Sakhalin Energy The New Energy Source for the Asia Pacific
Sakhalin Energy The New Energy Source for the Asia Pacific WWW.SAKHALINENERGY.COM Annual Overview Sakhalin Energy Investment Company Ltd.
Corporate Headquarters:
35, Dzerzhinskogo St., 693020, Yuzhno-Sakhalinsk, Russia Phone: +7 (4242) 66-2000 Fax: +7 (4242) 66-2012 www.sakhalinenergy.com www.sakhalinenergy.ru
Sakhalin Energy Investment Company Ltd.
Moscow Representative Office:
31, Novinsky Boulevard, 123242, Moscow, Russia Phone: +7 (495) 956-1750 Fax: +7 (495) 956-1760 www.sakhalinenergy.com www.sakhalinenergy.ru Sakhalin Energy The New Energy Source for the Asia Pacific
Annual Overview Letter of Introduction from CEO
It seems that every year, when we operations in 2006, we were able reflect on the past year’s to achieve over 11.5 million developments, we conclude that barrels of oil produced with it was challenging. As it happens, excellent flaring performance. 2006 seems to have been one of the most challenging and pivotal The installation of the Lunskoye years so far. platform topsides was undeniably the most impressive event of the The Sakhalin II Project, which year and also a key milestone on a started in 1996, marked its first critical path toward first LNG. In decade milestone last year. It is another, no less challenging, therefore an appropriate time to operation, two giant new take stock of the journey that we modules were installed on the have travelled together. Molikpaq platform. This also was done with impeccable accuracy. We have come a long way in These modules will play an building the world’s largest integral role in enabling year- integrated oil and gas project on round production of oil. Sakhalin. We were the first in Russia to begin an offshore field The installation of all the offshore development and to commit our pipelines, apart from some tie-ins, gas to LNG exports. Oil produced was completed in 2006. All of the by this Project was also planned Horizontal Directional instrumental in allowing Russia to Drilling river crossings are break into the fast growing complete and over 95% of the markets of the Asia Pacific region. onshore pipelines had been welded by the end of 2006. We owe this success to our employees and shareholders and Construction of the LNG plant of course to the entire team of also continued apace in 2006, excellent designers, engineers, with the LNG tanks and all managers and workers. The marine works, including the Russian Federation authorities installation of the LNG jetty, and the Sakhalin Oblast now complete. Out in Aniva Bay, Administration also played a role the Tanker Loading Unit, which that cannot be too strongly will be used to load tankers with emphasised. crude oil bound for international markets, was also Despite the harsh weather that successfully installed and delayed the beginning of Phase 1 powered up.
Sakhalin Energy The New Energy Source for the Asia Pacific We have an extensive work programme to deliver in 2007, including installation of the Piltun-Astokhskoye-B topsides, year-round production for Molikpaq and LNG commissioning
The Onshore Processing Facility socio-economic development of entry of Gazprom, the world’s also progressed. Construction the Island. largest gas producer and exporter, works are progressing well and as a leading shareholder will also in January 2007 the plant We also remain committed to be of great value to the Project. commenced supplying power to protecting the environment on the Lunskoye platform. the Island. In 2006 we involved And one more thing. You really independent environmental shouldn’t be surprised if you read With more agreements with LNG experts to further mitigate in our next Annual Report that buyers in 2006, we are happy to potential risks to the Western 2007 was the greatest year of all report that we have contracted to Gray Whale population. We are in the Project’s history. We have a customers practically the entire taking unprecedented actions not close-knit team of professionals LNG capacity for Trains 1 and 2 to disturb the nesting Steller’s sea which is determined to reach on a long-term basis. eagles on the Island, have new heights of success. embarked on a programme to An ever greater role in the Project research Sakhalin taimen and a has been played by domestic river restoration project that will suppliers and contractors, Russian increase salmon spawning areas. specialists and Sakhalin communities. By the end of 2006, When the Project was criticised the total value of contracts signed by Russian regulators, we took with Russian vendors and this as a challenge to improve our suppliers exceeded US$8.2 billion. environmental performance, find This includes significant new new solutions and strengthen awards to local contractors, who controls and management of our have demonstrated their ability to contractors. All this was meet international standards in incorporated into our new developing the oil and gas Environmental Action Plan, industry on the Island. More than which is now being implemented 740 Russian staff, including 439 to ensure a higher level of locals, were hired in 2006 as we protection for the sensitive built up our capacity. environment of Sakhalin Island.
We are confident that a large- Looking ahead, we have an scale project such as this one extensive work programme to should ultimately improve the deliver in 2007 including quality of life for local installation of the Piltun- communities. With this in mind, Astokhskoye-B topsides, year- we continued to develop the round production for Molikpaq Island’s infrastructure, building and LNG commissioning. Sincerely, and fitting out social welfare facilities and providing support to An important factor in the Ian Craig, the indigenous people, healthcare Project’s progress is the agreement CEO and education systems. We have with the Russian Party on the moved on from everyday social Amended Development Budget, Sakhalin Energy Investment issues to long-term goals for the reached in December 2006. The Company Ltd.
Annual Overview 3 Contents
MILESTONES IN 2006 6 OUR PROJECT, OUR COMPANY 12 Sakhalin Energy and Sakhalin II Project 14 Shareholders 15 Production Sharing Agreement 16 Benefits for Russia 17 Resource Base 19 Phase 1 and Phase 2 20 1996–2006: Key Milestones of the Decade 21 Key 2007 Milestones 23 INNOVATIONS. CONSTRUCTION 24 Project Map 26 The Innovator 27 Offshore Platforms 28 LNG Plant 30 Oil Export Terminal 32 Onshore Processing Facility 33 Onshore Pipelines 34 River Crossings 35 Offshore Pipelines 37 Ensuring Seismic Safety 38 Infrastructure Projects and Logistics 39 PRODUCTION. COMMERCE 40 Oil Production 42 Oil Marketing 43
4 Annual Overview LNG Marketing 44 Hydrocarbons Transportation 45 ECONOMICS. FINANCE 46 General Business Principles 48 Financing and Project Costs 49 Economic Efficiency 50 Taxes and Payments 51 RUSSIAN CONTENT 52 Russian Content Development Strategy 54 New Contracts 56 How to Become a Contractor 57 MANAGEMENT. PERSONNEL 58 Management System 60 Supervisory Board 61 Committee of Executive Directors 62 In Dialog with the Society 63 Personnel Development 64 ENVIRONMENT. SAFETY 66 Safety and Environment: Integrated Approach 68 Labour Safety 69 Environmental Protection 70 Emergency Response 72 Rare Species 74 SOCIAL RESPONSIBILITY 76
Annual Overview 5 Sakhalin Energy The New Energy Source for the Asia Pacific MilestonesMilestones inin 20062006 On 26 June 2006, Sakhalin Energy successfully completed the installation of the Lun-A topsides on the Concrete Gravity Base Substructure in the Sea of Okhotsk
Oil Production
In December 2006 Sakhalin Energy successfully completed the eighth production season at the Vityaz Complex.
Production season 2006 at the Molikpaq Platform resulted in 11.58 million barrels of oil produced. A total of 19 cargoes of Vityaz crude were delivered during the season to existing markets in Japan, Korea, Thailand and the USA.
The Phase 1 cumulative oil production since 1999 amounted to 85 million barrels, or approximately 11.5 million tonnes. (For more detail see Production and Commercial) plant under construction in The LNG jetty is capable of Prigorodnoye. handling LNG tankers ranging Construction of Major Oil and from 18,000 m3 to 145,000 m3. Gas Infrastructure Sakhalin Energy completed the installation of the Molikpaq tie-in On 30 August 2006, Sakhalin In 2006, considerable modules on 19 July 2006. The Energy completed the Sakhalin II progress was achieved in the two modules, each the size of a offshore pipelines ahead of construction of the Phase 2 10-storey block, were successfully schedule. The completion of the oil and gas infrastructure. lifted into position using offshore pipeline construction The most significant Castoro 8, a mobile crane barge. ahead of schedule allowed the milestones include the In addition, a new multi-million- early demobilisation of vessels installation of Russia’s first dollar crane assembled locally in engaged in the construction offshore gas platform at the Kholmsk was also installed works, which significantly Lunskoye gas field, the successfully on the platform. reduced total noise impact. installation of two Molikpaq These modules will allow year- tie-in modules, the round production from the Success in LNG Marketing completion of the offshore platform when the pipeline pipeline construction system is complete. New LNG sale and purchase (achieved ahead of schedule) agreements were added to and finalisation of the LNG With the installation of the last the LNG long-term contract jetty construction. trestle and the LNG loading portfolio in 2006. This has platform of the LNG jetty contributed to Sakhalin’s On 26 June 2006, Sakhalin reaching out 800 metres into development as a new Energy successfully completed Aniva Bay, Sakhalin Energy strategic source of natural the installation of the Lun-A completed the LNG jetty gas for Japan and has topsides on the Concrete Gravity construction on 23 August 2006. confirmed the Asia Pacific Base Substructure in the Sea of The completion of the LNG jetty region as a major new market Okhotsk in the north-eastern represents a major event for the for Russian energy. By the segment of the Sakhalin shelf. Project, as the jetty will be used to end of 2006, practically all the Lun-A will be the key source of load LNG onto specialised LNG to be produced at Trains gas supply to Russia’s first LNG tankers for delivery to customers. 1 and 2 of the LNG plant was
Annual Overview 7 maintenance of three offshore platforms and onshore oil and gas pipelines was awarded to a joint venture between the Sakhalin company SakhalinMorNeftemontazh (SMNM) and the American VECO.
Sakhalin Energy awarded a US$85 million contract to a consortium of several Sakhalin construction companies for the construction of five Pipeline Maintenance Depots along the 800 km onshore oil and gas pipeline route.
The contract for design, fabrication, procurement and commissioning of the Russian turbine generators and substation for Booster Station 2 was awarded to ZAO Iskra Energetika (Perm). The contract value is RUR 500 million, or approximately US$19 million.
A 5-year contract was signed sold, which allows the export terminal and onshore with Primorskoye Shipping Company the pride of processing facility, was awarded to Company for the provision of reporting that the Trains 1 SakhlinNefteGasService (SNGS). charters of two oil tankers, and 2 LNG marketing The Russian contractor will be Sakhalin Island and Governor campaign is complete. paid around US$100 million for its Farkhutdinov. The tankers built services. in 2004, each with deadweight of The first contract, for the 108,000 tonnes, will be used to provision of maintenance services The second contract, again worth ship the crude oil produced at for the first Russian LNG plant, oil some US$100 million, for the Sakhalin II facilities.
In addition, Russian shipbuilding companies were awarded four contracts to build new ships for the Sakhalin II Project. Two harbour tugs and two mooring tugs will be built by, respectively, Admiralty Shipyard in St. Petersburg and Zvezda Plant in the Russian Far East. These orders are executed within the 15-year contract for the charter of six new ships, which Sakhalin Energy, the Sakhalin II operator, has awarded to SvitzerWijsmuller Sakhalin. (For more detail see Russian Content)
8 Annual Overview A 5-year contract was signed with Primorskoye Shipping Company for the provision of charters of two oil tankers, Sakhalin Island and Governor Farkhutdinov
Infrastructure Development
A formal ceremony was held on 13 October 2006 to put into operation the upgraded section (172–182 km) of the Yuzhno-Nogliki road in Makarov District. Sakhalin Energy provided US$24 million financing for the design and construction of this upgrade.
This is one of many examples of implementing logistics and infrastructure development projects in Sakhalin, including asphalt coating of 8 kilometres of roads in Yelniki, Onor, Zonalnoye, Krasnaya Tym, Ado- Tymovo and Argi-Pagi villages, provided together with Sakhavtodor in 2006. SKS, the main telecommunications contractor of Sakhalin Energy, built 480 km out of 823 km of fibre optic cable required for interconnection of all production facilities. (For more detail see Innovation. Construction) continue. The parties have Agreement has been reached for agreed to jointly resolve all the current Sakhalin Energy Investment Increase outstanding issues. The shareholders – Royal Dutch Shell, shareholders now look forward Mitsui and Mitsubishi – to give up The Sakhalin II to implementing the project in half of their respective Shareholders – Royal Dutch line with the current schedule, shareholdings for Gazprom to Shell, Mitsui and Mitsubishi – including obtaining all acquire a 50% stake plus one and the RF Ministry of necessary permits and approvals share in Sakhalin Energy for a Industry and Energy as the granted in accordance with total cash purchase price of Government body vested applicable Russian legislation US$7.45 billion. The current with PSA supervision and the PSA. Sakhalin Energy shareholders will authority reached on 21 (For more detail see Project each dilute their stakes by 50% to December 2006 an Economics and Finance) accommodate this transaction, agreement about the with a proportionate share of the Sakhalin II amended budget Gazprom to become purchase price. Shell will retain a and cost recovery. a Leading Shareholder 27.5% stake, with Mitsui and Mitsubishi holding 12.5% and The Amendment to the The signing of the 21 10% stakes, respectively. Development Budget for December 2006 protocol to Sakhalin II Phase 2 is to be bring Gazprom into the Sakhalin Energy will remain the submitted to the Supervisory Sakhalin Energy Investment operator of the Sakhalin II project. Board for approval. The Company Ltd. as a leading Gazprom will play a leading role Production Sharing Agreement shareholder was a as majority shareholder while for the Sakhalin II Project will landmark event. Shell will continue to significantly
Annual Overview 9 contribute to Sakhalin Energy Jeroen the shareholders, will find management and remain as van der Veer, further growth opportunities for Technical Advisor. The key focus Chief Executive, Shell: the LNG project after the first for Sakhalin Energy is to complete phase is complete. the project on schedule, allowing LNG to be delivered to existing customers in Japan, Korea and the We welcome Gazprom’s entry Shoei Utsuda, North American West Coast. All as a project partner and a President and CEO, existing LNG sales contracts will leading shareholder. The Mitsui: remain in force and will be greatest news is that we have honoured. stabilised the situation with the project and all the partners can After the protocol signing now work together to get We believe that Gazprom's entry ceremony the Sakhalin Energy Sakhalin II up and running. This in the project is one of the most shareholders met with President agreement is an important step significant milestones in the Vladimir Putin in the Kremlin. forward, and positions Sakhalin Sakhalin II project. We, Mitsui, The Russian leader welcomed the II for further growth are confident that Gazprom’s agreement with Gazprom and opportunities. entry, coupled with the project’s assured the shareholders that the cooperation with the Russian Russian Government would give I think all the parties have won Government and the Sakhalin full support to the Sakhalin II from the deal – the Russian Oblast, will not only give more Project. The leaders of the parties Federation, LNG buyers in Japan, strength to the project, but will in the negotiating process Korea and other Asia Pacific also contribute to further expressed their full satisfaction markets and, of course, the development of Russia-Japan with its outcome. project investors. I hope that we, relations.
10 Annual Overview Sakhalin Energy will remain the operator of the Sakhalin II project
Sakhalin has extensive strong player in the LNG market, Alexey Miller, hydrocarbon development but also a highly valued supplier of Chairman of the opportunities that are still crude oil to Asia Pacific markets. Management unused and we believe that this Committee, Gazprom cooperation will encourage In this connection we see new further growth of hydrocarbon opportunities for development developments in Sakhalin. Given in our joint work with the Gazprom has negotiated its entry Sakhalin's proximity to Japan, we partners. We are also happy that into Sakhalin II and joint LNG intend to scale up our activities the shareholders have finally business with Shell for two years. in Sakhalin with a view to succeeded in reaching mutual The Japanese shareholders from increasing energy security for understanding and agreement the very beginning supported the Japan and its people. with the Ministry of Industry idea of Gazprom joining the and Energy on the outstanding project. Yorihiko issues connected with the Kojima, project. We are assured that this Gazprom becomes the majority President and CEO, agreement will add strength and shareholder and will jointly work Mitsubishi: solid performance to our with other shareholders to project, which will prove and launch the Sakhalin II Project as strengthen our commitment to soon as possible. We are very glad that all issues deliver the project – in have been resolved and we would particular, our preparedness and We are consistent in like to welcome Gazprom’s entry commitment to supply LNG to implementing our strategy of as a new partner. We trust that the our buyers in Japan and other increasing Gazprom’s role in the unity and strength of four Asia Pacific markets. We are LNG market. Joining in an LNG shareholders will enable Sakhalin focused on delivering LNG to production and export project is Energy to become not only a our buyers on schedule. another step in that direction.
