Speech by Alexey Miller, Chairman of Gazprom Management Committee, at Annual General Shareholders Meeting

Dear shareholders,

The in-depth materials prepared for the annual General Shareholders Meeting on Gazprom's performance in 2017 include the Annual Report, the Accounting (Financial) Statements, the Audit Commission's Report, and other documents.

It is proposed that the Shareholders Meeting approve:

  • the 2017 Annual Report of Gazprom;
  • the 2017 Annual Accounting (Financial) Statements of Gazprom;
  • the allocation of profit and the proposals by the Board of Directors on the amount, period and form of the dividend payout based on the results of 2017.

It is also proposed that the Meeting approve the Company's Auditor, the remuneration for the Board of Directors and Audit Commission Members, and the election of the Board of Directors and the Audit Commission Members.

In addition, it is proposed that Gazprom's Regulation on the General Shareholders Meeting be supplemented with a provision regulating the use of additional premises equipped for the Meeting-related broadcasts, Q&A sessions, and debates.

You can find the draft decisions on these matters in the ballots and the additional information in the materials you received.

Dear shareholders,

Gazprom successfully pursues a strategy to attain leadership among global energy companies:

The Gazprom Group is No. 1 globally in terms of natural gas reservesproduction and supplies to international markets. The Unified Gas Supply System operated and developed by Gazprom is larger and more technologically advanced than any other system of its kind.

We have successfully created the largest vertically integrated power holding company in Russia, with the greatest installed capacity and power output among domestic heat generation entities.

We have propelled our oil subsidiary, Gazprom Neft, into the top three oil producers in the country and become pioneers in the development of the Russian Arctic shelf, providing for year-round oil shipments via the Northern Sea Route.

Gazprom is a major contributor to the Russian economy. The added value generated by the Group in 2017 was RUB 3.4 trillion, or nearly 4 per cent of Russia's GDP.

Gazprom is one of Russia's key taxpayers. In 2017, various budget payments made by the Group reached RUB 2.5 trillion, of which the severance tax and customs payments accounted for over 60 per cent. Gazprom is responsible for more than 8 per cent of Russia's consolidated budget revenues. Compared to the previous year, the overall payments rose by RUB 568 billion.

Through its ambitious strategic projects, Gazprom maintains its robust financial strength. The Group's sales revenue demonstrates steady growth: in 2017, it went up by 7 per cent and reached RUB 6.546 trillion.

Gazprom has firmly established itself as one of the world's top five oil and gas companies in terms of key financial indicators, such as net profit and EBITDA, which, at the end of 2017, totaled USD 12 billion and 25 billion, respectively.

Last year, our capital investments were fully financed by the operating cash flow. The Group's free cash flow amounted to RUB 24 billion without taking into account the changes in bank deposits.

Gazprom successfully attracts capital from international financial markets. Thanks to a measured approach toward our financing sources, the cost of debt financing remains low at an average of 5.6 per cent.

A key indicator of debt load – the net debt to EBITDA ratio – stood at 1.4 in 2017. Gazprom's excellent creditworthiness has been confirmed by the world's top credit rating agencies.

With the investment program at its peak, the Company pursues a range of large-scale forward-looking strategic projects. Taking into account the interests of shareholders, the Board of Directors chose not to reduce the level of dividend payouts. Following the results of 2017, it was proposed to pay out RUB 8.04 per share, which adds up to RUB 190 billion, or 27 per cent of the net profit attributable to the Company's shareholders. Gazprom continues to be Russia's leading oil and gas company in terms of dividends.

Dear shareholders,

Gazprom's ambitious projects in hydrocarbon production, transportation and processing stimulate innovations in the oil and gas sector, contributing to the development of Russian science. In 2017, we allocated RUB 8.2 billion for R&D and pre-investment studies.

Gazprom is at the forefront of import substitution in Russia's fuel and energy complex. In 2017, 17 targeted cooperation agreements with the manufacturers of import-substituting products were signed and updated. The share of domestic materials and equipment in Gazprom's procurements reached 99.4 per cent last year, with 100 per cent of pipes and joints bought from Russian producers. As regards this type of products, all of Gazprom's purchases come from Russian companies.

