START OF CALL

Good day ladies and gentlemen and welcome to your Gazprom Conference Call hosted by Gavin Anderson and Company.

KC       Ken Cronin, Gavin Anderson, Chief Executive Officer, London

SK       Sergey Kupriyanov, Gazprom Press Attaché to the Chairman of the Management

            Committee, Deputy Head of Information Policy Department

KC:       Good morning everyone and indeed good afternoon for those in Russia.

I would like to invite Sergey Kupriyanov who is the Press Secretary to the Chairman of the Board to give a statement. This statement will be in Russian and will be translated consecutively and questions will be held at the end. Mr Kupriyanov.

SK:       Good morning ladies and gentlemen.

Unfortunately it has become and unhappy tradition prior to Christmas to have certain problems in the relationship between Russian gas energy supplier and their partners in the Ukraine. This time we have been forced to raise the issue of the outstanding gas debt by the Ukrainian partner.

As you might be well aware we actually started negotiations with the Ukrainian side about concluding a long term contract for the year of 2009 and further on in due time, long before.

The end result of these negotiations was the conclusion of an important intergovernmental agreement about the corporation in the gas field. The agreement was signed by the two Prime Ministers of Russia and Ukraine on 2nd October.

I would like to underline the most important provisions of this agreement.

The first provision was that the two sides agreed to establish a direct long term agreement between Natfogaz Ukrainy and the Russian side.

One of the provisions actually specified a certain transit period for the transfer to market orientated prices for gas and also for the tariffs for gas transit.
The memorandum also included a provision according to which Gazprom was supposed to deliver gas to the end consumers in Ukraine to the amount of 7.5 billion cubic metres out of the total of 55 billion cubic metres which are supplied to Ukraine annually. Naturally there was a declaration on the commitment to abide by all the gas transit agreement.

Naturally one of the conditions was stipulated in the memorandum that the Ukrainian side will fully comply with its obligation to repay all the outstanding debt. Naturally the Ukrainian side agreed to pay for all the current supply.

During October and November we were engaged in talks with the Ukrainian side regarding our partnership/relationship for next year and further on. By mid October all the main documents were actually finalised and ready to be signed but at the same time the debt for the supplies that were made by Gazprom to Ukraine accumulated and there were no signs that the Ukrainian side was ready to pay for it. By mid November the accumulated debt amounted to around $2.4 billion (US).

This sum comprised of the following elements; first the debt for supplies in September totalling around $430 million (US), October around $800 million (US). Then there was a fine for not meeting these obligations of payment, which accumulated over the year to a total sum of around $340 million (US) and there was the debt incurred for current supplies in November totalling around $840 million (US).

There are some discrepancies in the estimates made by the Russian and Ukrainian side and the reason for that being; well first of all as you know the contract for gas supplies is between Natfogaz Ukraine and Rosukrenergo which actually gave ground for the statement that Ukraine doesn’t owe anything to Gazprom directly.

Formally it is so but it doesn’t change the basic principle that the debt has been accumulated by the Ukrainian side because Rosukrenergo is accumulating its debt symmetrically to Gazprom. The second reason why the estimates differ was that the Ukrainian side calculated only the outstanding debt for September and October and did not include the end sum, the fine and penalty.

For the moment the situation is as follows. Yesterday, on Tuesday, there was a meeting between the Chairman of Gazprom and the head of Natfogaz Ukrainy. During this meeting the head of Naftogaz Ukrainy Oleg Dubina confirmed that his company will honour the debt to Gazprom.

To be more specific Oleg Dubina said that they accept the debt that has accumulated - accumulated for Rosukrenergo and respectively the debt for Gazprom. We have agreed that until the 1st December the debt for September will be totally covered. The debt for October will be gradually covered and this will form the basis for the continuation of negotiation based on the intergovernmental memorandum signed in October.

That is it in a nutshell and now I am ready to answer your questions.

KC       Thank you Mr Kupriyanov. I will now pass back to the coordinator to arrange questions.

