Sustainable Development Report Contents

INTRODUCTION FROM THE CHIEF EXECUTIVE OFFICER ...... 5

ABOUT THE REPORT General information ...... 8 Definition of report contents ...... 8 Report quality assurance ...... 10 Definition of report boundaries ...... 11

INTRODUCTION Sustainable development and corporate social responsibility – essential components of Sakhalin Energy’s strategic development ...... 12 Sustainable development and corporate social responsibility, use of international standards ...... 14

ABOUT SAKHALIN ENERGY Management structure ...... 16 About Sakhalin-2 ...... 18 Company mission, core values and business principles ...... 19 Corporate culture ...... 22

SOCIAL AND ECONOMIC BENEFITS OF SAKHALIN-2 PROJECT FOR THE RUSSIAN FEDERATION AND SAKHALIN OBLAST General ...... 23 Financial benefits for the Russian Federation ...... 24 Russian content ...... 25

MAIN PRODUCTION AND BUSINESS ACHIEVEMENTS Startup of gas production in the Lunskoye field ...... 27 Inauguration of the LNG plant ...... 28 Essential completion and status of facilities ...... 30 Well drilling programme ...... 34 Implementing plans to produce and export hydrocarbons ...... 35 New phase of project financing ...... 37

STAKEHOLDER ENGAGEMENT Stakeholder engagement strategy and principles ...... 38 Stakeholder engagement in 2009 ...... 39 Community liaison officers ...... 39 Company information centres ...... 41 Community grievance procedure ...... 41 Engaging Sakhalin indigenous peoples ...... 41 Interaction with NGOs ...... 42 Engaging Japanese stakeholders ...... 42

2 2009 Sustainable Development Report MANAGING NON-FINANCIAL RISKS IN HEALTH, SAFETY, ENVIRONMENT, AND SOCIAL ISSUES General principles of managing non-financial issues ...... 44 Structure and content of managing non-financial risk ...... 44 Hazards and risk management ...... 45 Objectives and annual improvement plans ...... 46 Audits and inspections ...... 46 Corrective and preventive actions ...... 46 Management reviews ...... 46 ENVIRONMENTAL PROTECTION, ECOLOGICAL AND INDUSTRIAL SAFETY Policy ...... 48 Goals and performance ...... 48 Industrial environmental monitoring ...... 49 Waste management ...... 49 Biodiversity ...... 50 Training and awareness ...... 61 Monitoring and follow-up ...... 61 HUMAN RESOURCES MANAGEMENT AND DEVELOPMENT HR management and HR policy approaches ...... 62 General ...... 62 Labour safety and protection ...... 63 Protecting the health of personnel ...... 65 Housing policy ...... 66 Recruitment, motivation and assessment ...... 66 HR training and development ...... 68 SOCIAL INVESTMENT AND CONTRIBUTION TO REGIONAL SUSTAINABLE DEVELOPMENT Company principles and approaches to Social investment and sustainable development ...... 70 Development of the regional social infrastructure ...... 71 Social investment and sustainable development programmes supported by Sakhalin Energy ...... 72 Sakhalin indigenous minorities ...... 75 2010 plan ...... 78 EXTERNAL REVIEW OF THE REPORT ...... 79 LIST OF ACRONYMS ...... 80 APPENDIX 1: GRI standard disclosures (Version 3.0) ...... 81 APPENDIX 2: Sakhalin Energy’s answers and commitments as part of its dialogue with stakeholders for development of the 2009 Sustainable Development report ...... 93 APPENDIX 3: List of stakeholders who participated in dialogues for development of the 2009 Sustainable Development report ...... 104 APPENDIX 4: Sakhalin-2 records ...... 105 APPENDIX 5: List of Company information centres ...... 106

2009 Sustainable Development Report 3

INTRODUCTION FROM THE CHIEF EXECUTIVE OFFICER

our Company in the southern part of Sakhalin Island. The strategic importance of the Sakhalin-2 Project for the entire Asia–Pacific was seen in the distinguished guests at the ceremony, including Taro Aso, the Prime Minister of Japan, Prince Andrew, Duke of York, Maria van der Hoeven, the Minister of Economic Affairs of the Netherlands, and other high–ranking officials and guests from Russia and countries that are co–partners in the Project from the UK, the Netherlands, and Japan. On 29th March 2009, the first scheduled Russian LNG cargo was successfully loaded from the Sakhalin-2 LNG plant onto the LNG carrier, the Energy Frontier. The first Sakhalin LNG was delivered to two of the Company’s founding customers – Tokyo Gas and Tokyo Electric. As always, safety and reliability remain the main priorities for Sakhalin Energy during construction, start–up and operation of Sakhalin-2. Dear Colleagues and Friends, offshore pipelines that connect all On 31st May 2009, Train 2 of the The Sakhalin-2 Project is the three platforms to shore, more than LNG plant and related facilities at the world’s biggest international shelf oil 1,600 km of onshore oil and gas Lunskoye–A (LUN–A) platform and and gas project ever implemented in pipelines, an onshore processing onshore processing facility started up. the harsh environment of Sakhalin facility, an oil export terminal, and On 22nd July 2009, Sakhalin Island in the Russian Far East. The Russia’s first liquefied natural gas Energy exported its 200th oil cargo. Project is based on a Production (LNG) plant. Our Sakhalin-2 Project The Sakhalin Island, a PRISCO– Sharing Agreement (PSA), and is is probably the most innovative and owned tanker on long–term charter uniquely organised. In 1999, first oil technically advanced in Russia, and is to the Company, delivered some was produced from the Molikpaq contributing to a comprehensive 100,000 tonnes of oil produced at offshore platform installed at the upgrade of the country’s oil and gas the Company’s offshore facilities in Piltun–Astokhskoye field during industry. the Sea of Okhotsk to a refinery in Phase 1. In Phase 2, two more On 18 February 2009, Russian South Korea. offshore platforms were President Dmitry Medvedev Since the beginning, our Company constructed and started up. The attended the official inauguration of has based its activity on a strategy Project includes some 300 km of the first Russian LNG plant built by of sustainable development, which

2009 Sustainable Development Report 5 allows us to achieve our business goals while taking into consideration potential environmental and social impacts on our employees and on local communities. It is fair to say that such an approach means no operational or technological decision is made without adequate environmental and social assessments of their potential impact. We rely on best international practice and standards in managing and gauging environmental, health, safety and social impact. In 2008 and 2009, our Company won several prestigious Russian and international awards in recognition of our efforts in environmental protection, charity, engagement with Sakhalin indigenous peoples, and public relations. You will find more information about these projects in this Report. In November 2009, Sakhalin Energy reached a new level of social responsibility and transparency by joining the UN Global Compact. The Company assumed a strict commitment to consistently advance 10 key principles of the Compact in the areas of human rights, labour, the environment, and anti–corruption. By joining the Global Compact, businesses express their support for the idea that business practice based on these universal principles promotes greater sustainability, fairness, and representation on the global market, and contributes to the creation of prosperous and successful communities. The 10 principles of the Global Compact are based on:

6 2009 Sustainable Development Report • The Universal Declaration of Human Rights • The International Labour Organisation's Declaration on Fundamental Principles and Rights at Work • The Rio Declaration on Environ- ment and Development • The United Nations Convention Against Corruption. Since 2001 our Company has issued annual reports covering our social activities as well as our charitable and environmental efforts. Relying on our analysis of international and Russian best practice, in 2009 Sakhalin Energy took a major decision to follow the leading companies in Russia and abroad and publicly disclose our non–financial reports, based on best international standards. Our new report is presented in the most advanced format, in accordance with the principles and indicators of sustainable development. We are delighted to present the first result of this work. We hope you will recognise this full disclosure as an important milestone for our Company — beneficial for our shareholders, communities, authorities, and even All our efforts are targeted at lenders, employees, and the general competitors. We welcome your harmonious and sustainable public. This report reflects the feedback and your comments on development, public benefit, and critigue we got from key this Report. Your input will enable environmental protection. stakeholders during special public us to develop our business in a consultations and dialogues held by more efficient and responsible way, Sakhalin Energy in 2009 and 2010. and consider social and This Report is not a goal in itself; environmental factors in our rather, it is a tool for more development. With this report, we effective communication with our aim to demonstrate and prove once customers and partners, non– again our social responsibility in the Andrei GALAEV governmental organisations, local most advanced sense of the term. Chief Executive Officer

2009 Sustainable Development Report 7 ABOUT THE REPORT

General Information • Fill out the feedback form on the certain information was the principle After joining the United Nations Company’s public website of materiality, which involves Global Compact in 2009, the (www.sakhalinenergy.com) or evaluating the significance and impact Company made the crucial decision to • Fill out the feedback form at one of specific events, factors, and change to non–financial public of the Company’s information indicators on the Company and its reporting based on the best centres (a list of information main stakeholders. It is essential to international standards used by the centres is provided in Appendix 5: take into account the materiality and world’s leading companies. List of Company information information about events when This report describes the centres). making strategic and immediate Company’s sustainable development decisions on sustainable performance in 2009 according to Definition of Report Contents development. the principles and indicators of the The main approach to presenting This is why the Company shares Global Reporting Initiative (GRI). The information in the Company’s and uses the main principles of target audience for this report performance report was to provide international reporting on sustainable includes the internal and external of balanced coverage of three main development, such as: stakeholders listed in Section areas of sustainable development: Stakeholder engagement. In economy, ecology, and social policy. preparing this report, the Company An important criterion for held two rounds of consultations with deciding whether or not to stakeholders, according to the include АА1000SES international standard. This complements the GRI and recommends logical and systemic interaction between a modern, socially responsible company and its stakeholders. Detailed information about the consultations is presented in Section Stakeholder engagement. The report is published on the Company’s public website and is circulated among the principal stakeholders. The Company wellcomes the opinions, suggestions, and comments of all stakeholders on its sustainable development report. To respond, you may use any of the following options: • Complete the feedback form attached to this report and send it to the address indicated

8 2009 Sustainable Development Report GRI Principle Definition

Materiality Sakhalin Energy seeks to disclose in this Report all the topics and indicators relating to its sustainable development performance. To identify these issues and to determine and avaluate their materiality, the Company analyses the internal and external factors of its operations that affect the economy, the environment, and the social sphere, including the Company’s mission and vision, strategy and development, questions, expectations, and stakeholder concerns, etc. The Company used a series of balanced methods and tools, especially the following: • Identify and analyse public needs, interests, expectations, and concerns in the course of public, group, and individual consultations (a detailed annual report on completed consultations, issues raised, and the Company's response is available on the Company's public website) • Public opinion polls (as a minimum, annual sociological surveys of the population and/or experts’ opinion in areas where the Company operates, as well as opinion polls of Company personnel); as a rule, a specialised contractor was enlisted to conduct public opinion surveys. In 2009, 800 individuals in 22 communities on Sakhalin Island were surveyed. Some of the objectives accomplished by this survey include: • public opinion on individual aspects of implementing the Sakhalin-2 Project, possible impact on the population, and the socioeconomic state of communities • public attitude towards the Sakhalin-2 Project, Sakhalin Energy, its contractors and subcontractors, and concerns over the Sakhalin-2 Project and the operations of Sakhalin Energy • public information needs on Project implementation and the operations of Sakhalin Energy, and related matters. • Media analysis which is conducted by the Company on a regular basis.

Additionally, we analysed issues raised in reports by other oil and gas companies

Stakeholder The Company determines and analyses in a systematic and logical manner the range of inclusiveness stakeholders by groups and issues of mutual interest. Section Stakeholder engagement of this report presents information on stakeholder engagement, including approaches, principles, and the results of engagement processes. The principal document guiding the Company's stakeholder engagement is the Public Consultation and Disclosure Plan, developed according to Guidance Note F: Guidance for Preparation of an Information Campaigns and Public Consultation Plan of the International Finance Corporation (IFC). It is updated yearly and is available on the Company’s public website. The plan details the process used to identify and analyse stakeholders and describes methods used for stakeholder engagement. Additionally, in preparing this Report, the Company held two rounds of consultations with its stakeholders, according to the principles and provisions of the AA1000SES International Standard. Detailed information about the consultations and their results is presented in the Section Stakeholder engagement.

