long-term contracts with oil indexation and the take-or-pay obligation. This mechanism has set the conditions for a gas consumption increase in Bulgaria," Alexander Medvedev said.

One year after the first line of the Nord Stream Pipeline went into operation in 2011, the Nord Stream Pipeline is now fully operational. At a special ceremony held on 8 October at Portovaya Bay, Russia – near the starting point of the pipelines on the Baltic coast – Nord Stream officials announced that gas has begun flowing through the second of the twin pipelines. A number of representatives from the Nord Stream shareholder Consortium, along with high-ranking personalities from the world of politics and business, were present.

We deliverIn his address during the event, Chairman of the Nord Stream Shareholders’ Committee and Former Chancellor of the Federal Republic of Germany Gerhard Schröder remarked, "We have realized an international infrastructure project of outstanding technical difficulty, and done so within the ambitious timeframe and the budget framework. Today we can proudly say: ‘We Deliver.’"

Praise for the pipelinesAt the event, Sergei Ivanov, Chief of Staff of the Russian Presidential Executive Office, said Nord Stream represents a big step for all of Europe, made possible as a result

of mutual trust and consideration. He also stated that combined efforts and resources make it possible to carry out even the most complex international projects.

The inauguration of Nord Stream’s second line was also praised by several heads of state, including Russian President Vladimir Putin, German Chancellor Angela Merkel, Dutch Prime Minister Mark Rutte and French President François Hollande. In a video message, President Putin said, "Nord Stream will meet Europe’s growing demand for energy resources. Gas will be supplied directly by the shortest route, linking the major Russian gas reserves to European markets without transit risks, steadily and smoothly. We can guarantee this."

Chancellor Merkel said: "Nord Stream has strikingly shown that the state and the private sector can form a constructive and productive unit across several national borders. We can be proud of this truly European collaboration."

Europe needs natural gasThe importance of the use of natural gas in coming years was underscored by both the French and Dutch heads of state in their video messages. "I believe in natural gas. It has an important role to play in meeting the energy and environmental challenges that we all face," said President Hollande. Prime Minister Rutte added, "It’s hard to overstate the importance of the Nord Stream project. The International Energy Agency calls this ‘the Golden Age of Gas.’ And with good reason. Natural gas is relatively cheap and much cleaner than other fossil fuels. As we seek large-scale renewable energy solutions, natural gas remains the transition fuel of choice."

At the event, Alexey Miller, Deputy Chairman of the Board of Directors and Chairman of OAO Gazprom’s Management Committee, explained that Gazprom made great efforts to develop the Russian gas transmission system that will securely deliver gas into the Nord Stream pipeline system.

The Nord Stream Pipeline System is Fully OperationalTogether the twin pipelines will provide Europe with up to 55 bcm of gas a year

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Miller also mentioned the potential expansion of Nord Stream. "Today Nord Stream shareholders considered a preliminary feasibility study for the third and fourth legs; their construction was recognized as economically expedient and technically possible."

Control center SwitzerlandThe operation of the pipelines is overseen from the Control Center at the Nord Stream headquarters in Zug. Operators

are in constant contact with the supplier of the gas as well as the receivers to assess the flow of gas on a daily basis. The control system is linked via a dedicated cable and satellite connection to the sensors and valve controls at both landfalls, enabling the operators to monitor all parameters of gas flow. The Control Center is equipped with a large video wall display, as well as operator and engineering work stations.

For more information go to http://www.nord-stream.com/

The Turonian Era By Stanislav Tsygankov, Director General, Severneftegazprom

In recent years, more and more discussions in the gas industry are raising the possibility of the imminent depletion of global hydrocarbon reserves. At the same time, experts predict that by the middle of the 21st century, oil and gas consumption in the world will double, with 70% of energy still derived from

hydrocarbons in 2050. Demand for gas is growing, while its easily-accessible sources are decreasing.

The era of easy and cheap gas is over. This became evident not today or even yesterday. In this regard, both Russia and the world are moving into a new stage in the development of the gas industry, which involves development of fields in extremely difficult geological, mining and natural and climatic conditions. The industry faces the challenge of efficiently and rationally developing hard-to-recover gas reserves. Solving this task requires bringing together the entire available scientific and technical potential with the development and implementation of new technologies and equipment.

Severneftegazprom became the first among gas companies in Russia to take a step in this direction having launched


http://www.nord-stream.com/%20

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the pilot production of Turonian gas at the Yuzhno-Russkoye field in the Yamal-Nenets Autonomous District.