Annual Overview 11 Sakhalin Energy The New Energy Source for the Asia Pacific OurOur Project.Project. OurOur CompanyCompany Sakhalin Energy and the Sakhalin II Project 14 Shareholders 15 Production Sharing Agreement 16 Benefits for Russia 17 Resource Base 19 Phase 1 and Phase 2 20 1996–2006: Key Milestones of the Decade 21 Sakhalin II Project: 2007 Major Milestones 23
Annual Overview 13 Sakhalin Energy and the Sakhalin II Project
ff the north-east coast of world’s biggest energy completion of the project O the Sakhalin Island in producers and holders of would be available for use by the Russian Far East, Sakhalin energy resources, will be pivotal other potential offshore Energy is delivering a ground- to achieving this growth. Sakhalin oil and gas breaking oil and gas project – developments. The successful the Sakhalin II Project. This President Putin outlined the implementation of Sakhalin II project involves crude oil, target for Russia to become a will help forward other long- natural gas and LNG world energy leader. This will term projects involving large production and export. The require ambitious large-scale oil and gas supplies from the Sakhalin II Project will developments of the country’s Russian Far East to world contribute to the oil and gas reserves. The more exhausted markets. infrastructure development of the hydrocarbon reserves the entire Sakhalin Island and become onshore, the more Russia has supplied gas to neighbouring regions. interest will be shifted to Western Europe for many offshore reserves. It is going to decades and has acquired a The Project based on the be a massive learning curve for reputation as a reliable Production Sharing Agreement the world oil and gas supplier. The prospects of that was signed in June 1994 community to deliver repeating this success in the involves the construction of commercially viable projects in Asia Pacific markets and offshore platforms to produce sensitive frontier gaining profit from Sakhalin II oil and gas, a system of oil and environments. And that are a great encouragement for gas pipelines, an LNG plant learning curve is underway in all parties involved in the and export facilities for oil Sakhalin, a world-class oil and project implementation. and LNG. gas province, with estimated resources of some 45 billion Sakhalin II enjoys strong Some of these facilities are barrels of oil equivalent, support of the Russian Party operating; most of the others comparable to the at the federal and local levels. are well advanced on the way undeveloped reserves of the The Russian Party and to commissioning. The Russian North Sea. Sakhalin Energy are working Party to the PSA represented by together to deliver the the Russian Government and The Sakhalin II Project, project. the Administration of Sakhalin accounting for only about 10% Oblast supervises the project of these resource volumes, is implementation and the largest infrastructure development. project in Russia and the largest integrated oil and gas The significance of this export project in the world. unprecedented integrated oil Because of lack of basic The head office of Sakhalin and gas project is mainly infrastructure, Sakhalin II can Energy is in Yuzhno- determined by the be referred to as a project Sakhalinsk, Russia. The contemporary trends in the being built from scratch in a company also has offices in world energy markets. For harsh subarctic environment. Moscow and The Hague example, the IEA estimates that As of end 2006, Phase 2 (The Netherlands). the average annual growth of construction work was about world crude energy supply will 80% complete and the entire In 2006, Sakhalin II Project be around 1.6%. The fastest volume of LNG production was teams worked in London (UK), average growth, around 2% per contracted. Yokohama (Japan) annum, will be in the demand and on Geoje Island for cleaner fossil fuels such as Sakhalin II is creating (Republic of Korea). natural gas. Russia, as one of the infrastructure that on
14 Annual Overview The head office of Sakhalin Energy is in Yuzhno-Sakhalinsk, Russia. The company also has offices in Moscow and The Hague (The Netherlands). In 2006, Sakhalin II Project teams worked in London (UK), Yokohama (Japan) and on the Geoje Island (Republic of Korea)
Shareholders
t the end of 2006, Government and Sakhalin LNG projects developing the A Sakhalin Energy Administration for a feasibility reserves of six countries, with shareholders were Shell study to develop the 38 million tonnes of total Sakhalin Holdings B.V. Piltun-Astokhskoye and contracted LNG supplies. (“Shell”), Mitsui Sakhalin Lunskoye fields. Holding B.V. (“Mitsui”) and Diamond Gas Sakhalin (“Mitsubishi”). The stakes they held in Sakhalin Energy were 55%, 25% and 20, respectively. On 21 December 2006, the Shareholders agreed Gazprom is the world’s largest that Russia’s leading energy Shell is a major player in the gas company, with a 50.002% company, Gazprom, would world energy market, with 35 stake owned by the Russian join the Project as a million barrels of oil equivalent Government, and the world shareholder. Once the daily production. It is operating largest holder of natural gas transaction is closed, in 140 countries and is a major reserves. Gazprom accounts for Gazprom will hold a 50% investor in the Russian economy. around 20% of world gas stake plus one share, Shell production and for around 90% will retain 27.5%, Mitsui and The company is a world leader of gas production in Russia. Mitsubishi 12.5% and 10%, in LNG production, having Gazprom supplies gas to 32 respectively. implemented five LNG projects countries. in Australia, Brunei, Oman, Malaysia and Nigeria. The Russian Government has Shareholding Structure appointed Gazprom as the of Sakhalin Energy in 2006 Coordinator of the Programme for Establishment of a Unified Gas Production, Transportation and Supply System in Eastern Mitsui is one of the leading Siberia and the Far East, with a trading companies in the world. View to Possible Export of Gas Mitsui is involved in projects to the Markets of China and that annually supply 18.6 the Rest of the Asia-Pacific million tonnes of LNG to Japan (Eastern Programme). and plays a significant role in the energy-related projects implemented in the CIS area. Shareholding Structure of Sakhalin Energy after the Transaction with Gazprom Sakhalin Energy was established in April 1994 by the MMM Consortium (Marathon, McDermott and Mitsui), which Mitsubishi is a leader in the was later joined by Shell and world trading business, the core Mitsubishi to form the ММММS of the largest finance business Consortium. Sakhalin Energy group in Japan and one of the was established as a result of the largest in the world. It is Consortium winning the currently responsible for over international tender launched in 50% of total LNG imports to May 1991 by the Russian Japan and is involved in eight
Annual Overview 15 Production Sharing Agreement
he Sakhalin II Project is and Sakhalin Energy in the tax burden is minimal at the start T being carried out on the manner prescribed in the PSA. On of the project and becomes basis of a Production Sharing top of that, as was reported by Mr. heavier as the project develops). Agreement (PSA) signed on 22 Dementiev, Deputy Minister of June 1994. The parties to the Energy and Industry of the In lieu of a part of the tax PSA are the Russian Federation Russian Federation, in his speech payments, the state and the and Sakhalin Energy. This is the delivered at the State Duma investor share the profit first ever PSA in Russia. (lower chamber of the Russian production in an agreed parliament), on November 21, proportion, which helps to address In 1996, the Company was 2006, the Russian Federation two problems, the first being the granted licences to develop the receives a 32% profit tax on the long-term forecast of the tax Piltun-Astokhskoye and revenues of the Sakhalin II PSA burden, and the second being the Lunskoye licence areas under the operator – Sakhalin Energy. customised tax treatment. Sakhalin II PSA. What is a PSA? Contrary to common belief, the Subject to the provisions of the PSA is not a preferential tax PSA, the Sakhalin II Project A Production Sharing Agreement treatment, but rather a different should be implemented in (PSA) is a contract between the form of settlement between the accordance with laws, investor and the state, which investor and the state. Depending regulations, decrees and other enables large-size, long-term and on the terms of each individual governmental acts applicable in risky investments to be made by agreement, the Project the territory of the Russian investors. The purpose of a PSA is development phase and market Federation, officially enacted, and to secure a set of terms and trend, the state’s incomes may publicly available, and standards conditions applicable to the prove to be higher than those generally accepted in the development of the resource, by resulting from the regular tax international oil and gas industry. replacing the regular tax and treatment. Furthermore, by fine- licence treatment with contractual tuning the project’s economics it is According to the PSA, the Russian provisions remaining in force possible to achieve a significant Federation retains its title to the oil throughout the life of the project. extension of the Project’s life in and gas fields, while Sakhalin comparison to the regular tax Energy invests all necessary finance The first PSA in history was signed treatment. As a consequence, the for the development and pays in August 1966 in Indonesia. overall incomes from a PSA project bonuses to the Russian Federation Since then, PSAs have become a may be higher than those yielded once significant Project milestones common practice all over the by the regular tax treatment. have been achieved. world. They have been used in 64 countries, including all oil- Another important feature of PSA Throughout the whole life of the producing post-Soviet states, projects is the complete Project, Sakhalin Energy will pay from Uzbekistan to Ukraine. transparency of their economics. the Russian Federation 6% of all The State approves the budgets oil and gas produced in royalties. There have been hundreds of and has an opportunity to such agreements. Each PSA is supervise the investor’s All proceeds from the sale of aligned to an individual project production costs. This would hydrocarbons, less royalties, are and its specific conditions. The have been impossible with a allocated to the Company in only thing that remains invariable regular licence. compensation for the capital is the basic principles, which investment in the Project, until include the state’s title to the Finally, due to the contractual full cost recovery is achieved. The fields, stability of the PSA terms relationship between the parties, remaining part of all revenues and conditions, and priority they both feel mutual after cost recovery is allocated allocations for the investor’s cost responsibility to follow the between the Russian Federation recovery (as a result of which the established “rules of the game”.
16 Annual Overview The project has boosted the growth of investment and business activities
Benefits for Russia
he benefits for the Russian the oil and gas complex in its technological solutions will be in T Federation from the eastern regions. Sakhalin II high demand, as will be many Sakhalin II Project are manifold triggered the process of Russia Russian specialists with and significant. The Sakhalin II opening up the new fast-growing experience of Sakhalin II. Project delivers benefits not oil and gas markets in Asia Pacific only to Russia nationally, but and North America. Also, a modern oil and gas also to Sakhalin Island itself infrastructure has been built in and even to some of its The world-largest integrated oil Sakhalin from scratch, so that neighbours. Thousands of and gas project has brought to future energy developments in Russian households began to Russia the unique offshore expe- the Okhotsk Sea will be less live better and obtained new rience and state-of-the-art expensive and less challenging. positive opportunities. technologies. The project has boosted the In the geopolitical and The large-scale development of growth of investment and international cooperation aspects, Russian offshore fields is only business activities, with a positive and in terms of strengthening being prepared, but we are con- effect not only for Sakhalin economic and energy security, vinced that the experience Oblast, which is now the most Russia is interested in building up gained from our project and our economically dynamic of all
Annual Overview 17 districts of the Russian Far East, the payments to the Russian of roads and bridges, sea-ports but also for Russia in general. Federation will surge to around and airports, US$80 billion. telecommunications and other Russian companies were infrastructure projects. awarded over US$8.2 billion of Obviously, the source of revenues total contracts in 1996–2006. for both the Company and the Phase 2 employed in 2006 over This has triggered larger and Russian Federation are the sales 20,000 people, the majority of more advanced industries, of hydrocarbons. By the end of whom (70%) are Russian citizens. potential access to non-Russian 2006, the revenues to the Russian Unemployment on the Island has markets, new jobs, higher Government from the Sakhalin II dropped to the all-time low of salaries, growing retail trade, Phase 1 development exceeded 1.5%. In the operations phase, better social programmes and US$550 million in bonus Sakhalin Energy and its higher tax payments, or what is payments, royalties and taxes. contractors will create about usually referred to as a 2400 permanent jobs. “multiplier effect”. As part of the figure, US$100 million was contributed to the The Sakhalin II development At a forward oil price of US$34 Sakhalin Development Fund, opens up new prospects for local per bbl the project will generate which is managed by the businesses in Sakhalin, resulting US$50 billion for the Russian Sakhalin Administration. This in increased demand for local Federation over 40 years in the money has helped to address the services in design, environmental form of direct payments and the old problems with the consulting, office refurbishment, Russian share of profit energy/heat/water supply to transportation, catering and production. This estimate takes households in Sakhalin. The many other areas. into account the consequences of Sakhalin Development Fund also the revised project costs. At the helps support health and social And last, but not least, the project same time, this is a conservative facilities, as well as local is becoming a propellant of the estimate in terms of the world oil manufacturers in food, economic growth, creating a price scenario. Obviously, the woodworking, farming, coal, foundation for the development higher the oil price, the greater energy and transport industries. of other related businesses and the financial benefit to the contributing to the general Russian Federation. Thus, at the Sakhalin Energy also spends over upgrading of economic and living average oil price of US$50 per bbl US$400 million on the upgrades standards in Sakhalin.
18 Annual Overview Availability of such gas resource volumes will enable Sakhalin Energy to supply 9.6 million tonnes of LNG per annum for at least 25 years
Resource Base
he Sakhalin II Project tonnes of oil and condensate and The total in place hydrocarbon T involves the development 490 billion cubic metres of gas. resource volumes in both fields of two offshore fields: Piltun- are about 594 million tonnes (4.5 Astokhskoye (containing Since then, the Company has billion barrels) of oil and mostly oil with some free gas completed exploration as condensate and more than 700 and cap gas) and Lunskoye required by the PSA. In addition, billion cubic metres (24 trillion (containing mostly gas with 3D seismic surveys have been cubic feet) of natural gas. The some condensate and carried out using state-of-the-art recoverable resource volumes of considered among the largest technologies, and two new ap- the Sakhalin II fields are estimated in the world). The Piltun- praisal wells were drilled, which at around 653 billion cubic metres Astokhskoye field is 15–20 allowed pre-development work (22.4 trillion cubic feet) of gas and kilometres offshore in an and detailed studies of the deep 183 million tonnes (1.4 billion area of sea 28–32 metres horizons. barrels) of oil and condensate. deep. The Lunskoye field is 12–15 kilometres offshore in The 3D seismic and appraisal Availability of such gas resource waters 41–48 metres deep. drilling by Sakhalin Energy volumes will enable Sakhalin Both fields were discovered resulted in significant incremental Energy to supply 9.6 million in the 1980s by hydrocarbon resource volumes. tonnes of LNG per annum for at Sakhalinmorneftegaz. The least 25 years. fields are approximately 15 In particular, in 2001 Sakhalin km offshore northeast Energy declared the increase of Over 7 years since the beginning Sakhalin, in the waters of the the Lunskoye resource volumes by of the development of the Astokh Sea of Okhotsk, covered with 40%, from 384 billion cubic metres Feature of the Piltun-Astokhskoye ice for 6 months a year. (13 trillion cubic feet) to 531 field, the Company has produced billion cubic metres (18 trillion 11.5 million tonnes of oil, and the As at the date of the Production cubic feet). The State Reserves recoverable oil resource volumes Sharing Agreement, the total Committee of the RF Ministry of have increased by more than 30 original in-place resource Natural Resources approved the million tonnes, which means that volumes of the Piltun- revised gas resource volumes of the Company has achieved an Astokhskoye and Lunskoye fields the project. The world-class actually triple replenishment of on the balance sheet of the resource volumes of the Lunskoye the cumulative production from Russian Federation were field are the largest of the Sakhalin the incremental resource approximately 435 million proven resource volumes. volumes.
Sakhalin II Hydrocarbon resource volumes (1 January 2006)
Dissolved gas Free gas and cap gas Names Crude oil (В+С +С ), Condensate (С +С ), 1 2 (В+С +С ), (С +С ), bil-lion cubic 1 2 of Fields million tonnes 1 2 1 2 million tonnes billion cubic metres metres
In In In Recoverable Recoverable In place Recoverable place place place
Piltun-As- 474.597 130.051 59.610 17.154 103.537 12.341 8.301 tokhskoye
Lunskoye 43.866 3.172 8.912 1.785 530.884 63.005 41.859
Total 518.463 133.223 68.522 18.939 634.421 75.346 50.160
RF Government Annual Report on PSAs, Moscow, 2006
Annual Overview 19 Phase 1 and Phase 2
o accelerate the Offloading (FSO) vessel, a Single Full-field development of the T commencement of the Anchor Leg Mooring (SALM) and Sakhalin II Project involves the Sakhalin II development, a sub-sea pipeline. construction of two new Sakhalin Energy proposed a offshore platforms, onshore phased approach to the project The Vityaz operations include pipelines to carry oil and gas to implementation. The Work drilling, production and offloading the south of the Island, an Programme for Phase 1, which of oil and the associated support Onshore Processing Facility was launched in 1996, selected and exploration activities. Oil (OPF), a liquefied natural gas the development of the Astokh production occurs only during a (LNG) plant and offloading feature as the starting point 6-month period when ice cover terminals for crude oil and LNG. and included plans to continue is not prohibitive to navigation research studies and to launch and SALM operation. During the The LNG plant, consisting of two commercial oil production with ice period, from approximately trains capable of producing the a view to increasing the oil December to May, the FSO is total of 9.6 million tonnes of recovery factor in the future. disconnected from the SALM LNG per annum will be the first Phase 2 started in 2001 as a full- and leaves the Okhotsk Sea. As LNG facility in Russia. field integrated development of the PA-A platform has no oil the Piltun-Astokhskoye and storage facilities, oil production Phase 2 of the Project also Lunskoye licence areas, is suspended till the end of the includes the tie-in of the PА-А including the construction of a ice period. (Molikpaq) platform to the field new infrastructure for pipeline system of the Piltun- hydrocarbon production and oil To increase oil recovery by Astokhskoye field, in order to and LNG transportation. maintaining reservoir pressure, ensure year-round hydrocarbon water flooding was implemented production, which is expected in Phase 1 from the PA-A platform (Phase 1). late 2007. The successful implementation of Phase 1 using the PА-А platform Phase 2 construction work is made it possible to obtain now (as at the end of 2006) important field and operation about 80% complete, and the data, including environmental entire volume of LNG monitoring data, which has been production has been contracted. used to optimise the next Phases of the Sakhalin II implementation. The implementation of Phase 1 began with large-scale Phase 2 prospecting and exploration activities in the Piltun- In 2001, Sakhalin Energy Astokhskoye field, including presented the Integrated Plan of seismic surveys and the drilling of Development of Piltun- prospecting and exploration Astokhskoye and Lunskoye wells between 1986 and 2000. Licence Areas (POD), which was The PА-А (Molikpaq) platform, approved by the Supervisory which began to produce oil in Board, the steering body of the July 1999, was installed in the Project. On 15 May 2003, the Sakhalin shelf in 1998. Today, the Company announced the PА-А platform is the heart of the Development Date for Lunskoye Vityaz Production Complex, Field, which marked the formal which also includes the double- launching of Phase 2 of the hull Okha Floating Storage and Sakhalin II Project.
