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Read Sakhalin Energy CEO’s speech to the Sakhalin Oil and Gas Conference (buckets of BS and no mention of David Greer?)

4 September, 2007: Company CEO Ian Criag delivers message at Sakhalin’s major energy conference

Mr. Chairman, Ladies and Gentlemen.

It is a great privilege and pleasure to be here to provide an update on the Sakhalin II project.

I would like to start by taking this opportunity to thank our shareholders, our staff and our key Russian and international contractors for their many achievements to date.

I would also like to thank the Sakhalin Oblast and the Russian Federation for their foresight, understanding and continued support.

Together we are delivering a world-class oil and gas development that will be safe, environmentally sound and that will maximise the benefits to the Russian Federation, the Oblast and our shareholders.

In this brief presentation I will describe key developments over the last year or so.

Of course, the landmark for this year was the entry in April of Gazprom as Sakhalin Energy’s largest shareholder. Gazprom’s new majority shareholder role confirms Sakhalin II’s status as a project of strategic Russian national importance.

The entry of the world’s largest gas company brings access to a wealth of expertise and knowledge that has been accumulated over decades of successful operations both in Russia and as Europe’s major energy partner. Gazprom’s extensive experience with Russian practices and procedures, and of course pipeline construction and commissioning, is of great help to us. Gazprom has already provided extensive specialist input into our environmental action plans and facilitated inter-ministry liaison, which was required for the first ever LNG import into Russia, which I will describe later.

All change must be carefully managed. A key objective of the shareholders was to ensure that continuity was maintained through the change of ownership and beyond. Sakhalin Energy remains of course as the operator of the venture and Shell remains as Technical Advisor. Over the next year or so, there will however be a gradual transition from Shell nominated to Gazprom nominated staff in some executive director and other senior positions. We now have two Gazprom nominated executive directors, one of which is Deputy CEO, Andrei Galaev.

It is clear that the new, broader shareholding base substantially strengthens the Company and will help us deal with future challenges as well as generating additional opportunities.

Allow me to remind you that Sakhalin II Phase 2 is an integrated oil and gas development in a demanding frontier environment, which requires the simultaneous execution of several projects. In summary:

· Two new production platforms, 300 km of offshore pipelines, and tying in the existing Molikpaq offshore platform.

· An onshore processing facility (OPF).

· 1600 km of onshore oil and gas pipelines to the south of the island.

· And the first LNG plant in Russia and associated oil and gas export facilities.

In this venture we are combining advanced international and Russian practices, adapting technologies and in many ways pioneering sub-arctic offshore development. Given its scale and complexity, Sakhalin II is a key step towards understanding and mastering the challenge of future energy extraction in the Arctic region. We believe that the Sakhalin experience will help Russia build expertise and international confidence in the development of its offshore fields; “serving as a springboard for further arctic developments”, as the president of Rosneft, Mr Bogdanchikov, recently commented.

Let’s look at what has been achieved.

You may recall that last summer we installed the 22,000 tonnes topsides for the Lunskoye-A platform with a world record float-over. This year that record was broken once more when we installed the 28,000 Piltun-Astokskoye-B (PA-B) topsides in a similar operation.

The platform’s gravity-base structure – built in Vostochny, Primorskiy Krai – was placed on the seabed in 2005. This summer, the integrated 28,000-tonne PA-B topsides travelled 3,000 km from the Samsung Heavy Industries shipyard in Korea to the Sea of Okhotsk. It was transported on a unique T-shaped transport barge, the size of two football pitches, which was specially built for the purpose. On arrival in early July 2007, the 28,000-tonne topsides was successfully mated to the gravity-base structure by carefully positioning then ballasting down the barge.

The PA-B platform is now undergoing hook up and commissioning with the aid of a flotel, a floating hotel, accommodating some 520 workers. A major milestone will be achieved later this month when the platform will be certified fit for habitation – a crucial step in preparing for the onset of winter and of course essential for drilling the development wells at the turn of the year.

I am also pleased to report that the installation and testing of all the offshore pipelines for the project is now complete.

The noise generated by all of the offshore work described above was, as in 2006, monitored by acoustic sentinel buoys placed near the edge of the Western Grey Whale feeding zone to alert us if noise levels reached those that might significantly disturb the whales. This was only one element of a suite of measures including dedicated whale watchers on each vessel, restricted vessel speeds, prescribed vessel corridors and noise suppression measures, which ensured minimal disturbance.

Our efforts to minimise any adverse impacts on the whales are supported by the advice we receive from the independent international advisory panel and, of course, the programme requires the approval of the Russian Authorities.