Question from Miss Danilova, Associated Press

AP                    Is there a threat of Gazprom cutting off gas supplies to Ukraine just as it happened back in the year 2006.

Translator/SK        Sergey Kurpiyanov has just answered that yes definitely this is one of the most dramatic issues but we have drawn our lessons from the past and we would certainly make every effort to avoid such a scenario. Last year for instance we actually managed to deal with our partners in the so called year near abroad without resorting to such remedies which happened back in 2005/2006.

I would also like to add that we certainly believe it is of paramount importance to avoid this kind of conflict and that the Ukrainian side would abide by the provisions of the memorandum signed on 2nd October. The Russian side definitely will comply with its obligations in accordance with this document.

AP                    What could be the price for Russian gas for Ukraine in 2009?

Translator/SK        The answer is that in accordance with the memorandum of 2nd October it was agreed that there would be a gradual transition to market prices for Ukraine but on one precondition: if there is full compliance with the obligation of Ukraine to repay all the outstanding debts and make all the current payments. If there is no gradual transition then starting from 1st January considering the current European prices for gas the price for Ukraine might reach $400 (US) per 1,000 cubic metres. As we have warned the Ukrainian side several times. We did it this time and the first time we made the warning was last summer.

AP                    What actually defines whether there would be a gradual transition to market prices or not.

Translator/SK       The answer is only compliance with the provisions of the intergovernmental memorandum.

Question from Mr Nyilas Hungarian Daily Nepszabadsag, Moscow correspondent

Nyilas               Most European countries have long term contracts with Gazprom or companies which belong to Gazprom while Ukraine has only a one-year contract. Wouldn’t it be more beneficial to sign long term contracts on gas export with Ukraine otherwise these regular scandals might harm the image of Gazprom. So what is the most important argument for yearly contracts at the moment?

Response in Russian.

Translator/SK        Well actually this is one of the Russian dreams or sort of, confirmation to be wished. They have long term contracts with Ukraine in this respect. Unfortunately our Ukrainian partners are very limited in their ability to conclude such deals.

Well let me reiterate that the October memorandum specified that both sides have agreed to move to long term contracts. We in Gazprom are doing everything which is possible in order to make it happen and to implement the agreements in the memorandum.

Well there are several examples when Gazprom has signed gas supply agreements with some of the ex USSR republics based on long term, but rather mid term, conditions. For instance such contracts were signed with the Baltic Republics, Moldova, Armenia and Belarus. So far it is very important that our partners do abide by these agreements just like our partners in Eastern and Western Europe are doing it; complying with the provisions of such contract.

Question from Amy Rotman

AR                    Hi. Thanks for answering our questions. I just had a question regarding the December 1st payment. Could you tell us exactly how much this will be in terms of dollars?

Response in Russian.

Translator/SK        Well we have agreed with the head of Natfogaz Ukraine not to disclose the exact figures. However what I can say is that this payment will cover the outstanding debt for September amounting to around $430 million (US) and also repayment for October will actually begin.

AR                    Okay thank you very much.

KC                    Sharon next question please.

Question from Catherine Belton, Financial Times

CB                    I would just like to clarify, if by the end of the year Ukraine has not paid more than the sum for September and started to pay for October but hasn’t fully paid off the debt for this year does that mean that automatically the price for next year is going to be more than $400?

Response in Russian.

Translator/SK       No definitely there will not be an automatic switch over to the new price because all the price issues have to be negotiated separately every year.

KC                    Next question please.

Question from Lucian Kim, Bloomberg

Translator        The first question was whether there is an agreement to start negotiations after the 1st December, is there any preliminary views about that and about the price for gas to the Ukraine. The second question was about whether the decline in global oil prices will actually affect the price for gas?

Translator/SK        The answer is that we have definitely agreed to start negotiations after 1st December if the Ukrainian side abides by its obligations to make all the necessary payments. As for the second question, the price for gas will take into account the present European energy prices. If the Ukrainian side abides by this agreement then definitely the negotiations will take into account all these parameters. If they don’t abide by the agreement included in the memorandum then it will be difficult for the Gazprom side to abide by its obligation.