2009 Sustainable Development Report 9 GRI Principle Definition

Sustainability A focus on corporate social responsibility and an adherence to sustainable development context principles is at the core of the Company’s production operations. The Company developed a sustainable development policy from the outset of its operations. This policy has been applied throughout the entire duration of the Sakhalin-2 Project, by incorporating sustainable development principles in the business plans and operational methods of the Company. Throughout this report, the Company sought to present its contribution to sustainable development in a broader national context and a regional context.

Comprehen - The report contains information on all structural units of the Company and on all areas siveness affected by the Company’s performance on sustainable development, including economic, environmental, and social aspects. In this report, the Company sought to make the most complete disclosure of information possible:

• According to GRI principles and indicators, within the boundaries of its operations (primarily the Production Sharing Agreement) • Taking into account the interests and expectations of stakeholders to include specific topics in this report • According to the priorities of shareholders, lenders and Company executive management.

Report Quality Assurance

Balance The Company sought to make a balanced presentation of its performance, including favourable aspects (accomplishments) and unfavourable aspects (action items). It sought to pay attention to issues disclosed in the report relative to their materiality, interest, and the stakeholders expectations to include specific topics in this report.

Compatibility In this report, the Company follows the GRI Sustainable Development Reporting Guidelines and their technical protocols, so stakeholders can compare the results of the Company’s performance with other companies and organisations. Since this is the first sustainable development report prepared in accordance with GRI Guidelines, the Company’s performance indicators can only be compared with future reports.

Accuracy The Company sought to make an accurate, specific, and sufficiently detailed presentation of its performance results, so that stakeholders can objectively evaluate the results. To this end, the Company used qualitative descriptions and quantitative information based on data from standard financial and statistical reports, reports to relevant oversight agencies, the Russian Party, shareholders and lenders, and from internal reports drawn up according to the procedures and methods adopted by the Company. Where estimates are used, a reference to the source is provided or a rationale is presented for using estimates.

10 2009 Sustainable Development Report Timeliness This is the first sustainable development report prepared according to GRI Guidelines. Development of the report was carried out systematically, including special consultations with stakeholders in the course of its development and publication in the second quarter of the year immediately following the reporting year.

Clarity In preparing sustainable development report, the Company sought to present information in a manner that is understandable and accessible to stakeholders in form and substance. The report avoids specialised technical terms, acronyms, jargon, or other content likely to be unfamiliar to most stakeholders. The report makes use of charts, graphs and schemata, and provides explanations of abbreviations and terms where appropriate and necessary.

Reliability Report details are based on data from standard financial and statistical reports, reports to the relevant supervisory agencies, the Russian Party, shareholders and lenders to the Sakhalin-2 Project, as well as internal reports drawn up according to the procedures and methods adopted by the Company. A number of details reflecting the results of the Company's sustainable development performance have also been verified independently. A corresponding reference is in the report.

Definition of Report Boundaries The report is corporate wide and contains information on all structural units of the Company and areas affected by the Company’s sustainable development performance, including social, economic and environmental aspects.

2009 Sustainable Development Report 11 INTRODUCTION

Sustainable development Triple Bottom Line principle: economy Sakhalin Energy developed a and corporate of companies, ecology of production, sustainable development policy from Social Responsibility – and social policy. the outset of its operations. The policy essential components At the corporate level, a reflects the realities of the Company's Sakhalin Energy’s strategic sustainable development strategy operations in Russia and envisages the development ensures a gradual fusion of the achievement of specific and ‘Sustainable development meets economic, environmental and social practicable Company goals. These the needs of the present without aspects of the Company’s operations goals are aimed at facilitating the compromising the ability of future into a single self–organising system. In sustainable development of Sakhalin generations to meet their needs’– this sense, sustainable development Island. This policy has been pursued this definition in 1987 is from the UN presumes and ensures economic throughout the entire duration of the World Commission on Environment effectiveness, environmental safety Sakhalin-2 Project by incorporating and Development (the Brundtland and social justice, combined with an sustainable development principles Commission). The essence of this overall reduction of human pressure into the business plans and definition is still relevant and is on the biosphere. operational methods of the Company. shared by politicians, the public and entrepreneurs worldwide. ‘Sustainable development’ has become firmly embedded in the activities of the general public and business in developed and major emerging economies. This is mainly because the majority of these countries made significant international commitments in accordance with An Agenda for the 21st Century, adopted by the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, and the Johannesburg Declaration on Sustainable Development, adopted at the World Summit on Sustainable Development in 2002. Owing to this forward–moving process, flagship companies and corporations are developing and implementing their own corporate sustainability plans. An important stage in the establishment of corporate sustainable development practice was the introduction of the Global Reporting Initiative (GRI) international standard based on the

12 2009 Sustainable Development Report The starting point of the These principles are incorporated Sakhalin Island while keeping a Company’s sustainable development into the Company’s sustainable balance among economic policy is the following seven development policy. The main development, environmental principles. Sakhalin Energy has commitments Sakhalin Energy has protection and social responsibility followed them since its inception: made in connection with its • Work with stakeholders to identify • Minimise environmental impact sustainable development policy are ways to contribute to the wider • Use resources efficiently the following: long–term economic, • Maximise profitability • Carry out business responsibly and environmental and social benefits • Maximise benefits to the efficiently to deliver a robust of the Sakhalin Oblast. community project that maximises benefits to To us, corporate social • Respect and protect the rights of shareholders, the Russian responsibility (CSR) is a measure to personnel and the population Federation and the Sakhalin realise the Company’s sustainable • Interact and work with the community development policy in stakeholder shareholders • Contribute to the present and engagement. As a socially responsible • Provide quality service to clients. future needs of the society of company, since 2001 Sakhalin Energy

2009 Sustainable Development Report 13 published information on its the global community, including CSR ensures the profitability and performance, demonstrating to the individual countries, regions, cities, sustainable development of public at large that it pays constant enterprises and corporations is the companies. and specific attention to transition to ‘sustainable Social responsibility was and environmental and social aspects. development’. This is understood as remains an important factor in the This minimises the Company’s the preservation of the environment business reputation, public image, exposure to the risks of internal and and the conservation of natural sustainable development and external conflicts and to resources, in combination with the capitalisation of any company. The evnvironmental sanctions. social and economic welfare of global financial and economic crisis As mentioned above, in 2009 the present and future generations. caused both international and Company took a major step towards Corporate best practice has Russian companies to scale back improving the format of its public demonstrated that sustainable somewhat the scope of their CSR reporting: a transition to development and CSR are activities, particularly voluntary international standards in sustainable interrelated concepts, and measures initiatives of a social and charitable development reporting and of their practical implementation are nature. Nevertheless, in the context stakeholder engagement, as part of mostly identical. of decreasing financial capabilities for the Global Reporting Initiative and Over the last 15 years, the the implementation of CSR AA1000 Accountability (AA1000SES leading members of the international initiatives, the greater part of them standard). In many ways, this is business community have recognised are becoming increasingly relevant connected with the successful that CSR encompasses a broad and even critical for overcoming the completion of the major construction range of business activities in the crisis. As international practices works of Phase 2 of the Project and economic, social and environmental show, the importance of CSR and the beginning of the operational spheres: within the so–called three sustainable development measures phase, aligned with the stable ‘pillars’ of social responsibility or at the recovery stage is not production and delivery of oil and three interconnected aspects of diminished, but, quite the opposite, liquefied natural gas to consumers in sustainable development. CSR is substantially increases. This applies 2009. We hope that this modern, based on compliance with legislation to all companies that, while standardised way of non–financial and additional voluntary initiatives by undergoing transformation, continue reporting will enable our stakeholders companies, in making their to operate. Sakhalin Energy too, as a in Sakhalin, the Russian Federation, contribution to social development. socially responsible company in the and interested parties globally to As shown by the best international broadest sense of the concept, regularly receive even more and Russian practices, CSR is a continued to focus on this essential objective, concreate and system of ethical norms and values component of its business during the comprehensive information on our for companies; at the same time, it crisis year of 2009. operations. is a system that measures economic, Modern international standards of ecological and social activities CSR and non–financial (sustainable Sustainable development implemented on the basis of regular development) reporting spell out and Corporate social stakeholder engagement, aimed at principles and processes for the responsibility, minimising non–financial risks; long– effective interaction between the use of international standards term enhancement of Company Company and its stakeholders. For It is common knowledge that at image; and comprises corporate instance, AA1000SES, one of the the turn of the 21st century a business reputation of companies world’s most widely used standards universal goal for the advancement of capital growth and competitiveness. and one often used in Russia,

14 2009 Sustainable Development Report proposes a model of consistent and economic, 30 ecological and 40 Energy has joined this club of systemic interaction between a social indicators, which primarily flagship international companies and modern socially responsible company enable stakeholders and the public now uses not only the best CSR and and its stakeholders. at large to objectively evaluate the sustainable development practices, Another international standard, level of social responsibility of a but also universally accepted forms the Global Reporting Initiative (GRI), company and its contribution to of international sustainable calls for a system of indicators sustainable development. By the end development reporting. across all areas of sustainable of 2009, international CSR and The introduction and use of development based on the Triple sustainable development reporting advanced international CSR Bottom Line concept. G3, the third was practiced by over 6,000 leading standards and non–financial generation of this standard that international companies. Having reporting will enable Sakhalin Energy went into effect at the end of completed its large–scale to join the ranks of the leading 2006, comprises 121 elements of infrastructure Phase 2 construction Russian and international companies standard reporting, including nine works in 2008–2009, Sakhalin in this sphere.

2009 Sustainable Development Report 15 ABOUT SAKHALIN ENERGY

Sakhalin Energy Investment Company Ltd. (‘Sakhalin Energy’ or Company) was set up to implement the Sakhalin-2 Project according to the production– sharing agreement with the Russian Federation. The Company, established in 1994, is developing the Piltun– Astokhskoye and the Lunskoye oil and gas fields, offshore Sakhalin Island in the Sea of Okhotsk in the Russian Far East. Sakhalin-2 is one of the world’s biggest offshore projects to produce and export oil and gas, and one of the most technologically advanced ever implemented by the oil and gas industry. The level of objectives, scope of operations, and scale of the investments, coupled with the harsh environment, unique ecosystem, and the lack of oil and gas infrastructure on Sakhalin Island, and its remoteness from major Russian commercial centres meant the Company had to apply the best practices of the industry and use innovative technologies and efficient managerial solutions. A unique partnership of its shareholders helped Management Structure Sakhalin Energy to master these tasks. Sakhalin Energy is the investor and operator of the Sakhalin-2 Project.

Sakhalin Energy signed a production sharing substituting the collection of various taxes, substituted by production sharing. This agreement (PSA) in 1994 with the Russian levies and duties, and ensuring a stable effectively means that instead of a mineral Federation, represented by the Russian taxation regime during the life of the project. resources tax, property tax and some other Government and the Sakhalin Oblast According to the PSA conditions, the Russian taxes and levies, Sakhalin Energy pays royalties Administration. A PSA is a commercial Federation retains the sovereign right of (fees for subsoil use), starting from first oil contract between an investor and the state, ownership to the oil and gas fields and Sakhalin production. In addition, as soon as the investor allowing the investor to make a long–term Energy invests the funds required to explore recovers the production costs, production investment on a large scale that carries a high and develop the fields. profits are shared by Sakhalin Energy and the risk. In a PSA, the state grants an investor the The PSA allows for complete financial Russian government. The specific shares of exclusive right to develop a subsoil field by its transparency of the Sakhalin-2 Project. The each party depend on Project economics. The own means and at its own risk. The Sakhalin-2 Russian Federation approves the estimates of Company also pays the Russian profits tax, at PSA defines the terms and conditions to expenditures and has the right to audit the a rate, which according to the PSA exceeds explore, develop, produce, process and investor’s expenses. In addition, the parties the currently effective profits tax rate transport hydrocarbons. The PSA provides a bear mutual responsibility for compliance with generally established for tax payers not eligible framework for contractual relations between the rules established by the PSA. to PSA conditions. This means the Russian an investor and the government. The The Sakhalin-2 PSA describes a specific tax Federation share of the Sakhalin-2 Project is agreement spells out the production sharing regime for Project development. The majority made up of tax receipts, royalties and a share arrangement between the contracting parties, of the taxes and custom duties are of production profits.

