Gazprom in Power Industry

Gazprom’s major energy assets:

OAO Mosenergo
OAO OGK-2
OAO OGK-6

Gazprom’s investments in power generation between 2009 and 2013:

RUB 250 bln

Why is Gazprom taking part in power generation business?

In order to become a world’s leading energy company, Gazprom is to span the entire production chain – from the wellhead to the end-user – primary energy carriers and a wide range of end products including electricity.

Gas and power generation business mergers represent a trend nowadays observed all over the world. For instance, the merger between E.ON (energy) and Ruhrgas (gas) in Europe resulted in a considerable synergizing effect. Direct involvement of Gazprom being a prominent energy resource supplier in electric power generation and distribution projects will eventually enable to normalize Russia’s fuel balance, elaborate and implement effective schemes for balanced consumption of coal and gas, thus, preventing from wasteful consumption of blue fuel. It is also important that Gazprom’s participation in energy business will allow the Corporation to enjoy significant economic benefits owing to the introduction of the most efficient schemes of energy supply to production companies of the Group.

Gazprom’s conversion into a global, vertically integrated energy company with significant energy assets is needed not only by the Company itself, but by the shareholders as well. Strengthening the Company’s positions in the electric power industry will allow Gazprom to further enhance the appeal of its shares on the market.

What areas of the power sector is Gazprom operating in?

In 2007 OAO Gazprom’s Board of Directors approved the Company’s Power Generation Strategy. The following measures are planned for its implementation:

acquisition of generating and distributing companies that will develop in a competitive environment;
construction of coal-fired power generation facilities in the regions with a big share of natural gas in the fuel balance;
creation of new efficient capacities and upgrade of the existing ones to decrease the energy intensity of power generation;
centralization of power capacities to decrease costs and provide for continuous power supply to the subsidiary facilities engaged in hydrocarbon production, transportation and processing.

What assets does Gazprom own in Russia’s power industry?

In 2007-2008, as a result of the electric power industry reform in Russia and participation in additional share issue by power generating companies, Gazprom Group substantially achieved its strategic goals to enter the electric power generation business. The Group consolidated controlling stakes in OAO Mosenergo, OAO Second Generating Company of Wholesale Electricity Market (OGK-2) and OAO Sixth Generating Company of Wholesale Electricity Market (OGK-6). In addition, Gazprom Group holds a 28.7% stake in OAO Territorial Generating Company – 1 (TGC-1).

OAO OGK-2 and OAO OGK-6 comprise major federal power stations located in various regions of Russia. ОАО TGC-1 is the third biggest territorial generating company in Russia in terms of installed capacity (6,278 MW as of December 31, 2008). The company is carrying out its activities in Russia’s Northwest region with an actively growing consumption level.

: Major electric power generation assets of Gazprom Group
(as of December 12, 2008, OAO OGK-2 and OAO OGK-6 data was collected starting from the second half of 2008)

Generating assets of Gazprom Group are located in rapidly developing regions with solvent consumers’ demand which guarantees demand for electric and heat power.

At the end of 2008 the Group became Russia’s largest in electric power generation and distribution and the second largest in heat power generation.

What is the structure of Gazprom Group’s energy assets?

Gazprom’s energy assets are consolidated on the books of a specialized subsidiary company – OOO Gazprom energoholding. This enables to create an effective management system based on unified corporate standards. Gazprom energoholding is responsible for Gazprom’s power generation strategy development (fuel supplies, electric and heat power marketing, adding new power generation capacities, etc.). The company is also cooperating with state authorities in order to elaborate a common stance on the principle matters.

There are two specialized companies operating to optimize the activities related to the acquisition of electric power on the wholesale market and its delivery to Gazprom Group members: OOO Gazprom energo (network operator) and OAO Mezhregionsbyt (energy distributor).

The power supply facilities of Gazprom Group’s gas production and gas transportation companies were leased out to the network operating subsidiary (except for the facilities that are part of UGSS). Currently, OOO Gazprom energo is operating 16 thousand facilities in 43 constituents of the Russian Federation.