Gazprom plays a significant role in the development of the domestic pipe industry. Owing in large part to orders from Gazprom, the annual output of Russian pipe producers has skyrocketed from 9 million tons in 2000 to over 23 million tons today, with the share of high-tech products exceeding 60 per cent. By executing Gazprom's orders, Russian pipe manufacturers have achieved excellence and become highly competitive in every segment of the global market.

For 25 years, Gazprom has successfully expanded the resource base of Russia's gas industry, with more than 80 fields discovered since 1993. As a result of geological exploration, Gazprom's gas reserves have grown by 10.5 trillion cubic meters in that period.

In 2017, Gazprom's explored reserves in Russia grew by 852.9 billion cubic meters, which translates into 96 per cent of the annual growth nationwide. Our liquid hydrocarbon reserves added almost 100 million tons.

Today, Gazprom is the global leader in terms of proven hydrocarbon reserves. Our reserves are 1.5 times bigger than those of the world's top five public oil and gas companies – ExxonMobil, PetroChina, BP, Shell, and Chevron – combined.

Since 2005, our reserve replacement ratio for natural gas has consistently been greater than unity. In 2017, it stood at 1.82 and the replacement ratio for liquid hydrocarbons was 1.64.

In 2017, gas output by the Group went up by 52 billion cubic meters (12.4 per cent) from 2016 and reached 471 billion cubic meters.

In a period that is short from the historical viewpoint, Gazprom's employee teams have created the world's largest gas production complex in Russian territory. Its production capacities exceed 550 billion cubic meters per year. New gas production centers are being set up in Russia's Far East and Eastern Siberia.

In the Arctic, we are developing the Yamal gas production center. Yamal's gas reserves constitute the resource base for the expansion of the northern gas transmission corridor – the main route for delivering the “blue fuel” to the Russian market and Europe.

2017 marked the fifth anniversary of the commissioning of the Bovanenkovskoye field. The field is key to the development of Yamal's resources. Bovanenkovskoye produces more and more gas with every passing year. In 2017, its output added 15.3 billion cubic meters and its peak productivity reached 264 million cubic meters per day. Bovanenkovskoye accounted for 17.6 per cent of the gas produced by the Gazprom Group in the span of 2017.

Extensive efforts are underway to pre-develop the Chayandinskoye field – the main field of the Yakutia gas production center. Gas extracted from that field will be fed into the Power of Siberia gas pipeline and exported as soon as next year.

Based on the Kovyktinskoye field, which is unique thanks to its enormous gas reserves, Gazprom makes efforts to build the Irkutsk gas production center. The field is being prepared for commercial development.

The Sakhalin center serves as a testing ground for the unique methods of subsea production. Meanwhile, in order to maintain the high productivity of the Nadym-Pur-Taz region, we take measures to improve the gas production methods applied to the Cenomanian and Achimov gas deposits by, inter alia, using advanced technologies of multistage hydraulic fracturing.

The amount of liquid hydrocarbons extracted by the Gazprom Group in 2017 grew by almost 2 million tons against 2016, reaching 56.9 million tons. Oil production rose to 41 million tons.

In terms of aggregate hydrocarbon production – counting gas, gas condensate and oil – Gazprom is the world's leader, as its output is larger than that of PetroChina and ExxonMobil by 2.6 times, that of Shell by 2.8 times, and that of BP by almost 3 times.

In the oil industry, Gazprom is well-represented by the Gazprom Neft subsidiary. The company is highly efficient, demonstrates excellent operational and financial results, and makes efforts to develop innovative methods of hydrocarbon production. In 2017, Gazprom Neft strengthened its foothold in the Russian oil sector, breaking into the top three of liquid hydrocarbon producers. Taking into account its joint ventures and operations, Gazprom Neft produced 62.4 million tons of oil in 2017.

