"With adequate profit, capital is very bold. A certain 100 percent will make it ready to trample all human laws."

Karl Marx, Capital

• Russian Gas Insight is an annual multi-client report that analyzes volumes, costs and benefits of all operations with natural gas that gets into the pipeline system of Russian gas monopoly Gazprom.

• Russian Gas Insight gives our evaluations of security of supplies of Russian gas to different markets in the former Soviet Union and Europe.

• At this stage, Russian Gas Insight does not cover future LNG projects that are or will be designed to operate separately from the existing pipelines (like Shtokman). LNG terminals supplied via Gazprom pipelines are included into the study.

• Russian gas business has entered an exciting period of rapid and sometimes unexpected change.

  • For instance, the transit conflict with Ukraine has resulted in an immediate increase of cost of gas delivered to Europe by $15 per thousand cubic meters (mcm).

  • In October 2006 Gazprom has changed its plans for the development of Shtokman field in the Barents Sea.

  • A change of this scale can affect potential investor’s decision on participation in a gas production project in Russia.

• We expect many changes to take place in Gazprom and in Russian gas business in the coming two or three years.

  • There are predictable changes, such as introduction of new transit tariffs for third parties (the linear tariff that depends on transportation distance will be replaced by a more complicated formula), new gas pricing system in Russia (load factor will be added to the currently used distance factor), separation of gas storage from the transportation business segment of Gazprom, and some other.

  • Unpredictable changes may be caused by an excessive growth of operating costs of Gazprom, drop in oil price or a successful lawsuit against Gazprom.

  • Transit agreement with Ukraine is very likely to be reconsidered this year.

  • Our clients know in advance what are the likely effects of all important changes in the Russian gas scene.

• Every report has a section covering gas business environment in Russia. It has updates on gas prices, external costs (labor, materials and supplies), taxation and general observations.

• Section on volumetric analysis gives updates on volumes of gas produced, transported and sold to different markets. It also has analysis of annual and maximum daily flows in all important sections of Gazprom pipelines and presents forecast on location and size of future bottlenecks.

• Section on cost analysis will have the most important information on the cost of gas in any place of the pipeline system of Gazprom and beyond – from cost of gas at producer gate to cost of gas delivered to Russia, all export terminals (Vyborg/Primorsk, Kondratki, Uzhgorod, Orlovka and other) and gas metering stations in Europe (Waidhaus, Frankfurt, etc).

• Every report has comments on financial statements of Gazprom.

  • In this issue we discuss the overpayment of export duties by Gazprom and discrepancies of financial reports.

• Every report has one or two sections focusing on most important problems of gas business in Russia.

  • This issue includes section focusing on Ukrainian gas transit.

  • In the next issue we plan to investigate the capacity of Gazprom pipelines in West Siberia.

    • Our previous calculations indicate that after completion of the new SRTO-Torzhok pipeline and upgrade of existing West Siberian pipelines, there will be enough capacity to accommodate all gas from West Siberia including all production from Yamal reservoirs.

    • Construction of pipelines from Yamal to Yamburg would be a way more cost-efficient solution than the expensive new pipeline system from Yamal to Ukhta and Torzhok (though steel pipe brokers may think different).

    • Record volumes transported via Gazprom pipelines in January 2006 also disclosed the actual pipeline capacity.

    • We will use the January 2006 data in our analysis.

  • In one of the coming issues, we plan to investigate effects of outage of major transmission pipelines on security of gas supplies to different markets. We will consider different locations of major export pipelines.

• We plan to publish Base Case (most likely case) and Best Case scenarios. The latter will show steps to be taken to provide maximum increase of shareholders value.

• We are open to suggestions from our subscribers. If you have questions about the way we calculate particular parameters or if you can recommend a different approach, we will be happy to receive your comments. Feedback from our subscribers is highly appreciated.

• Gazprom is a company with great potential for improvement.

  • According to our estimations, Gazprom can increase its cash flow by over $1.5 billion a year at absolutely no cost.

  • From 2004, Gazprom could have generated over $1.5 billion of additional profits for its shareholders by avoiding payments of export duties on cost of gas transit out of Russia.

    • Instead of that, Gazprom started to divert part of its profits out of Russia to unnamed owners of RosUkrEnergo.

• Currently Gazprom goes the way of Standard Oil of the 1880s.

  • Gazprom strengthens its monopolistic position in Russia and expands it to other states of the FSU.

  • We believe it would take much shorter time than in case of Standard Oil to turn the development in gas sector of Russia the opposite way.

  • Eventually, Russia will join WTO and will ratify the Energy Charter Treaty. These also are predictable changes with important consequences.

• Russian Gas Insight is a unique source of information that is very important for decision makers on all sides of the gas business.

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