On Lunskoye-A commissioning activities continued over the winter months and we have now driven the first nine conductors and spudded the first well.

Currently however we have a summer campaign in progress with the assistance of an accommodation vessel to carry out most of the remaining construction and commissioning work before we resume drilling the first gas production wells.

Our policy is one of “zero drilling discharges” from our platforms, i.e., drill cuttings and mud will not be discharged overboard from any of our facilities. The platforms each have a special cuttings re-injection, or CRI, well, designed for the safe subsurface disposal of cuttings.

What then do you do with the cuttings generated by the drilling of the first CRI wells? This material is transported for disposal in the existing CRI well on the Molikpaq platform.

To assist with training offshore drilling technicians, the Company has installed a Drilling Advanced Rig Training (or DART) simulator in Yuzhno. It uses 3-Dimensional graphics, sound effects and real time simulations to enable users to develop and test various drilling techniques and skills. Sakhalin is only the sixth place in the world to have a simulator of this kind.

The Onshore Processing Facility is also taking shape. It is destined to become the upstream operations centre as well as processing (by that I mean separating, cleaning and dehydrating gas and oil) then compressing and pumping the gas and oil through the trunk lines to the south.

Another key OPF role is that of providing power to the nearby Lunskoye-A platform, a function it has been reliably performing since early this year. The eagle-eyed amongst you may be able to make out the Lunskoye-A platform just below the horizon in this photograph.

Our onshore pipelines are approaching the final stages of construction.

With over 1,000 streams and rivers to traverse, river crossings have been a huge effort. Where ground conditions were suitable, the most sensitive large rivers were crossed by horizontal drilling techniques. Others were crossed in the winter when the river is frozen or flows are low so as to minimise the impact on the salmon spawning grounds.

I am pleased to report that all of the winter crossings were completed in April. As in 2006, these winter river crossing efforts were followed by a spring erosion control campaign the aim of which was to ensure that, following the thaw, the river banks and adjacent water protection zones were stabilised prior to the summer salmon runs.

The vast majority of the pipe is therefore already in the ground and under the rivers but many challenges remain. We now have increased focus on reinstatement of the Right of Way where a key objective is to achieve as much permanent reinstatement as possible on completed sections before the onset of winter. 

This slide illustrates various phases of reinstatement: the use of slope breakers and silt fences to stabilise the soil on steep slopes, followed by the growth of newly seeded grass, river bank stabilisation using gabions, and of course agricultural land being put back into use.

Whilst our onshore pipeline construction and reinstatement activities on the rivers and streams will be completed next year, part of our long-term commitment to the island is to foster sustainable development projects.

Key amongst these is the Sakhalin Salmon Initiative. This is a public-private partnership to support conservation and sustainable use of wild salmon and their ecosystems and to build institutional capacity for conservation. Launched late last year with strong support from several stakeholders including the Oblast and the international NGO, the Wild Salmon Centre, it offers long term economic, social and ecological benefits for island.

Other key remaining onshore pipeline activities include seismic fault crossings, cleaning, gauging and testing of the lines, and block valve installation and commissioning. When complete, the pipelines will include 104 oil and 48 gas block valve stations (of which about 40 are common oil and gas sites) and five Pipeline Maintenance Depots to allow maintenance and emergency response teams to provide full coverage for the whole system.

On Aniva Bay the Oil Export Terminal and its associated Tanker Loading Unit are already complete and custody has transferred from our Project Directorate to our Production Directorate.

The first LNG train and associated equipment was also substantially complete by the middle of the year. In an unusual step we actually imported LNG in an operation that was the first of its kind in Russia. This unconventional procedure – unconventional as it was only the second such operation ever performed – saves months in commissioning time… the imported gas allowing us to commence LNG commissioning operations prior to the completion of the mainline and gas wells feeding gas from the north of the island.

In early July, therefore, the LNG carrier “Granosa” berthed alongside the new 805-metre jetty at the LNG plant with a cargo of LNG from Indonesia made possible with our customer, Kogas, and Pertamina’s support. The cargo was slowly unloaded into the LNG tanks to control the rate of cooling and is now being used to test various LNG plant systems, such as the flare, gas turbine generators, vapour gas compressors and other processing equipment.

We will import a second cargo from Alaska later this year, with the support of our customers Tokyo Electric and Tokyo Gas, to top up the LNG in storage to continue this commissioning and testing process through to early 2008.

