GAS SUPPLY TO DOMESTIC MARKET. EXECUTING RUSSIAN REGIONS GASIFICATION PROGRAM

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1 EXECUTING RUSSIAN REGIONS GASIFICATION PROGRAM Kirill Seleznev Management Committee Member, Department Head, Gazprom; Director General, Gazprom Mezhregiongaz PRESS CONFERENCE AS PART OF GAZPROM S ANNUAL GENERAL SHAREHOLDERS MEETING

2 Natural Gas Sales by Gazprom Group in Russia Gazprom: largest gas supplier in Russian market Gazprom Group s gas sales in Russia 1 Sales volume, bln m Average selling price, RUB/1,000 m % -5.5% +7.4% +3.8% 3, , , % of Group s total gas sales in % of Group s total sales proceeds in % decline in domestic gas consumption in 2015: Abnormally warm weather Falling gas demand due to unfavorable economic situation. Reduction 2 by: - 3.4% of total industrial production in Russia - 1.3% of electric power generation at TPPs - 4.5% of thermal power supply by TPPs and boiler houses - 9.9% of cement production - 1.8% of steel production Regulatory environment enhances competitiveness of independent producers despite limited gas demand: Independent producers supply gas mostly to industrial consumers in richer regions at negotiated (non-regulated) prices Proceeds from sales, RUB bln % -1.8% Gazprom continues to cooperate with federal authorities on gas market development and pricing system improvement: Gazprom sold 4.3 bln m 3 of gas at SPIMEX in Excluding intra-group sales. These performance indicators of Gazprom were calculated in accordance with IFRS principles; they may differ from similar indicators in accounting documents prepared in compliance with management accounting methodology. 2 Data from Federal State Statistics Service 1

3 Key Operating Results of Gazprom Mezhregiongaz Group in Ensuring Reliable Gas Supplies to Russian Consumers in 2015 Gas sales bln m 3 natural gas supplied by Gazprom and other producers 49 regional gas distribution companies sell gas to all consumer groups in 69 Russian regions Gas supplied to: Gas distribution thousand km length of gas distribution networks bln m 3 natural gas transmission volume Over 25 mln households and apartments; 31 thousand industrial facilities Nearly 280 thousand public utility facilities 6.4 thousand agricultural facilities Technical connection of consumers: thousand specifications issued 79.8 thousand connection agreements signed 36.6 thousand connections of capital construction facilities 13 bln m 3 will be added to gas consumption if all specifications issued are implemented Gasification 87 inter-settlement gas pipelines constructed in 34 Russian regions In 206 population centers, conditions created for connecting: 41.8 thousand households and apartments 263 boiler houses LNG-based autonomous gasification facility put onstream in Perm Territory Possibilities created for autonomous gasification of: 2,237 households 10 boiler houses 1 Management accounting data; may be inconsistent with IFRS indicators 2 Including performance indicators of Gazprom Gazoraspredeleniye s subsidiaries and affiliates, with exception of Gazprom Transgaz Kazan and Chechengaz 2

4 Results of Russian Regions Gasification Program including 2015 Gazprom s investments, RUB bln Gas pipelines built, units Gas pipeline length, km Gasification made possible for boiler houses, units Gasification made possible for households and apartments, thousand units ,889 > 27,000 4,269 > , Due to unfulfilled obligations on part of regional authorities, gas did not reach over 1,000 boiler houses some thousand households and apartments Gasification level in Russian regions 3 As of January 1, 2016 As of January 1, % 66.2% Cities, towns and urban settlements 70.4% 56.1% 60.0% 34.8% Rural area

5 Obligations Fulfilled by Regional Authorities with Regard to Building Inter-Settlement Gas Pipelines in 2015 under Work Synchronization Plans Region Number of inter-settlement gas pipelines constructed Length, km Degree of fulfillment Region Number of inter-settlement gas pipelines constructed Length, km Degree of fulfillment Kamchatka Territory Novosibirsk Region Kursk Region Orel Region Omsk Region Republic of Altai Republic of Karelia Republic of Bashkortostan Republic of Mordovia Ryazan Region Saint Petersburg Tambov Region Sakhalin Region Tver Region Chuvash Republic Tomsk Region Yaroslavl Region Tula Region Altai Territory Republic of Udmurtia Volgograd Region Khabarovsk Territory Ivanovo Region Republic of Karachay- Cherkessia Kaluga Region Moscow Region Kirov Region Pskov Region Krasnodar Territory Republic of Adygea Kurgan Region Republic of Dagestan Nizhny Novgorod Region Komi Republic Obligations fulfilled according to synchronization plans Obligations fulfilled behind synchronization plans Considerable delays in fulfillment of obligations on preparing consumers for gas supplies 4