The Yuzhno-Russkoye oil and gas field being developed by Severneftegazprom is one of the largest fields in Russia, unique in its structure and hydrocarbon reserves with a total volume of more than 1 tcm of gas and 40 million tons of oil and gas condensate. It is a major resource base for the Nord Stream gas pipeline, which is designed to ensure stability and continuity of gas supplies to Europe.

The Yuzhno-Russkoye field development is an international project in the field of gas production. Severneftegazprom has three shareholders: Gazprom and two German minority shareholders, BASF SE (Wintershall Holding GmbH) and E.ON AG (E.ON Exploration & Production GmbH).

Turonian deposits of the Yuzhno-Russkoye fieldAt present, the company produces more than 25 bcm of gas per year. Until recently, production was carried out exclusively from the Cenomanian deposits. However, the situation has changed since the beginning of this year. Thanks to the successful implementation of the Turonian deposit pilot project, our company was able to produce the Turonian gas and fed it into the unified gas transportation system of Russia.

Until now, no one has been able to achieve this. The fact is that Turonian deposits are

classified as hard-to-recover reserves. They are distinguished from Cenomanian deposits by their abnormally high formation pressure; ten times worse reservoir permeability and gas recovery from the bed; complex pressure and temperature conditions; and the heterogeneity and facies variation of the reservoirs. Turonian development using traditional (for Cenomanian deposits) vertical wells is unfeasible. Here, there was the need to use a novel approach.

This was not an obstacle for Severneftegazprom. About two years ago, we started to actively search for ideas. The company hired the best Russian and foreign experts to develop innovative technological solutions – including top-notch experts from LLC Gazprom Bureniye, Korvet JSC, Halliburton, among others. Their engineers worked side by side with our company’s experts to develop and apply unique solutions to make development of Turonian deposits technologically feasible and cost-effective. As a result, an experimental two-downhole well was built on a ready-to-use base of an existing well cluster. This experimental well was connected to an existing gas-collecting network in the field. This special well, unique in Russia, makes it possible to operate two Turonian beds simultaneously and independently of each other. For its operation, we designed and built a dual "Christmas tree" of valves and fittings that is unique worldwide.

Today the well is working perfectly as a pilot project; its output exceeds the design

The Turonian EraContinued from page 15

The Yuzhno-Russkoye field in the Yamal-Nenets Autonomous District.




level of 200 tcm per day. We believe that the development of the Turonian deposits of the Yuzhno-Russkoye field will be a successful project. Becoming a pioneer in the Turonian development project is a great honor and a special status for our company.

Of course, the Turonian beds are still poorly studied and definitive conclusions on the expediency of their large-scale development remain to be made. However, it is already clear at present that this area has good prospects. According to experts, Turonian deposits are, in terms of reserves, comparable to the large, some say giant, Cenomanian fields. For example, the Turonian gas reserves at the Yuzhno-

Russkoye field alone are estimated at a minimum of 300 bcm of gas, while the Turonian gas reserves in Western Siberia are estimated at least in 3 tcm of gas.

"I would like to thank the staff of Severneftegazprom and all those who contributed and initiated the new stage in the development of the gas industry in Russia, aimed at developing hard-to-recover gas reserves," stated Alexander Medvedev, Chairman of the Board of Directors of Severneftegazprom, and Deputy Chairman of Gazprom Management Committee, during the well launching ceremony.

Thanks to the production potential and human resources accumulated, and the professionalism of all participants in the project, we were able to successfully start the project. We have a short-term plan of preparing the Turonian gas deposit for commercial operation. If the project is successfully implemented, there could be potential increase by 5 to 8 bcm in annual gas production at the Yuzhno-Russkoye field. Obviously, the results of our experiment could be useful to other domestic and foreign gas production companies. Gazprom Dobycha Noyabrsk, Gazprom Dobycha Yamburg, and Rosneft are already showing interest in the Turonian deposits.

Certainly, Severneftegazprom is willing to share its experiences accumulated in implementing the project on gas production from the Turonian deposits with colleagues both in Russia and abroad. I hope that our experience will be the first step and the basis for the beginning of a new stage in the development of the gas industry – the era of hard-to-recover reserves. The Turonian era!

Natural Gas Takes to the RoadBy David Graebe, Head of Gas as Motor Fuel, Gazprom Germania GmbH

More CNG-filling stations, more natural gas cars: Natural gas is becoming increasingly important to transport, and Gazprom Germania is playing a significant role in its growth.Gazprom operates more than 200 natural gas filling stations in the Russian market and has long been committed to developing natural gas for transport in Russia and abroad. German subsidiary Gazprom Germania is assisting with marketing and positioning natural gas as a motor fuel in close collaboration with Gazprom and Gazprom Export.

