1. London, June 7, 2005www.eegas.com1 GAZPROM: Can The Behemoth Fly? In Russian, Behemoth (of the Book of Job) is a synonym of Hippopotamus

2. London, June 7, 2005www.eegas.com2 Is the Market Too Good? The first years of the XXI century were the most successful years of GazpromThe first years of the XXI century were the most successful years of Gazprom Average price of gas in Russia went up from $12/mcm in 1999 to over $43 in 2005Average price of gas in Russia went up from $12/mcm in 1999 to over $43 in 2005 Average price of gas exported to Europe increased from $65/mcm in 1999 to $165 in early 2005Average price of gas exported to Europe increased from $65/mcm in 1999 to $165 in early 2005 Revenue increased from $13bn to an estimated $40bnRevenue increased from $13bn to an estimated $40bn –Profit from European exports went up from $2bn to $9bn (huge space for cost growth) The market sends wrong signal to Gazprom – “Cost management is of low importance”The market sends wrong signal to Gazprom – “Cost management is of low importance”

3. London, June 7, 2005www.eegas.com3 No Reason for Cost Control Gazprom showed the record growth of costs among Russian industrial sectorsGazprom showed the record growth of costs among Russian industrial sectors The cost of fuel gas (gas burnt at compressor stations) is a good indicator of the overall cost performance of GazpromThe cost of fuel gas (gas burnt at compressor stations) is a good indicator of the overall cost performance of Gazprom –Fuel gas expense is reported at the delivery cost of gas –Note that a part of the growth was caused by tax increase –According to Gazprom, metallurgical price index is 466% of the level of 1999 Every year Gazprom applies for domestic gas price increaseEvery year Gazprom applies for domestic gas price increase –Monopoly has no reason for cost management Gazprom could have saved at least $0.8bn in 2004Gazprom could have saved at least $0.8bn in 2004 965 465 280 822 Net of mineral tax increase

4. London, June 7, 2005www.eegas.com4 Questions for Shareholders’ Meeting Here are two good questions Gazprom shareholders may want to ask at the annual meeting on June 24, 2005Here are two good questions Gazprom shareholders may want to ask at the annual meeting on June 24, 2005 1.Does Gazprom need a broker to import 56” steel pipe? 2.Why Gazprom is overpaying taxes? We estimate the combined cost of these two issues at about $0.8bn in 2004We estimate the combined cost of these two issues at about $0.8bn in 2004 In 2005, the loss is likely to exceed $1.0bn, if no action is takenIn 2005, the loss is likely to exceed $1.0bn, if no action is taken

5. London, June 7, 2005www.eegas.com5 Pipe Broker Gazprom uses a broker to import 56” steel pipe from Ukraine, Germany and other countriesGazprom uses a broker to import 56” steel pipe from Ukraine, Germany and other countries –There were just two buyers of 56” pipe – Gazprom and LUKoil –Unlike Gazprom, LUKoil imported 56” pipe from Japan without a broker In 2004, the broker imported about $100M worth of 56” pipeIn 2004, the broker imported about $100M worth of 56” pipe –Import volumes are expected to grow with the start of Yamal development Kickback rate in Russia is reported at 20% to 60%Kickback rate in Russia is reported at 20% to 60% –The broker is a relatively small issue of $20M to $60M a year –Note that the broker would benefit from early start of huge pipeline projects

6. London, June 7, 2005www.eegas.com6 Tax Overpayment: Background In January 2004, excise tax was replaced by export dutyIn January 2004, excise tax was replaced by export duty –Excise tax = 30% of revenue net of transit cost out of Russia –Export duty = 30% of revenue According to Q3-2004 financial report of Gazprom, this change has caused tax growth of $550MAccording to Q3-2004 financial report of Gazprom, this change has caused tax growth of $550M –We estimate the full-year tax increase at $0.8bn Note that Gazprom pays transit fees in kind (by gas) or by cashNote that Gazprom pays transit fees in kind (by gas) or by cash Gazprom could have avoided the additional taxationGazprom could have avoided the additional taxation –We do understand that it is an extremely hard time for tax optimization in Russia now –However, paying tax on transit cost is absolutely wrong Annual Report of 2004: Gazprom proudly reports a daily tax contribution of one billion rubles