6 Programs for Gas Supply to and Gasification of Russian Regions in Gasification Program in Russian regions participate in Gasification Program RUB 25 bln will be invested by Gazprom Gasification infrastructure will be developed in parallel with execution and approval of urban planning documents (area planning and demarcation projects) by executive authorities Failure of regional authorities to fulfill obligations according to plans and lax financial discipline RUB 5 mln (only for completion of works already underway) in investments for 9 regions: Arkhangelsk Region Volgograd Region Kemerovo Region Republic of Dagestan Republic of Ingushetia Republic of Kalmykia Khanty-MansiAutonomous Area Chechen Republic Yaroslavl Region RUB 0 mln: Tver Region Provided that regional authorities settle debts for gas supplied and fulfill obligations to prepare consumers, investment amounts may be revised for these regions Prospects of programs for gas supply to and gasification of Russian regions in Gazprom Mezhregiongaz is drafting programs for gas supply to and gasification of 67 Russian regions in : It is planned to build 23.9 thousand km of gas branches and inter-settlement gas pipelines If regional authorities fulfill obligations to prepare consumers to full extent, gas will be supplied to: 3.5 thousand population centers 670 thousand households and apartments 3 thousand boiler houses, public utility, agro-industrial and industrial facilities 1 28 draft programs already submitted for approval to regional authorities 5

7 Consumers Debt to Gazprom Mezhregiongaz Group DEBT ACCUMULATION Outstanding debts (RUB bln) 94.5% 97.6% 94.8% 96.0% 97.6% 96.2% % % +43.6% % +9.4% % January 1, 2011 January 1, 2012 January 1, 2013 January 1, 2014 January 1, 2015 January 1, 2016 April 1, 2016 Generating companies in gas supplies by Gazprom Mezhregiongaz in % Consumers share in total debts (as of April 1, 2016) 13.7% Payments made Q Q % 95.0% Outstanding debts (as of April 1, 2016) RUB 25.8 bln Heat supply companies (HSC) Budget-financed consumers Population 13.4% 17.3% 1.6% 2.3% 34.7% 34.7% 77.7% 84.9% 88.1% 77.4% 78.1% 91.1% RUB 65.8 bln RUB 4.4 bln RUB 65.7 bln Other consumers 35.4% 14.6% 96.3% 94.9% RUB 27.6 bln 6

8 Default in Payments by Heat Suppliers, Energy Companies and Budget- Financed Entities 79.4% % % Most persistent non-payers Regions with highest debts owed by heat supply companies (as of April 1, 2016) % 26.5% 45.4% 87.1% 98.2% 29.4% 60.6% Persistent non-payers among heat and electricity generating companies (as of April 1, 2016) Debts of Tsentralnaya CHPP (Novokuznetsk) RUB 2.05 bln Debts of TGC-2 1 RUB 10.2 bln Debts of Ministry of Defense entities (Maintenance and Repair Directorate and Main Directorate for Housing & Utilities) (as of April 1, 2016) % RUB 4.37 bln 69.8% RUB bln 3.05 Debts paid Overdue receivables, RUB bln Reasons for debt growth Debts of T Plus (KES Holding) RUB 7.5 bln 1 including debts of Tver-based companies set up by TGC-2 Russian Ministry of Defense Other budget-financed consumers Existing tariffs are unable to cover actual costs of heat generation 7 Violations: - Heat supply companies/managing companies are holding back funds received from consumers (regional gas companies provide loans to heat supply companies) - Deliberate bankruptcy of heat supply companies / taking of property by owner without repayment of debts Possibilities to cut off gas supplies to debtors through regulatory appeals are limited