Gazprom Germania’s stated goal is to assist the Gazprom Group’s entry into consumer-oriented stages of the value chain in Europe and open new sales channels for Russian natural gas.

"We want to position natural gas as an alternative fuel for motor vehicles to help expand our business in the long term," says Vyacheslav Krupenkov, Senior Managing Director of Gazprom Germania GmbH.

Gazprom Germania is actively driving the development of the market for natural gas to power motor vehicles through its memberships in German gas industry associations erdgas mobil e.V. and Initiativkreis Erdgas mobil Berlin-Brandenburg.


Deputy Chairman of Gazprom Management Committee, Chairman of the board of directors of Severneftegazprom, Alexander Medvedev (left) and Director General of Severneftegazprom, Stanislav Tsygankov (right). Launching ceremony of the well at the Turonian deposits. 7 April 2012.

Together with its partner companies, Gazprom Germania runs projects to enable the clean and efficient use of natural gas as an alternative fuel to power motor vehicles.

Filling station expansionThe advantages of natural gas are obvious: It is available in large quantities, emits less carbon dioxide in comparison with petrol or diesel, and emits no soot. That’s why Gazprom Germania continues to invest in expanding the required infrastructure: An additional 15 natural gas filling stations will be built throughout Germany by 2014.

Gazprom Germania GmbH opened four new natural gas filling stations in 2012, and another four are scheduled to open in 2013. "By investing in environmentally-friendly natural gas filling stations, Gazprom Germania is making an important contribution to the development of green transport in Germany," says Krupenkov.

International cooperationGazprom Germania presented busses running on liquefied natural gas (LNG) in collaboration with Polish bus manufacturer Solbus in mid 2012. Two LNG-powered busses were run on regular bus lines in the Polish cities of Toruń, Gdynia, Olsztyn, Warsaw, and Katowice. Plans are underway to introduce LNG-powered vehicles in more cities in both Poland and neighboring countries. Plans of the

associated infrastructure are being drawn up in parallel.

This project demonstrated that environmentally-friendly LNG is a viable option for metropolitan transport.

Media coverageAn additional task was to promote the environmental and commercial benefits of natural gas as an alternative fuel to power motor vehicles through continuous media presence in tier one media to encourage a paradigm shift away from conventional motor fuels.. Background briefings with selected journalists (BILD, Frankfurter Allgemeine Zeitung, WELT), articles and interviews were conducted in collaboration with Gazprom Germania’s Corporate Communications department. A television documentary was also broadcast by German news channel n-tv.

The 6th Blue Corridor Rally, organized by Gazprom and E.ON, gave further enhanced media coverage. A convoy of 20 natural gas vehicles of various manufacturers with drivers from Russia, Belarus, Finland, the Czech Republic, Canada and Germany travelled a distance of 6,700 km across Europe. Gazprom Germania also held background briefings to educate media representatives in attendance at a round-table event held during the convoy’s stop in Berlin, about the environmental and commercial benefits of natural gas in transportation. You can learn more about the Blue Corridor Rally online at: http://www.bluecorridor.org/

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Natural Gas Takes to the RoadContinued from page 17




On 14 November, the team at Gazprom Energy’s German office could be seen – and heard – celebrating the success of their business around the little town of Walluf, located near Wiesbaden in South Western Germany. The celebrations were not just about the first birthday of the business. They confirmed the power of what true team spirit and a passion for excellence have been able to achieve, turning around the previously failing business, envacom GmbH.

When Gazprom Marketing & Trading (GM&T) bought envacom in November 2011, it recognized that while there were some serious issues with the way the business had been run, the acquisition also represented real potential and an opportunity to develop our expansion into the power and B2C markets in Germany. Gazprom Energy was already an established supplier in the UK, Ireland and France and was well recognized for its commitment to customer service and innovation.

"It’s not always been easy," says Jozua Knol, Managing Director of Gazprom Energy in Germany. "But we recognized that we could provide much greater security for existing staff and service excellence for our customers, while investing in the business to create new jobs and promoting greater competition within the German power market. I am very proud of what we have managed to achieve – since September 2012, we have seen new customer acquisitions increase by nearly 20%. This is a fantastic achievement in a market where customers tend not to switch supplier." (Churn ratios in Germany are estimated to be around 7%).

Know the customerThe first thing the Gazprom Energy team did following the acquisition was to delve into its customer database and really understand the cause of customers’ dissatisfaction. It

was vital for the management team to understand customer-related information, such as:

• How much energy has each customer consumed?