20 Annual Overview 1996–2006: Major Milestones over the Past Decade
n June 2006 Sakhalin Energy held its first decennary of the Sakhalin II Project, which started I the very same day 10 years before. In this interval of time the Project added many bright pages to its track record…
1996 2000
• Sakhalin Energy announced a • Sakhalin Energy concluded a US$10 million Commencement Date under the Sakhalin II contract for the development of project Production Sharing Agreement – the official technical specifications for the LNG plant start of the Project. construction. • Contracts for the offshore and onshore facilities design awarded, including mainline pipelines required for the full-scale development of the 1997 Piltun-Astokhskoye and Lunskoye fields. • Shell concluded an asset swap with Marathon and • The Government of the Russian Federation assumed the major shareholder role in the approved the plan of development of the Project. Astokh feature (Phase I) of the Piltun- Astokhskoye field. • Carried out 3D seismic on the Licence Areas over an area of 1330 square kilometres. 2001 • Sakhalin Energy started financing the project for studying of grey whale • Natural gas geological resource volumes increment population distribution and behaviour near by 40% was obtained at the Lunskoye field. the Vityaz production complex offshore • Integrated Plan of Development of the Piltun- Sakhalin. Astokhskoye and Lunskoye fields approved.
1998
• The Molikpaq ice-class drilling and production platform was installed offshore. • PA-16 prospecting hole of 3200 m target depth was drilled at the Piltun-Astokhskoye field at a depth of 2480 m. A commercial oil flow was obtained.
1999
• The offshore Vityaz oil and gas producing complex started producing oil under Sakhalin II Project. • The first crude cargo produced offshore Sakhalin was exported.
Annual Overview 21 2002
• Sakhalin Energy prepared and submitted for the state expert reviews the TEOC of Integrated Development under the Phase 2 Project.
2003
• The official launch of the implementation of the Sakhalin II Phase 2 Project. The Shareholders took the Final Investment Decision. The Lunskoye field Development Date officially announced. • Sakhalin Energy announced the start of tenders for the main contracts under the Sakhalin II Phase 2 Project. • First LNG sale contracts with Japan utility companies negotiated. • Positive conclusions of the state expert reviews obtained.
2004
• Commencement of the onshore oil and gas pipeline system construction – one of the biggest in the world. • Sale and purchase agreement signed to supply LNG to the Western Coast of Northern America.
2005
• Russia’s first gravity-base structures (GBSs) for the offshore platforms in the Lunskoye and Piltun fields successfully installed.
2006
• The Lunskoye-A topsides installation on the base structure successfully completed in a record- breaking operation offshore Sakhalin Island. Lunskoye-A is the first gas-producing offshore platform in Russia. It will become the main source of gas production for the LNG plant at Prigorodnoye. • New modules successfully installed on the Molikpaq platform. • All offshore pipelaying completed ahead of schedule. • First Russia’s LNG jetty completed. • A protocol to bring Gazprom into the Sakhalin II Project as a leading shareholder signed.
22 Annual Overview Sakhalin II Project: 2007 Major Milestones
n 2007 documents will be signed to bring • Lun-A platform well drilling, I Gazprom on board as a leading • Installation of PA-B platform topsides, shareholder of Sakhalin Energy. This expected • Operational readiness of the offshore and event will give new stimuli for the development of our Project and strengthen onshore pipeline, the Company’s position in the LNG and oil • Commencement of year-round oil market place in Asia Pacific. A wide-scale production at the Molikpaq, work programme for 2007 has been outlined, • Arrival of the first LNG carrier the completion of which will allow us to report major new achievements for the • Start of testing and commissioning Sakhalin II Project, such as: activities at the LNG plant.
It is beyond any doubt that the implementation of this project will contribute significantly to improving the global energy market. Energy consumers in Japan, the Republic of [South] Korea, and North America will certainly notice these improvements. This project will certainly also benefit Russians living in the region and the Russian government.
Vladimir Putin, President of Russia. (21 December 2006)
Annual Overview 23 Sakhalin Energy The New Energy Source for the Asia Pacific Innovations.Innovations. ConstructionConstruction Project Map 26 The Innovator 27 Offshore Platforms 28 LNG Plant 30 Oil Export Terminal 32 Onshore Processing Facility 33 Onshore Pipelines 34 River Crossings 35 Offshore Pipelines 37 Ensuring Seismic Safety 38 Infrastructure Projects and Logistics 39
Annual Overview 25 Sakhalin II Project
26 Annual Overview Sakhalin II brings innovation to the Russian Federation in terms of new technologies such as LNG and offshore production of hydrocarbons
The Innovator
t is safe to say that the I Sakhalin II Phase 2 is a megaproject by any standard. This is a truly mammoth groundbreaking development in a frontier environment, requiring the simultaneous execution of several major multi-million dollar complex engineering projects.
Sakhalin II brings innovation to the Russian Federation in terms of new technologies (LNG, offshore production, seismic protection) and in terms of new management techniques (simultaneous execution of several large scale subprojects, transparency in survive a rare intensity complete. The most significant activities and decision making). earthquake, expected on average milestones of the past year include every 3000 years, without any the installation of Russia’s first The Project is an integrated oil serious damage. A seismic safety offshore gas platform, “Lunskoye-A” and gas development in an factor has also been built into the (Lun-A), the transportation and extremely harsh frontier environ- design of the LNG plant and the installation of giant new modules ment, which creates additional pipelines. Proven techniques and for the Molikpaq platform in a challenges to the design and technologies, as well as extensive one-of-a-kind operation, and construction teams. experience of the company completion of the laying of the shareholders, are used in an offshore pipeline. For example, the pipeline on its innovative manner to ensure safe way from the north to the south and effective operations. By developing unique engineering of the Island crosses more than solutions, we are helping forward 1000 rivers and streams. A large- By the end of 2006, the Phase 2 their broad utilisation by other scale monitoring programme was construction was about 80% potential developments. carried out for over three years. The resulting data were used to develop a “River Crossing Strategy” covering an extensive set of actions aimed at minimising any potential environmental impact.
The seismic activity on Sakhalin Island is a further example of the challenges facing the Project. The offshore platforms are designed to withstand the kind of earthquake strength level that is expected on average around every 200 years without yielding or failure of equipment, and to
Annual Overview 27 Offshore Platforms
he Sakhalin II Project PA-A platform T provides for the development of the Piltun- The PA-A platform (Molikpaq), Astokhskoye and Lunskoye oil installed at the operations site in and gas fields using three fixed 1998, is the first offshore production offshore ice-class platforms: PA-A platform in the Russian Federation. (Molikpaq), PA-B and Lun-A (Lunskoye-A). PA-A is a converted drilling rig first used in Arctic waters offshore In the course of construction in Canada. A steel “spacer” July 2006 two modules were manufactured by Amur Shipyard successfully installed on the was fitted to the bottom of the Molikpaq platform. These Molikpaq so it could be used in the complex modules, each the size deeper waters and severe ice of a 10-storey apartment block, conditions of the Sea of Okhotsk. will be used to hook up the platform to the pipeline system Molikpaq is located 16 km offshore north-east Sakhalin. The platform is being constructed, which will 120 m wide and weighs 37,523 tons. enable year-round oil and gas production. The modules were Molikpaq is the key facility of the Vityaz production complex, which also installed using a heavy lift crane includes Single Anchor Leg Mooring and Okha Floating Storage and barge. In addition, a new multi- Offloading Unit. Phase 1 of the Project has been producing oil since 7 July million-dollar crane assembled 1999 on seasonal basis. locally in Kholmsk was also installed on one of the modules. Lun-A platform The modules were constructed by Gulf Piping Company in Abu Lun-A (Lunskoye-A), installed 15 Dhabi and delivered to Sakhalin km offshore north-east Sakhalin at by a 160-m self-propelled barge, a depth of 15 km, is a drilling and Enterprise. The 11,000 km voyage production platform with the to the installation site offshore minimum necessary of process Sakhalin took more than a month. equipment. The platform is designed for year-round operation Construction of the two modules, in ice conditions, low one for oil and one for gas, took temperatures, wind, wave and 14 months. The modules, seismic loads. The main part of the designed by ABB and constructed gas to be used at the LNG plant by Gulf Piping Company, can will be produced at this platform. withstand the harsh winter climate offshore Sakhalin with The platform production capacity is more than 50 million cubic metres of temperatures as low as minus 40 gas per day and some 50,000 barrels of condensate per day (8000 cubic degrees Centigrade. The metres per day). commissioning of the modules is planned for summer 2007. The platform consists of a 2005. The Lunskoye CGBS was Installation of Lunskoye-A, the first concrete gravity base substructure the first huge facility built in the offshore gas platform in Russia, (CGBS) and topsides. port of Vostochnoye in the was a major 2006 milestone for the The Lunskoye-A substructure was Primorsky Krai. It has a total dry Sakhalin II Project. installed offshore Sakhalin in weight of 103,000 tonnes. The
28 Annual Overview Lunskoye-A platform is almost as high as the building of the Moscow State University on the Vorobyovy Hills and approximately as high as one of the Seven Wonders of the World, the Lighthouse of Alexandria
base is 105 metres by 88 metres. with a “zero discharge” of drilling substructure shaft. At the Piltun- The overall height of the struc- wastes into the sea. Astokhskoye field, it is planned to ture is 69.5 m. drill wells with large inclination The Lunskoye-A topsides were The PA-B platform topsides are angles and deviations, horizontal manufactured in May 2006 by under construction at the Samsung wells, and wells to be stopped in Samsung Heavy Industries at their Heavy Industries construction yard several horizons. The horizontal yard at Geoje in South Korea. on Geoje Island in Korea. As at late deviation of wells will reach 6 km. 2006, the fabrication is The topsides are a fully integrated mechanically complete. To increase oil recovery, a module deck with all the necessary capable of daily injecting about drilling and production As soon as the ice thaws, the 20,000 m3 of water to the equipment, an accommodation 28,000 tonne topsides will start formation will be installed at the module for the operating the journey to Sakhalin and will be platform. All produced water will be personnel and life support installed in the summer of 2007. injected back to the formation, and equipment. The topsides have 27 treated seawater will be also injected drilling slots designed for drilling The drilling complex should if additional volumes are required. of directional wells, which will ensure the drilling of directed The construction of injection wells ensure full-scale development of wells through a subsea is similar to that of oil wells. the Lunskoye field. PA-B platform The platform design incorporates unique engineering solutions to The PA-B (Piltun-Astokhskoye-B) meet the combined challenges of platform at the Piltun- artic, wave and seismic design Astokhskoye field is an and ensure fail-proof operation. integrated oil and gas production platform with For the first time in international drilling equipment that will practice, friction pendulum produce oil and associated gas bearings are used on an offshore in the Piltun area. The platform platform to allow the platform to will be operating some 12 km withstand earthquake loads. They offshore north-east Sakhalin at will help the platform sustain a depth of 32 metres. Similar to heavy earthquakes. On the other Lun-A, the PA-B platform is hand, in “calm” environments equipped with friction they can serve to reduce wave pendulum bearings to protect the platform from earthquake loads, and to and ice loads onto the topsides reduce wave and ice loads onto the topsides and the equipment. and the equipment. The concrete gravity base substructure with four legs was built in the port The Lunskoye-A topsides were of Vostochny in the Russian Far East and installed in August 2005. successfully installed on the CGBS in May 2006: the heavy Production capacity: 21,800 tonne topsides were Oil: some 70,000 barrels/day (11,130 m3/day) slowly and gradually lowered Associated gas: 100 million standard cubic feet/day (2.8 million m3/day) onto the CGBS by ballasting the barge build specially for this operation. The “silent elegance” • The Lunskoye-A platform is almost as high as the building of the Moscow of the docking and mating of State University on the Vorobyovy Hills and approximately as high as one these two structures was a new of the Seven Wonders of the World, the Lighthouse of Alexandria. world record for offshore • In terms of weight the Lunskoye-A platform topsides can compete with operations of this type. three Eiffel towers. • A barge as large as two football fields was required to carry these topsides. Drilling of wells from Lunskoye-A • Transportation of the even heavier PA-B topsides will require a new will commence in 2007. Sakhalin gigantic barge. Energy will operate the platform
Annual Overview 29 LNG Plant
LNG Plant By the end of 2006, the overall progress in engineering, The Liquefied Natural Gas procurement and construction Plant (LNG Plant) is being work scope at the LNG site built near Prigorodnoye on was over 90%. the south coast of Sakhalin (Aniva Bay). The total area of Commissioning activities started the LNG Plant is 490 on the project in 2006. The hectares. It is designed to Central Control Room and the process and liquefy natural Main Administration were gas. It is the first LNG plant handed over to the operations in Russia. team. Construction activities within the main production area The LNG Plant has two process trains to purify, process and liquefy natural have been completed. Start-up gas. Should there be in the future a requirement to expand the plant with a and commissioning of the third train, the premises are large enough to accommodate additional emergency diesel generator, facilities. instrument air compressors, boilers and fire water pumps was The combined capacity of the two trains will be 13.8 bcm of feed gas per successfully finalised. annum (approximately 1510 million standard cubic feet of feed gas per day). The Plant is designed to produce 9.6 million tonnes of LNG per annum Installation of all process (4.8 million tonnes of LNG per year produced by each of the process trains). equipment in both LNG trains was completed by the year end. The LNG Plant process trains will utilise the Shell Double Mixed Refrigerant The total weight of the installed process for gas liquefaction, which will allow them to take advantage of the equipment is over 25,000 tonnes. natural specifics of Sakhalin’s cold climate and to use energy effectively in the LNG process. Liquefied gas will be stored in two LNG storage tanks of 100,000 In 2006, both LNG storage tanks cubic metres net capacity each and from there shipped by LNG tankers. were successfully hydrotested. The density of water is about All LNG Plant buildings and their substructures are designed to withstand twice that of LNG which means earthquakes. The facility has special units for safe disposal of LNG tanker boil-off gas.
30 Annual Overview The International Energy Agency predicts a dramatic increase of the LNG share in natural gas interregional trade. Russia leads the world in natural gas reserves and gas production, but so far it has not produced LNG. The Sakhalin LNG plant will be Russia’s first step in utilisation of this advanced technology
Contractors
The LNG Plant construction contract was awarded to CTSD, set up by Chiyoda Corporation and Toyo Engineering from Japan, and Russian NIPIGasPererabotka (NIPIGaz) and Khimenergo consortium.
Khimenergo consists of Transstroi Engineering Corporation, IKEM and Angarsk Building Company.
that the greatest load imposed Opening Daruma’s Eye during the lifetime of the tanks occurs during the hydrotest. Daruma is a traditional Japanese spherical tumbler toy personifying Bodhidharma, a godling of good fortune. When you make a wish, Another important milestone of you paint a black pupil in one of its eyes, and when your wish 2006 was the completion of all comes true you are supposed to fill in the other eye of the Daruma toy. LNG jetty installation activities. The LNG jetty is capable of The official ceremony of signing some of the LNG and OET facilities “ready for handing LNG tankers ranging commissioning” certificate was also accompanied by the “Daruma Eye from 18,000 cubic metres to Opening” ritual executed by Japanese representatives of CTSD, the EPC 145,000 cubic metres. Once the contractor. plant is operational, loading of LNG tankers from the jetty is The Project participants and guests will see this memorable ceremony more expected to take between six and than once since the completion of all LNG/OET facilities is close. sixteen hours, depending on the size of the vessel. Visitors As construction work intensified, approximately 10,000 people In 2006, LNG/OET construction team hosted more than 150 various visits were employed on site during the and more than 2000 people had a chance to see the construction of the 1st peak periods of 2006. More than LNG plant being built in Russia with their own eyes. Key visitors in 2006 50 percent of those working on included Russian Deputy Prime Minister Mr. Medvedev, the RF President’s the site were Russian nationals Envoy in the Far East Region Mr. Iskhakov, Minister of Foreign Affairs Mr. and almost 1500 were employed Lavrov, representatives of various Embassies including British, Australian, from the local district of Japanese and Dutch. Korsakov.
