Open Joint Stock Company Gazprom

The construction of Gazprom's gas pipeline system was started 57 years ago with the firstSaratov-Moscow pipeline, however the majority of Gazprom's gas pipeline system was constructedduring the period from 1970 to 1990. The age of the pipeline system, as at 30 June 2002, is shown inthe table below:Up to 10 years 2211-20 years 4121-33 years 23Over 33 years 14Total 100%Source: Gazprom.The continuous and long term operation of the pipeline system, combined with ageing and wornand obsolete equipment, dictate the maintenance requirements of the gas lines and compressor stationfacilities. Annual capital repairs and preventative maintenance programmes are carried out with a viewto enhancing efficient gas flow distribution, reliable gas supply and technological and environmentalsafety of the transportation operations. Maintenance work is preceded by gas pipeline inspectionachieved through various means. In 2001, 11,300 km of pipelines were inspected using in-the- pipeprobes, while 40,000 km of trunk gas lines were checked using electric measurements. Following suchdiagnostic checks, 1,111 km of pipelines and 251 underwater crossings were overhauled. As a result ofsuch pipeline repairs, the incidence of faults that involve interruptions or restrictions of gas supplydropped from 0.58 per 1000 km of pipelines in 1985 to 0.19 in 2001.Under the auspices of the EBRD, 13 Western European companies, (in conjunction withGazprom's specialists) conducted a two-year study of the UGSS between 1993 and 1995, in order toassess the system's condition and to formulate measures for improving its performance. The finalreport, which was based on an analysis of the operation of the UGSS in 1995, showed that, in mostcases, the extensive branching structure of the UGSS, together with the availability of spare pipelinethrough put capacity, enabled natural gas flow to be either re-routed or increased in the case of anemergency.Gazprom is continually working to improve the UGSS. It has developed a detailed programme torefurbish a number of its compressor stations and gas pipelines by year end 2005. The programmeincludes plans for the replacement of worn out and obsolete compressor gas pumping units with stateof-the-art hardware as well as the implementation of process controls and optimisation systems, bothfor individual pipelines and for the system as a whole. To date, this programme has resulted in 53 gaspumping units being refurbished and 35 replaced. The new units have a total power output of 508MW.Gazprom believes that the programme will allow it to achieve a significant reduction in its in-housegas consumption as well as a reduction in atmospheric pollution. The programme has already deliveredimprovements with emissions in 2001 being 6,600 tons lower than in 2000. This figure includes areduction of carbon oxide emissions by 3.5% and of nitrogen oxides emissions by 0.3%.Gazprom outsources a significant amount of its pipeline construction work to third partycontractors through a tender process. Construction contracts are awarded to the most competitivebidder by the Gazprom Tender Committee. Stroytransgaz has been a successful bidder for a largenumber of Gazprom's construction projects, due to the competitive terms that it has offered and itshistorical experience of previous successful co-operation with Gazprom. Gazprom has determined toestablish its own construction company — Gazpromstroy, although Gazprom's management haveindicated that it will continue to contract with Stroytransgaz and other contractors should the contractualterms offered by Stroytransgaz and other contractors prove to be more competitive.Gazprom has confirmed that all transactions with Stroytransgaz have been conducted on anarm's length basis and on normal commercial terms.Gazprom is in the process of acquiring a 25% equity interest in Stroytransgaz.47