Gazprom stepping up cost optimization measures for Group’s companies

The Gazprom Board of Directors took note of the information about the Gazprom Group’s cost optimization (reduction) efforts in 2019 and its priorities in this area for 2020.

Gazprom is taking a comprehensive approach to enhancing both the efficiency of its operating and investment costs and their control, thereby keeping its cost growth rates at a minimal level.

Considerable attention is given to the formation of Gazprom’s budget. When drawing up the expenditure budget for the next year, Gazprom annually sets strict cost limits for the parent company and its subsidiaries, while actively looking for cost reduction options. The Company ranks investment projects in order of priority, depending on their strategic importance and effectiveness.

This approach delivers significant cost savings. For instance, Gazprom managed to reduce the expenditure budget by RUB 65.7 billion during the budget planning for 2020. In the course of the budget implementation, the Company continues to search for additional cost reduction opportunities.

At the same time, Gazprom is improving the budgeting process in the Group’s companies and strengthens the control over their budget performance. In particular, a set of key performance indicators (KPIs) for budgeting was updated for 822 companies in 2019, depending on their types of activity.

A crucial innovation was put into practice starting from 2020: Gazprom transitioned to review and approval of the consolidated budgets issued by the three main sub-holdings of the Group: Gazprom Mezhregiongaz, Gazprom Energoholding, and Gazprom Export. Previously, Gazprom had controlled their financial and economic performance through the use of individual solutions: application of the KPI system and participation mostly in the budgeting of the parent bodies of these sub-holdings. The new approach will help increase the transparency of business processes engineering in the sub-holdings and enhance control over their operational and investment indicators, and will also help identify further growth and development capacities in the top-priority activities.

Significant economic benefits are achieved through the implementation of annual operational efficiency and cost reduction programs for Gazprom and the Group’s subsidiaries. Each program includes a list of specific activities for separate lines of businesses.

The main sections of Gazprom’s program for 2020 include optimization of estimated project costs at the design stage, cost reduction in the procurement of goods, works and services, as well as energy conservation and energy efficiency measures. It is planned to obtain additional funds from disposal of non-core assets of Gazprom.

Gazprom is consistently expanding the application of advanced tools to improve the financial resources management within the Group. For example, the Group’s companies are widely using banking support services for contracts on the supply of goods, performance of work and provision of services in their investment projects.

In addition, Gazprom further develops the centrally-controlled physical cash pooling system, which makes it possible to redistribute liquidity within the Group’s companies in the best possible way, reduces their need for external financing and provides additional revenues from the placement of temporarily disposable funds. The cash pooling system already includes the accounts of 484 Group’s companies based in Russia and abroad, and more than 160 companies are at different stages of connection.

Full control over the settlements of the 140 largest subsidiaries of the Group in line with best Russian and international practices is maintained by a special service center – the Unified Settlement Center of Gazprom. Work is underway to connect other Group’s subsidiaries to the center.

It was highlighted that the Company closely follows the instructions of the Russian Federation Government with regard to operating cost reduction: the corresponding KPI was included in the KPI system of Gazprom. It is planned to set this indicator at 2 per cent as a target for 2020.

The Management Committee was tasked with continuing the Company’s cost optimization efforts in 2020.