9 Payments and Outstanding Debts of Population for Gas Supplies Outstanding debts of consumers Payments made Federal Districts NWFD CFD FEFD SFD UFD VFD RUB 65.6 bln RUB bln (as of April 1, 2016) NWFD CFD VFD UFD SFD 97.8% 97.6% 96.5% 95.5% 95.2% SFD NCFD FEFD SFD 94.4% 93.8% Upon establishment of Gazprom Mezhregiongaz Grozny, collection of payments from population rose by RUB 2.5 bln between 2006 and 2016 NCFD 43.4% Gas payments from population in Chechen Republic RUB mln 2, National total: Excluding NCFD Including NCFD 96.3% 84.6% 8

10 Outstanding Debts of Consumers in North Caucasus Federal District As of April 1, 2016, debts of all North Caucasian consumer groups for gas supplied total RUB bln, incl.: Debts of heat supply companies RUB 14.0 bln Debts of population - RUB 52.5 bln Reasons for consumer debt accumulation and gas losses in North Caucasus Federal District Unsanctioned gas offtake resulting from illegal connections to gas supply system on a mass scale Criminal activity in gas market Absence of verifiable customer base Moral and ethical aspects of North Caucasian mentality rooted in the clan system Unauthorized tampering with gas meters Lack of organizational efforts on part of local authorities with regard to subsidizing gas payments for population Limited possibilities for cutting off gas supplies to debtors in compliance with law enforcement practices 9

11 Examples of Criminal Activity among Gas Consumers in North Caucasus Federal District Lack of proper control over real estate development by regional authorities. Sporadic construction of apartment houses without any permits leads to illegal gas consumption Republic of Dagestan. Apartment house built illegally over medium-pressure gas pipe Republic of Dagestan. Unauthorized gas connection and use of uncertified equipment during brick production 10

12 Examples of Criminal Activity among Gas Consumers in North Caucasus Federal District Absence of residential addresses or plates with house numbers and street names impedes customer record keeping, collection of payments for consumed gas, and measures for recovery of receivables Kumtorkolinsky District, Republic of Dagestan. No plates with street names and house numbers Karabudakhkent District, Republic of Dagestan. No plates with street names and house numbers Gazprom Mezhregiongaz Group identified 407 population centers in Republic of Dagestan, 14 population centers in Republic of Ingushetia, and 1 population center in North Ossetia-Alania with no street names or house numbers 11

13 Examples of Criminal Activity among Gas Consumers in North Caucasus Federal District Collection of consumer payments in North Caucasus regions is significantly complicated by numerous unauthorized connections to gas supply systems and other wrongdoings by gas consumers Skachki residential district, Karabudakhkent settlement, Karabudakhkent District, Republic of Dagestan. Illegal gas connection detected Mesker-Yurt settlement, Shali District, Chechen Republic. Illegal hose connections to residential buildings and greenhouses 12

14 Examples of Criminal Activity among Gas Consumers in North Caucasus Federal District Examples of uncertified gas equipment use Henhouse, Republic of Dagestan. Uncertified heating equipment installed Kindergarten, Republic of Dagestan. Uncertified equipment installed 13

15 Measures to Improve Financial Discipline in North Caucasus Federal District between 2013 and 2015 Причины образования задолженности потребителей I. Inventorying СКФО of customers Violations detected during inventorying of 1,180,635 customers: 52,830 residents whose details were not provided to supplier 2,900,656 m 2 of unaccounted floor space 9,607 instances of tampering with metering devices Over 54 mln m 3 of gas has to be paid for additionally II. Detection of ownerless gas pipelines in North Caucasus Federal District Inventorying covered over 32 thousand km of gas pipelines and 12 thousand gas distribution points 2,604 km of ownerless networks and 198 gas distribution points detected III. Number of disconnections made ( ) Legal entities 28,756, incl.: - 9,374 in ,988 in ,394 in 2015 Individuals 119,656, incl.: - 32,062 in ,592 in ,002 in 2015 IV. Online banking Setting up subscribers personal accounts with Bank Rossiya Leaving local banks out of payment collection process Collecting gas payments through outreach teams of lending institutions authorized by Gazprom Group 14

