"Current state of problem of rational associated petroleum gas use in Russian Federation" General Director LLC "EcoNefteGazControl" Alexey N. Aksenov

Level of APG utilization by the leading Russian oil companies Level of APG utilization, % Year

Resources of the useful components in APG (according to Russian State Statistics Service) Volume, thou. tons sulfur ethane propane butane pentane and higher (stable condensate) Year

TechnicalEconomicalInstitutional 1. Limited capacity of gas transmission systems; 2. Current condition of APG processing capacities; 3. Shortcomings (lack) of product transportation infrastructure from gas processing plants (broad fractions of light hydrocarbons, liquefied hydrocarbon gases) 1. State control of the APG wholesale prices; 2. Pricing on the market of APG products (LHCG, dry stripped gas); 3. Dry gas transport and sales costs; 4. Cost of transportation for liquid products obtained from APG processing. 1. APG has not been designated as mineral resource, no state control of APG use; 2. Uncertainty as to who owns APG produced from the subsoil; 3. Not all of licensing agreements establish mandatory level of APG utilization; 4. No requirements outlined concerning introduction of mandatory account of APG resources, extraction volumes and utilization ; 5. No procedures developed for state control of APG utilization; 6. Procedures for access of oil companies to the APG transport and processing capacities are not legally formalized; 7. No effective pricing system developed to insure balance between interests of oil companies and natural monopoly entities. Main reasons for wide-scale associated petroleum gas flaring

In order to commercialize APG, following will be required: 1.Joint efforts of oil producing and oil processing companies; 2. Well-planned long-term strategy of the Government including, along with state control and monitoring, the mechanisms to stimulate investment projects involving APG utilization with innovative technologies and equipment.

Name of Russian Federation territorial subdivision Quantity of flare devices (gas bleeders) Gas bleeders Availability of instruments on flare systems as of As of (preliminary) EquippedNot equipped% equipped Northwest Federal District Arkhangelsk Region Kaliningrad Region Nenets Autonomous Area Komi Republic Total for Northwest Federal District Southern Federal district Astrakhan Region Volgograd Region Krasnodar Territory Republic of Dagestan Republic of Ingushetia Republic of Kalmykia Republic of North Ossetiya - Alania Stavropol Territory Chechen Republic Total for Southern Federal District Summary register of flair devices of oil & gas companies by Russian Federation territorial subdivisions

Name of Russian Federation territorial subdivision Quantity of flare devices (gas bleeders) Gas bleeders Availability of instruments on flare systems as of As of (preliminary) EquippedNot equipped% equipped Volga Federal district Orenburg Region Perm Region Republic of Bashkortostan Samara Region Saratov Region Republic of Tatarstan Udmurt Republic Ulyanovsk Region Total for Volga Federal District Ural Federal district Tyumen Region Khanty-Mansi Autonomous Area - Yugra Yamalo-Nenets Autonomous Area Total for Ural Federal District

Name of Russian Federation territorial subdivision Quantity of flare devices (gas bleeders) Gas bleeders Availability of instruments on flare systems as of As of (preliminary) EquippedNot equipped% equipped Siberian Federal district Krasnoyarsk Territory Novosibirsk Region Omsk Region Tomsk Region Total for Siberian Federal District Far Eastern Federal District Yakutia (Sakha) Republic Sakhalin Region Total for Far Eastern Federal District Total, Russian Federation:

Bottlenecks in the production chain from well to the output of liquefied hydrocarbon gases Production chain elementsBottlenecks : production Bottlenecks : government role and its incentives Wells (oil deposits) APG production and use accountingTechnical regulation measures; APG utilization programs in the development projects (licenses) Gas-gathering infrastructuresHigh capital expenditures and their questionable profitability for oil companies; APG price level Technical regulation measures; government participation in the investments; prices for APG liberalized Gas Processing Plants and GFUs (Gas Fractionation Units) Shortage of capacities Exemptions from VAT and customs duties on the equipment imported; government participation in the investments; prices for LHCG liberalized Transport of broad fractions of light hydrocarbons, liquefied hydrocarbon gases Shortage of capacities (loading racks, stations) Encouragement of investments; government participation in the investments Gas transmission network, main gas pipeline Limited capacity of areas critical for dry gas sale Ensuring priority access of dry gas to the gas transmission network; encouraging investments to the gas transmission network capacity expansions

Share of flare systems in their total number in terms of APG quantity burned

Following approach can be utilized to attract funds for comprehensive programs of APG use and processing : Oil companies and Russian Federation territorial subdivisions jointly invest into APG pipelines; Gas and chemical companies and federal center (e.g., within Federal Target Program) invest to create infrastructure for the sales of Gas processing plant products (filling racks, pipelines for dry gas and broad fractions); All parties have a share of profits (from the sales under the entire program) proportional to contributed investments.

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