• How to secure an accurate overview of billing data?

• What bonus or loyalty payments were still outstanding?

It was during this process that the company found itself in a position where it had to manually correct the large customer database and make contact with every single customer to ensure complete accuracy and transparency within its contract and billing systems. Inevitably this led to a huge surge in customer service inquiries, and led to a particularly stressful time for the team as they were handling thousands of calls each week.

It didn’t help that we even had some of these calls going to the Gazprom Germania offices in Berlin, causing confusion for everyone. So, an external call center was established to help with ‘first line calls,’ e.g. simple requests for a statement or notice of a change of address. More complex calls regarding account management could then be handled more efficiently by the customer service team already set up in Walluf.

"The strategy to separate customer service into first and second levels of support was the right step towards securing the highest possible quality of customer service," commented Jozua Knol.

By April 2012, the volume of calls into the business was clearly reducing and, more importantly, the gap between the number of calls received and those answered had narrowed significantly. A concerted effort by the whole team over the summer included the Managing Director

Gazprom Energy Gains Customers’ Confidence in Germany

"Danke … ich habe die korrigierte Abrechnung erhalten und bin damit einverstanden. Ihre sorgfältige Bearbeitung war erfolgreich [und] ich bin gerne weiterhin ihr Kunde."

Mit freundlichen Grüßen nach Walluf, Christiane C.

"Thank you…. I have received the corrected invoice and am happy with this. Your careful attention has been successful and I am happy to continue as your customer."

Best wishes to all in Walluf, Christiane C.


contacting more than 2,500 customers personally – a gesture which many really appreciated, as this is not common behavior for an energy supplier.

Since June 2012, customer service levels have increased significantly. Now more than 95% of calls each month are answered in less than 20 seconds - a figure which is well above average for customer service centers in the energy sector. And with customer numbers beginning to grow again, this culture of great service will enable the business to keep focused on its long term vision – offering innovative energy solutions that keep abreast of consumer buying needs.

Climate change for the betterWhen GM&T announced its intention to buy envacom there were inevitably some concerns in the immediate area as to what this would mean for employees of the company. But the team has grown strong under Gazprom Energy’s leadership.

"Not only have we increased our employee headcount by 15% at a time when many businesses are laying off staff. We have also focused on promoting people from within the business –

employees who have been here for several years and know our customers and what will work best for them," says Jozua Knol. "I didn’t want to bring in a whole set of new people to run the business. The skills and competence were already here – they just needed to be given a proper framework in which to flourish. We believe that the Gazprom Energy values of team spirit and passion for excellence are now well and truly embodied in the Walluf team."

And so the good work continues. In a recent interview, Shamsa Khalid, Customer Services Manager, told us: "We used to be really worried about customer calls – often the customer was angry or frustrated and it was difficult to understand how best to solve the problem. Under the Gazprom flag, we feel we have a proper system and processes for dealing with our customers – they are more like partners than customers. In fact, recently, a business customer arrived at our door interested to find out more about what we have to offer. We invited him in and shared a cup of coffee and by the end of the meeting, he had signed two contracts with us!"

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Gazprom Energy Gains Customers’ Confidence in GermanyContinued from page 19




LNG Carrier "Ob River," chartered by Gazprom subsidiary, Gazprom Marketing & Trading (GM&T) group, and operated by Dynagas (Greece), has successfully completed the world’s first LNG delivery through the Northern Sea Route (NSR).

The "Ob River" LNG carrier loaded LNG cargo from the Snohvit terminal in Hammerfest, Norway on 7 November, discharging it from the Tobata terminal in Japan on 5 December.

Russian nuclear icebreakers operated by "Rosatomflot" and assisted by ice-pilots provided by the Northern Sea Route Administration escorted the vessel during its voyage between 9 and 18 November, encountering ice that was up to 30 cm thick between Vilkitskogo and the Bering Strait.

The voyage was completed safely, on schedule and with excellent support from the ice pilots, masters, ice breaker crews, onshore personnel from "Rosatomflot" and the Northern Sea Route Administration of the Ministry of Transport of Russian Federation.

An October ballasting voyage through the "Ob River" preceded this voyage from Europe to Asia. The conclusion of the vessel’s trip confirmed the technical and commercial viability of NSR for global LNG transport. The combination of dedicated support from "Rosatomflot" and the Northern Sea Route Administration, shorter cargo delivery times, fuel economy, the ability to meet tighter schedules on cross-basin trades, reduction in boil-off with more cargo delivered, lower greenhouse gas generation and reduced piracy risks

present an attractive and sustainable option for present and future cross-basin LNG trade.

