Open Joint Stock Company Gazprom

U.S.$43 million and from those customers in Moldova by U.S.$47 million. The Baltic States were themost reliable paying customers among the natural gas-consuming FSU countries. Since June 2000, inline with Gazprom's policy to limit supplies to non-paying customers, deliveries of natural gas to theUkraine are in payment for Gazprom's use of transit services through the Ukraine only. Accordingly nofurther debts for the non-payment of gas delivered to the Ukraine have accrued.Gazprom's management is taking specific measures to reduce arrears for payments of naturalgas owed by FSU customers. In 2000, Moldova restructured a portion of its debt to Gazprom by issuingU.S.$90 million worth of sovereign notes with a Repayment Schedule over seven years. In 2001Gazprom's contribution of U.S.$60 million into the charter capital of the Moldova Gas was set off againstindebtedness in relation to gas supplied in 1997. An amount of U.S.$276 million owed by the Ukrainewas set off against delivery of military hardware to the Ministry of Defence of the Russian Federation.In consideration of this delivery of military hardware Gazprom received tax credits to an equivalent valueof the amount owed by the Ukraine. Towards the end of 2001, the Government, the Cabinet of Ministersof the Ukraine and the Government of Moldova signed agreements which provided for the restructuringof the Ukraine's and Moldova's debt for the previously supplied natural gas in the amounts of U.S.$1.4billion and U.S.$0.9 billion respectively, although the restructuring arrangements with respect to theUkraine are yet to be finalised.RussiaAccording to Goskomstat (the State Committee for Statistics), the share of natural gas productionas a percentage of the total volume of primary energy production in Russia increased from 20.5% in1980 to 39.7% in 1990 and to 47.7% in 2000, while the share of oil production decreased from 38.9%in 1990 to 32.8% in 2000 and coal production from 14.5% in 1990 to 12.2% in 2000. The strict regulatorycontrols imposed on the rise of natural gas prices compared to other fuels has led to the shift towardsthe increased use of natural gas. As a result of this pricing policy adopted by the Government, naturalgas prices at the end of the year 2001 were 1.4 times lower than power-generating coal and three timeslower than fuel oil as referenced against 1 tonne of equivalent fuel. In contrast to many other majorindustrial economies where gas is primarily used for household consumption, in Russia natural gas issold principally for use in electricity generation and heavy industry. Gazprom believes that electricitygeneration accounted for 38.6% of total natural gas consumption in Russia in 2001, while industrialusers accounted for 32.4%, households consumed 14.5%, and budget and municipal organisationsaccounted for 14.5%.Currently, wholesale natural gas prices and transportation tariffs are regulated by the Stateauthorities. Wholesale prices for natural gas supplied to household consumers are lower than the pricesfor natural gas supplied to industrial consumers. Pursuant to the Resolution of the Government of theRussian Federation No. 1021 dated 29 December 2000, the Government intends to abandon the Stateregulation of prices for natural gas delivered to end-consumers. Instead, the Government intends tocontinue regulating tariffs for natural gas transportation services provided by Gazprom (See AppendixB – Part I "Overview of the Russian Gas Industry and its Regulation").In 2001, Gazprom delivered 282.1 bcm of natural gas (compared to 255.0 bcm in 2000) toRussian consumers. This amounts to 62.6% of the total natural gas supplied by Gazprom in 2001.During the six months ended 30 June 2002, Gazprom delivered 145.4 bcm of natural gas to Russiancustomers.Gazprom's natural gas sales to domestic users are confined to natural gas supplies towholesalers rather than end users. In 2001, approximately 85% of the total volume of natural gas soldby Gazprom within Russia was distributed through third party regional natural gas distributioncompanies and 15% of natural gas was sold by Gazprom directly to large industrial consumers.Mezhregiongaz (a wholly-owned subsidiary of Gazprom) accounts for substantially all ofGazprom's domestic sales of natural gas. Mezhregiongaz either sells natural gas through regional gascompanies and gas distribution companies which enter into direct sales contracts with end consumersand gas distribution companies., as well as through its regional branches which enter into direct salescontracts with end consumers and gas distribution companies on behalf of Mezhregiongaz. Gas forhousehold use is delivered by the regional gas companies through gas distribution companies. In34