7. London, June 7, 2005www.eegas.com7 Paying Tax on Transit Cost The illustration shows how it works with exports to Waidhaus, Germany (sample numbers)The illustration shows how it works with exports to Waidhaus, Germany (sample numbers) In 2003, the tax was defined as 30% x $120/mcm = $36/mcmIn 2003, the tax was defined as 30% x $120/mcm = $36/mcm The 2004 tax = 30% x $150/mcm = $45/mcmThe 2004 tax = 30% x $150/mcm = $45/mcm In both years Gazprom carried transit cost of $30/mcmIn both years Gazprom carried transit cost of $30/mcm The solution is very obvious:The solution is very obvious: –The point of sale should be moved to the Russian border In 2004, this solution could have saved Gazprom about $0.8bnIn 2004, this solution could have saved Gazprom about $0.8bn –In 2005 the overpayment will be closer to $1.0bn $150/mcm at Waidhaus Transit cost of $30/mcm paid by Gazprom $120/mcm at Russian border

8. London, June 7, 2005www.eegas.com8 How to Save a Billion There are at least four simple ways to reduce the export dutyThere are at least four simple ways to reduce the export duty 1.Filing application for a change of definition of taxation base –Customs Code of the Russian Federation allows the use of alternative ways for calculation of taxation base of export duty –Gazprom should have filed the application on the first business day of January 2004 (it would have made the overpayment refundable) –The regulation is very likely to be changed because this is the best way for the state, but Gazprom’s application is needed first –We assume that Gazprom does want to reduce tax payment (which may not be true)

9. London, June 7, 2005www.eegas.com9 How to Save a Billion – 2 2.Changing contract terms with all gas importers –Moving the point of sale to the Russian border and cutting the price by the cost of transit –Dividing payment gas volumes between the relevant importers –Importers would pay transit costs either by gas or cash 3.Creating a 100% daughter company Gazexport-Ukraine –Selling all export gas at the Russian border to Gazexport-Ukraine at the price reduced by the cost of transit –Selling gas to all importers at the existing terms –Showing no profit in Ukraine –Setting a similar company in Poland

10. London, June 7, 2005www.eegas.com10 The Way of Eural Trans Gas 4.Setting up a private company that would buy all export gas at the Russian border and sell it to importers –Gazprom and the new company would split the saved export duty (~$3 mill. per day in 2005) –In recent history of Gazprom, companies like Itera and Eural Trans Gas have benefited from helping Gazprom to reduce tax payment Note that Gazprom benefited as well, though some analysts do not recognize this fact –It is a nice way of making new legal multi-millionaires or a billionaire It would be a bigger and a way more transparent business than Baikal Finance Group, that bought Yugansk This business would end with the change of tax regulation, so Kremlin’s cooperation is a must $20bn

11. London, June 7, 2005www.eegas.com11 A More Equal Shareholder The overpayment continues now at the rate of $3 million a dayThe overpayment continues now at the rate of $3 million a day One shareholder does benefit from tax overpaymentOne shareholder does benefit from tax overpayment –The shareholder’s name is “the Russian Federation” –For the state, taxes are a way more important than dividends The state also uses Gazprom in the stick-and-carrot play with neighboring countriesThe state also uses Gazprom in the stick-and-carrot play with neighboring countries –Belarus has a better gas deal than any region of Russia –Belarus pays the low Russian price of gas AND gets transit payment on top of that –Reportedly, presidential fund of Belarus benefits from the deal, while both Gazprom and Russia suffer losses ~ $0.2 bn ~ $13.0 bn

12. London, June 7, 2005www.eegas.com12 Why Is Gazprom Overpaying Tax? There are no legal obstacles to stopping the overpaymentThere are no legal obstacles to stopping the overpayment –Managers’ will or shareholders’ pressure are required Gazprom is using third parties for tax reduction for yearsGazprom is using third parties for tax reduction for years –RosUkrEnergo and KazRosGaz buy C. Asian gas in Kazakhstan and export it out of Russia –It saves Gazprom about $0.8bn a year of export duty It’s hard to believe they do not see the overpayment problemIt’s hard to believe they do not see the overpayment problem –Gazprom’s Charter still says the Company’s goal is to make profit –Since Jan-2004, lack of action has caused a loss of about $1.3bn –Every day Gazprom loses $3 mill. –Mr. Miller’s responsibilities became unclear lately

13. London, June 7, 2005www.eegas.com13 Side Effects of Tax Overpayment The missed opportunity to increase Gazprom’s cash flow by $1.3bn has negative side effectsThe missed opportunity to increase Gazprom’s cash flow by $1.3bn has negative side effects –Gazprom had to take additional loans, which resulted in additional financial costs –Market capitalization of Gazprom could have been much higher The price of shares sold in 2004- 2005 was not quite rightThe price of shares sold in 2004- 2005 was not quite right –The 2004 profit could have been higher and shareholders will get less dividends It is not all positive for the state neitherIt is not all positive for the state neither –To fill the financial gap, Gazprom lobbies increase of the domestic price of gas –It results in higher inflation in Russia

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