GM&T Executive Director for LNG and shipping Frédéric Barnaud praised the voyage, saying: "Never before has LNG been transported through this route. This huge achievement is the result of the LNG and Shipping & Logistics teams at GM&T working together with our partners to make this happen. The importance of opening up the NSR as a viable alternative for our customers fully complements our commitment to the fast growing Asian LNG market which is a key area of growth for the Gazprom group."

The "Ob River" was built in 2007 with 1A ice class notation (Lloyd’s Register) and extensive winterization equipment. The vessel and its crew successfully performed in ice conditions in 2009-2011 when chartered by the GM&T group to export LNG from the Sakhalin-2 project. The vessel has an international crew on board, including graduates from the Admiral Makarov State Maritime Academy in St. Petersburg, Russia’s leading maritime education and training center.

The Northern Sea Route, or North-East passage, is a shipping lane that extends from the Atlantic to the Pacific Ocean along the North coast of Siberia. Icebreakers open navigation fairways to extend the navigation period. The route cuts the maritime distance from Northern Europe to Northeast Asia by up to 40% compared to southern sea routes via the Suez or Panama canals. This first voyage is a significant step that demonstrates the safety and effectiveness of this new maritime route.

Gazprom Successfully Completes the World’s First LNG Shipment Through the Northern Sea Route

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Gazprom Marketing & Trading Singapore and KOGAS Sign Mid-Term LNG AgreementGazprom Marketing & Trading Singapore (GM&T Singapore), a wholly owned subsidiary of Gazprom, signed a sale and purchase agreement with Korea Gas Corporation (KOGAS), South Korea’s largest natural gas company.

Under the agreement, GM&T Singapore will annually supply KOGAS, the world’s largest LNG importer, with up to eight cargoes of LNG from its diversified portfolio in 2013 and 2014. The agreement was officially announced on 9 October.

GM&T CEO Vitaly Vasiliev said, "As the largest LNG importer in the world, KOGAS is a key strategic partner of Gazprom and we are very pleased to have concluded this medium-term agreement that extends our well-established relationship."

GM&T’s Executive Director for LNG and Shipping, Mr. Frédéric Barnaud, added, "This agreement provides a good basis for the further expansion of our commercial portfolio, putting us on the path to become

the leading LNG marketer in the Asia Pacific region. We look forward to partnering with the region’s other major energy players to build and maintain a secure supply of energy and meet growing demand for LNG."

Since its launch in 2009, GM&TS has grown to become one of the most active LNG players in the Asia Pacific region. It will continue to expand its trading, marketing and shipping activities in the region ahead of equity supplies expected in the latter part of this decade.

Gazprom Marketing & Trading Singapore (GM&TS) and Electricite du Laos (EdL) recently signed a carbon credits agreement. Under the agreement, which was formally announced on 26 November 2012, GM&TS will purchase the certified emission reductions (CERs) generated by EdL’s Nam Khan 2 Project.

The deal was signed by Serguei Edrenkine, General Director of Gazprom Marketing & Trading Singapore, and Sisavath Thiravong of Electricite du Laos in front of assembled dignitaries, including Khammany Inthirath, Deputy Minister for

Energy and Mines, other Laotian government officials and representatives of the Russian embassy in Laos.

The estimated volume of CERs is 312,290 tCO2 per year between 2016 and 2020. These emission reductions are the result of EdL’s investment in a new hydro power plant, the Nam Khan 2 Project. Once commissioned in 2015, the project will generate an output of 568,700 MWh power per annum from 2016. This project is expected to receive a positive report from the World Commission on Dams (WCD) supporting its sustainability and respect of social considerations. The region is

Gazprom Marketing & Trading Singapore signs Carbon Credits Agreement with Electricite du Laos




still highly dependent on coal-generated energy, and this will be a significant contribution to its emission reductions and the fight against climate change.

This project will follow the United Nations Framework Convention on Climate Change (UNFCCC) process via the Clean Development Mechanism (CDM) in the coming months. As per the Least Developed Country (LDC) status of Laos, these credits will be able to be used for compliance under the European Union Emissions Trading Scheme (EUETS) until 2020.

Commenting on this deal, General Director of GM&TS Mr. Edrenkine said, "We are very pleased to have signed this agreement with EdL, not only because it cements our continuing

efforts to provide solutions to our partners for a low-carbon economy, but also because it is our first carbon deal with EdL, a significant energy company in the region. We are very confident it will be an excellent platform for further cooperation in Laos and Southeast Asia."

