Russia: Gazprom Pursues Integrated Approach to Cost Reduction

Gazprom Pursues Integrated Approach to Cost Reduction

The Board of Directors examined information on cost reduction activity in various businesses of Gazprom Group in 2011.

The Management Committee was charged to continue Gazprom’s cost reduction efforts in 2012.

It was noted that Gazprom was pursuing an integrated approach to cost reduction. The approach is based on three main principles:

  • cost reduction as part of the budget process;
  • cost reduction program compilation and implementation;
  • targeted measures implementation for cost reduction.

As part of the budget process, Gazprom takes the cost reduction efforts based on investment projects ranking, expenditures optimization at the budget compilation stage (including tender procedures for suppliers and contractors), cost categories prioritization. This helps cut down Gazprom’s operational costs. Comparing the years of 2011 and 2010, the operational costs will grow by 6.7% only (without consideration of the growth in the severance tax on gas and the cost of foreign gas purchased by Gazprom). This figure is lower than the price growth index among the industrial producers, determined by the Economic Development Ministry of the Russian Federation for 2011 (18.8 per cent).

In 2011 Gazprom is implementing a number of new targeted measures on cost reduction. These include reducing the costs of pipe products purchase, optimizing the supply schedule and cooperating with pipe manufacturers on the issues of the long-term price formula approval. Moreover, the measures include reducing the specific costs of geological exploration, optimizing the logistics costs (of construction, maintenance and operation of industrial facilities), optimizing the operation modes and gas flows at UGS facilities. It is expected that in 2011 cost reduction as a result of the targeted measures will exceed RUB 21 billion.

The Board of Directors meeting noted that Gazprom’s internal expertise of project solutions elaborated by specialized organizations to construct facilities as part of the Company’s investment program would become one of the efficient cost reduction measures. Construction cost reduction totaled some RUB 52.6 billion over nine and a half months of the current year. Costs were also reduced owing to the sci-tech progress and participation of Gazprom’s subsidiaries in the cost reduction program.

At the moment, Gazprom is developing the guidelines for cost reduction indexes determination for the purchase of goods, work and services. This is done in compliance with the Order by the Russian Federation President Dmitry Medvedev requiring the annual reduction of costs per unit by at least 10 per cent during three years.


Source: Gazprom, October 25, 2011