16 Measures to Improve Financial Discipline in North Caucasus Federal District between 2013 and 2015 Year Причины образования задолженности потребителей СКФО V. Preventive actions Throughout North Caucasus Federal District: 4.1 thousand raids to detect gas supply violations were conducted, resulting in 35.5 thousand petitions filed to law enforcement agencies Criminal and administrative proceedings were initiated against more than 18 thousand offenders In Republic of Dagestan: VI. Cooperation with law enforcement agencies 635 raids were conducted, resulting in over 12 thousand petitions filed Over RUB 3 bln of debts recovered Name of regional gas Petitions filed to law enforcement No court ruling company agencies made Petitions dismissed Criminal/administrative proceedings initiated Countrywide 5, ,025 Pyatigorsk 2, /1,853 Grozny /151 Stavropol /134 Countrywide 18,567 7,767 2,135 8,665 Pyatigorsk 14,661 6, /7,055 Grozny /184 Stavropol /26 Countrywide 20,205 7,214 3,718 10,467 Pyatigorsk 15,992 5,880 1,302 46/7,967 Grozny 1, /668 Stavropol /50 Countrywide* 44,330 15,655 6,712 23,157 Total in NCFD* 35,534 14,025 2, /18,088 Between 2013 and 2015, 35,534 petitions concerning gas supply violations were filed to the law enforcement agencies of the North Caucasus Federal District, which accounts for 80% of the Russian total. After the review of these petitions, 199 criminal and 18,088 administrative proceedings were initiated, 2,335 petitions were dismissed and no court rulings were made (or petitioner was not notified) in respect of 14,025 petitions. Most often, if wrongful acts are identified, the offenders are subject to administrative liability and a penalty of RUB 3,000, which is paid off in 30% of cases. As a result, consumers continue their wrongful behavior and the number of illegal connections does not drop. In this regard, the law enforcement authorities were tasked to, following the decisions of the Government Commission on the Socio-Economic Development of the North Caucasus Federal District, intensify efforts on the identification and combating of offences in the field of gas supply.

17 Measures Taken to Improve Financial Discipline: Claims and Administrative & Legal Sanctions Imposed on Debtors and Their Representatives Gazprom is actively collecting debts through legal actions Number Amount, RUB bln Claims filed against debtors Court rulings and judgments made number 244, , ,393 amount number 175, , ,720 amount Debts recovered through enforcement procedures amount Debts assigned to new debtors number 1,077 1,302 1,270 Debts assigned by insolvent legal entities to solvent ones amount Assigned debts recovered amount Year Number of petitions filed to law enforcement agencies In addition, administrative & legal sanctions are imposed on debtors and their representatives Number of proceedings initiated Number of court rulings made Criminal Code Code of Administrative Offences Sentence passed Administrative liability Petitions were filed to government authorities and law enforcement agencies to impose sanctions on debtors Period Government authorities Russian Ministry of Internal Affairs Russian Federal Security Service Russian Prosecutor General s Office and Investigative Committee Total

18 Measures Taken to Improve Financial Discipline: Limiting/Cutting off Gas Supplies to Indebted Companies Most effective way to improve financial discipline is by limiting/cutting off gas supplies to indebted companies Total number of gas consumers, legal entities 204,921 Total number of gas consumers, individuals 28,837,075 10,073 cases of cutting off/limiting gas supplies to legal entities in ,014 cases of cutting off/limiting gas supplies to individuals in 2015 Meanwhile, prosecution offices issued 893 injunctions prohibiting limitation of gas supplies In 2015, over 5,241,108 claims were sent to consumers (individuals) Gazprom Mezhregiongaz Group is taking actions aimed at simplifying the procedure for limiting/cutting off gas supplies to debtors without affecting honest consumers 17

