Open Joint Stock Company Gazprom

addition to selling gas to households, gas distribution companies deliver gas to all companies throughlow and middle pressure pipelines.Gazprom has recently accumulated controlling equity stakes in various regional distributioncompanies that own low pressure pipeline assets with a cumulative pipeline length of 329 thousandkilometres. Such equity stakes were transferred to Gazprom in lieu of a debt repayment. Gazprombelieves that due to the new cost based system of tarification for gas distribution the operation of suchregional distribution companies will not be loss making.Simultaneously with the formation of regional gas companies, Mezhregiongaz altered itscontracting policies. In addition to long-term contracts with terms of up to 10 years (subject to annualdelivery volume adjustments), Mezhregiongaz now widely uses one year gas supply contracts. Themain terms and conditions of such contracts are as follows:• full payment for any natural gas received by the consumer. Such payment, less anyadvance deposits, must be made on or before the 10th day of the month immediatelyfollowing the month of the relevant natural gas deliveries to that consumer;• in the event of the consumer's failure to pay for natural gas supplies on the due date, apenalty will be charged. Should a consumer continue to fail to pay, its natural gas supplieswill be restricted and finally, the consumer may be disconnected; and• natural gas off-take by consumers in excess of the agreed daily quotas without the priorconsent of the supplier entails a surcharge payable on such excess consumption (wintersurcharge of 50% and summer surcharge of 10%).Delayed Payments for Gas Deliveries in RussiaDuring 2001, positive results have been achieved with respect to the collection of payments fornatural gas delivered to Russian consumers. This has been due to the resurgence of the Russianeconomy and Gazprom's co-operation with consumers and administrations of the various republics,federal cities, autonomous regions and other Subjects of the Russian Federation. As at 30 June 2002,arrears of payments for natural gas supplied to Russian customers (including Russian VAT but excludinglate payment charges) amounted to approximately RUR 43.4 billion. As at 31 December 2001, sucharrears amounted to approximately RUR 43.5 billion compared, compared to RUR 80.1 billion as at 31December 2000. Cash accounted for 91.9% of sales proceeds collected during the first six monthsended 30 June 2002 and 83.3% and 61.7% in 2001 and 2000, respectively.Pursuant to various Government regulations, there are certain consumers who cannot bedisconnected. These consumers include organisations such as hospitals, household utilities (such aswater and electricity suppliers), military and state telecommunication organisations as well as otherconsumers whose operations are vital for the Russian population's life support and environmentalsafety.CompetitionGazprom has been and continues to be a major supplier of natural gas in Europe. European gasmarkets are, however, undergoing significant restructuring as a result, in particular, of the EU GasDirective which came into force in 1998. The purpose of the Directive is to deregulate and liberalise theEU gas market.This has resulted in increased competition among the major suppliers of natural gas to theregion, namely Russia, Norway, Algeria and The Netherlands. Gazprom's substantial reserves and theproximity of major Russian natural gas fields to Europe are expected to support Gazprom's competitiveposition in the Western European market.The table below shows the proportion of European natural gas supply attributable to each majorsupplier of natural gas to the European market in 2001:35