16 2009 Sustainable Development Report The Company’s shareholders, annual report of the Company and plans and strategies, and solutions which retain their shares through appoints auditors on behalf of the for their implementation. As of 1 April subsidiary structures, are Gazprom Russian Party. The Board comprises 2010, the Company had six executive (50% +1 share), Shell (27.5% six representatives of Sakhalin Energy directors who are department heads –1 share), Mitsui (12.5%) and and six representatives of the in charge of key functions: Chief Mitsubishi (10%). These major Russian Party, including two Executive Officer, Production international companies have government representatives of the Director, Technical Director, Finance extensive knowledge and experience Sakhalin Oblast and four from the Director, Legal Director, and in the construction and operation of Russian Federation. Director of Human Resources. oil and gas infrastructure facilities, Shareholders appoint the Board of and in the production and Directors to manage Sakhalin Energy. Main office of the Company transportation of hydrocarbons. The Board of Directors is made up of 35, Dzerzhinskogo Str., The responsibilities of the executive and non–executive Yuzhno–Sakhalinsk, 693020, Supervisory Board (SvB) for Project directors of the Company. All board Russian Federation. implementation are spelled out in the members are appointed by Tel.: +7 4242 66 2000. PSA. The Board makes fundamental shareholders. Charles Watson is the Fax: +7 4242 66 2693. decisions relating to the PSA. Among Chairman of the Board of Directors. its decisions, the Board approves The Committee of Executive Moscow Representative Office development and work programmes Directors, headed by the Chief of the Company and budgets, LNG sales agreements, Executive Officer, directly manages 31, Novinsky Boulevard, procurement procedures, and training the Company. The Committee sets Moscow, 123242. and employment plans for Russian out the everyday activities of Tel.: +7 495 956 1750. Nationals. The Board also reviews the Sakhalin Energy through business Fax: +7 495 956 1760.

2009 Sustainable Development Report 17 2009 hydrocarbon deliveries

About Sakhalin-2 condensate field. The water depth in on 30 July 2008. In late 2008, the The license areas of the Sakhalin-2 the fields varies from 28 to 48 Molikpaq platform was successfully Project are in the Sea of Okhotsk metres. The total estimated reserves switched to year–round operation near the north–eastern coast of of the Project fields represent using the new infrastructure of Sakhalin Island. The location of the oil approximately 9% of the Phase 2. and gas fields determines the hydrocarbons reserves offshore Phase 2 of the Project started in destination of supplies: most of the Sakhalin. 2003, the large–scale integrated liquefied natural gas and an oil blend The Sakhalin-2 Project is development of the Piltun– produced from the Project are sold implemented in phases determined Astokhskoye and Lunskoye fields, to to the high–growth energy market of by the scope, technological simultaneously produce oil and gas the Asia–Pacific region (APR). sophistication, required investment, with an integrated production The resource base of the Project and by the harsh environment and infrastructure. While similar is formed by two oil and gas fields remoteness of the fields from major integrated projects have been located about 15 kilometres off the Russian centres of economic implemented in other countries, the coast of Sakhalin Island. Piltun– activity. Field development began in construction phase was much longer Astokhskoye is predominantly an oil 1996 in the Astokh area of the and facilities were commissioned in field and Lunskoye is a gas and Piltun–Astokhskoye field. In 1999, succession. Sakhalin Energy started seasonal oil Phase 2 involved constructing and production from the Molikpaq (PA–A) commissioning one of the world’s THE SAKHALIN-2 PROJECT ice–resistant offshore platform, the largest oil and gas infrastructure IS THE FIRST RUSSIAN OIL first offshore oil and gas production projects to produce oil and gas, AND GAS COMPLEX TO SELL platform on the Russian shelf. Under liquefy natural gas and transport oil TO THE ASIA–PACIFIC Phase 1 of the Project, oil and LNG to customers. MARKET. IN 2009, SAKHALIN production took place only in ice– Production facilities of the ENERGY CELEBRATED ITS free months, for about six months. Sakhalin-2 Project comprise: 10TH ANNIVERSARY The 10th production season, the • The Molikpaq (PA–A) platform OF OIL SALES TO THE REGION. last season during Phase 1, started to produce oil and associated

18 2009 Sustainable Development Report gas in the Astokh area of the • The first Russian liquefied stakeholders (see Appendix 4 Piltun–Astokhskoye field natural gas plant. Sakhalin-2 records). • The Piltun–Astokhskoye B The LNG Plant, along with the LNG (PA–B) platform to produce oil jetty/OET, is part of the facilities of Company mission, and associated gas in the the Prigorodnoye Production core values and business Piltun area of the Piltun– Complex, where the first Russian principles Astokhskoye field specialised seaport for oil and gas • Lunskoye A (LUN–A) gas exports operates. Mission and vision production platform, the first More detailed information on the The mission and vision of Sakhalin and only Russian offshore gas Company and the Project, including Energy provide the basis for and gas condensate production determining the goals and strategies platform of the Company. VITYAZ CRUDE OIL • TransSakhalin pipeline system, The mission: Sakhalin Energy is IS A NEW BRAND consisting of offshore pipelines committed to being a premier energy connecting three platforms to INTRODUCED supplier, recognised for its the shore, and onshore oil and BY SAKHALIN ENERGY. operational excellence, reliability and gas pipelines running from north IT IS A LIGHT SWEET OIL safety. We conduct our business in to south of Sakhalin Island to SIMILAR TO LIGHT OMAN an ethically, socially and the Prigorodnoye production CRUDE OIL. environmentally responsible manner. complex The vision: to be the premier • An Onshore Processing Facility the history of development, is energy source for the Asia-Pacific. (OPF), designed to process gas available at the Company’s public The objectives: to commercially and gas condensate coming website. Under the Sakhalin-2 develop, operate and sell from the platforms, for further Project, unique for its content and hydrocarbons from our fields, in transportation via the onshore the scope of its implementation, the keeping with the licenses of the pipeline system Company set a number of records at Sakhalin-2 Project, and to develop • Booster Station 2 (BS2) Russian and international levels, the required project infrastructure • An Oil Export Terminal (OET) and including for technological for the benefit of our shareholders, the Tanker Loading Unit, located achievements, project financing, and the Russian Federation, the 5 km offshore in Aniva Bay unique partnerships with Sakhalin Oblast and the local community. Liquefied natural gas, or LNG, is natural gas in LNG tankers. Less than half the density of in its liquid form. Natural gas is made up of water, LNG will float if spilled on water. primarily methane, with low concentrations of LNG is returned to a gaseous state at re– Values and general business other hydrocarbons, water, carbon dioxide, gasification terminals after delivery to principles nitrogen, oxygen and some sulphur customers. LNG is not corrosive or toxic. It The core values of Sakhalin compounds. During the process known as can be used for heating and cooking as well as Energy, such as integrity, liquefaction, natural gas is cooled to minus generating electricity and for other industrial 160° Celsius. Before the gas can be cooled, uses. LNG can also be kept as a liquid for use transparency and respect for people, components such as water vapour, carbon as an alternative source of fuel for transport. underlie all Company activities and dioxide and heavy hydrocarbons are removed Natural gas is the cleanest–burning fossil from the gas in various processes. During the fuel. LNG is a price–competitive energy source form the basis of its General subsequent cool down period, the gas that could help meet the future economic Business Principles. These principles becomes a clear, colourless, odourless liquid. needs of many countries. LNG also offers cover business, competition, In this state, natural gas is reduced in volume unrivalled flexibility of delivery compared with by 600 times, so it can be transported by sea natural gas supplied by pipeline. business integrity, political activities, health, safety and the environment,

2009 Sustainable Development Report 19 THE COMPANY’S EFFORTS TO Quality Assurance evaluation of actions. It assumes necessary PROTECT THE ENVIRONMENT Sakhalin Energy uses quality assurance, a precautions have been taken so the entire formal methodology to assess the quality of production of a product or service is within HAVE BEEN RECOGNISED BY products or services provided. Quality specifications under a wide range of operating THE INTERNATIONAL assurance includes a review and assessment conditions. This usually requires creating of services, problem identification, corrective indicators to master and monitor the COMMUNITY: THE OIL EXPORT actions to remedy any deficiencies, and production process. TERMINAL OF SAKHALIN ENERGY WON ‘THE ENVIRONMENTAL SAFETY’ liaison with the local population, and conduct of each employee in each CATEGORY IN THE OIL compliance with Russian laws. subdivision. Over all the years of its TERMINAL 2009 SECOND The General Business Principles existence, the Company has been apply to all aspects of Sakhalin guided by these General Business INTERNATIONAL CONTEST, Energy activities and determine the Principles, and compliance with IN NOVEMBER 2009.

20 2009 Sustainable Development Report tthose principles is the decisive competitive with the other career development and deploy component of our continued success. industry leaders. the abilities of staff at a The General Principles are • To the Russian Party: to maximum; to ensure equal supported by a number of comply with the Company opportunity to employees and to documents, especially the following: commitments to the Russian develop their abilities and skills; • Statement of General Business Federation and Sakhalin Oblast, to encourage employee Principles and to protect the rights of participation in selecting and • Code of Conduct both under the production– planning their work; and to • Sustainable Development Policy sharing agreement signed provide employees with the • Grievance procedure between Sakhalin Energy and opportunity to inform • Conflict of interest policy and these parties. management of their needs. The procedure. • To customers: to engage new efficiency of all Sakhalin Energy Application of these principles is customers and to retain existing employees in their work is supported by control procedures, customers by manufacturing considered a pre–condition to developed to ensure these principles and offering products and commercial success. are understood by employees, so services attractive in price, • To business partners: to employees can acknowledge their quality and safety, and with a establish mutually beneficial activities are in line with these minimum impact on the relations with contractors and principles. The control system also environment, and delivered with suppliers, and to facilitate includes the responsibility of a high level of commercial, application of the General management to provide employees technological and environmental Business Principles of Sakhalin with safe and confidential methods to competence. Energy, or similar principles in express their concerns, ask • To Company staff: to respect relations with business questions and inform the Company of employees rights, to provide partners. Effective application of cases infringing these principles. In employees with decent and safe these principles should be an turn, employees are responsible for working conditions and essential condition for deciding notifying the Company about competitive terms of whether to start or continue a suspected infringement of the employment; to contribute to business partnership. General Business Principles.

Company responsibility People are judged by their actions. Company in maintaining its excellent and commitments Business integrity, due diligence, and mutual reputation. We call on our staff to respect underlie all activities of Sakhalin demonstrate leadership, responsibility, and Sakhalin Energy’s commitments Energy staff. We are strongly convinced that team spirit, qualities that promote the extend to six stakeholder groups. the key principles behind the work of any success of Sakhalin Energy. We also call on Management is responsible to team should include confidence, our partners to adopt these principles or to transparency, professionalism, team spirit, adhere to their own high standards. continuously assess the business and and pride in their work. Management of the Company must serve as prioritise its activities to effectively Sakhalin Energy is committed to promoting an example for all employees in following fulfill its commitments as a single and sustainable development in all areas of its these principles, and to persuade employees activities. This means finding a balance between to comply with the spirit and the letter of undivided business objective. short–term and long–term interests, and this document. • To shareholders: to keep the taking into account economic, environmental Over many years, these principles have investments of shareholders and social factors in commercial decisions. been the foundation of our business success, safe and to ensure these Conducting activities in strict compliance and their further observance guarantees our with the business principles assists the continued success. investments grow at a level

2009 Sustainable Development Report 21 • To the community: to conduct in several areas of potential risk in all • Internal communications include: business in a socially responsible Company subdivisions, including: – Conducting opinion polls of manner, observing the laws of • Health, Safety and Environment Company staff on a wide the Russian Federation and the • Personal and business integrity, range of issues countries where Sakhalin Energy including on bribery and – Publishing corporate mass operates; to express support for corruption, and conflict of media and various information basic human rights within the interest and reference materials legal business framework; to pay • Protection finance and assets – Providing general corporate necessary attention to health, • Staff issues, such as equal information messages safety and environmental issues. opportunity based on skills, job through the daily news performance, and other work– screen and e–mail Corporate culture related characteristics clearly – Using general information The corporate culture of Sakhalin articulated and consistently boards Energy is based on its mission and applied labour standards – Holding training workshops vision, and furthered by its General standards of job performance to explain the Company’s Business Principles and Code of and management systems new procedures and Conduct. inadmissibility of defamation by programmes. The Code of Conduct is the main action, illegal discrimination of Company staff are regularly document that ensures greater clarity staff showing respect and informed on the results from on the norms and standards of impartiality to staff and external meetings of the Committee of behaviour the Company expects its parties, in compliance with the Executive Directors, the Board of staff to adopt and to observe, and core values and the General Directors and the Supervisory Board, how to align their personal behaviour Business Principles and on other important Company with the core values of the Company, • Information management. events, through internal such as integrity, due diligence, and An essential component of our communications. Over many years, respect for people. The Code of corporate culture is internal the Company has held regular staff Conduct summarizes the main rules, communications. The Corporate engagement sessions, where standards and norms of behaviour External Affairs department sets up members of the Committee of required to achieve Company goals. and maintains a corporate culture of Executive Directors report on the The Code details the requirements and excellence and an efficient internal main results of Company activities guidelines for all Company employees communications system. and current and strategic plans.