Annual Overview 31 Oil Export Terminal
The OET is located 500 metres detection systems will be Work on this project is nearing east of the LNG plant at the same installed in the tank pads. completion. In 2006 crude oil site in Aniva Bay. The OET will be Crude oil will be exported via a pumps were installed. An used to store oil in two oil subsea pipeline to the Tanker onshore pipe rack and a pipeline storage tanks with geodesic Loading Unit (TLU) located from the tanks to the TLU were curvature-type domes and approximately five kilometres installed and tested. Installation floating internal roofs. offshore in Aniva Bay. Crude oil of the TLU was completed. will be offloaded at the rate of The tanks have total net about 50,000 barrels per hour Four lightning towers around operating capacity of 1.2 (8000 cubic metres/hr). The TLU the oil tanks were installed to million barrels (190,000 m3). will be equipped with a pressure provide protection against This is approximately equal to equalising system to protect the lightning as required by Russian six days throughput for the TLU against overpressure and oil legislation. The towers are 60 onshore pipeline. To prevent spills in case of an abrupt metres high (crude oil tanks are soil contamination, oil leak offloading system shutdown. 18 metres high).
32 Annual Overview Onshore Processing Facility
Onshore Processing Facility
The Onshore Processing Facility (OPF) is located near the north- eastern coast of Sakhalin, 7 km inland from the Lun-A platform pipeline landfall.
The OPF is designed to treat the Lunskoye Field gas and condensate prior to their piping to the Oil Export Terminal and LNG Plant at Prigorodnoye, in the south of Sakhalin. The OPF will also receive oil and gas from the Piltun-Astokhskoye Field offshore platforms to prepare them for further pipeline transportation to Prigorodnoye.
The OPF includes a 100 MW power plant capable to supply power required by the OPF and the Lun-A platform. When operated at full design capacity, the OPF will be able to process 1800 million standard cubic feet of gas (51 million cubic metres) and approximately 60,000 barrels of condensate/oil (9500 cubic metres) daily.
All of 2007 will represent the very project organisation to a long complex phase of completing term operating organisation construction and getting the requires a lot of attention, and systems flushed and ready for the OPF will see its highest startup at the end of the year. manning over its lifetime Transition from a construction while it is undergoing this site to a live plant and from a change in 2007.
OPF facilities
The Onshore Processing Facility includes: • inlet vessels • three phase separation units; • condensate stabilisation unit; • condensate storage tanks; • gas dehydration and dew point control; • flash gas compression. The OPF also includes a wastewater treatment plant.
Booster Station # 1 (BS #1) is located on the OPF premises and includes compressor stations to service the gas and oil export pipelines.
BS #1 compresses the Lunskoye Field gas, as well as the Piltun-Astokhskoye Field gas for its further pipeline transportation. The pumps boost pressure of the stabilised condensate and oil stream to deliver them by main pipelines to the Oil Export Terminal (OET).
Annual Overview 33 Onshore Pipelines
subcontractors and ten Russian subcontractors are engaged in support operations. The onshore pipeline deploys the major proportion of the entire Russian pipeline laying capacity.
The pipelines installation is done by pipeline “spreads” which include both personnel and machinery required to complete all phases of pipeline construction, from pipeline layout at the initial phase to land reinstatement at the close of activities.
In 2006, the Right of Way he onshore oil and gas pipeline system was completed. underwent two significant T pipelines will run from the Total length of the pipes delivered environmental protective Piltun-Astokhskoye Field in the to Sakhalin exceeded 300 km of exercises. One of them was a north of Sakhalin via the offshore and some 1600 km of programme to install temporary Onshore Processing Facility onshore pipelines, weighing more soil erosion control measures (OPF) near the Lunskoye Field than 500,000 tonnes. 1500 km of such as silt fences, slope breakers, to Prigorodnoye, in the south line pipe were welded out of the silt traps, river protection devices, of the Island. The total length total length of 1600 km. Oil and etc. The other one was a of each pipeline will be over gas pipelines were installed across winterisation programme in 800 km. some of the most difficult areas of preparation for spring thaw (to Sakhalin. protect the exposed ROW areas The oil and gas pipelines will which may be vulnerable to share a single pipeline corridor. The engineering, procurement erosion during spring thaw). In The pipelines are each installed in and construction contractor for particular, the winterisation a separate trench (backfilled by a this project is Starstroi. Nine big programme included heli-seeding minimum 0.8–1.0 m layer of soil Russian companies are involved of over 200 km of the pipeline over the pipe). The external in the project as construction Right of Way. surface of the line pipe has an external three-layer polyethylene Booster Station #2 to protect them against external corrosion. At fault-crossing sites, Booster Station#2 (BS#2) is tied into the onshore trunk pipelines near special pipe-laying techniques are Gastello approximately half way between the Onshore Processing Facility used to ensure their safety in case and Oil Export Terminal. It includes main line oil pumps, gas compressors of seismic activity. and auxiliary equipment, including the nitrogen oxides inhibition system. There is also a flare system to release gas in case of emergency from the gas Operation of both main pipelines compression system as well as fuel gas. BS#2 will be also used as a pipeline will be controlled by a state-of- emergency response centre. the-art pipeline leakage detection system. In 2006, Sakhalin Energy awarded the BS #2 Front End Engineering and Design, as well as Engineering, Procurement and Construction contracts. In 2006, the Onshore Pipeline Construction of site roads, piling and foundations all commenced during Project advanced significantly. Q4. Purchase orders for most long lead items were also placed during Q4. The delivery of pipes for the
34 Annual Overview All the rivers classed as most sensitive for salmon spawning are crossed during winter
River Crossings
he onshore pipelines cross ensuring that sedimentation from Out of 179 rivers, eight are Т over 1000 watercourses. construction activities is crossed by Horizontal Directional These include small channels minimised. Where the use of a Drilling (HDD) and one by the and streams, but some of them flume pipe is not possible, wet- augur bore method. Sakhalin are spawning rivers of high cut methods will be applied, with Energy’s enhanced approach to commercial importance. The strict control over water the crossing of the remaining pipeline route also crosses management to ensure minimal 170 sensitive watercourses is several watercourses which impact on the rivers. documented in the Company’s may be inhabited by Red Data Book fish species. Sakhalin Construction of the Naiba River crossing in the Dolinsk District turned Energy is committed to “no net out to be a formidable challenge for DrillTechRus, Sakhalin Energy’s HDD loss” of salmon habitats. The contractor. It was one of the longest HDD river crossings (about 1.15 km), Company undertakes all where the 48-inch pipe had to be laid deep beneath the river bed. measures to reduce the impact The Naiba River is no more than 50 metres wide at the crossing site, but of the pipeline crossings the contractor drilling crew had to drill a well bore over 1 km long to construction and operation to comply with environmental requirements. insignificant and short-term. For the HDD method, a slant rig was installed on one of the river banks at All the rivers classed as most an angle of 60°. A small diameter borehole was first drilled under the river sensitive for salmon spawning bed to the other bank and subsequently reamed out to the 64-inch will be crossed during winter. diameter by increasingly larger augers to hold the 48-inch line pipe. Wherever possible and permitted, Immediately after the borehole reaming, a pre-welded 1150 m long river crossings will be constructed section of pipe was pulled through for tie-in. The pipeline section using a dry-cut method. This uses weighed about 730 tonnes, but the line pulling force was reduced to a flume pipe, through which the 80 tonnes due to rollers and special buoyancy control methods. The river flows temporarily whilst the pipeline pull-in activity lasted 12 hours altogether. trench is being prepared,
Annual Overview 35 River Crossing Strategy (public 35 gas pipeline crossings of crossing also carries additional document) and among other sensitive rivers and 30 crossings maintenance requirements over things stipulates the crossing of of tributaries). Also, at the end of and above the routine these sensitive rivers under low- the winter season 2005/2006, maintenance for buried flow conditions and largely approval was obtained from pipelines. The exposure to the during the winter period Rosselkhoznadzor to cross a extreme air temperatures would (December–April), which timing number of small rivers (up to 4.5 lead to the requirement for constraint is imposed over and m wide) with flume pipes and insulation, which in itself adds to above the Sakhrybvod timing this method will be applied the maintenance requirements conditions. wherever necessary to minimise as this can lead to enhanced environmental impact. corrosion probabilities. In 2006, the last of the Compared to open trenching, Horizontal Directional Drilling Sakhalin Energy prefers not to the construction of elevated (HDD) river crossings was construct any above ground river crossings requires additional completed. Each drilling crossings for the pipelines for time and hence a longer period operation took several months. security reasons. of impact.
Sakhalin Energy put in place a In terms of environmental impact Regardless of the crossing focused winter river crossing during construction, elevated method to be used, silt fencing campaign for winter December crossings have a lesser impact will be installed along both 2005 – April 2006 using specified than open trenching and more banks of the stream and along working methods, dedicated impact than HDD. With regard to the limit of ROW for a work crews and supervision. the rivers on Sakhalin, however, minimum distance of 20 Information gained from this due to extensive flood plains, metres to minimise the effects successful campaign is taken into possibility of liquefaction and of wash out of excavated spoil. account during the 2006–2007 potential scouring, this type of After that, clearing and winter season for crossing the crossing would require significant grubbing, and installation of remaining sensitive rivers (a total foundation construction to required equipment will be of 23 oil pipeline crossings and support the pipelines. This type of completed.
36 Annual Overview The overall length of the Sakhalin II oil and gas pipelines exceeds the distance between Moscow and Berlin, which spans two time zones The pipeline system weighs as much as 1300 Tsar Cannons would weigh, and the Tsar Cannon is recorded in the Guinness Book of Records as the world’s heaviest howitzer
Offshore Pipelines
he offshore pipelines systems The 2006 summer season work scale acoustics monitoring of T includes oil and gas pipelines scope included dredging and construction noise. The designed to transport production installation of four pipelines monitoring was carried out by from PA-A and PA-B to the shore, (total length over 230 km): these the Company during the 2006 multiphase pipelines from the were the oil and gas pipelines construction season. Monitoring Lun-A platform to the shore, a from the Chaivo Bay shore to the activities were also undertaken MEG (monoethyleneglycol) feed future PA-B platform and similar by independent environmental line from the Onshore pipeline from the Chaivo Bay organisations. The monitoring Processing Facility (OPF) to the landfall to the existing Molikpaq proved that the noise impact Lunskoye Field platform, and an (PA-A) platform. was in compliance with the oil export pipeline in the south officially established noise of the Island. The offshore When constructing the pipeline, standards. pipeline engineering, the Company used heavy-duty procurement and construction pipes with a thick coating of The early completion of the contract was awarded to Saipem, concrete, ensuring high reliability offshore pipelines installations a worldwide leader in offshore in any conditions. To eliminate allowed the support vessels to pipelaying. A dredging and the potential risk of pipeline depart from the operations area backfilling subcontract was damage caused by icepack ahead of schedule, which awarded to Jan de Noel. ploughing, deeper trenching was dramatically reduced the overall used in the sea areas less than 30 noise impact. The delivery of the pipes for the metres deep. offshore pipelines was completed The installation of the offshore in early 2006. Total length of These challenging and large- pipelines was followed by diving pipes delivered to Sakhalin scale operations completed in operations for the final tie-in of exceeded 300 km. In August 2006 the severe conditions of the Sea the pipelines and offshore Sakhalin Energy completed the of Okhotsk have no impact on platforms. Upon completion of Sakhalin II offshore pipeline the Western Grey Whales. This is this stage, the pipeline will be construction ahead of schedule. proved by the results of a wide- hydrotested.
Annual Overview 37 Ensuring Seismic Safety
he exploration of oil and line with global LNG safety Sakhalin Energy is currently T gas in seismic frontier standards to survive, without producing a seismic monitoring regions is a further example of yielding or failure of equipment, plan that will cover a significant the challenge and complexity of the kind of earthquake expected length of the Island and includes delivering and operating at the site once in 500 years, and all of the pipelines and all the Sakhalin II Phase 2. to survive, with only limited other major project assets. Data damage, a rare-intensity will be collected at Sakhalin Seismic activity in Sakhalin is on earthquake expected once in Energy’s seismic monitoring a par with the Persian Gulf. 10,000 years. Even in the case of stations during any earthquake Therefore, the ability to such extreme events, the plant and will be recorded in digital maintain safe operations in the has been designed to prevent format and be available for event of a major earthquake has major loss of containment. processing immediately after the been embedded in both the earthquake event. To ensure design and construction of the The onshore pipelines cross emergency response capability, project’s hydrocarbon faults at a number of locations. the processed data will be infrastructure. In general, At these locations, a transmitted to the pipeline Sakhalin Energy has minimised combination of thicker-walled control centre for use in potential impact by rerouting pipe and special trenching is operations decision-making. where possible – the pipelines employed to minimise the Seismic data from Sakhalin away from areas prone to both deformation imparted to the Energy can also be made available landslides and seismic hazards. pipeline by a potential fault to emergency response agencies rupture. The offshore pipelines and various scientific institutes. The offshore platforms are do not cross any active faults. designed to withstand the kind of strength-level earthquake that is On Sakhalin, landslide risk is expected on average around mostly confined to a every 200 years without yielding particularly mountainous 120 or failure of equipment, and to km section of the pipeline survive a rare intensity route. The total cumulative earthquake, expected on average length of landslides was every 3000 years, with only identified to be in the order of limited damage. 20 km, accounting for 2.5 per cent of the total length of the This is made possible through the right of way. In addition to For the first time in the world, pioneering deployment of a rerouting, Sakhalin Energy has seismic isolation devices are cradle system (friction pendulum adhered to industry best installed on the Sakhalin II bearings) never before used on an practice to mitigate the risk offshore platforms to protect offshore platform. More from landslides to the pipelines. them against seismic loads. commonly used in major infrastructure such as highways, bridges and airports, the cradle system reduces the horizontal The pipe is installed in a trapezoidal trench containing special backfill loads on the platform topsides in (either made up of selected sand or lightweight expanded clay) to extreme conditions by helping to allow the pipe to move more freely. If minor to moderate fault isolate the topsides from the displacement occurs, all movement will take place within the special most damaging earthquake backfill. In the unlikely event of greater displacements the pipe is ground motions. designed to be able to rise out of the trench. The design for the oil and gas pipelines also includes approximately 105 automated block valves, Sakhalin Energy has designed including block valves on either side of fault zones. and is building the LNG plant in
38 Annual Overview A major milestone for 2006 roadworks was the commissioning of the Makarov road
Infrastructure Projects and Logistics
Marine Operations The Lun-A helideck received its Roads and Bridges certification and approval from In 2006, three Platform Supply the Federal Aviation Authorities A major milestone for 2006 Vessels (PSV), designed to serve on time and on schedule to roadworks was the the offshore platforms, arrived to allow helicopter operations to commissioning of the Makarov Sakhalin. The PSVs were built in commence in 2006. road (about 10 km). The general Romania and outfitted in contractor is SU-4/FSC Joint Norway. An additional five helidecks on Venture. the various barges and rigs The new support vessels do not required for the summer In 2006 Sakhalin Energy in require icebreaker assistance offshore operations were conjunction with Sakhavtodor and their dynamic positioning certified during the year, completed asphalting works in systems allow them to stay put also without any problems the communities of Yelniki, Onor, at a specified position next to or delays. Zonalnoye, Krasnaya Tym, Ado- the offshore platform. Tymovo and Argi-Pagy, a total Icebreaker class support vessels Telecoms length of about 8 km. are the first in the line of special purpose vessels which are being The main telecom contractor In 2006 Sakhalin Energy and built by the JV set up by the SKS has installed 480 km of Sakhavtodor were awarded the Primorsk Shipping Corporation fibreoptic cable (FOC) on the contract for replacement and Swire Pacific Offshore for Pipeline Right of Way out of a of 13 temporary bridges to the the purpose of the Sakhalin II total of 823 km required to permanent ones to marine operations in the Sea of connect all the Project facilities OOO Vostokdorstroi. The Okhotsk. into a single system. Installation company has started the works of the new fibreoptic cable and it is planned to complete Kholmsk Port across the whole of the Island them in 2007. will allow the management and In 2006, Sakhalin Energy control of the Project facilities as Road repairs are going on in awarded the contract for well as improving the level of Korsakov. JV SU-4/FSC started provision of 1537 various telecoms services provided to the the upgrades of the Korsakov – containers to Sakhalinremflot. Sakhalin public. Novikovo section of the road. In Some of the containers were 2006 a new bridge across the completed in the Among other things in 2006, key Korsakovka river was Sakhalinremflot yard in Kholmsk. achievements were the constructed under the contract mechanical completion, between Sakhalin Energy and The contract with Sakhalin Shelf commissioning and handover of Korsakov administration. Services for the provision of the OPF to Lunskoye FOC link. warehousing and personnel in This also enabled the platform Hospital Upgrades the Sakhalin Western Sea Port to be connected into the was extended for a further 4-year network, which is now fully In 2006 Sakhalin Energy period until 2010. operational, carrying all voice, commissioned upgrades in the data and process control Kholmsk District hospital. New Aviation networks. equipment was supplied including surgical tables, The remaining three contract Telecoms systems installation ventilators (both surgical and helicopters were equipped with and commissioning was cardiac), ICU beds, and others. Health and Usage-Monitoring completed successfully on the The repairs work was done by System (HUMS); modifications Lunskoye platform and 90% the local (Kholmsk) completed by the end of complete at the OPF by the end construction company October. of 2006. OOO Remstroiservice.