Speaking on behalf of Electricite du Laos, EdL’s Managing Director Mr. Thiravong remarked, "We too are very pleased to have signed this agreement with Gazprom Marketing & Trading because we share their commitment to a low carbon economy, and this agreement is also consistent with the larger economic development plans of Lao People’s Democratic Republic. Gazprom is a truly global energy company, and we share their optimism about future collaboration."

Italy: Between Russian Gas and the New National Energy StrategyA Blue Fuel interview with Davide Tabarelli, President of Italian think tank Nomisma Energia

Blue Fuel (BF): During the February cold snap, Gazprom was accused of being responsible for gas supply shortages in Italy. However, some argue that Italy depends more on North-African gas, and during that same time period, North-Africa was also forced to reduce gas supply to Italy. Is Gazprom’s position in

Europe weaker after last winter’s supply shortages?

Davide Tabarelli (DT): Russia depends heavily on its natural gas exports. Italy, on the other hand, imports the majority of its gas. The relationship between Russia and Italy is therefore a close one. Moreover, all attempts to diversify Italian energy sources in the past 30 years have pointed towards a development where Italy’s demand for Russian gas will increase.

Gazprom, leaving aside some challenges beyond its immediate control, has in fact proven to be a reliable gas supplier. Italy has no problem relying on Russia to secure its energy supply, as Russia, has consistently guaranteed supply.

BF: Shale gas seems to be the new big player in the global gas market. The natural gas glut in the U.S. has depressed prices, and Poland and China both allegedly have significant shale gas reserves. Can we call this a ‘shale gas revolution’?


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DT: Energy is a complex issue and gives way to various myths. One of these myths is shale gas. I will not deny its positive aspects, but there are some pitfalls of which we should be aware. Hydraulic fracturing represents a threat to the environment – France, Bulgaria, Romania and the Czech Republic have all decided to ban it. While ENI is currently trying to develop some shale gas projects in Poland and Ukraine, I believe that shale gas exploitation will be limited to the United States. Furthermore, even if the U.S. was to export shale gas to Europe, it would come at a higher cost for consumers. While it is fair to say that the shale gas discovery may be revolutionary, I would argue that its impact on the energy market as a whole is blown out of proportion.

BF: The Italian government under Mario Monti seems to demonstrate increasing support for the "Southern Corridor" by endorsing both ITGI and TAP, while ENI’s CEO Paolo Scaroni has recently confirmed ENI’s interest in the realization of South Stream. What is your view on these developments?

DT: With regard to the Nabucco project, I would argue that there is no point in building it at the moment: where would Nabucco source 50 bcm of gas per year? In addition, ITGI, TAP and SEEP will only transport small amounts of gas from Shah Deniz. They cannot be considered serious competition to South Stream. Because of all these factors, I doubt the realization of the Southern Corridor as a whole.

With regard to the feasibility of South Stream, Gazprom and its European partners have the financial resources and the incentive to invest in the infrastructure needed to transport gas to Europe. This is why South Stream will be realized. For Italy, ENI’s participation in the project is positive for various reasons, but most of all because it will create employment opportunities for Italy. For example, SAIPEM realizes the off-shore part of the pipeline for South Stream.

Nevertheless, it is necessary to point out that the Southern Corridor does not represent a threat to Russia: gas as an energy source will play a greater role in the future and Russia, as we all know, has vast gas reserves.

BF: ENI and Gazprom have recently renegotiated their long-term contract. Many analysts, however, criticize this type of contract, using the argument that consumers lose out due to higher-than-normal prices. What is your expert opinion on this controversial issue?

DT: From a consumer’s perspective, it is all about lower gas prices, no doubt. However, as a consumer, I also want reliable gas supplies. And for that reason, it is in my interest that Russia develops projects that, for example, enable the exploitation of gas resources in the Arctic Sea. Russia, without question, needs to invest in new infrastructure and production capacity. The best way to ensure that such investments are made is by means of long-term contracts, as they streamline price and revenue expectations, allowing for long-term strategic planning.

Still, various analysts favor spot markets, pointing in particular to the current low price of $2.3 per Mbtu on the U.S. spot market. Data, however, should be considered in their relative context: going back to January 2008 shows us that prices were as high as $17 per Mbtu on the spot market. This stark price fluctuation demonstrates that thinking in the short term is not only easily done, but can also skew reality. It is of great necessity to consider the long term in order to make appropriate choices when it comes to future developments.

BF: After more than 20 years, Italy is close to designing a national energy strategy. According to Minister Passera, Italy must become a European gas hub. To that end, the government has opted for ownership unbundling of ENI and Snam. Do you think that this decision will have positive effects on the Italian gas market?