22 2009 Sustainable Development Report SOCIAL AND ECONOMIC BENEFITS OF SAKHALIN−2 PROJECT FOR THE RUSSIAN FEDERATION AND SAKHALIN OBLAST

General US$ 14 billion (see Section quality of the workforce. During Investments to develop a large– Russian content) construction, Sakhalin-2 employed scale project stimulate more • Russian businesses have gained about 12,000 Sakhaliners; at the business for industries and services invaluable experience working end of 2009, 78% of 5,600 of outside the oil and gas sector. The together with international Sakhalin-2 employees were local activities of Sakhalin Energy to consortiums on complex project residents. From 2003 to 2009, implement the Sakhalin-2 Project management, in line with best the Sakhalin Oblast had the boosted the development of many international practice. lowest unemployment rate of any enterprises on Sakhalin Island and Russian region (1.2 per cent in elsewhere in Russia, and gave them Benefits for the Sakhalin Oblast early 2009) potential access to international • Paid US$ 100 million to the • Contributed to a higher income and markets. The Project also provided Sakhalin Development Fund (as better living standard for local employment opportunities, higher committed under the production residents salaries, growing retail trade, better sharing agreement for Sakhalin-2) • Sakhalin–based companies have social programmes and more tax • Generated significant income flows been actively involved in the revenue. In general, the Project is for the budgets of the Sakhalin Project as contractors and making a major contribution to the Oblast and municipal entities (see subcontractors, building up their wide–ranging revitalisation and Section Financial benefits for the capacity and competitiveness (see development of the Island’s economy, Russian Federation) local content examples in the usually referred to as a ‘multiplier • Contributed to the large–scale Section Russian content) effect’. According to the Council on upgrade of Island infrastructure • The Company has taken a the Study of Productive Forces at worth approximately US$ 600 million proactive approach to developing the RF Ministry of Economic (see Section Development of the regional social and public initiatives Development, every dollar invested in regional social infrastructure) (see Section Social investment the construction of the Sakhalin-2 • Created new employment and sustainable development Project resulted in 0.6 dollar added opportunities, directly and programmes supported by to other sectors of the economy. indirectly, and improved the Sakhalin Energy).

Benefits for the Russian Federation • The Project has transferred US$ 1.299 billion to the Russian Federation (see Section Financial benefits for the Russian Federation) • Russian companies have mastered new technologies and enjoyed new business opportunities (see Section Russian content) • Russian contractors have been awarded contracts of more than

2009 Sustainable Development Report 23 Time period Russian Party revenue from the Project (US$ million) 1995–2008 931

2009 368

1995–2009 1,299

Financial Benefits for the Russian Federation When the Project started producing and exporting oil year round, the Company significantly boosted hydrocarbons output, and financial inflows to the Russian Party increased in proportion. As a result, subsoil royalties in 2009 increased sevenfold to US$ 281 million versus US$ 39 million the previous year. Sakhalin Energy paid a total of US$ 368 million in taxes and other statutory payments into government budgets at federal, regional, and local levels in 2009, a 75 per cent increase from the year before. The Russian Federation through 2009 has received a total of US$ 1.299 billion from the Project. Payments by Sakhalin Energy accounted for 28 per cent of the total amount transferred to the budget from 1995 to 2009. The Company paid to the Sakhalin Oblast budget RUB 1.79 billion in taxes and other charges in 2009. Some decrease in these payments reflects the completion of construction and a consequent decline in the number of construction workers engaged in the Project. Receipts from Sakhalin-2 account for a significant part of the budget revenues of most of the municipalities engaged in the Project.

24 2009 Sustainable Development Report Russian Content In June 2009, Sakhalin Energy and offer delivery and management services for Russian content commitments in Sakhalinremflot signed a US$ 2.7 million special–purpose shipping containers. We were long–term contract for the manufacturing able to mobilise all the necessary resources at the Sakhalin-2 Project as stated in and maintenance of lifting equipment for the short notice and obtain international quality the PSA are a strategic priority for Sakhalin-2 Project. certificates. Already, we have received a Sakhalin Energy. The Russian ‘This is not the first order Sakhalinremflot number of interesting offers to participate in content clause of the PSA provides carried out for offshore projects,’ Anatoly other offshore projects, which means Russian Moiseev, the General Director, said. ‘We are companies are able to compete with a unique mechanism for Russian proud to be the first Russian company to international companies.’ companies to get access to the best international technologies, business practices, and managerial skills.

BY THE END OF 2009, RUSSIAN COMPANIES HAVE BEEN AWARDED CONTRACTS WORTH MORE THAN US $14 BILLION.

Russian content is defined as the use of Russian industrial and human resources. It is measured in man– hours and units of supply. Sakhalin Energy is committed to 70% Russian content of its workforce, equipment, supplies, and contracted services over the life of the Project. Sakhalin Energy is continually Pioneer in document management performed engineering, office working to increase Russian In February 2009, Sakhalin Energy maintenance, procurement and other awarded Russian Kronix a contract for the services for Sakhalin Energy and Exxon content in the development of storage of design engineering documents. Neftegaz Limited. According to Kronix Sakhalin-2. To achieve this, the The Sakhalin–based enterprise decided to Project Manager Matvey Egorov, the Company developed and introduced develop the archive business according to the company was aware of the strict very highest standards. It is now the first qualification criteria applied by Sakhalin a Russian Content Policy and a private documents archive in the Russian Far Energy in putting together its bid. It Russian Content Development East, a pioneer in this market segment. surveyed the Sakhalin market of archive Strategy. Both documents are The Sakhalin archive company had to services and studied the experience of available on the corporate public compete in a tender against bids from major Moscow–based companies. To obtain the international companies, and was able to necessary skills, Kronix joined the website. Accordingly, the Company prove its ability to collect and store International Document and Archive is planning procurement and documents that meet rigorous Russian and Management Association. The company contracting for Sakhalin-2 over the international standards. analysed other market opportunities to long term and is identifying Kronix already had experience in the oil further develop the document management industry. Since 2001, the company business in Sakhalin. opportunities to expand Russian

2009 Sustainable Development Report 25 content in due course. Another policy priority for Sakhalin Energy under these plans is to extend targeted assistance to Russian businesses to boost their competitiveness. Apart from creating new jobs, especially during construction, personnel development, and capacity building in hydrocarbons production, the Sakhalin-2 Project opens up other opportunities to Russian companies: • To improve corporate health standards and services, and the quality of supplies • To adopt new technology and gain new experience • To work with international partners and establish joint ventures • To improve competitiveness in New horizons for Sakhalin’s projects on Sakhalin Island, the Institute tenders in the Sakhalin Oblast and design engineers had to accomodate the requirements of Sakhalingrazhdanproject, a design international standards, which are now widely internationally. engineering institute, has been in the applied in Russia. Sakhalin Oblast for over half a century. The To win an international tender and to Vendor Development institute survived the tough economic and comply with its demanding requirements, the political reforms of perestroika and retained Institute completed the huge task of Programme its core human resources. However, its implementing the International Quality To boost the competitiveness of workforce shrank from 700 in 1988 to System. Because health, safety and Russian companies and share 200 in 1994. environment are top priorities for Sakhalin The situation improved when new Energy, the Institute applies a systematic unique experience from the offshore oil and gas developments offered approach to health management and has Sakhalin-2 Project, in 2009 the many new opportunities for design added new environmental support services. Company continued its vendor engineering contracts. In working with Sakhalin Energy, Sakhalingrazhdanproject has been a Sakhalin Sakhalingrazhdanproject also had to master development programme. The Energy contractor for over a decade, and has state–of–the art engineering processes and programme has several training completed a number of contracts for the improve working conditions. courses to give Russian vendors Sakhalin-2 Project, including designing Today, Sakhalingrazhdanproject is a stable construction camps and storage facilities, and rapidly developing company. In the short access to information on working and developing environmental documents. term, the Institute plans to add new with Sakhalin Energy and other Igor Emelyanov, General Director of the services. The clients of the Institute are yet major operators. Institute, believes the 10–year collaboration another demonstration of its credibility. They of Sakhalingrazhdanproject with Sakhalin include the capital construction offices of The vendor development Energy has created new project work. Local the Sakhalin Oblast, Yuzhno–Sakhalinsk, and programme covers three areas: designers have been able to learn and to other cities of the Oblast, Sakhalin Energy, • Health, safety and environment practice international design standards of fire Exxon Neftegaz Ltd., Sakhalin Railways, and • Quality assurance safety and earthquake–resistant the Directorate of the Kuril Islands Federal construction. By working on oil and gas Programme. • Tendering skills.

26 2009 Sustainable Development Report MAIN PRODUCTION AND BUSINESS ACHIEVEMENTS

Startup of gas production for year–round operation in a climate LUN–A, THE FIRST OFFSHORE in the Lunskoye field with ice, wind, waves and extremely GAS PLATFORM IN RUSSIA, Sakhalin Energy started producing low temperatures. A similar design WAS INSTALLED IN 2006 gas from the Lunskoye field in was used in PA–B platform. AT A WATER DEPTH January 2009. Lunskoye–A is the By the end of 2009, five of the OF 48 METRES first platform to produce offshore wells in Lunskoye field were gas in Russia. producing gas. These are ‘big bore’ LUN–A is the first platform in the wells, special technology designed for Gas produced from LUN–A is world equipped with friction pendulum prolific reservoirs like Lunskoye that pumped through a multiphase pipeline bearings, which protect the platform also have a very high gas flow rate. to the Onshore Processing Facility from seismic loads in the event of an These are the largest producing gas (OPF) installed seven kilometres inland earthquake. The platform is designed wells in Russia. from the LUN–A pipeline landfall.

2009 Sustainable Development Report 27 Inauguration of the LNG plant was a truly global event. About 500 2003. The plant was designed and On 18 February 2009, the first important dignitaries were present built by CTSD, an international LNG plant in the Russian Federation during the ceremony. It was President consortium comprising Chiyoda was inaugurated in a ceremony on Medvedev’s first visit to Sakhalin since Corporation and Toyo Engineering of Sakhalin Island. Russian President assuming office. The presence of Prime Japan and Nipigazpererabotka and Dmitry Medvedev, who addressed Minister Taro Aso of Japan marked the Khimenergo of Russia. the audience, described the plant as first visit by a Japa nese leader to The LNG facilities occupy a site of ‘one of the most innovative, state– Sakhalin since the end of World War II. 490 hectares. The LNG plant consists of–the–art production facilities that Among the honorary guests were of two gas liquefaction trains (each meets the highest standards.’ Prince Andrew, HRH Duke of York capable of producing 4.8 million tonnes Praising the LNG plant and the (UK); the Netherlands’ Minister for of LNG per year), an LNG jetty, a project as a whole, President Economic Affairs, Maria van der chemical la boratory, a central control Medvedev also said: ‘Russia is one of Hoeven; executives of Gazprom, Shell, room, and LNG tanks. Gas from the the world’s leading gas produ cers, Mitsui and Mitsubishi; high–ranking Lunskoye and Piltun–Astokhskoye and I am confident that this new Russian and foreign government fields is piped to the LNG plant after facility will strengthen our potential officials; and business leaders. processing by the OPF for transport. for supplying gas and Russia’s Construction of the LNG plant took The world class Lunskoye field is the position as a global energy supplier.’ five years. About 10,000 workers main source of gas. In addition to its The high profile of the guests who and engineers from nearly 40 high heating value, Sakhalin gas is also attended the ceremony was an countries were employed during known for its low level of impurities, indication the launch of the LNG plant construction, which started in August and is considered a ‘clean gas’.

28 2009 Sustainable Development Report DMITRY MEDVEDEV: THE CREATION OF THIS FACILITY WILL DEEPEN INTERNATIONAL COOPERATION, WHICH IS ESPECIALLY IMPORTANT TO US TODAY.