Annual Overview 39 Sakhalin Energy The New Energy Source for the Asia Pacific Production. Commerce Oil Production 42 Oil Marketing 43 LNG Marketing 44 Hydrocarbons Transportation 45
Annual Overview 41 Oil Production
n December 2006 Sakhalin I Energy successfully completed the eighth production season at the Vityaz Complex, which has been producing Russia’s first offshore oil since 1999. The cumulative oil production for the 2006 season which started in mid-June was 11.58 million barrels of light “Vityaz” crude.
The eighth production season had a late start-up, caused by the Due to the harsh climatic planned to take place in the end ice invasion in early June and by conditions of the Okhotsk Sea, oil of 2007. From then on very challenging construction is currently produced only during produced oil will be transported activities associated with the six months of the year in the via the 800 km long main installation of tie-in modules on ice-free period. pipeline to the Oil Export the Molikpaq producing Terminal which is being platform. These gigantic modules The changeover to year-round constructed in Aniva Bay in the will be used to tie-in the offshore production from Russia’s first south of Sakhalin where the sea platform to the export pipeline offshore Molikpaq platform is is free of ice the year round. system. Nevertheless, the Company managed to produce as much crude as in 2004, which Vityaz Crude Properties was only 4% less than in 2005. In Density (g/cm3) 0.8568 view of the above, the 2006 API 33.6 production season can be Pour point (°C) <-45 considered successful. Kinematic viscosity (at 20°C, cSt) 3.85 Sulphur (wt%) 0.24 The cumulative Sakhalin II oil production since the project Solubleness (m3/m3*MPA) 6.11 commencement is almost 85 Gas/Oil (m3/ton) 138 million barrels.
The Vityaz Production Complex Molikpaq 1999–2006 Production Profile consists of the Molikpaq offshore platform, Single Anchor Leg Mooring (SALM) and the Floating and Storage Offloading Unit Okha. During production season the Okha tanker is moored to the SALM and receives produced crude for further offloading into shuttle tankers. In winter, when production on the Vityaz Complex is shut down, the Okha tanker is used as a regular crude carrier and the SALM is lowered to the sea floor.
42 Annual Overview The Sakhalin II Project opened up new prospects for Russian oil on the Asia Pacific and USA markets
Oil Marketing
n 2006, the Company Vityaz Crude Sales Geography and History I marketed 11.58 mln. bbl of (1999–2006) Vityaz crude and achieved a record result with a weighted average crude oil sales price for the year. The success of the Crude Oil marketing team strategy was highlighted by the record number of customers that participated in the Company tenders and sales negotiations, confirming the continuing increase in interest in Vityaz crude in the Asia Pacific crude oil market.
All produced crude oil is exported prospects for Russian oil on the 2006 Vityaz Crude and in 2006 a total of 19 cargoes Asia Pacific and USA markets. Sales Pattern of Vityaz crude were delivered About 85 million barrels of crude during the season to existing oil have been exported to these markets in Japan, Korea, Thailand markets since the beginning of oil and the USA. production on the Molikpaq in 1999. A primary buyer of Vityaz In addition to these countries, crude in 2006 was Japan, which Vityaz crude was exported in imported about 70% of produced previous years to China, Taiwan oil. It should be noted that Japan and the Philippines. The Sakhalin has been the largest consumer of II Project opened up new the Vityaz oil since 2003.
Annual Overview 43 LNG Marketing
n 2006 Sakhalin Energy 20 years. The Sales and Purchase The remaining LNG will be I managed to execute and Agreement (SPA) provides for the supplied to Korea and West Coast prepare for signing several supply to Hiroshima Gas Co. Ltd. of of North America. Sakhalin gas will additional LNG (liquefied 0.21 million tonnes of liquefied be delivered to the receiving natural gas) sales agreements. As natural gas (LNG) per annum for 20 terminal Costa Azul in Baja a result, the Company was able years. This deal is the first one California, Mexico, where some of to conclude to date various LNG involving use of a small LNG carrier, it will be used to satisfy the growing sales contracts and has sold 98% and indicates the flexibility that can Mexico’s demand, while the rest of the LNG plant capacity on a be offered at the Sakhalin Energy will be exported to the USA. long-term basis. The remaining LNG plant marine loading facilities. 2% will be used for operational Alongside with drafting the LNG flexibility. It has in effect Under the Chubu Electric and HoAs and SPAs, Sakhalin Energy successfully completed the LNG Osaka Gas HOAs, the buyers will negotiated with customers marketing of the first two trains. receive annually 0.5 million mitigation of the LNG shortfall That was accomplished well in tonnes and 0.2 million tonnes of during the initial phase, which advance before the LNG Plant Sakhalin LNG for 15 and 20 years will occur due to the Project completion and Sakhalin II respectively. schedule slippage. Sakhalin commercial gas production. Energy is resolved to develop an In view of the latest agreements, optimum action plan to mitigate In 2006 Sakhalin Energy executed the Sakhalin II overall long-term the effect of the project schedule two new LNG sales agreements LNG commitments have reached changes. with Japanese buyers Hiroshima 9.4 million tonnes per annum Gas and Tohoku Electric. In whilst the total capacity of the In addition, with the execution of addition, the Company finalised future LNG plant will be 9.6 an original trilateral swap deal, Heads of Agreement for LNG sales million tonnes of LNG per year. Sakhalin Energy secured purchase with Chubu Electric and reached of the first LNG cargo to an agreement in principle on the Approximately two thirds of the commission the LNG facilities, execution of a similar document Sakhalin LNG plant capacity will which will allow it to meet the with Osaka Gas. be supplied to Japan to nine Project schedule. buyers located all over the Under the Tohoku Gas Electric country. This figure proves that The first LNG cargo is planned to contract, Sakhalin Energy Sakhalin Island is becoming a be offloaded from the plant at undertakes to supply annually 0.42 new strategic source of natural Prigorodnoye in the south of million tons of LNG over a period of gas supply to Japan. Sakhalin in 2008.
44 Annual Overview Marketing of LNG of the first two trains is successfully completed
Hydrocarbons Transportation
n 2006, one of Sakhalin conditions prevailing offshore with which Sakhalin Energy I Energy’s priorities was the Sakhalin, which are especially signed long-term chartering development of marine harsh from January to March. In agreements earlier. Sovkomflot transportation system to ensure line with the Sakhalin Energy’s and PRISCO are Russian parties to the smooth delivery of LNG to environment protection policy, these consortia. As a symbolic customers. both ships are constructed as commencement of construction, double-hull. first steel was cut in January 2006 In September 2006 the Company for a new LNG tanker signed an agreement with PRISCO has installed a bow- constructed in Nagasaki (Japan) Primorskoye Shipping Company loading system suitable for by a consortium including (“PRISCO”) for the provision of loading oil from the year-round Sovkomflot. two oil tanker charters for five Tanker Loading Unit, which is years. The floating charter price already installed and is being Each of the ships can transport will be tied to the market commissioned in Aniva Bay. 145 thousand cubic metres of environment, making this LNG. The two Russian companies contract attractive for both parties. PRISCO has been providing will play a key role in ownership of tankers for crude shipping to the ships and provision of Russian The 108,000 DWT tankers will be Sakhalin Energy since 2000. crews. In 2006, the two Russian used to ship the crude oil companies already started training produced at the Sakhalin II Construction of the three LNG their crews in LNG transportation. facilities. These tankers were built ships chartered by Sakhalin Russian ship-owners are gaining in 2004 to state-of-the-art Energy on a long-term basis is valuable experience that will standards in Croatia. Both ice- progressing as planned. The new become useful for implementation class tankers were designed to LNG ships being built at shipyards of other LNG projects in Russia, in operate in low-temperature in Japan have been ordered by particular, Russian arctic shelf environments and natural two Russian-Japanese consortia , development.
Annual Overview 45 Sakhalin Energy The New Energy Source for the Asia Pacific Economics. Finance General Business Principles 48 Financing and Project Costs 49 Economic Efficiency 50 Taxes and Payments 51
Annual Overview 47 General Business Principles
Sustainable development relationships with all those with directly or indirectly, the welfare whom they do business. The of the communities in which it We are committed to direct or indirect offer, payment, does business. contributing to sustainable soliciting and acceptance of development. This requires bribes in any form are absolutely The Company pays considerable balancing short- and long-term unacceptable practices. Any attention to the social impacts of interests, and integrating payments aimed at streamlining its business activity, cooperates economic, environmental and formalities are also considered with other parties for the benefit social considerations into bribes and should not be effected. of the communities and seeks to business decision-making. mitigate any impacts resulting All business transactions on from its activities. Economics behalf of Sakhalin Energy must be reflected accurately and fairly in Communication Long-term profitability is essential the accounts of the company in to achieving business goals and accordance with established Sakhalin Energy recognises the ensuring continuous growth of procedures and will be subject to importance of ongoing the Company. It is a measure both audit and disclosure. communication with the of efficiency and of the value that stakeholders. The Company customers place on Sakhalin Political Activities undertakes to report on results of Energy’s products and services. It its business and provide full is essential to the allocation of the Sakhalin Energy acts in a socially relevant information about its corporate resources necessary to responsible manner within the activities to legitimately support the investment into laws of the Russian Federation interested parties, subject to any development and production of and the other countries in which overriding considerations of future energy sources that meet it does business in pursuit of its business confidentiality. customer’s demands. legitimate commercial objectives. Compliance with Law Criteria for investment decisions Sakhalin Energy does not make take into account sustainable payments to political parties, Sakhalin Energy undertakes to development considerations organisations or their comply with all applicable laws (commercial, social and representatives or take any part in and regulations of the country it environmental) and an appraisal party politics. operates in. of investment security. Safety and the Environment Observance Competition of Our Principles Consistent with its commitment Sakhalin Energy supports free to contribute to sustainable The main general values of enterprise. It seeks to compete development, Sakhalin Energy Sakhalin Energy – integrity, fairly and ethically and within the has a systematic approach to openness and respect for people — framework of applicable health, safety and environmental underlie all Company’s activities competition laws; it will not management in order to achieve and serve as a basis for the general prevent others from competing continuous performance business principles. freely with the Company. improvement. For many years the general Business Integrity Local Communities business principles have been providing the foundation for the Sakhalin Energy insists on Sakhalin Energy endeavours to be Company’s business and adherence honesty, integrity and fairness in a good neighbour in local to these principles is the key all aspects of their business and communities and continuously component of our future success. expects the same in its develops ways to improve,
48 Annual Overview Financing and Project Costs
akhalin II is Russia’s first cost inflation. The industry has better mitigate the impact of the S large-scale multi-source seen many projects around the project on the endangered financed project. world impacted by material cost Western Grey Whale population. increases as a result of the inflated Following a review of the Phase 1 of the Project was for the market. The impact on Sakhalin II recommendations, the Company most part financed by Sakhalin has been exacerbated by the long decided to reroute the offshore Energy shareholders, with project duration and the fact that pipelines at a considerable cost. additional financing in the amount much of the original design and of US$116 million provided by costing dates from some years ago. Furthermore, when the three lenders: European Bank for Cost has further been impacted by development was sanctioned, Reconstruction and Development Russian inflation and over-aggressive targets in terms of (EBRD), Overseas Private strengthening of the Rouble. cost and schedule were set. They Investment Corporation (OPIC) did not fully reflect the and Japan Bank for International In addition to rising energy uncertainties and challenges of Cooperation (JBIC). prices and inflation in Russia, this frontier province, which have both recommendations from led to a lengthening of the Currently, Phase 2 financing is Russian technical expert bodies construction schedule, and some accomplished by Company and changes to detailed design design adjustments as a result of shareholders, including have impacted cost. For detailed engineering, or through reinvestment of proceeds from example, following additional improved technical or scientific sale of crude. Decisions on further seismic analysis, changes were understanding, in some cases as a financing will be made by required in the technical result of the recommendations of shareholders after the official specifications of our offshore Russian expert bodies. entry of Gazprom into the Project. facilities, requiring additional Nevertheless, the project remains steel for strengthening the economically sound for the According to the updated cost concrete-based gravity shareholders and beneficial for estimate formally presented by structures. Also, Russian whale Russian Federation (see Sakhalin Energy to the Russian scientists identified the need to Economic Efficiency). Party in the fall of 2005, the full cost of Phase 2 implementation was estimated at some US$20 billion. In December 2006, Sakhalin II shareholders and the RF Ministry of Industry and Energy, as the body authorised by the RF government to supervise PSA implementation, reached an agreement on Sakhalin II updated development budget and cost recovery. The Sakhalin II Phase 2 updated cost estimate is to be reviewed and approved by the Supervisory Board in 2007.
The reasons for the cost increase
High oil prices have resulted in an increased demand for oilfield services and commodities (e.g. steel) and has led to substantial
Annual Overview 49 Economic Efficiency
uite naturally, the updated Russian and international The mechanism in the PSA that Q Sakhalin II Phase 2 cost consulting firms, representatives gives a higher share of the profit estimate (approximately of the Russian Ministry of Energy hydrocarbons to the RP at higher US$20 billion) caused concern and Industry, Ministry of Finance, returns assures that in case of over commercial impact of Ministry of Economic beneficial impacts on the project this disclosure on Sakhalin Development and Trade, and the in the future (higher sales Energy and its shareholders as Sakhalin Oblast Administration. revenues, additional volumes…) the well as on the state as a party Analysis results clearly RP will benefit to a larger extent. to production sharing under demonstrate the commercial Under the structure of the PSA, the the PSA. viability of the continuing most part of the overall loss in implementation of the Sakhalin II value is borne by the Company. In conformity with the Project. recommendations of the Project’s It is also important to note that Supervisory Board and decisions The Project remains even with Project costs up to US$20 of the Supervisory Board’s economically attractive for the billion, Sakhalin II Phase 2 unit costs Working Group the economic Russian Federation. Assuming an are comparable with those of other efficiency of Sakhalin II Phase 2 oil forward price of US$50 per similar oil and gas projects already was thoroughly analysed to allow barrel, the Russian take will implemented or still in progress. for cost increases caused by amount to US$80 billion. Once objective reasons related to the project has reached cost At the same time, the increase in market, environmental and recovery (estimated to be in Project costs provides a production factors. This work 2014), the yearly benefit to motivation for Sakhalin Energy to was carried out with the Russia in royalties, profit contain the growth of participation of the Company hydrocarbons and taxes rises to expenditures and to proactively specialists, experts of the leading around US$2 billion per year. seek saving opportunities.
50 Annual Overview In total, from the start of the Sakhalin II development to the end of 2006 Russia has received some US$552 million from the Project
Taxes and Payments
he pivot of the special PSA T treatment is not a benefit to any of the parties of the Agreement, but the stability and opportunity to redistribute the tax burden in time (it grows as the production volume increases, the cost recovery approaches and the rate of return goes up). Once the revenues from the Project have achieved a certain level, the Russian Federation’s share may reach up to 70%. In addition, Sakhalin Energy pays tax on all of its profit gains.
In 2006, Sakhalin Energy paid taxes and fees to the Federal and regional budgets in the amount of US$91.8 million.
In addition to royalty, the profit tax, individual income tax and mandatory payments to social funds, as well as a number of other tax payments and changes, the Company pays a number of special payments envisaged in the PSA, including bonuses, compensations for past exploration expenses and contributions to the Sakhalin Development Fund.
Structure of Sakhalin Energy’s payments and Taxes (1995–2006)
In total, from the start of the Project to the end of 2006 Russia When the Project reaches the has received some US$552 million. production plateau (in the This amount includes the end of the current decade), Commencement Date Bonus Russia will be getting (US$50 million), past exploration approximately US$300 million expenses (US$80 million) and every year in royalties alone. Sakhalin Development Fund contributions (US$100 million).
