Operating Costs of Gazprom (February 22, 2005)

• In financial reports of Gazprom, costs of gas operations are hidden among the total costs.

• We believe the reported cost of fuel gas (gas burned at compressor stations) is a good indicator of the gas operating costs' performance.

  • Fuel gas is accounted at its delivery cost.

  • Cost of fuel gas is not affected by most significant taxes, such as excise tax, export tax and VAT.

_{Source: East European Gas Analysis (based on financial reports of Gazprom)}

_{Source: East European Gas Analysis (based on financial reports of Gazprom)}

• The left chart above shows calculated cost of fuel gas as reported by Gazprom.

  • The estimation for 2004 is based on the Q3-2004 financial report of Gazprom.

• Cost of gas operations of Gazprom grows much faster than the Russian average wage and industrial price index.

  • In 1999-2004, cost of fuel gas has risen ten-fold, compared with about five-fold increase of the average Russian wage and three-fold of the industrial price index.

  • Cost of fuel gas was growing fast after the period of hyper-inflation caused by the Russian crisis of 1998.

  • In 2004, cost of fuel gas is 2.5 times higher than in 2001, compared with 2.1 times for the average Russian wage and 1.6 for the industrial price index.

    • About $3.00 out of an estimated $5.35/mcm increase of fuel gas cost between 2003 and 2004 is attributed to the surge of mineral production tax.

  • Based on the Q3-2004 financial report of Gazprom, we reduced our estimations for the fuel gas cost in 2004.

_{Source: East European Gas Analysis}