Let me make one more observation. As you know when establishing the price for Europe we had to supply dozens of countries in Europe and if you take for instance the prices for November the price was much more than $500 (US) per 1,000 cubic metres. However, Ukraine is receiving Russian gas at the border for the price of $179.5 (US) per 1,000 cubic metres. Nowhere else neither in Western nor in Eastern Europe are countries actually having Russian gas for such a price and despite the fact that in Western and Eastern Europe the price is much higher nowhere does Gazprom face such problems as with the Ukraine.

KC                    Sharon is there any more questions?

Question from Mr Nyilas Hungarian Daily Nepszabadsag, Moscow correspondent

Nyilas               Will Rosukrenergo be involved in the scheme of gas export between Russia and Ukraine for the next year and the second question is concerning the role of Rosukrenergo on Hungary because about 14% of Hungarian gas import is provided by the Rosukrenergo, what about this role in the future?

Response in Russian.

Translator/SK        Well the answer is the following Sergey would like to refer once again to the memorandum which explains that both sides agree to establish direct relationships between Gazprom and NAK Natfogaz Ukraine provided that the Ukrainian side makes all the necessary repayments and meets its obligations to handle the outstanding debt to Rosukrenergo in particular. As for the role of this intermediary company in providing gas supplies to Hungary very much will depend in the future on the gas reserves that will be at the disposal of this company.

KC                    Is there any other question Sharon?

Nyilas               Can I have last one?

KC                    We will take one more and then we will wrap this up.

Mr Nyilas          Okay. So if I understand the role of Rosukrenergo is not really clear yet that is why I check when will the prolongation of contracts with Hungary be signed because there is a contract that is valid until 2016 while France or Germany have already signed contracts for the next 27 years. Is it because of the status of Rosukrenergo?

Response in Russian (no translation given)

Nilus                Okay then.

Question from Maria Danilova, Associated Press

Translator        The question from was well once again supposedly the Ukrainian doesn’t meet its obligations to pay all the outstanding debts will Gazprom resort to cutting off gas supplies or it will try to avoid such a situation so as not to spoil relationships with customers in Europe.

Translator/SK          The answer is I would like once again to reiterate that Gazprom will do everything which is possible in order to avoid such a scenario.

KC                    Sharon is there any more questions?

[No further questions]

Well thank you everyone and deepest thanks to Mr Kupriyanov.

Translator/SK        Mr Kupriyanov would like to point out another thing.

There is one more question that hasn’t been asked but definitely the issue is very much there and probably there will be questions in the near future about that. Well there is one thought that is being promoted rather widely in Ukraine. Due to the global financial crisis many of the Ukrainian companies in various sectors here are facing problems and they will have problems in particular in paying for their energy supply.

There are certain things to be noted in this respect. Well first of all there are no affects supporting the assumption that there is an economic slowdown in the Ukraine. The gas supplies coming from Russia are intact in terms of volume. We are supplying as planned around 4.5 billion of cubic metres every month to the Ukraine. Once again comparisons between Ukraine and other Eastern European countries show that there is no actual domestic slump in Ukraine… It should be noted that the gas prices for Eastern European countries are much higher than for Ukraine and yet they are buying the same amount of gas from Russia.

The third point that should be made even if we assume that some of the customers of Naftogaz Ukrainy has problems in paying for the gas supply it still doesn’t explain in any way why there are no payments at all from the side of NAK.

KC                    Thank you Mr Kupriyanov. Thank you Vladimir and thank you everyone for attending the conference call. We look forward to more questions later on. Thank you very much.

Translator/SK        Well, I hope that next week I will be able to come up with some more optimistic news for you but anyway I really hope that we will continue this kind of communication in the future. Thank you.

KC                    Many thanks. Sharon I think that concludes our call.

 

KC       Ken Cronin, Gavin Anderson, Chief Executive Officer, London

SK       Sergey Kupriyanov, Gazprom Press Attaché to the Chairman of the Management Committee, Deputy Head of Information Policy Department