Annual Overview 51 Sakhalin Energy The New Energy Source for the Asia Pacific RussianRussian ContentContent Russian Content Development Strategy 54 New Contracts 56 How to Become a Contractor 57
Annual Overview 53 Russian Content Development Strategy
Nine elements of the Russian Content Development Strategy in terms of Contracting and Procurement, and the timely identification of potential for • Contracting and Procurement activity plan for 2006–2010; involvement of Russian resources and companies, as • Russian Content Opportunity Identification Process; well as rendering assistance to • Sakhalin Island Business Development; Sakhalin and Russian enterprises • Russian Vendor Development Programme; seeking contracts under Sakhalin II. • Russian Content Communication Plan; • Strengthening of the Russian Content Development Department; The objective of the strategy is • Increased involvement of the Joint Committee; to use Sakhalin industry potential to the full, and • Revised Tender evaluation procedure; maximise payments for goods • Russian Content Responsibility and Compliance with Russian Content Plan. and services provided, thus increasing contribution to Sakhalin economic STRATEGY In 2006, Sakhalin Energy development. continued implementation of the ussian content is an Sakhalin II Russian Content Based on the approved Russian Rimportant criteria to Development Strategy approved Content Development Strategy, a measure the overall success of in May 2005. five-year contracting and Sakhalin II; it remains to be one procurement plan was developed of additional benefits which the The main concept of the (2006–2010), and measures were Project brings to Sakhalin Region strategy is the long-term taken to identify Russian content and the Russian Federation. planning of future requirements opportunities.
Overall cost and amount of new contracts awarded in 2006 and contract variations approved in 2006
Including Russian Russian vendors Total vendors share %
Cost, 1,365.83 1,127.32 83% million USD New contracts
Quantity 2,766 1,962 71%
Cost, 2,255.90 923.24 41% Contract million USD variations Quantity 1,118 8,535 48%
Cost, Overall awarded value 3,621.73 2,050.56 57% million USD
54 Annual Overview In 2006, 83% of new contracts value was awarded to Russian industry
In 2006 the Company measured in value terms. From The main objective of the Joint commenced with preparation of the time when Phase 1 Committee is provision of a structured Russian Vendor construction commenced (1996), maximum involvement of Development Programme to Russian contractors and sub- Russian industry in Sakhalin II. provide targeted assistance in contractors had been awarded The established procedures and removing shortcomings of contracts for US$8.2 billion or mechanisms of this body help the selected Sakhalin and mainland 46% of the overall cost of awarded Russian Party better understand Russia based vendors. contracts and contract variations. the Company’s procurement and facility maintenance processes as well as the Project requirements MAJOR ACHIEVEMENTS JOINT COMMITTEE and to educe new opportunities for the Russian industry. At the n 2006, Sakhalin Energy he Joint Committee is an same time, the Joint Committee I continued successful T effective “information helps the Company take into fulfilment of one of its key channel” between Sakhalin account the changes in the obligations under Sakhalin II – Energy, the Russian Party and business practices in the Russian efficient involvement of Russian Russian industry. Successful Federation. industry and manpower performance in the area of (Russian content). Russian content development In 2006, the Joint Committee and was achieved by joint efforts of other Russian Party The value of new contracts all JC participants. representatives attended 4 (four) awarded to Russian vendors in Special Tender Board meetings. 2006 made up 83% of the overall The Joint Committee includes Based on the results of those value of new contracts. Taking into two representatives of the meetings, two (2) very large account 2006 contract variations, Company, two representatives of Sakhalin II onshore and offshore the value of contracts awarded to the Federal Government and two facilities maintenance and repair Russian companies added up to representatives of the Sakhalin contracts were awarded to US$2 050.56 million or 57% of the Oblast Administration. Russian contractors. overall value of contracts in 2006. Both figures indicate that involvement of Russian industry in The Joint Committee: project work has improved in comparison with prior periods. • provides consultancy to Russian and foreign companies on how to As of the close of 2006, Russian better introduce their companies to be involved in Sakhalin II; content in the Project measured in man-hours of service • makes a list of goods and services that can be provided by Russian provided and volume of contractors and subcontractors, as well as a list of potential Russian material and equipment contractors, including manufacturers of equipment and service providers; delivered exceeded 70%. From 1996 to 2006, Russian • provides Sakhalin Energy with recommendations on wording of the companies and manpower tender conditions; worked over 159 million man hours, which makes up • assists in arranging inspections at factories of potential Russian approximately 78% of overall contractors; labour costs under the Project, and Russian materials and • arranges workshops for potential contractors for the purpose of equipment exceeded 8.9 million explaining the PSA requirements, as well as to discuss problematic issues; tons or made up 91% of the overall volume of materials and • identifies activities where establishment of joint ventures can be equipment supplied. efficient;
renders assistance in establishing joint ventures. The Company appreciates the • importance of Russian content
Annual Overview 55 New Contracts
Contracts for maintenance pump packages to OAO services for production Aviadvigatel, one of the largest assets enterprises in the Perm Engine- In 2006, two joint ventures were Manufacturing Complex. These awarded two long-term contracts pump units will be installed as part for maintenance of Sakhalin II of Sakhalin II Booster Station #2. Project production assets with the total value of about US$200 million. Major contracts with Sakhalin enterprises The first contract for the Sakhalin Energy awarded a provision of maintenance contract for the construction of A US$140 million contract was services for the first Russia’s five Pipeline Maintenance Depots awarded to Sakhtransbunker for liquefied natural gas (LNG) plant, along the onshore pipeline route diesel fuel supply for the Sakhalin oil export terminal and onshore to a consortium of several II Project needs; another US$18 processing facility was awarded Sakhalin construction companies: million contract was awarded to to SakhalinNefteGasService Sfera, Transstroy Sakhalin and Sakhalin-Shelf-Service for fuel (SNGS). SakhalinNefteGasService Joint Venture SU-4/FSK. The transportation in the north of is a Sakhalin enterprise contract value is US$85 million. Sakhalin Oblast. consolidating the international This is the largest contract under experience of its partners (Fluor Sakhalin II awarded to Sakhalin Vyksa Metallurgic Plant Daniels and Dietsmann) and the companies for the works on Vyksa Metallurgic Plant (VMP) experience of a local contractor, development of Sakhalin shelf. representing the United Metallurgic Dalelektromontazh. Company (OMK) has successfully Another major contract was completed the manufacture of 399 The second contract for awarded to ZAO Transstroi- conductor pipes (4224 metres long maintenance of three offshore Sakhalin. The scope of work under and weighing 3000 tonnes) that platforms and onshore oil and gas this contract includes construction will be used as elements of the well pipelines was awarded to the joint work to be done in the coastal area design at the Lunskoye and Piltun venture of the Sakhalin company adjacent to the Material Offloading production platforms. Such SakhalinMorNefteMontazh Facility at Prigorodnoye. conductor pipe was the first of its (SMNM) and the American VECO. kind ever manufactured in Russia. The contract worth US$35 million Having acquired this experience, Award of two major for the lease of shipping containers, Vyksa Metallurgic Plant was the contracts for high-tech provision of storage services, as first Russian company and became industrial equipment well as container and sling the fifth company in the world to for Booster Station 2 certification and maintenance produce to such high technological The EPC contract worth 500 services was awarded to standards. million roubles (approximately Sakhalinremflot, a local company US$19 million) for the Booster based in the city of Kholmsk. Booster Station #2 Construction Station #2 power generation and The construction contract for substation package was awarded A US$30 million contract for Booster Station #2 was awarded to ZAO Iskra-Energetika, a construction of thirteen (13) to Eaststroi company. Russian manufacturing company capital bridges across the based in the city of Perm. Yuzhno-Nogliki-Okha motorway to replace temporary bridges was Also, Sakhalin Energy awarded an awarded to Vostokdorstroi. Other EPC contract worth 230 million major contracts were awarded to roubles (approximately US$8.7 JV SU-4 and FSK for road million) for supply of two gas maintenance and turbine-driven crude oil booster upgrading.
56 Annual Overview The contract for the construction of five Pipeline Maintenance Depots awarded to a consortium of Sakhalin construction companies (Sfera, Transstroy Sakhalin and SU-4/FSK) is the largest contract awarded to Sakhalin construction companies
Utilisation of Russian shipbuilding companies and shipowners Four new vessels are being built at the Russian shipbuilding yards as part of Sakhalin II. The order is being executed within the framework of marine services contract between Sakhalin Energy and SvitzerWijsmuller Sakhalin. Under the contract terms, all vessels will sail under the Russian flag and have Russian specifications need to meet the Company for the provision of two crews on board during the whole highest international standards. oil tanker (Sakhalin Island and 15-year charter period. In 2006, the Russian–British Joint Governor Farkhutdinov) charters. Venture company, Prisco Swire In 2006, the St. Petersburg Offshore, constructed three Safe air transportation Admiralty Shipyard started modern icebreaker class supply for Sakhalin II Project construction of the harbour tugs. vessels for provision of year-round In 2006, Aviashelf company Zvezda Plant in the Russian Far supply services for three offshore finished work on the installation Eastern Nakhodka is building the oil and gas production platforms of the monitoring system and mooring tugs. The tugs will have of the Sakhalin II Project. The diagnostics (OMSD) onboard oil spill response and fire-fighting charter of Pacific Enterprise, four Mi-8MTV1 helicopters. The equipment installed. Russian Pacific Endeavour and Pacific system on board the helicopters, plants apply advanced Endurance will continue for 15 performing flights for the technology to build these vessels years. A five-year contract was Sakhalin II Project, was installed because their technical signed with Primorskoye Shipping at a request of Sakhalin Energy. How to Become a Contractor
akhalin Energy awards Pre-qualification Bid submission S most contracts for At this stage potential vendors By a fixed date, all bidders submit materials and services on a included in the long list are pre- their bids. competitive basis. qualified for the purpose of identifying those with the Bid evaluation The bidding process has capability to carry out work or On the basis of the bid evaluation the following stages: provide materials in accordance the Company makes its decision with the Company’s standards. as to the bid that can be Making a list of potential bidders considered the optimal one. Price This list is based on the Distribution of invitations to bid is an important aspect. However, Company’s database containing The Company’s contracting contracts are not necessarily information on all registered or department sends invitations to always awarded to bidders who qualified vendors. bid to the vendors included in the offered the best price. Other key list. From now on, they are called aspects that are taken into Contractors’ registration “applicants” or “bidders”. account are quality of service, To register as a potential vendor, compliance with high HSE it is necessary to fill in a vendor Information clarification standards, as well as a schedule of registration questionnaire found A bidder can request from the work. at the Sakhalin Energy website Company any additional information (www.sakhalinenergy.ru; on the bidding process. The bidders’ Contract award www.sakhalinenergy.com) questions and the Company’s Once all bidding stages are or send a fax to answers are placed in a tender completed, the Company awards +7 (4242) 66-47-93. bulletin to be sent to all the bidders. a contract.
Annual Overview 57 Sakhalin Energy The New Energy Source for the Asia Pacific Management.Management. PersonnelPersonnel Management System 60 Supervisory Board 61 Committee of Executive Directors 62 In Dialogue with the Society 63 Personnel Development 64
Annual Overview 59 Management System
akhalin Energy management Sakhalin II Governance Structure in the PSA context S system has been formed under the influence of two major factors. On the one hand, the Project is being implemented under a PSA, which assumes the active participation of the Government in the supervision of the Project, making strategic decisions and approving them. On the other hand, Sakhalin II is the world’s largest integrated oil and gas project, whose production units have very complex interrelations which requires synchronisation of all processes under one project while providing an adequate autonomy to functions in their core activities. Russian Party). The Board of The Company’s functional Sakhalin’s natural/climatic Directors holds responsibility for departments and directorates, environment and shelf communication with the chaired by senior managers of the conditions make synchronisation Shareholders and general Company, exercise control over even more important, because management of the Company. the management of various many operations can be carried The Committee of Executive activities and the efficiency of out only during certain seasons: a Directors provides integration of them. delay of several weeks or days can implementation of decisions result in one year lost. made by the Board of Directors As of today, there are eight and the Shareholders’ meeting, functions: Project, Operations, The highest executive body that and holds responsibility for a Technical, Commercial, Finance, makes the most important strategic day-to-day and operational Human Resources, Legal and decisions is the Supervisory Board, management of the Company. External Affairs. with equal membership from the Shareholders and the Company on Sakhalin Energy Corporate Governance Model the one hand, and the Russian Federation (the RF Government and the Sakhalin Oblast Administration) on the other. The Supervisory Board members from the Russian Federation are appointed by a decree of the RF Government.
Sakhalin Energy is operating under a three-tier model of management. Key decisions are made by the Shareholders (the most important ones are submitted for discussion of the
60 Annual Overview The Supervisory Board held five meetings in 2006 that addressed various strategic issues of Sakhalin II development
Supervisory Board
he Supervisory Board is The Supervisory Board has two • approval of the base Work T Sakhalin II’s highest Co-chairmen: one from the Programme & Budget; executive entity and consists Russian Party and one from of six members nominated by the Company. The Co- • discussion of updated reservoir Sakhalin Energy (Sakhalin II chairmen chair the management plans for Lunskoye Operator and Investor) and its Supervisory Board meetings on and Piltun licence area; shareholders, and six members an alternating basis. nominated by the RF • discussion of the status of the Government and the Sakhalin The Supervisory Board shall Amendment to Development Oblast Administration. meet at least four times every Budget approval; year. • Heads of agreements negotiated Duties of the Supervisory Decisions of the Supervisory with LNG customers; Board. The Supervisory Board shall be adopted by Board shall have the majority vote of all members of • reports on the measures taken following responsibilities: the Supervisory Board. to address the RF Accounting Chamber and Rosprirodnadzor • review and approval of the In 2006, five meetings of the audits findings; Development Plans and Supervisory Board were held Development Budgets and that addressed various strategic • plan for establishment of the review and approval of any issues of Sakhalin II port and border checkpoint at material amendment to the development, including the Prigorodnoye and offshore aforesaid documents; following: operations. • review and approval of Annual Work Programmes and Budgets and review and approval of any material amendment to the aforesaid documents; • review and approval of any LNG Sales Agreement or other agreement for the long-term sale of natural gas, and of any material amendment thereto; • review and approval of the Procurement Procedures; • review and approval of the Plans for Employment and Training of Russian Nationals; • review of Annual Reports; • approval of the appointment of an Operator, financial service provider, marketing service provider or technical service provider that is not an Affiliate of the Company; • review of the principal Financing Documents.
Annual Overview 61 Committee of Executive Directors As of 31 December, 2006
Steering Group members are heads of the Company’s departments
Chief Executive Officer Technical Director Ian Craig Jaap Huijskes
Head of Corporate Affairs Igor Ignatiev
Deputy Chief Executive Commercial Director Officer/Sakhalin II Project Director Ate Visser HR General Manager David Greer Mark Wojcik
General Counsel / Production Director Finance Director Corporate Secretary Tim Hake Kerst Troost Guus Klusener
62 Annual Overview Engagement with community-based organisations and non-governmental organisations (local, national and international) has significantly increased with the development of the Phase 2 Project
In Dialogue with the Society
he Company believes that especially important during the Sakhalin Oblast T regular communication and facility construction when a Administration, Sakhalin Energy constructive interaction with large-scale mobilisation is taking and representatives of the public and key stakeholders, place, enormous amounts of indigenous peoples. as well as broad promotion of work are carried out and the Sakhalin II in mass media, are potential impact on the Val reindeer herders are the only important for Sakhalin II’s population is highest. group of indigenous people that successful implementation. is directly affected by the Project The Company’s CLO team was construction. To mitigate impacts For more than ten years, the formed in early 2003 and by the on this group and jointly fix the Company has been building up its end of 2006 it included eleven most acceptable timeline for strategy for conducting information specialists working in the construction, it was decided to campaigns and consultations with Company and six specialists hold regular meetings with the the public via communication with working in contractors’ reindeer herders. Sakhalin communities and other organisations. Besides there are stakeholders. The strategy was specialists responsible for social Engagement with community- shaped using the information performance in contractors’ and based organisations and non- received from the public. subcontractors’organisations. governmental organisations (local, national and international) has According to advanced In the communities, impacted by increased with the development international practices, during the Project, meetings with the of the Phase 2 Project. implementation of large oil and public, interviews with experts gas projects community liaison and public opinion surveys are Sakhalin Energy has held many officers (CLO) are necessarily conducted on the regular basis. The face-to-face meetings on Sakhalin involved. The aforesaid officers Company arranged a free “hotline” Island, in Japan (Hokkaido Island form the Company’s “eyes and to receive Sakhalin community and Tokyo), and with ears”, they are always ready to help enquiries and complaints. representatives of NGOs in a the local administration and number of locations including the people find answers to numerous On a regular basis, the Company UK, the Netherlands and the questions associated with the interfaces with representatives of United States. This increase in Project’s implementation. indigenous peoples of North- meetings and the type of meetings Eastern Sakhalin. On 25 May has come about in response to Involvement of CLOs is important 2006, a tripartite agreement was feedback received by Sakhalin at all Project stages. However, it is signed for cooperation between Energy from stakeholders.