Italy: Between Russian Gas and the New National Energy StrategyContinued from page 23




DT: I agree with ENI’s CEO Paolo Scaroni when he says that ownership unbundling will not trigger a decrease in gas prices. Moreover, such an undertaking incurs considerable administrative and bureaucratic costs and is consequently not cost-free. State-controlled Cassa Depositi and Prestiti will buy part of ENI’s shares in Snam. So, in this case, the Italian State will essentially pay. Yes, we are in the process of implementing the EU’s Third Energy Package with the aim to make our energy market more competitive in the longer term. For those in favor of economic liberalization, ownership unbundling is a giant step. In my opinion, this decision will weaken ENI, our national champion. However, this goes against our national interest of having a strong ENI without financial constraints to pursue global investments.

BF: The Italian government, notably Minister Passera, seems to be less favorable of renewable energy, due to the high costs involved. Do you think that renewable energy sources can be used to reduce consumption of fossil fuels?

DT: Renewable energy sources will play a role in projections of the future Italian energy mix, but not a significant one. They will certainly consume considerable financial resources, as they are expensive to produce. I can understand that many endorse this energy source today, but at the national level renewables will never surpass 20% of national electricity production. EU targets in this area are not only too ambitious, but they are also simply unrealistic.

BF: And what about nuclear power?

DT: It will be possible to continue the use nuclear power in countries such as China, Russia and India, where it is easier to obtain licenses. As The Economist has written in the past, nuclear power is "a failed dream" in the West, and especially in Italy. While the decision to ban nuclear power has been

expensive for governments and consumers alike, we cannot finance its return either.

BF: The decision to ban nuclear power forces governments to revise their projected energy mix. Natural gas as a consequence has the potential to play a bigger role overall. In a recent report, the IEA has stated that "we are entering the golden age of gas". Do you believe this statement to be true?

DT: Yes, definitely. In my opinion, the golden age of gas will last at least 50 years in Italy and the U.S.; gas will play a key role in the future Italian national energy scenario. But we have been living in a golden gas age for a long time. Italy, for example, started to use gas for heating after World War II, and we have recently opted to return to gas for electricity production. At the global level, gas is growing in importance in electricity generation, too. This is a positive development, giving us the possibility to reduce the use of coal, the most polluting energy source. Gas can help us cut CO2 emissions more significantly than renewable energies can. It is in this context that Italy will continue a privileged partnership with Gazprom, aided by clearly delineated common interests: Gazprom is a reliable supplier, while Italy is a "good" client. Moreover, it is necessary to improve ties with Russia to integrate it into Europe. A close partnership with Gazprom is a good starting point for that.

BF: Final question. In what other sectors or industries can gas play a major role?

DT: Gas could play an important role in transportation. Italy is, in fact, the most motorized country in the world. I, therefore, see great opportunities for gas as a motor fuel. Gazprom’s Blue Corridor initiative for trucks should receive more visibility. We should also consider that by using gas in the transport sector, it is possible to cut CO2 emissions by 20 – 30%, a number that is in line with or even exceeding EU targets.

Photo WheelThe first phase of educational program "Photo Wheel" kicked off on 15 November in the city of Smolensk. The program was organized by cultural project RUSS PRESS PHOTO together with Gazprom Export and For The Sake of the Future – a rehabilitation center for orphans and children without parental care.

The program is devoted to students from various social institutions throughout Smolensk Oblast, such as Kardymovskaya, Yartsevskaya, Shatalovskaya, Pochinkovskaya, and Smolenskaya boarding schools for orphans and children without parental care. Its main objective is to acquaint the children with prominent art photographers and their best works, introduce children to still-picture culture, and master the


After the success of the 2012 Tribeca Film Festival premiere of "The Russian Winter," a Gazprom Export-sponsored "European Tour" took off in the autumn of 2012. Taking on four European capitals, John Forté, a Grammy-nominated singer, songwriter, producer, and former member of The Fugees, captivated audiences with his Russia-inspired documentary and brought people to the dance floor with his band’s infectious beats.

The filmDirected by Petter Ringbom, "The Russian Winter" features John Forté embarking on a 9-week, 5-city tour across Russia to collaborate with some of the country's greatest

musical talents amidst the starkness of the region's most trying season.

Part tour diary, part biopic, John Forté re-evaluates the remarkable journey that takes him from Brownsville, Brooklyn to Phillips Exeter Academy, through early success, a tragic stumble and a miraculous second chance.

