Open Joint Stock Company Gazprom

GeneralAPPENDIX B – PART 1 – OVERVIEW OF THE RUSSIANGAS INDUSTRY AND ITS REGULATIONThe information set forth in this section is based on publicly available informationThe Russian natural gas industry developed during the Soviet era and expanded rapidly after thediscovery in the 1960s of significant reserves in the exceptionally large natural gas fields of WesternSiberia. Russia experienced a profound crisis in the early 1990s as a result of the dissolution of theSoviet Union, suffering a decline in industrial production and GDP.Between 1990 and 1999, the Government's policies on natural gas industry structure and pricesresulted in the demand for natural gas and natural gas production levels remaining relatively stable incomparison to the production of other energy sources over the same period, such as oil and coal. Totalnatural gas production only declined by 7.6%, whereas the production of oil and coal declined by 41.7%and 36.7% respectively. Moreover there has been a continuous substitution during this period of the useof oil and coal by natural gas, primarily because domestic natural gas prices have been kept at a lowlevel.Since the dissolution of the Soviet Union, the oil and coal industries have been restructured intoseveral regional enterprises, but the structure of the UGSS, which is the basis for natural gasproduction, transportation, storage and supplies in the Russian Federation, has been preserved.Classification Of ReservesRussian methods for calculating and classifying reserves differ from generally accepted practicesin the United States and other countries. Reserves which are calculated using different methods cannotbe accurately reconciled.The following is a summary of an extract taken from a classification document concerningreserves and potential and forecasted oil and natural gas resources, which was approved by the Orderof the Ministry of Natural Resources No. 126 dated 7 February 2001.Categories of reserves and potential and forecasted oil and natural gas resources.Natural Gas, gas condensate and oil reserves and their components, which have industrial value,are subdivided depending on the degree to which they subsist into explored reserves (represented bythe categories A, B, and C1), and into preliminary estimated reserves (represented by the category C2).Oil and natural gas resources are subdivided depending on the degree to which they subsist intopotential resources (represented by the category C3), and into forecasted resources (represented bythe categories D1 and D2).Category A – Deposit reserves (or a part of a deposit), which have been analysed in sufficientdetail to comprehensively define the type, shape and size of the deposit; the level of the oil and naturalgas saturation; the reservoir type; the nature of changes in the reservoir characteristics; the oil andnatural gas saturation of the productive strata of the deposit; the content and characteristics of the oil,natural gas and condensate; as well as major features of the deposit which determine the conditions ofits development (mode of operations, well productivity, strata pressure, the oil, natural gas andcondensate balance, hydro and piezoconductivity and other features).Category A reserves are calculated on the part of the deposit drilled in accordance with anapproved development project for the oil or natural gas field.Category B – Deposit reserves (or a part of a deposit), the oil and natural gas content of whichis determined on the basis of commercial flows of oil or natural gas from wells at various hypsometicmarks.104