Executive Summary

Key Messages

Frustrated ambitions in the face of economic slowdown

Gazprom has had to contend with a dramatic fall in demand from Europe, its key source of revenue, following the
economic crisis and resulting slowdown in world economic growth. In the face of oversupply, Gazprom has taken the
role of swing supplier – cutting export volumes in an attempt to stem the growing disconnect between weak spot prices
and oil-indexed contracts. The impact of this strategy is evident in the short-term rebound in spot prices seen in the first
half of 2010. To protect, in part, its own production levels, Gazprom has chosen to back-out gas from Central Asia.
Delays have been announced at its two largest development projects Yamal and Shtokman, signalling acceptance of the
less bullish medium term demand picture in Europe. We forecast the over-supply in Europe could continue to 2015,
despite the actions of Gazprom and other key suppliers. The outlook for the Russian domestic market is also one of
slow growth, with energy demand in 2010 forecast to be flat, and growth rates thereafter unlikely to return to pre-crisis
levels. For Gazprom, the impact will be a gradual recovery to pre-crisis levels of production, with limited room for growth
in the short term. Overall, we forecast that gas production will increase by 2 bcfd in 2010 - but remain 13% below peak
figures reported in 2006. Thereafter, we expect Gazprom’s production growth to be subdued until the middle of the
decade. The out-look for the period 2015 to 2020 remains uncertain, and will be sensitive to volumes of LNG entering
the European market. We currently forecast 2020 production of 53 bcfd, well below the company’s target of 59-60 bcfd,
although there is significant room for Gazprom to perform above our base case, if demand is greater.

Longer term, its role as a pivotal global supplier is secure

The long-term outlook for Gazprom’s core business remains fundamentally positive. With unrivalled reserves and an
intact monopoly position over Russian gas exports, Gazprom remains well placed to capitalise on expected long-term
demand growth in both the European and Russian gas markets. Furthermore, Gazprom is progressing plans to diversify
into new markets, with ambitions to grow its LNG exports and expand its piped gas exports to Asia. With this in mind, we
expect Gazprom to continue progressing its major development projects, albeit at a slower pace than originally planned.
We believe Gazprom’s latest start-up date of end 2012 for its first Yamal field Bovenankovskoye is achievable. However,
in our view, the 2016 start-up target for the challenging Shtokman field is optimistic, and we predict it will be 2020 before
start-up of piped gas is achieved, followed by LNG in 2021.

Protecting contract pricing is key to financing growth

The era of cheap and easily accessible low cost gas is fading. Gazprom’s ‘Big 3’ gas fields in Western Siberia have all
entered decline, and are more than 50% depleted. Production costs will rise at these fields as more expensive extraction
techniques are needed. Gazprom can no longer fall back on cheap imports from Central Asia to compensate for any
shortfall in its own output. Production in new areas, notably Yamal and the Barents Sea (Shtokman), will be much more
expensive due to complexity of development and remoteness from infrastructure and markets. Gazprom’s plans to enter
the Asian market will also require significant investment in an area which has no existing infrastructure.

We expect Gazprom to continue to try to protect the more lucrative oil-indexed contract prices for exports (though some
horse trading may be necessary near term whilst market conditions are weak). Robust prices, and the volume security of
long-term contracts will be essential to provide the cash flow needed as Gazprom embarks on a new chapter of capital
intensive development. Gazprom will also continue to push for greater progress towards net-back parity on gas price
sales both at home and to FSU countries as it readies itself for longer term growth.

Efforts to diversify away from Europe will intensify

The recent down turn in the European economy has strengthened Gazprom’s ambitions to diversify its markets. LNG
remains a long term goal for the company, and we believe it will be the end of the decade before it adds any new
projects to its single existing LNG facility at Sakhalin II. Gazprom faces significant technical challenges at Shtokman and
Yamal, as well as resource issues at its proposed LNG development in the Far East at Vladivostok. In the longer term,
however, a slow down in global LNG production should open up an opportunity for Gazprom. LNG is one area where
Gazprom is more open to pursuing international partnerships to gain access to technical expertise; we believe further
announcements on strategic alliances are likely.

We anticipate Gazprom will increase its efforts to capture the growing Asian market. Our analysis shows the best returns
will be achieved through pursuing piped gas developments, with supply under-pinned by the giant Kovykta and
Chayanda fields. We expect Gazprom will expedite its attempts to finalise a controlling interest in Kovykta, a transaction
that has been stalled since 2007. The presence of helium at both fields will complicate their development, but the
presence of liquids and relative proximity to market improves the economics, making them competitive compared to
other gas destined for the Chinese markets. Key to the progress of Gazprom’s developments in the Far East will be its
success negotiating an acceptable gas price with China, and whether Gazprom can win market share ahead of
alternatives which may include Chinese shale gas.

Corporate Service - Company Report - August 2010