The eventJohn Forté made stops in Paris, Berlin, and Brussels, successfully completing the European tour in London. Each event was very well-attended by exclusive guests – selected from among policymakers, influencers, and media – who were treated to a private screening of "The Russian Winter" and concert by John Forté & Friends. Joining John Forté on stage were American singer Firehorse, Russian-Lithuanian singer Alina Orlova and Ukrainian singer Sunsay.

The audiences in all four cities were highly appreciative of the events—impressed by the music and film, enthused by Gazprom Export’s initiative and inspired to visit Russia themselves.

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Photo WheelContinued from page 26

John Forté & Friends: Four-City Tour in EuropeGazprom Export European Tour (Paris, Berlin, Brussels, London)

basics of photography. Each participant has the opportunity to try their hand in a photo contest, and the best work will be featured in a special exhibition. The final exhibition of the work from the contest, as well as the final master class, which includes a discussion of the outcome, will take place in Moscow.

The first phase of the Photo Wheel program consisted of master classes with three well-known photographers: Vladimir Vyatkin, leading press photographer at RIA Novosti; Sergei Shakhidjanyan, press photographer at Komsomolskaya Pravda; and renowned photojournalist Vasily Prudnikov. Each shared their secrets and experience with the start-

up photojournalists. In addition to their main photographical work, Vladimir Vyatkin and Sergei Shakhidjanyan lecture and tutor at the photojournalism department at Moscow State University, while Vasily Prudnikov currently holds classes within the cultural project RUSS PRESS PHOTO.

The master classes with young photographers were organized in such a way that the children mastered the practice of photography in the course of a lively and accessible game. Engaging stories about the history of photography and interesting facts from the experience of prominent photographers were a highlight of the classes.





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Awe-inspiring Concert "Rachmaninoff Gala" Moved Polish AudienceOn 4 November, the audience gathered in the National Philharmonic in Warsaw had the unique opportunity to be present at the opening of the Year of Sergei Rachmaninoff, celebrating the 140th anniversary of his birth and marking the 70th anniversary of his death.

The special tribute concert, "Rachmaninoff Gala," organized with the support of sponsors Gazprom Export and Polish EuRoPol GAZ, was a big hit with music lovers. The tickets were sold out a month before the concert. Many eminent guests from the fields of politics, business, culture and art turned out to hear the outstanding pianist Denis Matsuev – accompanied by the Polish orchestra Sinfonia Varsovia, under the baton of Alexander Sladkovsky – who performed Sergei Rachmaninoff’s musical pieces during this one-time "Rachmaninoff Gala" concert in Poland.

Before the start of the concert, the memory of the late Alexander Rachmaninoff, grandson of the composer and founder of the Rachmaninoff Foundation, which promotes the great musician’s oeuvre, was honored with a moment of silence. A series of anniversary concerts will take place in 2013 in a number of European and musical capitals such as Madrid (Auditorium Nacional), London (Royal Festival Hall), Milan (Teatro alla Scala), Paris (Salle Pleyel), Moscow (Great Conservatory Hall), Geneva (Victoria Hall), Luzern (KKL), Ravinia (Ravinia Festival), Rome (Auditorium Parco della Musica) and Brussels (Palais des Beaux-Arts).

The famous artists did not disappoint their audience, providing an extraordinary music feast. During the first part of the concert, Sinfonia Varsovia, under the baton of conductor Alexander Sladkovsky, performed Symphony No. 2 in E minor. In the second part of the concert the genius of star pianist Denis Matsuev was on full display during a breathtaking and emotional performance of Concerto No. 3 in D minor. The performance brought tremendous applause and a standing ovation.

Proceeds from the concerts were donated to the charity foundation "Active for Lajsk," which works to aid children with autism, mainly by providing support for the School Complex in Lajski, the only educational institution in Poland that puts into practice the idea of inclusive education. Under the inclusion model, students with special needs spend most or all of their time with non-disabled students; all the School’s students make up a concert band that performs regularly in Poland and abroad.

The sponsors of the concert "Rachmaninoff Gala" are Gazprom Export and EuRoPol GAZ, which promote the best Russian artists performing for Polish audiences. In the previous years they enabled concerts by the following artists: Tchaikovsky Symphony Orchestra under the baton of renowned conductor Vladimir Fedoseev and legendary violist Yury Bashmet with the Moscow Soloists. These concerts were exceptionally well received by Polish audiences.

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blue fuel #17 | december 2012 | vol. 5 | issue 4

Documents

operational gazprom

gazprom groups export

gas business

gas trade

german gas transport

urengoi natural gas

russian gas supply contract

lng agreement