The LNG plant removes any water and trace impurities from the gas to prevent freezing or damage to advanced technology, saving energy infrastructure. The gas is then by taking advantage of Sakhalin’s cooled to around –160°C, when it cold climate. MORE THAN 100 turns into a liquid, occupying about LNG produced by two trains runs JOURNALISTS COVERED one 600th of its original volume and to LNG tanks, each with a capacity THE CEREMONY, remaining li quid at ambient pressure. of 100,000 m3, for further export REPRESENTING MORE The Sakhalin-2 LNG plant uses by special tankers. Due to the high THAN 60 RUSSIAN Double Mixed Refrigerant (DMR) level of automation of the LNG plant, AND INTERNATIONAL MEDIA. technology that Shell developed for a team of only 300 people is needed this project. It is the world’s most to operate it at the design capacity.

2009 Sustainable Development Report 29 Essential completion design documents. In February 2010, the first fixed offshore oil–producing and status of facilities Sakhalin Rostekhnadzor issued an platform in Russia. It began year– The facilities of Phase 2 were order approving the certificate of round operations during the winter of essentially completed at the end of compliance for the onshore pipelines. 2008–2009. Before switching to 2008. In parallel, the process of Issuing the certificates of gradually starting them up and compliance allowes the Company to IN JULY 2009, MOLIKPAQ phasing them into operation began apply to state authorities for the the transition to a fully integrated necessary approvals for the full ACHIEVED AN IMPORTANT HSE functioning of the system. operation mode. MILESTONE – FIVE YEARS In addition to the positive outcome OPERATING WITHOUT Transfer to full operation of the state checks, all our facilities A LOST TIME INCIDENT. The completed facilities under were certified to be in compliance Sakhalin-2 Phase 2 underwent with the requirements of the ISO year–round production, all oil from testing in 2009. The test operating 14001:2004 standard for Molikpaq was produced seasonally. mode is required to tune and environmental management systems. PA–A reached its design level for conduct final checks on all systems oil production in 2009. Molikpaq is and equipment before transferring Molikpaq platform (PA–A) currently operating 14 oil production them to full operation. The Molikpaq platform (PA–A), wells, four water injection wells, one installed in 1998 in the Astokh feature gas re–injection well and one IN MAY 2009, THE COMPANY of the Piltun–Astokhskoye field, was cuttings re–injection well. RECEIVED AN AWARD FOR THE BEST INNOVATIVE OFFSHORE PROJECT FROM THE BOARD OF DIRECTORS OF THE OFFSHORE TECHNOLOGY CONFERENCE, A WORLD FORUM FOR OIL AND GAS TECHNOLOGIES.

In parallel, Russian authorities carried out very thorough checks of the facilities. The final inspections by state body Sakhalin Rostekhnadzor covered all the major facilities of the Phase 2 project, including PA–B and LUN–A platforms, OPF, offshore and onshore pipelines, the LNG plant, OET, and pipeline maintenance depots. Sakhalin Rostekhnadzor issued conclusions certifying the completed facilities complied with technical standards, other regulations, and the

30 2009 Sustainable Development Report Lunskoye–A platform (LUN–A) Production of gas and condensate from LUN–A started in January 2009. The big–bore wells drilled from LUN–A are the largest gas wells in Russia. Each LUN–A well produces enough gas to feed a 2 GW power plant. The prolific gas bearing zone of the Lunskoye reservoir and the very high gas flow rate determine the large diameter of wells. Each well can produce up to 10 million m3 of gas per day.

Piltun–Astokhskoye–B platform (PA–B) PA–B produced first oil in December 2008. By the end of the following year, six oil wells were operating on the platform.

THE SUCCESSFUL TRANSPORTATION AND INSTALLATION OF THE PA–B TOPSIDES WEIGHING 28,000 TONNES SET A NEW WORLD RECORD IN 2007.

The average daily capacity of each PA–B production well is some 10,000 bbls (1.3 thousand tonnes) of oil.

Onshore processing facility (OPF) The main function of the Onshore Processing Facility (OPF) is the primary processing of natural gas and condensate coming from the Lunskoye field for transport by pipeline to the Oil Export Terminal and the LNG plant. The OPF also

2009 Sustainable Development Report 31 includes a 100 MW power IN JUNE 2009, THE LNG produced first LNG soon after that, generation unit that supplies power and the first LNG cargo was PLANT RECEIVED to LUN–A. offloaded later on. LNG train 2 ‘AN INNOVATIVE PROJECT’ In January 2009, gas started started operations in late May. The flowing from the OPF to the LNG AWARD FROM Sakhalin-2 LNG plant is the sixth– plant via the TransSakhalin pipeline THE JAPANESE MINISTRY largest LNG facility in the world in system. OF LAND USE, production capacity. Sakhalin INFRASTRUCTURE, Energy plans to optimise the LNG LNG plant TRANSPORT production systems, which may The LNG plant was inaugurated AND TOURISM. allow raising plant capacity by on 18 February 2009. LNG train 1 several percent.

32 2009 Sustainable Development Report TransSakhalin pipeline system (GTT). GTT specialists were directly High precipitation in the summer of The onshore facilities of the involved in testing and commissioning 2009 caused minor landslips and project are linked by the the pipelines. Engaging GTT in these washouts in some parts of the ROW. TransSakhalin pipeline system, which two tasks allows Sakhalin Energy to The heavy rainfall also caused some includes over 300 km of offshore and tap the wealth of experience of its damage to river banks of the rivers in over 1,600 km of onshore oil and gas major shareholder, Gazprom. GTT will the Makarov district. An action plan pipelines, 104 block valve stations, also provide maintenance services to was put in place to repair the damage and five pipeline maintenance depots. Booster Station 2, which will be from the heavy rains. By year end, all There are also two booster stations, commissioned in 2010. high priority repairs of the ROW were one at the OPF and the other about completed. Late in the year, winter halfway between the OPF and the Restoring the onshore works on repairs of the river banks in Prigorodnoye complex in the south of pipeline right of way the Makarov district began. the island. (ROW) A complete survey of the ROW was The oil pipeline was commissioned Construction of the onshore also carried out at that time to in late 2008, and the gas pipeline in pipeline involved a range of gauge the success of biological January 2009. In April, the operation activities to restore the pipeline reinstatement of the ROW, which and maintenance services of the ROW, control erosion and stabilise included recultivating the grass. The TransSakhalin pipeline system were river banks. By 2009, these survey revealed some areas requiring handed over to Sakhalin Energy’s activities were almost fully recultivation, and a plan was enacted contractor, GazpromTransgazTomsk completed within the pipeline ROW. to finish the work in 2010.

2009 Sustainable Development Report 33 Well drilling programme As of year end, six wells of the five wells for producing gas and one Drilling continued in 2009 from LUN–A platform were in operation, well for reinjecting cuttings. PA–B and LUN–A with ‘zero discharge’, meaning all drilling waste was injected in special cuttings re– A SMART WELL IS DRILLED IN THE SHAPE OF A FISH HOOK. injection wells which were completed SMART WELLS SUBSTANTIALLY REDUCE FIELD first. No wells were drilled from the DEVELOPMENT COSTS AND INCREASE OIL PRODUCTION. Molikpaq (PA–A) platform in 2009. As of year end, eight wells were THANKS TO THE UNPARALLELED SKILLS OF THE DRILLING producing in the Piltun area: six CREW AND IMPECCABLE COORDINATION, THE DRILLING producing wells, one dedicated TIME OF THE SMART WELL FELL FROM A PLANNED cuttings reinjection well, and one 77 DAYS TO A RECORD 41 DAYS. water injection smart well.

34 2009 Sustainable Development Report Implementing plans –60°С) and requires no heating charter contracts with Primorsk to produce and export during transport via pipeline. The Shipping Corporation. In October hydrocarbons blend derives its name from ‘Vityaz 2009, the Company signed a long– Crude’, which has been in the term charter contract with Crude oil market for the last decade. The new Primorsk Shipping Corporation for Once the PA–B offshore oil crude is called Vityaz Blend. another tanker ‘Zaliv Aniva’. These platform went into operation and In 2009, the Company produced the LUN–A platform started gas and offloaded over 5.5 million IN 2009, SAKHALIN ENERGY condensate production, crude oil tonnes of oil and condensate, SURPASSED ITS PLANNED exports increased. Oil produced almost four times the oil export ESTIMATES FOR EXPORTS from the Molikpaq and the PA–B is volume the previous year. The OF CRUDE OIL BY 11% blended with gas condensate from Company exceeded its 2009 the Lunskoye field. Gas condensate targets for oil production and AND LNG BY 47%. makes up 25% to 30% of the crude exports by 11%. oil blend. Due to its low sulfur Buyers of Vityaz include power three Aframax class tankers, each content and high amount of light and companies and refineries in Japan, with a gross deadweight over medium–light hydrocarbon fractions, South Korea, China, the Philippines, 100,000 tonnes are rated Ice 2 this blend of crude is used to Thailand and New Zealand. (ICE–1C as per international produce petrol, kerosene, diesel To transport the oil, Sakhalin classification). They are double fuel, and source materials for the Energy secured the tankers hulled and equipped with a bow petrochemicals industry. The blend ‘Governor Farkhutdinov’ and loading facility to load hydrocarbons also has a low flow threshold (below ‘Sakhalin Island’ under long–term from the Tanker Loading Unit.

2009 Vityaz Blend sales by country (mn barrels)

20 16.86

15 12.70

10 7.40

5 2.78 1.46 0.60 0 South KoreaChina Japan Philippines New Zealand Thailand

2009 Sustainable Development Report 35 LNG drilling rate, and a better–than– additional cargoes are needed to In March 2009, the first LNG expected performance of the transport LNG to buyers, the cargo was offloaded from the LNG reservoir contributed to the success Company charters tankers in the plant for Japanese buyers Tokyo Gas of the effort. spot market. Three ‘grand’ class and Tokyo Electric. The startup of the Almost all the annual output of LNG LNG tankers were custom–built in second process trains of the LUN–A (98% of the LNG produced by both platform, the OPF, and the LNG plant process trains) was contracted for EACH ‘GRAND’ CLASS LNG allowed the Company to gradually the next 20–25 years. A total of 13 TANKER HAS FOUR ramp up LNG production to 5.3 LNG sales contracts were signed, with SPHERICAL TANKS CAPABLE million tonnes of LNG by the end of 10 Japanese companies and the rest OF HOLDING 145,000 M3 OF 2009, a 47% increase over plan. with South Korean state–owned LNG. THE TANKERS CAN Such a successful performance company Kogas, Shell Eastern Trading, while in the midst of commissioning and Gazprom Global LNG. Thanks to BREAK ICE UP TO 40 CM and start up of a production facility is these last two contracts, buyers of THICK. THERE ARE ONLY 10 well above international standards. Russian LNG last year included India, LNG TANKERS OF THIS KIND This impressive feat was achieved China, Taiwan, and even Kuwait. IN THE WORLD. mostly due to the detailed and highly When the LNG plant reaches its efficient coordination of the design capacity, Sakhalin Energy will Japan to transport Sakhalin LNG: commissioning effort. The end result be producing some 5% of the ‘Grand Elena’, ‘Grand Aniva’, and has been the reliable operational world’s LNG output. ‘Grand Mereya’. The first two readiness of all equipment, including Sakhalin-2 LNG is transported to tankers belong to a consortium of the process facilities of the offshore customers by LNG tankers chartered Russia’s largest shipping company, platforms, the OPF and the LNG by the Company under long–term Sovkomflot, and Japan’s Nippon plant. In addition, the timely charter contracts or by the ships Yusen Kabushiki Kaisha. The owner commissioning of gas wells, a high provided by the buyers. Whenever of the third LNG tanker is a Russian–

2009 Sakhalin LNG sales by country (thousand tonnes)

2,884 3,000

2,250

1500 1,097 750 519 324 260 187 0 JapanSouth Korea India Kuwait China Taiwan

36 2009 Sustainable Development Report Japanese consortium set up by ships are required to change ballast THE $6.7 BILLION FINANCING Primorsk Shipping Corporation, water offshore, also required by the SECURED FOR PHASE 2 Mitsui OSK Lines and K Line. International Maritime Organisation IS THE HIGHEST EVER Sakhalin Energy sets the most (IMO). The Company closely controls IN RUSSIAN PROJECT stringent requirements for vessels and monitors compliance with this FINANCING. calling at Prigorodnoye Port to take mandatory requirement. For this oil and LNG on board. All oil and LNG task, the Company uses an tankers must be equipped with integrated monitoring system, widely project to reach full production special ice detection radar. They considered to be the most innovative capacity. must also have additional chain in Russia and the world. The Project financing for stoppers to secure reliable mooring Sakhalin-2 Phase 2 project including during cargo–handling operations. New phase of project this loan now totals $6.7 billion. These mandatory Company financing Project financing is often used by requirements greatly reduce In October 2009, Sakhalin Energy the oil and gas industry to develop environmental risk and in some and a consortium of international major infrastructure assets. Debt is aspects are stricter than the commercial banks signed an repaid from the cash flow generated recommendations of the International agreement for an additional $1.4 by the asset financed. Securing Organisation of Offshore Terminal billion in Sakhalin-2 Project financing. additional Project financing despite Owners for loading safety. The loan was insured by Nippon difficult financial market conditions To prevent alien species from Export and Investment Insurance shows the confidence a wide range dissemination with ballast waters (NEXI), an export credit agency of business interests and the from calling ships, the Company owned by the Japanese government. international financial community developed a procedure for ballast The funds are to finance have in Sakhalin Energy, a confidence water discharge from LNG and oil completion of the full scope of the grounded in the viability of the tankers in Aniva Bay. Among the Sakhalin-2 Phase 2 project, including project and its economic and measures in the procedure, all calling the drilling programme, enabling the financial strengths.