19 Streamlining of Legislation to Improve Financial Discipline among Gas Consumers Results of Q do not show any dramatic improvement resulting from entry into force on January 1, 2016, of all provisions of Law No. 307-FZ of November 3, 2015, aimed at strengthening financial discipline Key improvements under Law No. 307-FZ of November 3, 2015 Setting high penalty rates for failure to fulfill obligations Introducing obligation to provide supplier with guarantee of performance as part of energy supply contract Strengthening administrative liability in case of unauthorized connection (tie-in) to gas supply networks Strengthening administrative liability in case of disruption of supply limitation regime Consumer debt fluctuations in Q and Q % +15.9% % +24.4% RUB bln Jan 1, 2015 Apr 1, 2015 Jan 1, 2016 Apr 1, 2016 Legislation needs to be further streamlined, including by following up on Law No. 307-FZ. Jointly with relevant ministries and agencies, Gazprom is promoting regulations required for improvement of financial discipline 18

20 Further Streamlining of Legislation Вступление Actions taken в действие основных Required положений regulation закона 307-ФЗ от «О Status внесении изменений в отдельные законодательные акты РФ в связи с укреплением Public hearings платежной ended on дисциплины May 13 and 11, 2016, потребителей respectively. A энергетических Russian ресурсов» Government Directive не позволило on Approval кардинально number of comments улучшить and proposals ситуацию from Federal Antimonopoly Establishing criteria under which gas consumers assume obligation to provide guarantee of payment for gas supplies. Approval of updated rules for gas feed (supply) and offtake limitations. of Rules for Enforcement of Obligations for Energy Payments and on Making Amendments to Certain Acts of Russian Government; Russian Government Directive on Rules for Limitation of Gas Supply and Offtake. Service and Federal Service for Environmental, Technological and Nuclear Supervision were taken into account or dismissed during review of document. Comments from Russian Ministry of Economic Development were received after public hearings. At present, Russian Energy Ministry is finalizing draft regulations with due account for comments and proposals received during discussions. Entering into direct agreements with users of public utility services, bypassing managing companies. Ensuring transparency of settlements between heat supply companies and end consumers by granting legal status to Unified Information and Settlement Centers and their operational practices regarding acceptance of payments for public utility services, splitting thereof and transfer of fuel component to suppliers. Amendments to Housing Code and certain legal acts of Russian Federation. In cooperation with Russian Gas Society, Gazprom prepared proposals regarding draft law being developed by Ministry of Construction, Housing and Utilities of Russian Federation. Public discussions have been held. 19

21 Further Streamlining of Legislation Actions taken Required regulation Status Вступление в действие основных положений закона 307-ФЗ от «О внесении изменений в отдельные законодательные акты РФ в связи с укреплением Jointly with платежной Russian Gas дисциплины Society, Gazprom prepared потребителей proposals on энергетических ресурсов» не позволило кардинально making amendments улучшить to Art ситуацию of Criminal Code and Criminal Introduction of criminal sanctions for repeated unauthorized connections to gas distribution system. Amendments to Russian Criminal Code. Procedural Code of Russian Federation. Draft law was submitted to Supreme Court for official opinion. Improving calculation procedure for losses from unauthorized connections to gas grids. Extending time limits for compulsory installation of metering devices in gasheated housing facilities. Guidelines for calculating losses from unauthorized connections to gas grids and tampering with gas meters. Amendments to Federal Law No. 261-FZ of November 23, 2009, on Energy Saving and Energy Efficiency Improvement and on Making Changes to Certain Legal Acts of Russian Federation. It is planned to hold end-of-year meeting involving representatives of State Duma and Russian Energy Ministry to address monitoring of Guidelines application and to consider changing status of this document in order to make it legally binding, as well as to formulate proposals on registration thereof with Russian Ministry of Justice according to established procedure. Draft of Federal Law No FZ on amending Art. 13 of Federal Law No. 261-FZ that provides for extending time limit (to January 1, 2019) during which gas supply and transmission companies should install gas metering devices in housing facilities if homeowners failed to do so before January 1, 2015, was passed by Russian State Duma on first reading on May 13, Imposing administrative sanctions for refusal to provide access to gas-powered equipment in order to ensure monitoring and safe use thereof. Amendments to Administrative Code of Russian Federation. Proposals on making amendments to Administrative Code of Russian Federation were submitted to Russian Energy Ministry in May

22 THANK YOU FOR YOUR ATTENTION! PRESS CONFERENCE AS PART OF GAZPROM S ANNUAL GENERAL SHAREHOLDERS MEETING