Thanks to the Arctic Gate oil loading terminal, we can ship this oil all year round. Today, we are raising a flag over a new icebreaker, which will lead tankers across the Arctic ice. This is another step in the advancement of Russia's icebreaker fleet and Russian interests regarding the Northern Sea Route.

Gazprom's unique expertise is used outside of Russia as well. The Group takes part in international hydrocarbon production projects, the most significant of which are being successfully implemented in VietnamBolivia, and Iraq.

Dear shareholders,

Gazprom accounts for 50 per cent of all gas processed in Russia. Extracting the maximum possible amount of valuable components from feedstock and making high-value-added products are among the Group's priorities as far as gas processing is concerned.

Our prospects in this area are linked to the construction of the Amur Gas Processing Plant, which will become Russia's largest and second-biggest in the world.

Among the major accomplishments of Gazprom in the past quarter of a century is the precise operation of the Unified Gas Supply System, which is based on the world's largest gas transmission system – a sterling example of efficiency and high-quality management of gas infrastructure.

In addition, Gazprom owns and operates gas transmission systems in Armenia, Belarus, and Kyrgyzstan.

Our GTS is developed in two main directions. In European Russia, we expand the northern gas transmission corridor. It continues beyond Russia via such cross-border gas pipelines as Nord Stream and the planned Nord Stream 2 pipeline.

With Bovanenkovo – Ukhta, Bovanenkovo – Ukhta 2, and Ukhta – Torzhok, we have built the world's most cutting-edge gas pipelines with the working pressure of 120 atm. In 2017, we constructed compressor facilities at the Bovanenkovo – Ukhta 2 gas pipeline. This year, workshops with a total capacity of 371 MW will be put into operation. In 2018, the linear section of the Ukhta – Torzhok 2 gas pipeline will be completed.

In the east of Russia, construction of Power of Siberia is speeding toward the finish line. The gas pipeline is the most ambitious investment project in the global gas industry.

In parallel with developing the GTS, Gazprom ramps up the capacities of its UGS facilities. Compared to the 1993–1994 season, the potential maximum daily deliverability of Gazprom's UGS facilities has grown 2.6-fold. In 2017, that indicator hit an all-time record of 805.3 million cubic meters as of the start of the withdrawal season.

The working gas inventories in the UGS facilities have doubled in 25 years. By the 2017–2018 heating season, the working gas inventories in Russia reached a record 72.2 billion cubic meters. Compared to the 2015–2016 season, the volumes of gas withdrawn from Russia's UGS facilities grew by 1.6 times.

In 2017, Gazprom's gas supplies to consumers in the Russian Federation grew to 229.9 billion cubic meters, an increase of 7 per cent against 2016. Gazprom is the largest supplier of natural gas in the domestic market. The Group's main consumers include the population, public utility enterprises, and generating companies.

The bulk of natural gas consumed in the countries of the former Soviet Union is supplied by the Group. In 2017, gas sales in the region grew by 1.8 billion cubic meters against the previous year, with 35 billion cubic meters delivered.

Last year's growth in natural gas supplies to the former Soviet Union resulted from increased gas consumption and offtake in Belarus and the Baltic states, as well as resumed gas supplies to Azerbaijan.

Gazprom makes great efforts to ensure that tens of thousands of Russian families are provided with natural gas every year.

The national program for gas grid expansion is a top-priority socially significant project for Gazprom. Last year, 121 inter-settlement gas pipelines with a total length of 1,848 kilometers were built, allowing us to connect 207 population centers in 32 Russian constituent entities to gas grids and create the conditions for supplying gas to almost 52,000 households and 173 boiler houses with a total consumption rate of 400 million cubic meters of gas per year.

By the end of 2017, the natural gas penetration level in Russia averaged 68.1 per cent, including 71.4 per cent in cities and towns and 58.7 per cent in rural areas.

The use of natural gas in vehicles is a promising business segment for Gazprom. In 2017, the performance of the Group's gas filling infrastructure totaled 2 billion cubic meters. Gas sales through our gas filling stations in Russia went up to 525.9 million cubic meters.