2009 Sustainable Development Report 37 STAKEHOLDER ENGAGEMENT

Stakeholder engagement strategy and principles Sakhalin Energy considers regular and constructive engagement with the public and key stakeholders, together with broad and transparent disclosure, as important elements of its successful operation and implementation of the Sakhalin-2 Project. To this end, since the launch of the Project in 1994, the Company has engaged with the following stakeholders: • National and municipal authorities • Residents of communities directly affected by Project operations and other Sakhalin communities mechanisms for the exchange of information campaign and public • Stakeholders in Japan, especially views about previously identified consultation strategy have been on Hokkaido Island issues and the ways in which evolving for more than a decade on • Public organisations and other Sakhalin Energy manages them, the basis of engagement with non–government organisations and to create conditions so that Sakhalin Island residents and other (NGOs) locally, regionally, emerging issues of concern are stakeholders and have been shaped nationally and internationally brought to the Company’s by taking resident’s opinions into • Mass media locally, regionally, attention and addressed in a account. nationally and internationally and timely manner The main document of the other stakeholders. • Engagement shall be documented Company regulating stakeholder The General Business Principles of and the relevant summary engagement and information Sakhalin Energy call for transparency reports shall be published, where disclosure is the Public Consultation and open stakeholder engagement. possible, with the exception of and Disclosure Plan, which was The Company follows these principles issues relating to personal developed according to Guidance in achieving its goals and its information and the privacy of Note F: Guidance for the Public engagement approaches: individuals. Consultation and Disclosure Plan of • Engagement shall be constructive, Sakhalin Energy complies with the the International Finance purposeful and open, as inclusive requirements of Russian legislation Corporation (IFC). It is updated as possible and practicable, and concerning public consultations and every year and is available on the shall incorporate as diverse a strives to follow best international Company’s public website. The plan range of views and interests as practices for information campaigns details the process of identifying and possible and public consultations. The analysing stakeholders, and • Engagement shall be aimed at Company is developing and constantly describes methods of engagement. building solid, positive relationships improving tools for effective The Company publishes an annual with the community and other stakeholder engagement and report on stakeholder engagement stakeholders, to provide effective communication. The Company’s on its public website.

38 2009 Sustainable Development Report Additionally, in 2009 the Company prepared and released 50 Energy TV programmes, broadcast by local Sakhalin television channels, held four media briefings, and arranged eight media tours for representatives of national and Sakhalin–based mass media.

Stakeholder engagement • Information centres were opened Community liaison officers in 2009 across the entire island on the The Company employs a unique In 2009, the Company continued premises of local libraries (see system of engagement with affected its public consultations and Section Company information communities – a network of stakeholder engagement on a variety centres) community liaison officers. In 2002, of issues. Core activities included: • Stakeholders were informed following social impact assessment of • As in previous years, a series of throughout the year via the the Sakhalin-2 Project on the island regular public community meetings Company’s public website, with community and taking into account were held to update communities access to more than 2,500 best international practices, the on the latest developments in the documents, including press Company proposed setting up this Company’s performance and releases, articles, and reports, network to establish and maintain progress on the Sakhalin-2 the monthly corporate effective engagement with local Project; 17 public meetings were newspaper Vesti, information authorities and communities, and to held in different parts of the island, centres, disclosure reports, and identify and address any Project attended by some 300 materials circulated in related concerns in a timely and representatives of Sakhalin communities via radio, print, and effective manner. Key activities of communities television. these officers include: • Company engagement with representatives of Sakhalin indigenous minorities, as part of In 2009, the Company decided to publish its first non–financial report on sustainable the Sakhalin Indigenous Minorities development, prepared according to the guidelines of the Global Reporting Initiative (GRI) and the AA1000 Stakeholder Engagement Standard. Development Plan (see Section As part of this process, in November 2009, the Company held a first round of Sakhalin indigenous minorities) consultations with stakeholders to learn their major interest and expectations, in order to • An information campaign include them in the 2009 report. Representatives of local and regional public organisations attended these continued, including publishing consultations, including those with an environmental and social focus, the Sakhalin information in local mass media, indigenous minorities, executive and legislative authorities of the Sakhalin Oblast, and mailing notices, and circulating social institutions. In addition to these consultations, during a meeting of the Western Gray Whale Advisory information materials. These Panel in December 2009, Sakhalin Energy met with representatives of international messages were aimed at raising environmental organisations in Geneva, Switzerland, as part of its preparation of the public awareness about safety Sustainable Development Report. In April 2010, the Company held the second round of consultations with stakeholders, issues at the Company’s facilities, to present the Company’s answers to comments and proposals voiced during the first the measures necessary for round. Answers and the preliminary commitments of the Company were mailed to all preventing emergencies, and participants in advance. The list of participants consultation results are published in Appendices 2 and 3. emergency response measures

2009 Sustainable Development Report 39 THE COMPANY’S COMMUNITY LIAISON SYSTEM RECEIVED A HIGH RATING AFTER AN INSPECTION BY REPRESENTATIVES OF AEA. SINCE 2001, THIS AGENCY HAS BEEN AN INDEPENDENT CONSULTANT TO THE LENDERS OF THE SAKHALIN-2 PROJECT. EXPERTS NOTED THE SPECIAL ROLE OF THE COMMUNITY LIAISON OFFICERS IN ESTABLISHING AND MAINTAINING EFFECTIVE COLLABORATION BETWEEN THE COMPANY AND THE LOCAL POPULATION. COMMUNITY LIAISON OFFICERS HAVE ALSO RECEIVED LETTERS OF APPRECIATION FROM THE ADMINISTRATIONS OF MUNICIPALITIES IN THE SAKHALIN OBLAST AND FROM NGOS.

• Open hours for community residents • Regular meetings with government the grievance procedure. Effective zone of Sakhalin Island. A district and municipal authorities and other and prompt resolution of community centre in each zone has opened an special interest groups grievances is critical for building office where the community liaison • Coordination of the district trust between a community and an officer is based. Details of the information centres industrial project. activities of these officers are • Annual public community meetings The organisation of community described in the Company’s PCDP Community Liaison Officers are liaison officers consists of a and Public Consultation and also responsible for engaging with coordinator and four officers. Each Disclosure Reports available on the community within the framework of officer oversees one discretionary Company’s public website.

40 2009 Sustainable Development Report A project to develop business approaches to human rights has been ongoing since 2005, undertaken by John Ruggie, Special Representative of the UN Secretary General for Business and Human Rights. In 2008, the UN Council on Human Rights and the largest international business associations approved practical principles and recommendations for the business community. These principles are developed by Ruggie under his UN mandate, and formulate new standards for organising the complaints review process during business operations. Tests of those principles are taking place from 2009 to 2011. The results will be used to develop recommendations for the global business community. recommended steps to file a Sakhalin Energy was selected in 2009 as one of five international companies to test these principles and recommendations. The Company is honoured to represent Russian complaint about the Sakhalin-2 business and the international oil and gas industry in this process. International experts Project. involved in the project have said ‘the procedure for handling complaints in place at Detailed information on addressing Sakhalin Energy is one of the most advanced in the industry’. grievances is available in the annual report on the Company’s Public Company information centres A total of 1,500 queries from Consultation and Disclosure on the In 2009, the Company completed the local community were Company's public website. setting up the network of 20 registered at the information information centres, a core element centres by the end of 2009. The Engaging Sakhalin of the Company’s effective most frequently asked questions Indigenous Peoples engagement with the public. The were about employment The Company regularly engages network offices are based in district opportunities, requests for Sakhalin indigenous minorities, and rural libraries in communities additional information about the mostly those living in the north– along the route of the TransSakhalin Sakhalin-2 Project, and eastern part of Sakhalin Island. pipeline system and near other opportunities to participate in the Consultation activities and Project facilities. Company’s social programmes and contributions to development of public initiatives. indigenous minority communities are THE JOINT PROJECT TO SET detailed in the Sakhalin Indigenous UP INFORMATION CENTRES Community grievance Minorities Development Plan, IN LIBRARIES HAS EXTENDED procedure developed in 2005 and 2006 THE COMPANY’S As a core element of according to the World Bank ENGAGEMENT WITH THE safeguarding human rights and Operational Directive 4.20. An GENERAL PUBLIC. NOW THE more effectively engaging essential component in its communities, in 2003 Sakhalin preparation was the involvement of LATEST INFORMATION ABOUT Energy developed a procedure to representatives from indigenous THE COMPANY AND address community grievances minorities. THE SAKHALIN-2 PROJECT related to the Sakhalin-2 Project. The only indigenous minority IS AVAILABLE IN SMALL The main benefits of the community community that could have been COMMUNITIES, NOT ONLY grievance procedure lie in its adversely affected from Project IN THE REGIONAL CENTRE. simplicity and effectiveness. A construction was the reindeer complaint can be filed in one of herders living in Val in the Nogliki The information centres are seven ways, including anonymously. district. To lessen the impact of equipped with information boards, Informing residents about the construction on this group and to computer and office equipment, and community grievance procedure is identify the most acceptable have Internet access, which essential to public engagement. methods of engagement, intensive accomplishes the Company's Sakhalin Energy regularly stages an consultations were held with objectives and enhances the extensive public information reindeer herders during the capacity of the libraries. campaign on who can file construction phase. Visitors to the centres are helped complaints, and how. The Company The Company held consultations in by library employees, who have taken also developed information 2009 with indigenous minorities on a Company-organised training materials, including a leaflet on the implementing the Development Plan, workshop. grievance procedure that contains how to make information available,

2009 Sustainable Development Report 41 the Plan’s effectiveness, listening to the best solution for minimising Sakhalin Island to Hokkaido Island in their concerns and ideas for potential any adverse impact on Gray Japan. Experts, business, NGOs, projects, and reminding the Whales. During meetings with the fishermen and other stakeholders in population about the grievance Panel, Company representatives Japan are concerned with the procedure and how to use it. met with representatives of the environmental impact of the The Development Plan is described WWF, the Pacific Environment and Sakhalin-2 Project, notably oil spill in more detail in the Section Sakhalin Resources Centre, the response, preserving biodiversity, indigenous minorities. International Foundation for Animal and protecting and preserving the Welfare, and other international Steller's Sea Eagle. Interaction with NGOs NGOs (see Section Western Gray Sakhalin Energy held a number of Sakhalin Energy collaborates with Whales) public consultations and meetings representatives of local, national, and • The Wild Salmon Centre and the throughout 2009 in Japan: Far Eastern NGOs, and maintains Sakhalin Salmon Initiative, as part • February and November: the regular contact with NGOs in Japan of a programme of the same name Company met with Japanese and internationally. (see Section Social investment fishing industry organisations and Public organisations and other and sustainable development stakeholders along the shore of NGOs are regularly updated on the programmes supported by the Sea of Okhotsk; these progress of the Project, and discuss Sakhalin Energy) meetings were attended by the all issues of interest with Company • Stakeholders in Japan: fishermen Japanese Bank for International representatives. associations on Hokkaido Island, Cooperation (JBIC), one of the Consultations take place in Hokkaido Island authorities, and leading Project lenders different formats, including personal other local stakeholders on oil spill • June, August, and September: and group meetings, and by written response, preserving Steller's Sea At public environmental forums, correspondence. The most important Eagles, and biodiversity. Company management made meetings held in 2009 with key presentations on the status of NGOs from the island, region, Engaging Japanese Project implementation and federation, and internationally were stakeholders environmental issues the following: Japanese stakeholder • September: The Company met with • The Western Gray Whale Advisory engagement is important to the Japanese experts on biodiversity Panel, as part of efforts to find Company, due to the proximity of issues.

