Open Joint Stock Company Gazprom

the Energy Charter Conference and participates in the Energy Charter Secretariat's day to dayactivities.European Union Gas DirectiveOn 22 June 1998, the European Parliament and the Council of the European Union adopted adirective on common rules for the internal market in natural gas (the "Directive"). The Directive cameinto force on 10 August 1998.The Directive establishes common rules for the transmission, distribution, supply and storage ofnatural gas. It lays down rules for the organisation and function of the natural gas sector (includingliquefied natural gas), access to the market, the operation of transmission and distribution systems, andthe criteria and procedures applicable to the granting of authorisations for the transmission, distribution,supply and storage of natural gas. It requires the Member States to open up their natural gas marketsto competition on a staged basis – 20% by August 2000, 28% by August 2002 and 33% by August 2008.These are minimum requirements and Member States may accelerate the rate by which they open theirmarkets, if they so wish.The implementation of the Directive has lead to significant structural changes in the Europeannatural gas market. The Directive is bringing about a significant liberalisation of the European naturalgas market, which goes further than the Directive's minimum requirements. Almost 80% of the total EUmarket has now been opened up to competition. The EU Commission is considering the possibility ofintroducing a further Directive which would require total liberalisation of European natural gas marketsby 2004.Russia is the largest natural gas supplier into Western Europe (followed by Algeria and Norway).Cur-rent EU projections show that in order to meet the rapidly increasing demand for natural gas andto compensate for the decline in the production of natural gas within the EU, there will be an everincreasing dependence upon imports from outside the EU. The electricity industry and other sectors ofthe economy are increasingly using natural gas because of its favourable ecological characteristics,resulting in a rising demand for natural gas.As a result of the liberalisation of the EU's natural gas market, short term contracts and singletransactions involving natural gas have become more popular. In time, this may have a significant effecton the state of the market, however the long-term "take-or-pay" contracts, under which most of Europe'snatural gas is supplied by Gazprom and other traditional exporters, provide the only guarantee forsecure and stable natural gas supplies, whilst at the same time balancing the interests of both exportersand importers. This is because such contracts are the main element of major natural gas exportfinancing projects, which provide to a producer a guaranteed return on capital investments.Furthermore, these contracts guarantee reliable natural gas supplies to the purchaser for an extendedperiod of time.111