OAO Mezhregionsbyt is represented in 25 constituents of the Russian Federation. The company is one of the biggest energy traders in Russia with over 85 billion kWh sold both on the wholesale and retail electric power markets in 2008.

Heat power business of Gazprom Group is concentrated in a special-purpose holding – OAO Mezhregionteploenergo. The holding is comprised by 23 regional companies dealing with heat power generation and transmission, hot water supply, as well as executing investment projects in heat power industry of 21 Russian Federation constituents.

How is Gazprom’s energy business developing?

Gazprom Group’s energy business is primarily related to the execution of investment programs in the electric and heat power generation industry.

Between 2009 and 2013 Gazprom plans to invest RUB 250 billion for the power sector development.

In 2008 Gazprom’s companies accounted for 90% of the generating capacity construction in Russia.

ОАО Mosenergo accomplished phase three of the investment program – commissioning of three power stations based on combined-cycle power plants with the capacity of 420-450 MW. The investments exceeded RUB 23 billion in 2008. Within 2009 another combinedcycle power plant is planned for commissioning with a capacity of 420 MW at the Combined Heat and Power Plant – 26 (CHPP-26). Thus, a total increase in the capacity in the Moscow region by the end of 2009 will exceed 1,700 MW.

In line with the joint investment program of the Russian power generating companies of the Group, the total capacity of the facilities to be commissioned before 2015 is estimated at 7 GW. In addition, the investment program of OAO TGC-1 provides for commissioning over 2 GW.

In 2008 Gazprom Group launched the second power generating unit construction with a capacity of 450 MW at the Kaliningrad CHPP-2. The facility will be commissioned in 2010. It is also planned to construct a power station with a capacity of 360 MW in Adler and commission it in 2012.

: Power generating companies of Gazprom Group in Russia and abroad

Investment programs in the heat power generation industry are focused on three key areas: firstly, integrated modernization and upgrading of the existing systems for heat supply to settlements; secondly, construction of heat supply facilities for new community areas and thirdly, creation of energy sources for industrial consumers.

During five years the amount of investments allocated for the reconstruction and construction of heat power facilities, as well as integrated modernization of heat supply systems in populated areas totaled RUB 21 billion. Investment projects implementation resulted in the construction and modernization of 212 boiler houses, 67 central heat supply stations and 527 km of heat supply networks in Saint Petersburg, Republic of Tatarstan, as well as Vologda, Leningrad, Moscow, Oryol, Pskov, Samara and Tver Oblasts.

Is Gazprom participating in energy projects abroad?

Gazprom’s marketing strategy provides for developing electric power generation business internationally. Among the top priority European markets are Germany, Italy, the UK and Turkey. In this regard Gazprom is considering various combined-cycle electric power stations acquisition and/or construction projects in these countries. In particular, the Memorandum of Understanding was signed with E.ON AG in 2008 to construct a 1,200-MW combined-cycle power plant in Lubmin (Germany).

Via Gazprom Marketing & Trading Gazprom effectuates electric power deals on foreign trading platforms. In 2008 the total amount of electric power sales increased 2.9-fold (by 15 billion kWh) versus 2007 and totaled 23 billion kWh.

Gazprom is participating in the investment project aimed at constructing a new power generating unit with a capacity of 320 MW at the Kaunas HPP. Investment appeal of this project is stipulated by the assumed termination of the Ignalina Nuclear Power Plant in 2010 resulting in a forecasted deficit in electric power in the Baltic region. Construction of a new power plant generating unit will be carried out by a separate company with Gazprom’s stake of at least 51%.

The Razdan 5 project being executed by Gazprom provides for accomplishing the fifth power generating unit at the Razdan HPP (Armenia) with state-of-theart gas turbines increasing the capacity to 480 MW. Upon the commissioning of the power generating unit Gazprom Group will capture a considerable share on the electric power generation market of the Republic of Armenia and gain the opportunity to increase electric power supplies to neighboring countries.