42 2009 Sustainable Development Report MANAGING NON–FINANCIAL RISKS IN HEALTH, SAFETY, ENVIRONMENT AND SOCIAL ISSUES

2009 Sustainable Development Report 43 General principles The steps the Company has taken lenders to eliminate, mitigate, or for managing to implement these principles in HSE manage any adverse HSE and social non–financial issues and social issues are briefly outlined impacts to acceptable levels that Health, safety, the environment below in the sections on have been identified. The Plan is (HSE), and social issues are an management. available to the public on the integral part of Company business Health, Safety, Environment and Company’s public website. activities, in line with its commitment Social Action Plan (HSESAP) was to do no harm to people, to protect developed for Phase 2 of the Structure and content of the environment, and to contribute Sakhalin-2 Project, in keeping with managing non–financial risk to sustainable development, including the international and Russian Sakhalin Energy takes a bringing benefits to the inhabitants Federation standards and systematic approach to managing its of Sakhalin Island and to other key international best practices. The HSE and social performance, to stakeholders. HSE approaches and Plan consolidates commitments from ensure compliance with Russian social performance (SP) the Environmental, Health and Social federal law, adopt international management are embedded in the Impact Assessments, including standards, and continuously improve Company’s values and general supporting documentation and performance. business principles (see Section addenda. It also details the The Company’s integrated HSE Company mission, core values and measures agreed between the and Social Performance Management business principles). Company and the Phase 2 senior System lists the controls Sakhalin Energy uses to manage HSE and social issues and risks. Sakhalin Energy sees managing these risks as critical to business success. The Company will continue to maintain, develop, and improve the Management System consistent with relevant international best practice. The Management System is based on the Plan–Do–Check–Act methodology of the management system standards ISO 14001 and OHSAS 18001: • Establish objectives and processes to deliver results consistent with the Company’s HSE and Social Performance policy • Implement the processes • Monitor and measure processes against policy, objectives, legal and other requirements, and report the results • Take actions to continually improve HSE and social performance.

44 2009 Sustainable Development Report Sakhalin Energy conducted three impact assessments on the environment, social issues and health (ESHIA), to determine potential risks and impacts from the Sakhalin-2 Project. Assessments were conducted in accordance with Russian regulatory requirements, best industry practice, and international standards. The Company involved local resources and international experts and organisations. In keeping with international standards on impact assessments, public consultations were held to discuss potential Hazards and risk management impacts and measures. In a short time period, from September 2001 to November The Company manages HSE risk 2002, over 5,000 Sakhalin residents were interviewed in 52 towns and villages. The first ESHIA was completed and published in 2003. In 2005, the assessment was and social issues to reduce major updated, and the reports posted at the Company’s public website. risks to ‘as low as reasonably practicable’ (ALARP), and to continuously improve. ALARP is the negative impacts that have been to Company standards, while current point where the cost in time or identified: Company activities are based on money of implementing further risk • Eliminate impact management plans and programmes. reduction measures becomes grossly • Provide compensation disproportionate to the benefit • Reduce likelihood of occurrence Risk assessment matrix obtained, or the reduced risk. • Expand opportunities Another important risk Detailed processes identify • Reduce impact management tool the Company uses is hazards and aspects of HSE and • Prevent impact. the risk assessment matrix to classify social issues, assess risks and actual and potential consequences, impacts, and determine appropriate IMPACT ASSESSMENT determine significance, and guide design and management controls in IS THE PROCESS OF appropriate risk management. accordance with: FORECASTING AND The risk assessment process falls • Russian Federation requirements MANAGING IMPACTS under the Company’s hazards and • Project lender requirements effects management methodology. THROUGH PROJECT DESIGN, • Adopted international standards The Company has modified the risk IMPLEMENTING IMPACT and best industry practices. assessment matrix since the MITIGATION MEASURES, Company’s inception, to classify Impact assessment AND EXPANDING incidents and to audit. To secure As a key component to managing FAVOURABLE OPPORTUNITIES. funding, the Company and the Phase non–financial risks, the Company IMPACT ASSESSMENT DEALS 2 senior lenders have agreed on the conducts impact assessments prior WITH ENVIRONMENTAL AND methods based on this matrix. to any major new project or before SOCIAL EFFECTS, AND THE Consequences of a breach or a making major modifications to IMPACT ON THE HEALTH OF risk fall into five categories: social existing facilities. Stakeholder STAFF AND THE COMMUNITY impact, damage to health, assets, consultations are integral to any FROM CURRENT the environment, or reputation, by impact assessment the Company OR PLANNED COMPANY selecting the appropriate risk does, and impact assessment BUSINESS. description in the respective matrix documents are made available for column. public consultation. Previous environmental and social A detailed description of the Impact management measures impact assessments including addenda matrix and methodology are provided are designed to mitigate negative and special studies have contributed in the Plan. impact and enhance the benefits from Project activities. Sakhalin Energy strives to eliminate or Innovative Approach and Risk Assessment Practice mitigate any impacts to the lowest The Company’s methodology of risk assessment is probably the most advanced available. Risks are determined and analysed consistently, structurally, and systematically, not only by possible level, or to compensate for category of damage inflicted to health, assets, environment and reputation, which is a them. The following measures were common practice, but also by social impact such as on the population or on community life. developed to apply to potentially

2009 Sustainable Development Report 45 The Company takes corrective and preventive actions to address incidents, including grievances, draws up non–conformance reports and lessons learned, records findings of assurance activities, and assumes other commitments. Actions taken to eliminate the causes of actual and potential non– compliance suit the magnitude of the problem and are commensurate with the HSE and social risks Objectives and annual management on the audits, and to encountered, and subject to improvement plans submit compliance reports to appropriate risk assessment. Every year the Chief Executive stakeholders and the Business Officer of Sakhalin Energy approves Assurance Committee. Management reviews the Company’s strategic objectives The Business Assurance Regular reviews are conducted of for the next five years, the specific Committee approves and adopts the regulatory compliance and parameters and results of Company audit programme, following an performance monitoring and activities, as well as HSES action approach based on risk assessment. reporting, incident and non– plans. The Committee then regularly conformance reporting and learning, The corporate HSE, corporate analyses implementation of the Plan the status of corrective and social performance, and and its basic results, weak points of preventive actions, and outcomes of supplementary plans provide detailed the management system, non– assurance activities. actions, timelines, and resources by compliance items, and the themes Sakhalin Energy conducts an subdivision and level of organisation. and status of the open results. The annual management review to ensure The effectiveness of results and auditee is responsible for the follow the continued suitability, adequacy, plans are gauged and controlled with up, elimination of identified non– and effectiveness of the management regular reports and assessments. compliances, and respective actions. system, and takes action to improve. Audit plans referto the specific The reviews include: Audits and inspections facility or contract part of the annual • Evaluating trends and lessons Audits and inspections are an audit plans for individual asset teams learned from performance, incident integral part of the management or contractors. investigations, audits; compliance system, to verify that internal with legal requirements and control systems required to manage Corrective and preventive changes in legal and other HSE and social risks, and comply with actions requirements; status of corrective Sakhalin Energy policy, standards, The importance of any non– and preventive actions, results of procedures and Company processes compliance or weaknesses revealed consultations are available and effective. The in an audit is determined with a risk • Completing a self assessment of results of audits and inspections are assessment matrix. If the audit the Management System subject to control to reduce risks indentifies issues requiring remedial • Assessing opportunities to improve and improve processes, to assist in actions, a corrective plan is and changes needed in the providing external reports, to inform developed. Management System.

46 2009 Sustainable Development Report ENVIRONMENTAL PROTECTION, ECOLOGICAL AND INDUSTRIAL SAFETY

2009 Sustainable Development Report 47 Policy Sakhalin Energy’s commitment to protect the environment is reflected in its health, safety and environment policy.

We care…

Sakhalin Energy Investment Company Ltd. Commitment to Health, Safety and Environment

We are all committed to: • Pursue the goal of no harm to people • Protect the environment • Use material and energy efficiently to provide our products and services • Develop energy resources, products and services consistent with these aims • Publicly report on our performance • Play a leading role in promoting best practice in our industry • Manage HSE matters like any other critical business activity • Promote a culture in which all Sakhalin Energy employees share this commitment.

In this way we aim to have an HSE performance we can be proud of, to earn the confidence of customers, shareholders and society at large, to be a good neighbour and to contribute to sustainable development.

Sakhalin Energy Investment Company Ltd. Health, Safety and Environment Policy

The Company: • Has a systematic approach to HSE management designed to ensure compliance with the law and to achieve continuous performance improvement; • Sets targets for improvement and measures, appraises and reports performance; • Requires contractors to manage HSE in line with this policy; • Will use its influence to promote this or an equivalent policy in company related activities which are not under its direct control; • Includes HSE performance in the appraisal of all staff and rewards accordingly.

… all of us have a role to play.

Each of us has a right and duty to intervene with unsafe acts and conditions or when activities are not in compliance with this HSE Policy and Commitment.

Goals requirements of the Russian measurements of their performance. and performance Federation, primarily our During 2009, each asset and project The Health, Safety and government–approved Environmental team developed plans consistent with Environmental Management Monitoring Project and relevant and supportive of the corporate plan. Committee of Sakhalin Energy, permits and licenses, and Performance objectives were comprising the HSE General Manager commitments to lenders and other introduced to the workforce, including and the Committee of Executive interested parties. key contractors. The Health, Safety Directors and chaired by the CEO, Sakhalin Energy is committed to and Environment Management oversees the Company’s HSE continuously improving its Committee met regularly during 2009 management. environmental performance. To to review HSE priorities, action plans, Our environmental management demonstrate this commitment, milestones, incidents and system is based on the HSE policy management prepares plans that set investigations, evolving HSE issues, and standards of Sakhalin Energy and out expectations, milestones and and the key environmental our Shareholders, the legal targets for the year, and performance indicators.

48 2009 Sustainable Development Report that feeds offshore northeast monitoring results were considered Sakhalin. Following a in engineering and technical recommendation from the Western assessment of the Project facilities, Gray Whale Advisory Panel and where necessary modification of convened under the IUCN, the existing equipment, or in some Company decided to postpone its cases installation of new equipment, planned 4D seismic survey. was carried out to reduce the Although fewer whales were amount of emissions and wastes. sighted offshore Sakhalin in 2008, The Company makes appropriate their numbersrebounded in 2009 payments to Russian authorities in to previous lrvels, and the Panel accordance with the legislation, has now agreed the seismic survey permits and licenses under which it can proceed in 2010. operates. • Sakhalin Energy’s Biodiversity Action Plan (BAP) was well- Waste management received at the fourth meeting of Waste management is done in the Sakhalin Biodiversity Group in accordance with Company policies, September. The group expressed Russian Federation legislation and their support for the plan and its regulations, and approved Sakhalin Energy continuous efforts implementation. Members of the programmes for the generation, use, led to one of the most impressive Group recommended using Sakhalin decontamination, transport, and results in the industry in oil spills Energy’s BAP as a basis for a disposal of waste. prevention. Whilst in 1999-2009 the regional BAP for Sakhalin Oblast. company produced almost • Planting approximately 140,000 Managing water resources 149,700,000 barrels (20,100,000 trees during the Djimdan River and effluents tonnes) of Vityaz oil, total oil spilled Restoration Project, which aims The total volume of water drawn constituted slightly over four barrels to stabilise the tree population of or received in 2009 from natural (slightly over 0.5 tonne). previously denuded areas, to help sources was 31,943 thousand m3. Notable achievements and rivers recover from increased The water was used to supply activities in 2009 included the sediment loads. Company facilities. The total volume following: of discharged water was 26,119 • Project-wide ISO14001:2004 Industrial environmental thousand m3. certification was granted in early monitoring Of the amount discharged to 2009, more than a year ahead of Sakhalin Energy maintains permits surface water bodies, such as the schedule. Regular internal and for air emissions, wastewater sea, rivers and creeks, 25,331 external audits were carried out to discharge, and waste disposal in thousand m3 (99.5 %) was related maintain focus and ensure accordance with Russian as standard clean water (not subject improvement plans were environmental legislation. The to treatment) and the rest was implemented. Company commissioned one of the treated. Where necessary, the • Continued, extensive engagement largest integrated oil and gas Company prepared an action plan to with key stakeholders on projects in the world in 2009. improve the effectiveness of protecting the critically During the transition from wastewater treatment, including endangered Western Gray Whale construction to operations, upgrades to the discharge system.