Along with compressed natural gas, Gazprom promotes the use of liquefied natural gas as a vehicle fuel. This is what the pilot investment project for building NGV infrastructure along the Moscow – St. Petersburg route aims to achieve. The route is a part of the Europe – Western China transportation corridor.

Dear shareholders,

In 2017, Gazprom celebrated its 10th anniversary in the power sector, taking stock of the Group's power generation strategy. In the last decade, we have established the country's largest heat and electricity generating holding. Its installed capacity accounts for around one-sixth of Russia's Unified Energy System's output. By the end of 2017, the holding's aggregate capacity was 38.8 GW.

Gazprom has delivered over 30 construction and upgrade projects for generating facilities with a total capacity of some 8.6 GW.

Within a decade, the Company's revenue from the power business has more than tripled, with EBITDA growing by over 7.5 times and the debt to EBITDA ratio dropping from 2.5 to 1.1.

In 2017, Gazprom Energoholding showed unprecedented financial and economic performance thanks to the commissioning of new efficient capacities and the optimization of operating expenses.

The key objectives of Gazprom Energoholding's strategy for 2018–2027 include improvements in internal efficiency and participation in a new modernization program.

As for international development, we are building a thermal power plant in Serbia and looking into the possibilities of constructing gas-fired generating facilities in Vietnam and China.

Dear shareholders,

In 2017, our natural gas supplies to Europe reached a historical high of 194.4 billion cubic meters. Within 25 years, we have almost doubled this indicator. The share of Gazprom in European consumption also soared to a record-breaking level of 34.2 per cent in 2017.

Russian gas demand is on the rise in Europe. In 2017, record-high imports by Germany and Turkey added another 7 and nearly 17 per cent, respectively. Last year, Gazprom broke a record in gas exports to Austria as well, providing the country with 9.1 billion cubic meters of gas, an increase of one and a half times from 2016.

During a cold snap in Europe in the 2017–2018 heating season, Gazprom set 10 records in daily deliveries to the region. In March 2018, daily supplies skyrocketed to 713.4 million cubic meters of gas.

According to provisional data, gas consumption in Europe reached 568.2 billion cubic meters in 2017, up by 26.5 billion cubic meters (4.9 per cent) from 2016.

The growth in demand was mainly caused by intensified economic activity in Europe and the recent trend toward a long-term decline in indigenous production.

The resource base of the European gas industry is shrinking. The Netherlands are imposing new caps on production from the major Groningen field. The Norwegian authorities are restricting offshore drilling in high latitudes. As such, there is room for further growth of gas imports in Europe.

Overall, gas deliveries to European countries grew by 22.8 billion cubic meters between 2016 and 2017. Gazprom was the largest contributor to this growth as its gas supplies rose by 15.1 billion cubic meters in that period.

Global LNG development is not causing any dramatic changes in the European gas balance. U.S. LNG supplies are constrained by high full-cycle costs and overseas transportation expenditures. In 2017, less than 2 million tons were dispatched to European buyers, mostly those that do not receive gas from Russia. American LNG accounted for only 0.5 per cent of Europe's gas consumption.

The results of 2018 so far show continued growth in Gazprom's supplies to European countries. According to provisional data, Gazprom's deliveries to that market will stand at 101.2 billion cubic meters of gas in the first half of 2018, an increase of 5.5 billion cubic meters (5.7 per cent) from the same period of the record-high 2017. If the trend persists, our exports to Europe may hit a new historic high of about 200 billion cubic meters in 2018.

Nord Stream provides reliable supplies to the European market via the most efficient route. The trans-Baltic route has proven its reliability, safety and efficiency as a thoroughfare connecting Europe and Russian gas fields. In November 2017, the Nord Stream gas pipeline transmitted its 200-billionth cubic meter of gas from Russia to Germany since the project had started operations.

Drawing on the success of Nord Stream, Gazprom is implementing the Nord Stream 2 project. In 2017, financing agreements were signed with ENGIE, OMV, Shell, Uniper, and Wintershall.