Meetings with NGOs
NGOs 2002 (from IV Quarter 2003 2004 2005 2006 2002)
Local (including formal organisations 11 103 185 169 156 of indigenous peoples )
Regional 3 9 4 27 20
National - 11 20 9 15
Japanese 14 32 32 21 7
Other international 1 9 32 13 5
Annual Overview 63 Personnel Development
akhalin Energy feels certain: S the core value of all business processes is in people, and it is people who form the main resources of the Company.
The Company developed and implemented seven basic principles of personnel development, which help form an employee-friendly environment. The backbone of the approach is in honesty, integrity and respect towards people.
Sakhalin Energy strives to bring the best international experience of its shareholders to the Company’s everyday work. To which multiple personnel Training and Professional achieve this, the Company offers recruitment and development Development various programmes for personnel programmes were drawn up. This recruitment and development as goal implies both potential Sakhalin Energy implemented a well as for the education and appointment of Russian compulsory programme for the training of youth. A structured employees to key management annual appraisal of personnel, approach allows the Company to positions in the Company and which stimulates the employees to evaluate its needs in experts at a scaling down expatriate personnel develop a corporate approach given time, determine their in favour of Russian nationals. towards identification of their development pattern and ensure professional targets and objectives their career growth. Personnel Recruitment and appraisal of their performance. Results of the appraisal serve as the Being a multinational company, In 2006 Sakhalin Energy was basis for individual development Sakhalin Energy tries to treat each actively involved in personnel plans, in which employees build and every employee as a recruitment. Throughout the year their career prospects, thus guiding personality. Employees differ in the Company employed 740 their further development and many ways: age, professional people to staff both administrative improvement potential. background, education, positions and positions at the nationality, religion, personal and facilities. A total of 439 of those In 2006 the personnel career expectations. The key employed are Sakhalin residents, development programme target of the Company with 15 were relocated from the Far provided training for 819 Russian regard to personnel is to nurture East, and the remaining 286 came and 399 expatriate employees of an understanding of personality from other regions of Russia. the Company. and respect towards it, as well as to establish an environment that Personnel development may be divided as follows: is comfortable for each individual, whilst remaining part of the • recruitment of personnel; Company’s atmosphere and its • training and professional development of personnel; corporate culture. • training of personnel for work at the Company’s new facilities; • internship for students; A few years ago the Company’s • educational grants. management set a goal, from
64 Annual Overview In 2006 the personnel development programme provided training for 819 Russian and 399 expatriate employees of the Company
Apart from training and All the trainees are Sakhalin acquire knowledge of Western workshops, the Company has residents. The experts required by business methods, as well as to developed an “on the job the Company, need to be conduct research, as required by training” programme, which technically trained in an their courses. Internship in the includes coaching and engineering school or college. Company is organised in winter mentoring. This means that more The training centre provides and in summer. experienced employees share education for vessel electricians, their knowledge and skills with builders and mechanics, as well as One of the objectives of the younger experts “on the job”. As for some specialists with higher programme is to discover young of today, formal mentors are education. The professional talent who have the potential to assigned to 45 Russian training programme guarantees a become successful candidates for employees. well-paid and interesting job. the positions in the Company. The internship programme was To ensure “Russianisation”, the Upon completion of intensive six launched in 2000. In 2006, 27 Company implemented a months’ language course, trainees students participated in it. programme for the development undertake thorough technical of talents which is targeted, training, the aim of which is to Educational Grants though not limited to, qualify the trainees for various substitution of expatriate trades. As the course is Sakhalin Energy contributes to the personnel with Russian completed, they may choose a job professional growth of the personnel. In 2006, Sakhalin at one of the Company’s facilities: talented young residents of Energy welcomed 23 Russian offshore platforms, LNG Plant, Sakhalin Island, providing them experts at management positions Onshore Production Facility with access to educational centres, of various levels. Forty eight (OPF) or pipelines. both on the Island and on the persons were promoted within mainland. Upon completion of the Company to managerial In 2006, 125 trainees participated the programme, the participants positions occupied by foreign in the programme, and 39 of those can be employed by the Company. personnel. trained earlier moved on to work. The programme was launched in Training of Personnel for Work Internship for Students 2003. In 2006, thanks to the at the Company’s New Facilities Company’s support, nine young Sakhalin Energy provides senior programme participants were Today, Sakhalin Energy manages students of Russian institutes and enrolled in Russian universities. its own education centre, where universities with an opportunity Throughout the three years, the the Company trains technical to take internship in a major oil programme has helped 42 boys experts using its own resources. and gas producing company, and girls become students.
Annual Overview 65 Sakhalin Energy The New Energy Source for the Asia Pacific Environment.Environment. SafetySafety Health, Safety and Environment: Integrated Approach 68 Labour Safety 69 Environmental Protection 70 Emergency Response 72 Rare Species 74
Annual Overview 67 Health, Safety and Environment: Integrated Approach
Management of health, safety and environmental protection (HSE), protection of the population and preservation of the environment that supports the basic functions of life is an integral part of the Company’s management system for the completion of the Project.
The Company has developed and implemented an integrated HSE Management System. This System describes management levers, used by the Company to handle risks, which the Company came t all Project stages the sphere, and to maximise the across in the field of health, A Company seeks to benefits contributed by its safety and environmental minimise the negative impact activities to the population of protection. caused by its activities on Sakhalin Island and any other health, safety, the parties whose interests might Sakhalin Energy’s HSE environment and the social be affected by the Project. Management System ensures systematic management of hazards and their impact on Sakhalin Energy HSE Management Components health, safety and environment. The Management System describes a structured process for the disclosure, assessment, control and elimination of risk factors. The emphasis is placed on those activities which might result in a potential impact on the population and the environment. Once identified, procedures for continuous improvement of the Company’s HSE indicators are envisaged.
Sakhalin Energy’s HSE Management System has been implemented in all works and projects performed by the Company, and is applicable throughout the activities of Sakhalin Energy personnel.
68 Annual Overview In 2006 the Company managed to bring down the number of road accidents registered in the course of three consecutive years
Labour Safety
akhalin Energy accords information campaigns are Energy, whereas the others were S special priority to safety launched on a regular basis. coordinated by the Company. It is at work. Compliance of employees with worth mentioning that it was professional suitability with regard Sakhalin Energy who initiated the In 2006 the Company managed to medical requirements is establishment of the partnership, to reduce the number of controlled duly at construction which allowed the unification of incidents and accidents at all sites; reasons requiring medical road safety efforts of the state facilities. However, unfortunately, intervention are eliminated at once. authorities, business and the four contractors’ employees died public of the Sakhalin Oblast. while working on the Project. Throughout 2006 the Company SRSP, established 2004, is the first kept investing funds into road association of that kind in Russia. To prevent fatalities in future, the safety programmes and managed Company launched the Safety to bring down the number of Health, safety and environmental Rangers project. The Company road accidents registered in the protection training courses are organised a workshop for 100 course of three consecutive years. provided for a large number of senior managers. During the newcomers, mainly those workshop emphasis was placed on The Company kept supporting employed in production, rigorous observance of safety rules Sakhalin Road Safety Partnership commissioning and start-up. by all the Company’s employees. (SRSP), whose members worked All the managers committed to on the implementation of five All the Company’s units have perform at least the minimum of projects aimed at reduction of introduced HSE competence checks and to observe fatality and accident rates in processes, which involve a international golden rules and the Sakhalin Oblast. These projects significant number of senior Company’s in-house regulations. A include an educational managers, HSE experts and road safety project and a project programme, the identification of employees in senior positions. for safety during hoisting especially dangerous road operations were launched, and sections, Road Victims All the basic tasks associated with safety training for managers was Remembrance Day, the second improvement of HSE indicators organised in line with the plan. phase of a seatbelt campaign, and in 2006 were successfully medical treatment at pre- accomplished. Those tasks Close attention to compliance of admission. The latter two projects incorporated health, safety and hoisting operations with safety were financed fully by Sakhalin environmental protection issues. rules resulted in the avoidance of any serious incidents in 2006.
The Company managed to reduce a specific number of occupational diseases down to 4.5 occurrences per 1 million man-hours versus 4.8 occurrences in 2005. Traumas of bone and muscular tissues were the most frequent, which can be explained by the large number of manual works at the Project construction sites.
Shell performed an audit of health issues, which proved its approach to health management to be structured and efficient. Healthcare
Annual Overview 69 Environmental Protection
onstruction of Phase 2 The proposed Plan contains Company strengthened control С facilities is ongoing in an short-term, mid-term and long- and management over all extremely challenging term actions in respect of all contractors involved in onshore environment. Sakhalin Energy, onshore facilities and some of the pipeline construction. being committed to minimising offshore facilities of the all harmful environmental Company, with the main focus on A clear-cut system setting impacts from construction the onshore pipeline personnel responsibility for works, has undertaken a whole construction. The environmental compliance has range of actions to ensure that implementation of the Plan had been introduced on Company the unique natural environment already commenced in sites. To provide information of Sakhalin Island is preserved November. In parallel, work from construction sites to the to the maximum extent. continued to update and integrated steering group in elaborate the Plan following the charge of onshore pipeline However, those actions proved not recommendations by construction, special reporting to be completely sufficient: in 2006 RosPrirodNadzor. forms are used. the environmental authorities demanded that Sakhalin Energy In total, since the Actions in the EAP provide a should pay more attention to the RosPrirodNadzor inspections in platform to ensure that the Project’s environment safety. Dolinsk (July 2006) and onshore pipeline construction Makarov (August 2006) districts, project is successfully delivered In the second half of 2006 Sakhalin Energy has completed a whilst maintaining high RosPrirodNadzor held a number large range of work to eliminate environmental standards and of inspections to check the the problems identified by the remaining in full compliance environmental compliance of inspections. Most of the actions with RF legislation. Phase 2 construction, especially proposed in the Corrective the onshore pipelines. To eliminate Action Plan, developed by the Stringent compliance with the problems identified by Company and put into practice environmental requirements will RosPrirodNadzor inspections, on 8 in August–November 2006, have be achieved by way of November 2006 Sakhalin Energy been completed, as had been strengthened control over the submitted a draft Environmental prescribed by the corresponding construction techniques and the Action Plan (EAP) to the Ministry Citation of RosPrirodNadzor contractors’ quality of work on of Natural Resources. issued in September 2006. The the Company’s sites.
The most important areas of environment performance within the EAP are river crossings, erosion control and reinstatement, as well as management of spoil, which are the subject of the Company’s internal control. Specially developed control and management systems in these areas were introduced in May and August 2006, especially in erosion control and spoil management.
In the winters of 2005–2006 and 2006–2007 several groups of
70 Annual Overview Sakhalin Energy have dug up about 28,000 objects of cultural heritage
independent observers were engaged to ensure compliance The Company’s EAP was rated highly by Head of the Ministry of during river crossing Industry and Energy, Viktor Khristenko. He said that he is committed construction. They informed us to “close out all those problems that occurred due to justified of every noncompliance with criticism from environmental regulators, but also to prevent such the winter river crossings situations from happening in future”. strategy. Information received from independent observers “I am extremely pleased that Russia’s environment agencies and our helped the Company eliminate investors have agreed on the procedure to address the identified the non-compliances and problems… In principle, the issue may be considered closed, and the prevent their occurrence in approaches to problem resolutions agreed on”, President Putin noted subsequent river crossings. during a meeting with Sakhalin Energy shareholders in the Kremlin on 21 December 2006. One of the most significant environmental challenges we will continue to face is erosion A further challenge the Company The Company successfully control and permanent has faced this year has been spoil completed another season of reinstatement at our facilities. management. The Makarov archaeological fieldwork, and the This summer saw us undertake a mountains present the most excavation work undertaken on huge effort to ensure erosion difficult terrain along the Sakhalin II Project’s pipelines was controls were installed and onshore pipeline route, with heralded by the local media as maintained at particularly their low but steep mountains delivering us into an sensitive areas near our onshore and deeply incised steep-sided “archaeological golden age”. pipelines, such as steep slopes river valleys and landslides. As a Sakhalin Energy have dug up about leading down to rivers and result of this a large volume of 28,000 objects of cultural heritage – riverbanks. We undertook hand spoil is generated during many of which are thousands of seeding, aerial seeding and construction, whilst there are years old. These objects will be hydroseeding at these sensitive limited areas where excess spoil kept in Sakhalin’s local museum. locations to prevent run-off of can be stored. The total quantity soil into salmon spawning rivers. of spoil that will be generated is We are aware that despite our Although we will continue to estimated to be in the order of many ongoing efforts in 2006, our install and maintain erosion 3 million m3. Sakhalin Energy environmental performance still controls at our facilities, we will continue to address the issue has overall room for improvement. anticipate that this will of spoil management and any We do, however, recognise that we continue to pose a challenge associated environmental have significantly improved our in 2007. impacts. performance since 2005.
Annual Overview 71 Emergency Response
mergency management Emergency Situations and the a large magnitude earthquake E aimed at emergency Ministry of Transport, the Japanese during the Project’s lifetime prevention is an integral part of Marine Disaster Prevention Centre, presents challenges in technical the Company’s HSE policy. and international response design and construction for all organisations. aspects of the Project. As a Sakhalin Energy has been precaution, Sakhalin Energy has involved in planning for During 2006, Sakhalin Energy followed the most stringent emergency prevention and purchased six mobile response Russian and international design response since 1998. The units, ten rapid response trailers, codes to ensure that in the event of response plan is reviewed and one vessel-based kit and two port an earthquake, the structural updated on a regular basis. packs. Procurement of additional integrity of its facilities will remain oil spill response equipment to intact and, when necessary, Potential emergencies provided support Phase 2 operations will operations can be safely shut down. for by the plan are oil spills, fires, continue into 2007. airplane, ship and vehicle The Company has minimised the accidents, criminal activities and Sakhalin Energy continues to potential impact of these factors acts of sabotage. Special resources conduct research in oil and ice by diverting the pipeline route to are allocated and a detailed action behaviour and response avoid seismic and landslide plan is developed to deal with technology for a variety of hazardous areas wherever possible. hazardous risks and emergencies, conditions. In 2006, studies of in particular oil spills. algae in oil and ice, winter Sakhalin II offshore platforms are modelling, oil and ice response, designed to withstand loads from Oil spill response and in situ burning and dispersant earthquakes with a recurrence effectiveness with Vityaz crude got interval of 200 years without Oil spill prevention and response under way. The company is also damage or equipment failure and (OSR) is very important for participating in joint industry those from very rare earthquakes Sakhalin Energy. The Company studies concerning oil and ice with a recurrence interval of 3000 addresses this complicated response, oil dispersants and years without significant damage. problem through an integral herding agents. approach. The onshore pipeline route crosses Ensuring seismic safety several seismic faults. To minimise Being the largest integrated oil and pipeline deformation due to gas project worldwide, Sakhalin Sakhalin Island is located in an area possible earth movement in Energy recognises that the of high seismicity. The possibility of seismic fault areas, the Company additional infrastructure associated uses a combination of increased with Phase 2 of the project, pipe wall thickness and special together with year-round Since the commencement of oil pipe-laying techniques. production, carries with it a greater production in 1999, the total Furthermore, as part of the oil and degree of complexity for oil spill volume of hydrocarbons spilt as a gas pipeline construction project, response planning. Therefore, the result of emergencies at Sakhalin some 105 automatic block valve company has reviewed equipment Energy production facilities stations will be installed, including needs, type and availability, amounted to some 350 litres. ones preceding and following each requirements for additional trained When compared to the total oil seismic fault. Offshore pipelines do personnel, river as well as coastal production of some 85 million not cross seismic faults. and marine oil spill recovery barrels, this figure translates into procedures, and its response during about 1 litre for each 39 million The results of seismic risk ice conditions. Sakhalin Energy has litres of oil produced, which makes microzoning conducted to refine also increased coordination with Sakhalin Energy one of the best oil seismic conditions at the LNG site various external bodies including production operators worldwide. show that even in the event of a the Russian Federation Ministry of rare intensity earthquake with
72 Annual Overview Since the start of oil production in 1999, the total volume of hydrocarbons spilt at Sakhalin Energy facilities amounted to some 350 litres. This makes Sakhalin Energy one of the best oil production operators worldwide
recurrence interval of 10,000 years, Key elements of emergency response plan the structural integrity will remain intact and there will be no major • potential emergency analysis; loss of containment at the plant. • establishment of an organisational structure that may be mobilised in a Sakhalin Energy is currently timely fashion in the event of emergency; producing a seismic monitoring • availability of the necessary facilities (for example, oil spill response plan that will cover a significant equipment), purchased and stored in a state ready for employment, and length of the Island and include all in some cases in stand-by state; of the pipelines and all the other • establishment of a communication system for emergency response major project assets. Data will be control centres; collected at Sakhalin Energy’s • personnel education and training, conducting special training exercises; seismic monitoring stations during • liaison with Russian governmental structures and relevant private any earthquake and will be organisations. recorded in digital format and be available for processing immediately after the earthquake cumulative length of landslides stabilising the landslide or event. To ensure emergency was originally identified to be in installing the pipelines below the response capability, the processed the order of 20 km, accounting for landslide slip plane. data will be transmitted to the 2.5% of the total length of the right pipeline control centre for use in of way. Sakhalin Energy pays In 2006, on instruction from operations decision-making. special attention to the issue of Sakhalin Energy, an additional Seismic data from Sakhalin Energy protection from landslides, which audit of design decisions was can also be made available to present a hazard affecting pipeline carried out by internationally emergency response agencies and integrity and project safety. recognised foreign experts. various scientific institutes. Sakhalin Energy suspended work The major mitigation measure at the 7-km pipeline section to Landslide protection Sakhalin Energy has applied for ensure that proper construction landslide areas is to reroute to practices were used. In view of On Sakhalin, landslide risk is avoid them, but where rerouting the fact that a relatively small mostly confined to a particularly is not practicable other design section of the ROW is exposed to mountainous 120 km section of methods include complete landslides, no delay or schedule the pipeline route. The total removal of the landslide, disruption is envisaged.