The berthing of these LNG carriers are the first operations of what will shortly become Russia’s new, specialised seaport for oil and LNG. Although the port facilities are substantially complete, a number of steps remain before the port is fully established. One of these steps is the creation of a new port operating company.

I am delighted to report that Sakhalin Energy and Sovcomflot, Russia’s largest shipping company, are in the final stages of establishing a joint venture to operate the port, including the provision of specialist Russian LNG carrier and oil tanker pilots who are currently being trained on LNG projects around the world.

When the operations phase begins in earnest, the port facilities will allow a tanker to be loaded within 16 hours and turned around within 24 hours. The specialised seaport of Prigorodnoye – a name confirmed by the recent referendum on Sakhalin – will, at peak, serve approximately 160 LNG carriers and 100 Aframax oil tankers each year, which is approaching one ship per day.

The port’s loading terminal will comply with IMO standards. Navigational safety in the vicinity of the port will be enhanced by a vessel-tracking, management system (VTMS) once the authorities complete the associated support infrastructure. Prigorodnoye is clearly set to play a significant role in the energy security of the Asia Pacific in near future.

In less than a month we will have the naming ceremony for two new LNG carriers, which are currently under construction at Mitsubishi’s shipyard in Nagasaki. Sakhalin Energy has long-term charters for both ice-class carriers, designed for year-round LNG shipping operations. The carriers, to be named Grand Aniva and Grand Elena, are being built for a Russian-Japanese consortium with the participation of Sovkomflot.

The third carrier, the Grand Mereya, will be operated by a consortium which includes Primorsk Shipping Corporation.

Through their involvement in these ventures, Russian shipping companies are getting the chance to enter the dynamic LNG shipping market, train their crews and acquire invaluable experience.

We are still at peak activity levels with, over 25 thousand construction workers involved in project work on the Island in the past year, more than 70% of them Russian nationals.

The value of contracts awarded to Russian contractors is nearing the $10 billion milestone. The participation of Russian companies, particularly those based on Sakhalin, is allowing them opportunities to acquire new know-how, refine their skills and expertise, and gain valuable international experience in managing mega-projects.

Our training centre here in Yuzhno provides training to personnel in various disciplines. Training programmes take into account an individual’s work place, role in the organisation, baseline qualifications and the specific experience required for their job. Some 140 people have taken the programme and half of these have already joined operations teams. The number of apprentices currently in training is about 50.

This apprentice programme is of course complemented by graduate and mature hires from all over Russia. Since the start of 2005 we have hired over 1000 Russian nationals as we prepare to operate all the Phase 2 facilities.

The recent tragic earthquake in Nevelsk serves to remind us that Sakhalin, like our close neighbour Japan, is seismically active. We have therefore designed all our facilities to cope with severe seismic events.

Examples of these measures are the pendulum bearings at the top of each leg on the Lunskoye-A and PA-B platforms. These bearings, being used offshore for the first time, are designed to minimise seismic loading on the topsides by providing a degree of isolation from the seabed acceleration forces.

Other special measures include the ability of our LNG containment tanks to move relative to their outer shells through the provision of compliant straps.

To reduce the volume of oil that might be at risk our oil pipeline incorporates more isolation valves than would normally be the case. Where the pipeline crosses potentially active seismic fault zones it is reoriented and provided with elbows to minimise the stresses, strengthened and surrounded by crushable material in specially designed trenches to facilitate movement.

We should never be complacent regarding seismic risks but we are confident that all reasonable design measures have been taken and that our operational plans incorporate appropriate responses.

To sum up:

· The entry of Gazprom has substantially strengthened the company and positions us well for the future.

· The Project continues to make good progress with the achievement of several key milestones.

· Momentum continues to build readiness for the commencement of operations in 2008.

There are many challenges that still lie ahead and key milestones to be delivered but we are looking forward to starting up next year. As operations ramp up a phased scaling down our construction activities on the island will also be in train. The demobilisation of these construction resources must be carefully managed to minimise negative impacts and we are already in discussions with the Oblast on how best to do this.

Sakhalin Island is without doubt a word class energy province with some 80% of the potential reserves offshore Sakhalin still untapped. Maintaining and building on the expertise and experience that has been acquired on the Sakhalin I and II developments over the past few years should therefore be a key priority for the Sakhalin region. The challenge of course is in the uncertain phasing of potential future developments.

In this regard, whilst we remain totally focussed on delivering the Phase 2 development, we have begun detailed studies on possible future expansion – a topic that can perhaps be developed further at next year’s conference!

Thank you for your attention.

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