The new gas pipeline will be completed by the end of 2019. Upon its commissioning, the northern gas transmission corridor beyond Russia will increase its annual capacity to 110 billion cubic meters of gas.

Full sets of construction and operation permits for the planned gas pipeline have already been received from Germany, Finland, and Sweden.

The route from Yamal to Greifswald via the northern gas corridor is almost 2,000 kilometers shorter than that of the central corridor through Ukraine. Unlike the Ukrainian gas pipelines, the new pipelines in the northern corridor are characterized by reduced metal consumption, higher energy efficiency, and a much lower carbon footprint.

February 2018 marked the 15th anniversary of putting online the Blue Stream gas pipeline, which delivers more than 50 per cent of Russian gas exports to the Turkish market. Over that period, the gas pipeline has transmitted upwards of 158 billion cubic meters of gas. In 2017, a record 15.9 billion cubic meters was delivered via the gas pipeline. Gas supplies via Blue Stream have given a powerful boost to the Turkish gas market.

At present, Gazprom is building TurkStream, a new gas pipeline across the Black Sea. The pipeline's first string is completed. For the first time in history, a 810-millimeter pipe has been placed at a depth of 2,200 meters. TurkStream will further increase the reliability of gas supplies to our Turkish and European partners.

The growing demand for gas in Europe requires guaranteed stability of supplies. To that end, we use underground gas storage (UGS) facilities that Gazprom operates abroad. We strive to ensure that their working capacity is no less than 5 per cent of the annual export volume. The capacity has grown almost threefold in the last 10 years.

Gazprom is constantly expanding the geographical reach of its foreign UGS projects in Europe and beyond. At the moment, a feasibility study is underway for the Group's participation in new UGS projects in Austria, Slovakia, China, and elsewhere.

With a view to expand its client base and increase the flexibility of supplies to foreign countries, Gazprom is gaining a foothold in the global LNG market. In 2017, LNG from the Group's portfolio was delivered to nine countries. Most of the trading operations (80 per cent) occurred in the Asia-Pacific countries, including India, one of the most dynamic gas markets in Asia. In 2017, we also delivered LNG to Spain, our new market, which is still out of reach for our pipeline gas.

While building up its LNG production capacities, Gazprom together with Shell is engaged in pre-construction activities for the third train of the Sakhalin II plant with an annual capacity of 5.4 million tons of LNG. In addition, a joint feasibility study is being conducted to devise the main engineering solutions for the Baltic LNG project with an annual output of 10 million tons.

China is the most dynamic gas market in the world. The country's gas demand is rapidly increasing. In 2015, its consumption grew by 5 per cent, in 2016 by 7 per cent, and in 2017 by as much as 15 per cent. The share of gas in China's energy mix will rise from the current 7 per cent to 10 per cent in 2020 and to 15 per cent by 2030. This means that in the next couple of years, China will need up to 360 billion cubic meters of gas.

As its domestic production cannot provide such amounts, China is stepping up gas imports. Today, they cover almost 40 per cent of the domestic gas demand. The potential capacity of the Chinese market is so great that in the medium term it may require up to 110 billion cubic meters of Russian pipeline gas per year.

The Power of Siberia gas pipeline will be put into operation next December, and Russian gas will start to flow to China. Within 30 years, we will supply China with more than 1 trillion cubic meters of gas. Russian gas will help balance the Chinese market, increase its liquidity, and prevent shortages like the one that happened last year.

In 2017, we laid the foundation for another route of pipeline gas supplies to China. Gazprom and CNPC signed an agreement stipulating that additional volumes of gas would be delivered to China from Russia's Far East.

The partnership of Gazprom and Chinese companies is not confined to gas supplies, as we discuss cooperation in the areas of underground gas storage and gas-fired power generation in China, as well as NGV-related and social projects.

Dear shareholders,

We will continue to pursue our mission to supply Russian and foreign consumers with energy in a reliable and uninterrupted manner, especially during peak consumption in winter. This is our number one priority!

Thank you for your attention.

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