Annual Overview 73 Rare Species
Steller’s sea eagle Onshore Processing Facility Western Grey Whales (OPF), in the north-east part of The study of Steller’s sea eagle the Island, near Lunskoye bay. Every summer a small Western Grey habitat and population size in Whale population feed off the north-east Sakhalin conducted by Steller’s sea eagle are nesting on north-east coast of Sakhalin Island, Russian specialists and financed Sakhalin, so Sakhalin Energy near the Piltun-Astokhskoye field. by Sakhalin Energy is worthy of identified pipeline sections These endangered species have special note. Based on this study, located close to the nesting chosen this water area for their in the beginning of construction grounds and, wherever possible, summer-autumn feeding. for each work area special rerouted the pipeline or took mitigation measures were measures to mitigate the impact if This neighbourhood bounds developed and successfully rerouting was not an option. Sakhalin Energy to take enhanced implemented for this rare species. environmental protection Since 2003 Sakhalin Energy has measures in its offshore activities. The eagles are officially classified been working with Dr Vladimir as a “vulnerable” breed, and Masterov, an eagle expert from At the time of implementation of they’re on the Sakhalin Island’s Moscow University. Dr Vladimir the Sakhalin II project, only a few Red Data Book. Therefore, the Masterov conducted studies of the grey whales have been observed in Company was advised to carry out nesting sites impacted by pipeline the immediate vicinity of the the survey of the eagle population. construction. If, in his opinion, the Molikpaq platform. Until now, Results of the survey showed that construction is too close to nesting independent studies have not only about 7% of the 500 nesting sites, then a protective zone is revealed any evidence supporting sites on the Island were likely to established around the nests or negative impact of the Company’s be located on or near the pipeline other measures are taken, such as activities on Western Grey Whales right of way. The area where suspension of all activities from or other marine mammals eagles are most likely to be mid-March to mid-September (if inhabiting the area around the exposed to Project activities is nesting birds have been sighted in Vityaz production complex. located in the vicinity of the the area) or traffic limitations in the Nonetheless, the development area inhabited by Steller’s sea eagle. programme of Sakhalin Energy is formed with an allowance for the Sakhalin taimen fact that some common production activities may have a The Company initiated a project negative impact on grey whales. aimed at preservation of the Sakhalin taimen population (a Recognising such potential member of salmon family). The negative impact, Sakhalin Energy Sakhalin taimen is a Red Data together with Exxon Neftegaz Book fish species and protected Ltd. has been financing (since under Russian law. Not a great deal 1996) programmes of studying of information exists on the and monitoring of grey whales. ecology of the Sakhalin taimen The Company has used the data and in recognition of this Sakhalin from these studies to draw up Energy is committed to continue and implement a plan for the taimen research project. The protection of the Western Grey project will focus on research of Whale population. This plan has ecological requirements and study been designed to provide all of species biology and distribution reasonable measures, reducing and will involve Russian, Japanese negative impact on the and other international specialists, endangered population of these including NGOs. sea mammals.
74 Annual Overview Sakhalin Energy considers preservation of biodiversity on Sakhalin island that potentially may be impacted in the course of Sakhalin II implementation as one of its most important tasks
Until recently no plan to protect Sakhalin Energy is continuing to develop the Sakhalin Salmon Protection the habitat for whales or Programme. This programme was launched in October 2006 as a pinnipeds has existed anywhere in collaborative initiative that will be focused on promoting sustainable use the world. The first ever plan of of salmon and the ecosystems on which they depend. The programme is this kind has been drawn up by also aimed at the establishment of organisational resources to support the initiative of Sakhalin Energy. environment protection and sustainable economic development.
Sakhalin Energy undertook to minimise all potential impact on the whale population. In particular, pipelines in Piltun Bay were rerouted away from the Western Grey Whale feeding grounds.
An acoustic monitoring programme was successfully implemented during the installation of the Lunskoye topsides. Noise from vessels during this year’s construction season was shown to be below the thresholds proposed by international scientists.
Recognising the importance of a reasonably justified approach to environmental issues, the adopt optimal solutions during experts are drawing up Company continued cooperation construction and operation of recommendations for with the International Union for offshore facilities that do not improvements in offshore Conservation of Nature and impact grey whales. In November construction, operation and Natural Resources (IUCN) and 2006, the first meeting of Western research, with the aim of creating proposed to establish a specialist Grey Whale Advisory Panel was a balance between whale group to provide consulting that held, convened by the IUCN at conservation and oil and gas would enable the Company to Sakhalin Energy’s request. The developments.
The Western Grey Whale, one of the largest mammals on the planet, is an endangered species: this whale was considered to be extinct in the north-eastern Pacific until 1972, when several individuals were sighted near Sakhalin Island. Currently, the north-eastern Pacific population is believed to number 123 adults.
Annual Overview 75 Sakhalin Energy The New Energy Source for the Asia Pacific SocialSocial ResponsibilityResponsibility The Company’s Sustainable Development Policy establishes that Sakhalin Energy makes its own contribution to satisfy the needs of the population of Sakhalin Island today and in the future maintains the balance between economic development, environmental protection and social responsibility.
Annual Overview 77 Social Responsibility
US$1.5 million in the next five years. It is a unique commitment. 45% of the funds is intended for support of traditional activities (raindeer breeding and fishing), another 45% will go to the social development programmes and the remaining 10% will go to the fund of the minor grants, managed by representatives of the indigenous minorities. The annual budget of the Social Development Programme within the SIMDP is US$130,000. Financial resources or the past decade Sakhalin replenished annually by our will be invested in healthcare, F Energy exerted every effort shareholders. These costs are not education, culture and training. to become a good neighbour to included in the costs submitted the people of Sakhalin. The for recovery. In 2006 the budget of A programme for support of Company actively participates in the Donation and Sponsorship traditional economic activities was the resolution of local problems, Fund was US$500,000. developed to aid some providing a whole package of employment issues of indigenous social investments. Sakhalin Indigenous People minorities and to support their economic development. Another According to the PSA, the May 2006, Sakhalin Oblast reason was the concern about the Company donated US$100 million Administration, Sakhalin impact on the environment and to the Sakhalin Development Indigenous Minority Council and natural resources. The Programme Fund, managed by the Sakhalin Sakhalin Energy signed a trilateral budget is US$140,000 a year. In Oblast Administration. The Fund agreement for cooperation, laying 2006, nine bids were studied. The supported the development of the the foundation for the Sakhalin proposed projects concerned Sakhalin infrastructure, energy Indigenous Minorities gathering and reprocessing of wild sector and social provision, i.e. Development Plan (SIMDP). To herbs, fish processing, and the healthcare, education, etc. finance its implementation, establishment of production of Sakhalin Energy will allocate garments and knitwear with Donations to social projects traditional embroidery patterns. exceeding US$26 million were Nivkhi, Nanai, Uilta, and Evenki All submitted bids were reviewed, made from the provisions of the represent four principal groups of four business projects and two Company’s contractors. the indigenous population of the self-sufficiency projects from Throughout its activities the Sakhalin Island. three regions of Sakhalin have Company allocated US$400 been approved for financing. million on modernisation of Despite histories of arrival on Sakhalin infrastructure (roads, Sakhalin being unique for each of Compensation Payments bridges, railways and healthcare the minority, they are all seen as facilities). The Company invested indigenous population of the Sakhalin Energy is implementing a around US$24 million in this Sakhalin North. Today, there are Resettlement Action Plan, which project. We resolved to invest 3500 of them on the Island. envisages support to people that US$10 million into modernisation Obviously, they are not nomadic, had to resettle to new locations due of Korsakov infrastructure. but many of them depend on to construction works and/or nature, as they farm deer, hunt, go compensation payments for crop We established a donation and fishing and gather wild herbs. loss, incurred by construction of the sponsorship fund, which is LNG Plant and onshore pipelines.
78 Annual Overview Throughout its activities the Company allocated US$400 million on modernisation of Sakhalin infrastructure such as roads, bridges, railways and healthcare facilities
By the end of 2006, compensation the systematic nature of a of chemical substances have been in the total amount of US$3.6 particular issue, to work out an removed. million was paid to 111 land users integrated response approach to (including 51 unregistered users). the issues revealed. The World of Equal Opportunities In 90% of cases the impact is of temporary nature. Providing Unexploded Ordnance Throughout its activities Sakhalin compensation payments to the Energy has been supporting unregistered land users, the One of the most serious problems projects related to assistance for Company establishes new on Sakhalin, endangering lives of disabled people. One of the recent standards of social responsibility in people and animals, is unexploded instances is the Nadezhda Art the Russian Federation. World War II ordnance. Since 2002 Centre for handicapped people in Sakhalin Energy has been financing Poronaisk, which provides an Grievance Process removal of unexploded ordnance appropriate environment for the from the territories impacted by social activities of the handicapped Sakhalin Energy continuously the project. In line with Russian through arts and crafts. works to prevent public grievances legislation, the removal is through mitigation and public performed by servicemen. Today, the Company is awareness enhancement measures, implementing the World of Equal to help foresee potential issues and Like warfare agents, unexploded Opportunities project, a major address them in advance before ordnance are either destroyed in US$100,000 programme for the they became grievances. When situ or removed. The remains of handicapped. The main aim is to grievances do occur, they are the deceased soldiers of WWII are contribute to development of the addressed and resolved within the exhumed. Remains of Soviet facilities of rehabilitation centres Company’s grievance procedure. soldiers were reburied with and social integration of the military honours; remains of handicapped. Sakhalin Energy also In 2006, Sakhalin Energy Japanese soldiers were cremated supported an arts festival for the undertook proactive efforts to raise in line with ritual, the ash handicapped. public awareness about the transported to Japan. Company’s grievance procedure. Healthcare These efforts outreached to both The Company finances and local communities and contractors supports groups which assist In 2006 the Company kept involved in the Project. Accepted servicemen in the removal of supporting medical institutions of and registered in 2006 were 151 unexploded ordnance. The main Sakhalin Island. Thus the surgery grievances, against 40 in 2005. The task of the groups is to study centre of the Central Regional likely reasons for this growth were information on unexploded Hospital was commissioned in the following: (i) raising of public ordnance, military materials and Nogliki. Modern medical awareness about the Company’s equipment, obtained from the equipment was installed in the grievance procedure, and (ii) peak civilians. surgery centre. Sakhalin Energy level of project construction As of end 2006 over 5000 items of participated in the financing of the activities, which unavoidably unexploded ordnance have been purchase. In the same year, Nogliki multiplies all kinds of issues. disarmed, more than 30.000 litres Regional Hospital received a new ambulance vehicle. Sakhalin Most of these grievances were Energy provided another five fully addressed locally by Community equipped ambulance cars to the Liaison Officers through hospitals of Korsakov, Kholmsk, engagement of relevant Dolinsk, Poronaisk and Yuzhno- contractors and facilitation of Sakhalinsk. These vehicles ensure communication with local immediate emergency medical authorities and complainants. treatment.
The Social Performance Team In Korsakov, Sakhalin Energy is continuously monitors the constructing an outpatient clinic. grievance process to detect and The Company allocated more than track potential manifestations of US$4 million to the project.
Annual Overview 79 Sports Support Winners of the contest between Several initiatives of the Company students for the development of are intended to cultivate safety skills Eleven winning teams of various the best sustainable development among pupils. Thanks to the Sakhalin regions participated in the project were awarded with laptops partnership programme of Sakhalin finals of a tournament for children’s by Sakhalin Energy. Students Energy, the Oblast institute for amateur hockey teams, Sports proposed an unconventional extension courses for teachers, against Juvenile Delinquency 2006. project for heating the Tymovsk EMERCOM and Piligrim, All teams which qualified for the area with solar energy. Boomerang and Rodnik NGOs, final received hockey gear kits from classrooms for the study of basic Sakhalin Energy, the tournament Another project was launched by safety rules were equipped in a General Partner. The Company also Sakhalin Energy in 2006. For two number of schools in Sakhalin provided catering, insurance and months the Company’s experts Oblast. Video and audio equipment, accommodation for the young lectured on the Sakhalin II Project stands, modern text and reference sportsmen. As Vladislav Frolov, from and various aspects of its books, compasses, medical wallets, Oblast Administration, puts it: “this implementation, focusing mainly anti-gas and fire protection is one of the most colossal on subjects intended for future equipment were supplied to the children’s projects in Russia”. oilmen. The pilot project was classrooms. All the classes are concluded with a workshop, equipped with devices for crisis In summer 2006, two new sports called “Sakhalin in 10 Years. therapy in emergency situations. facilities were opened with the Development Scenarios”. “Our Children Draw Safety”, a vivid participation of Sakhalin Energy: a desk calendar designed with hockey and skating pitch in Aniva Tymovsk orphanage has its own children’s drawings, ensures the and a futsal pitch with artificial computer class now. New safety rules will not be neglected. grass and stands with a capacity of computers, equipped with training 150 seats in Makarov. software and games, were donated This list of examples is far from by Sakhalin Energy and Startsroi, the full list of actions initiated by University Students the Company’s general contractor Sakhalin Energy as part of its and Schoolchildren for pipelines. programme for safety.
In 2006 Sakhalin State University Changing Priorities created a Sustainable Development Sakhalin II Project is gradually transiting from construction to operation, which Chair. The basic targets of the Chair surely implies significant changes of priorities in social sphere. As soon as are to develop a Sustainable construction is completed, a number of challenges, varying between the negative Development Programme for impact of transport activities and impact on land resources and lifestyle pattern, Sakhalin Oblast and conduct related will no longer be urgent. Advantages, associated with the construction stage scientific research to implement the (employment and local contracting), will also be decreasing. The Company’s key Programme. The sustainable objective in the social sphere is to manage the shift of priorities efficiently. development concept is based on the simple idea of improvement of At the initial stage, as the impact of construction was especially apparent, and living standards for both the living the need for infrastructure especially crucial, the Company had to invest funds, intended for sustainable development, into short-term infrastructure projects. and future generations. Apart from Step by step, Sakhalin Energy Social Team started to launch long-term the initiative on organisation of strategies and facilitate augmentation of the potential of local organisations on the Chair, Sakhalin Energy Sakhalin Island. The Company initiated the establishment of a number of committed to invest US$40,000 in partnerships, which can be distinguished by an external party participating in its development within five years. decision making and thus augmenting its potential. This approach will bear fruit in the next several years.
As the Company transits to operation, it will be using sustainable development tools to support the long-term social and economic development of Sakhalin Island. The Company also studies the opportunity for local long-term support of social initiatives and economic growth. In the next year the Company will cooperate with interested parties on Sakhalin Island to develop a plan for the future and determine its role in the process, one that is acceptable both to other companies and to the authorities.
80 Annual Overview Sakhalin Energy Investment Company Ltd.
Corporate Headquarters:
35, Dzerzhinskogo St., 693020, Yuzhno-Sakhalinsk, Russia Phone: +7 (4242) 66-2000 Fax: +7 (4242) 66-2012 www.sakhalinenergy.com www.sakhalinenergy.ru
Sakhalin Energy Investment Company Ltd.
Moscow Representative Office:
31, Novinsky Boulevard, 123242, Moscow, Russia Phone: +7 (495) 956-1750 Fax: +7 (495) 956-1760 www.sakhalinenergy.com www.sakhalinenergy.ru Sakhalin Energy The New Energy Source for the Asia Pacific
Sakhalin Energy The New Energy Source for the Asia Pacific WWW.SAKHALINENERGY.COM Annual Overview