A working meeting between Russian President Dmitry Medvedev and Alexey Miller, Chairman of the Gazprom Management Committee was held today.

Alexey Miller informed Dmitry Medvedev on the Company's operating results of 2011, particularly on gas supplies to the domestic and European markets, execution of the Russian regions gasification program. Chairman of the Management Committee also reported on the current state of the Russian-Ukrainian cooperation in the gas sector and the progress in the South Stream project implementation.

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Transcript of the meeting:

Dmitry Medvedev: Good afternoon, Mr. Miller! Let us begin with Gazprom's year-end results. Report briefly and then we will discuss one more question.

Alexey Miller: Year 2011 ended on a good note for Gazprom. First of all, of course, we are glad that we have exceeded our planned volumes for 2011 by approximately 7.5 billion cubic meters of gas. In total, Gazprom produced and supplied to the market more than 513 billion cubic meters of gas, 150 billion of which was supplied to Europe – our main target market. In comparison with 2010 our gas supplies to Europe increased by 13 billion cubic meters. Undoubtedly, it is a pleasant fact for us because overall demand increased in 2011 amidst the apparent crisis signs in the eurozone, though we observed an unusual picture when two opposite trends were formed in two big countries of the European Union. Demand for Russian gas was growing in these countries. In other countries it not only stabilized but also was declining, however, aggregate supplies were considerably higher than in 2010.

As for supplies to the domestic market, I would like to notice a substantial growth in demand for gas in basic industries: agrochemistry, cement industry – by almost 10 percent. The Company increased gas supplies to the power industry by 3.5 billion cubic meters. This points to the fact that the Russian economy was developing in 2011 and an increase in energy and gas consumption is a good evidence of the economic growth in the country indeed.

The Company continued executing one of the prioritized programs – the gasification program, which undoubtedly has a great social sounding. According to the results of 2011, the average gasification level in the country exceeded 63 percent: more than 70 percent in municipalities and more than 45 percent in the rural area.

Since the beginning of the gasification program implementation the gasification level has increased in the country by more than 8 percent and gasification was growing a bit faster in the rural area according to an objective you had set beforehand. We pay utmost attention to the rural area and will continue doing so.

Certainly, I would like to notice Gazprom's extensive efforts in the Far East and Eastern Siberia in 2011. Construction of the Sakhalin – Khabarovsk – Vladivostok gas trunkline has been completed to gasify the region and supply gas to power industry facilities for the APEC Summit.

You are aware that the gas pipeline to Petropavlovsk-Kamchatsky has been constructed and we have started Kamchatka gasification. Thus, we have significantly expanded the gasification geography in the country. At the first phase of the gasification program we started with 25 regions. Now, we are operating in 69 regions and we have managed to get the financing level of gasification in 2011 up to almost 30 billion, a bit less than RUB 30 billion.

This year, the Company will continue gasification. First of all, we want to pay attention to updating general schemes for gas supply and gasification. When we launched the gasification program one of the objectives was gasification on a new methodical basis. In particular, general schemes are to be developed for each region as well as schedules and synchronization schedules are to be approved, because gasification is a like two-way street. It is not only financing by Gazprom but also financing by local authorities and administrations as issues of inter-settlement networks, household equipment, heat and power supply facilities are the issues of financing by local authorities. Thus, one of the issues that we will tackle in 2012 is updating general schemes (as it has been quite a long time since their construction) and we will keep the pace in meeting the objective.

Dmitry Medvedev: The objective is urgent for the years to come just because it is necessary to continue gasification, to complete it in those population centers where it is required and where it is expedient to use gas. That is the reason why we have to allocate funds for that. Responsibilities of regions should also be adequate indeed as the program was initially established on the basis of synchronized operations and co-financing.

I've got another question, Mr. Miller. Before the New Year I met with the Ukrainian President to address various issues and ways of cooperation. The discussion was centered on new large-scale projects in addition to signing of new documents. Have you achieved anything? Or nothing is going on yet?

Alexey Miller: No, Mr. Medvedev, nothing significant has happened yet. This sphere of cooperation is still being debated by our Ukrainian friends, no specific proposals have been made so far. We may hope they will be made in the nearest future. But Gazprom is worried about the fact that Ukraine is going to offtake much less gas than stipulated by the contract terms and conditions. The amount of gas announced is 27 billion cubic meters.

Dmitry Medvedev: Remind me, please, how much is stipulated by the contract.

Alexey Miller: The contract stipulates 52 billion cubic meters of gas per year. This is the contract signed with Ukraine and effective until the end of 2019. There is also a take-or-pay clause that equals 80 per cent under the effective contract with Ukraine.

Dmitry Medvedev: What measures will be taken in case of a failure to offtake the minimum specified amount?

Alexey Miller: If less gas is offtaken, we apply the take-or-pay clause.

Dmitry Medvedev: Does it mean that one has to pay for the untaken gas?

Alexey Miller: Yes, one has to pay for the untaken gas. But Ukraine has made a relevant statement without settling the issue with the Russian party. We have no changes in the contract, especially when changes in the annual contracted amounts or next-year supplies are concerned. According to the existing contract, such issues should be settled half a year in advance to be put into effect.

Dmitry Medvedev: You mean it is a unilateral statement.

Alexey Miller: It is a unilateral statement made by the Ukrainian party. Ukraine thinks that we can act in a civilized manner in case it violates the contract. But I think if it happens, we will take the appropriate measures.

Dmitry Medvedev: Of course, we will act in a civilized manner. Can we take another approach?

Alexey Miller: We will act in a civilized manner according to the terms and conditions of the existing contract.

Dmitry Medvedev: I see. Anyway, we have a solid contractual basis for further cooperation with our Ukrainian partners and meanwhile deliberating on the future cooperation in the gas sector. Am I right?

Alexey Miller: Indeed, you are. Our Ukrainian friends outlined the terms and conditions as acceptable for the Ukrainian party, in particular, this regards evaluation of the cost of Ukraine's gas transmission system. All experts, both foreign and domestic, agree on the fact that the announced cost of Ukraine's gas transmission system is overestimated and, most importantly, there are currently no drivers or reasons for Ukraine's gas transmission system to grow in price.

We fully meet the obligations under the contract for Russian gas transit across Ukraine, but I would underline that the 2011 results showed a decline in gas transit via Ukraine by 5 billion cubic meters against the backdrop of growing Russian gas supplies beyond the country. This is conditioned by the emergence of no less competitive routes than the Ukrainian one in 2011. There is a Belarusian route. In 2011 Nord Stream was commissioned to launch direct supplies from Russia to Germany. Besides, gas supplies were increased to Turkey via Blue Stream, a pipeline under the Black Sea that directly conveys gas from Russia to Turkey.

Dmitry Medvedev: Let's hope that execution of the South Stream project will be intensified in the context of the decisions made by the Turkish party.

Alexey Miller: Upon granting a permit to build South Stream in its exclusive economic zone, the Turkish party actually resolved all those issues that Gazprom had faced at the early construction phase of the South Stream project.

Pursuant to the Government decision, Gazprom approved in late 2011 the relevant documents on stepping up the operations within the South Stream project as well as on launching the project construction in late 2012 instead of 2013.

Dmitry Medvedev: I think, Mr. Miller, all these factors have to be taken into consideration while making major decisions including those concerning Ukraine. Our partners have to be aware that there are plenty of opportunities for Gazprom to supply gas to Europe. What you are calling evaluation of the cost of the gas transmission system or any other assets is, of course, an economic issue, but things change and these factors should not be disregarded.