2009 Sustainable Development Report 49 Table: Tonnes of waste per class* managed during 2009 Waste movement Class 1 Class 2 Class 3 Class 4 Class 5 TOTAL Waste at sites on 1 January 2009 0 0.297 11.954 515.700 0.350 528.301

Waste generated in 2009 0.915 18.200 462.233 22653.893 1465.646 24600.877

Use by Company for its production needs 0 0 201.618 0 0 201.618

Transferred to other parties for use 0 7.212 106.632 1683.431 491.674 2288.949

Transferred to other parties for decontamination 0.912 0.186 152.771 419.815 0 573.684

Transferred to other parties for final disposal at licensed landfills 0 0.028 0 2363.347 946.322 3309.697

Stored at Company assets 0 0 0 0 0 0

Disposed at Company assets 0 0 0 18703.000 0 18703.000

Waste at sites end 2009 0.003 11.071 13.166 0 28.000 52.240

* According to Russian Federal law, hazardous waste includes classes 1, 2, 3, and 4. Environmental monitoring results Non-hazardous waste is class 5 only. showed no adverse impact on water environment from Company’s monoxide, nitrogen oxide, sulphur comprehensive, and thoroughly discharges. dioxide, solids. researched document. It draws on In 2009, Company’s contribution the best available evidence from Air emissions to Sakhalin Oblast total emissions peer–reviewed scientific literature, The amount of air emissions from was 28.4 %. Total air emissions coupled with knowledge and Company’s stationary sources in increased in 2009 in comparison with understanding of national and 2009 was 33 thousand tonnes, those in 2008 due to commissioning international policy and legislative including carbon monoxide – 23,71 and start-up activities. frameworks, and presents a thousand tonnes, nitrogen oxides – reasoned account of the relationships 5,93 thousand tonnes, sulfur Biodiversity between Sakhalin Energy’s activities dioxide – 0,10 thousand tonnes, The Company’s Biodiversity Action and the biodiversity / ecosystems of solids – 2,34 thousand tonnes. Plan (BAP) sets out its approach to Sakhalin and how any detrimental As per Sakhalin Statistical fulfill its commitments to manage impacts might be assessed and Office data, total amount of air biodiversity and ecological impacts mitigated’. emissions from stationary sources from operations. The independent Sakhalin Energy is proud of this in Sakhalin Oblast in 2009 was environmental consultant to the recognition of its achievements, and 116 thousand tonnes, main Project lenders described Sakhalin will continue to set industry components emitted being carbon Energy’s BAP as ‘a clear, concise, standards on protecting and managing biodiversity. Table: Aggregated 2009 water use data, thousand m3 The BAP describes the framework and rationale to support the Water intake 31,943 monitoring programmes that Sakhalin Wastewater discharge 26,119 Energy, its stakeholders, government authorities, and Project lenders including believe are important, not only for discharge to surface water bodies 25,446 environmental protection, but because it makes good business discharge to land, drainage fields 672 sense. Key criteria for prioritisation

50 2009 Sustainable Development Report were the social and ecological value • Relevant species protected Terrestrial ecosystems placed on species and habitats, and under law Flora and veg etation the protection afforded them by • Coastal and wetland birds of the The location of Sakhalin Island is legislation. Other criteria include: Chaivo bar extremely important for floral • Threatened species or ecosystems • Certain breeding birds of the zonation. Scientists have divided the • Areas of ‘natural’ or relatively coniferous forest Island into two main areas: north– intact habitat • Certain breeding birds of river Sakhalin and south–Sakhalin. The • Habitats and areas supporting high valley mixed woodland northern flora belong to the species / habitat diversity • Salmonid fish populations of Okhotsk–Kamchatka province of the • Environments sensitive to potential selected river systems. Boreal floral region, and the southern impact For habitats: to the Sakhalin–Hokkaido province of • Species and habitats where • Certain forests the East Asian floral region. The flora significant declines in populations • Certain tracts of peatland and of Sakhalin are less numerous than and area have been documented swamps the neighbouring Japanese island of and may be worsening • Certain river catchments Hokkaido or the mainland Russian • Areas and habitats considered • Shallow coastal lagoon systems territories of Khabarovsk or important for providing and and fringing wetlands Primorye, and comprise maintaining ecological processes • Areas of Aniva Bay and the approximately 1520 species, 1230 and ecosystem function. northeast Sakhalin shelf. of which are indigenous. Using these criteria, Sakhalin Details of monitoring Nevertheless, Sakhalin Energy Energy’s Biodiversity Action Plan programmes for these species and recognizes the importance of this identifies (in summary) the following habitats carried out in2009 are scientific classification and works biodiversity priorities: presented in the following within these environmental For species: sections. conditions.

2009 Sustainable Development Report 51 Our monitoring shows that in through previous human activity. island has been clear–felled by the general, plant communities within the Originally, the island was Russian timber industry. Although vicinity of the LNG plant have characterised by coniferous forests, much of the island has been maintained their structure and where Yezo spruce, Sakhalin fir, and replanted, this has not kept pace composition. Comparing 2009 with Cajander’s larch were the dominant with the rate of forest loss, and in 2008 data indicates that no habitats species, with Japanese dwarf pine many areas the establishment of new of protected plants were destroyed and the Kurile bamboo found on the forest has been limited. or severely affected. As a direct upper parts of the mountain range. This fragmentation of areas of result of this research, several new Between the world wars, the contiguous habitat is considered to locations of protected species were southern region was severely clear– be one of the main causes of discovered, and currently nine cut, leaving only small areas of biodiversity loss. Regarding the species of Red Data Book seed old–growth fir forests on the Sakhalin-2 Project, it was not plants and two species of Red Data Susunaiskiy Ridge between Dolinsk possible for some sections of the Book lichens have been registered in and Yuzhno–Sakhalinsk, with onshore pipeline to avoid certain the area surrounding the LNG plant. fragments remaining on the Krillion blocks of forest habitat, especially The vegetation of Sakhalin Island Peninsula in the southwest. Similarly, in the more mountainous areas to has been significantly modified most of the northern half of the the west of the onshore processing facility and in the Makarov area. Following construction, the priority in relation has been to prevent or minimise further potential deterioration of intact blocks of habitat that may have been initially affected by the Project. Sakhalin Energy’s Biodiversity Action Plan targets these areas to determine and assess the extent of Project– related disturbance and to establish appropriate mechanisms to mitigate observed impacts. A survey was conducted of old growth dark coniferous forests along the pipeline right–of–way in 2009, to delineate locations of this forest type within the Project footprint, and to create permanent plots for long–term monitoring and assessment. As a direct result of this work, mitigation measures have been employed, including closing access roads and reinstatement where these roads are no longer required.

52 2009 Sustainable Development Report Although reinstatement of land Operations monitoring of soils river ecosystems. Increased that was disturbed during Project around the LNG plant started in sediment loads could smother plants construction has been very 2008, while operations monitoring and reduce their rates of successful in some areas, it has been along the right–of–way and around photosynthesis, and in the future less successful in others. Seeding of the onshore processing facility cause decrease in invertebrate and grasses and other plants has not led started in 2009. It is too early in the herbivorous fish populations. Fish to expected results at all sites. natural cycle to draw conclusions on stocks could be affected by changes Addressing this will take several the temporal dynamics of soil in water quality and habitat loss. years, and consequently the Company composition and structure. Along the Sakhalin Energy has therefore taken has an active programme to right–of–way, monitoring identified wide mitigation measures, including complete biological reinstatement. In several areas where erosion, using horizontal directional drilling many cases re–seeding is needed to swamping, and sagging of poorly (HDD) for all high–value fishery rivers establish stable vegetation cover. compacted soil, which slow the during construction. The Company development of vegetation cover, continues to monitor geomorphic and Soils and geomorphology were happening. Corrective actions hydromorphic processes during Impacts generally mitigated during have been designed and are being operations to manage pipeline typical construction projects include: implemented. Monitoring will integrity and environmental • Soil erosion and sediment release continue in 2010. disturbance. to land and water River systems are alive and Monitoring geomorphic processes • Soil mixing, compaction, and topsoil complex , and many have important during the operations phase of the loss leading to reduced fertility and ecological value. In developing Phase Project began in 2009, part of a biodiversity loss 2 of the Project, Sakhalin Energy long–term programme to assess the • Alteration of natural drainage. recognised the importance of integrity of onshore pipelines and the In most instances, soils on potential impacts of pipeline landscapes they pass through. Aerial Sakhalin tend to be boggy, fragile, construction and operation on the observations of the Gornaya River and podzolised, although soil type hydrology and morphology of rivers. If crossing showed the 2009 summer varies across the Island according to left unaddressed, such impacts could, floods had damaged left riverbank vegetation, relief, and climate. over different timescales, damage protection structures and scoured a Although some impact on soils during construction will persist into the operations phase of the Project, subsidence may continue to occur where soils used to backfill the pipeline trench often undergo natural settlement. The Company is monitoring the condition of soils around the major facilities during operations, to verify that controls designed to mitigate potential impacts, such as pollutant accumulation due to atmospheric deposition, maintenance, and other industrial activities are effective.

2009 Sustainable Development Report 53 demographic characteristics of rodent and shrew populations. In 2009, three species of rodent and five species of shrew were recorded in the area of the onshore processing facility. The northern red– backed vole was clearly dominant in the community, which is typical for rodent communities in undisturbed or slightly disturbed areas of northern Sakhalin. Although differences were noted in the morphological characteristics, none of these were significant abnormalities, and are likely to be due to the intra– new channel, affecting the pipeline monitoring of the Gornaya and other population dynamics of separate and right–of–way. This incident crossings will continue in 2010. species. highlighted the importance of these Three species of rodent and four surveys and of predicting Terrestrial mammals species of shrew were recorded in hydromorphic events before they The mammal populations of the area around BS–2 in 2009, with occur. Sakhalin Island are less diverse most species represented by only a Hydromorphological monitoring at compared with the mainland of the few individuals. Three species of river crossings showed river Russian Far East. The population rodent and three species of shrew channelling and erosion in certain levels and distribution of many were observed in the area around places. This is a natural and expected species have responded to human– the LNG plant. process in hydrologically energetic induced pressures, so that highly locations; the environmental adaptable species tend to dominate. Birds management objective is to keep Those with more restricted ecological The wide variety of terrestrial such potential effects to a minimum, requirements were either never habitats on Sakhalin Island, including whilst recognizing the natural present in the first place, or are wetland and coastal habitats, process of denudation and significantly fewer, or have been support a range of distinct bird peneplanation. When comparing data completely lost from the island fauna assemblages. The Red Data Book from 2004–2006 and 2008–2009, a long time before Sakhalin Energy (RDB) of endangered species for considerable variations are noted for started operations. Sakhalin Oblast lists about 105 bird the Malaya, Tym, Pobedinka, Rodents and shrews are highly species. The largest part, Leonidovka, Nituy (northern sensitive to disturbances and approximately 70%, of Sakhalin’s anabranch), and Gornaya river respond quickly to environmental rare bird fauna are species of crossings, as well as for steep slopes changes. For this reason they are wetland birds, such as lake swamp in the basins of the Lesnaya, used as indicator species, so that the and littoral marine. This reflects the Krasnaya, Rybnaya, and Kirpichnaya health of small mammal communities large presence of these habitats rivers. An extensive repair in total, and the potential impacts of across the island and especially the programme was designed and industrial activities on them, can be dynamic and productive coastal successfully executed, and indicated by the size and ecosystem in the north–east part of

54 2009 Sustainable Development Report the Island. Terrestrial species, cinnamon russet sparrow, mandarin At the Chayvo bar along the right– representative of the mountainous duck, white–tailed and Steller's Sea of–way, 10 protected species were and forested interior of the Island Eagles, European hobby, Siberian observed, dominated by Sakhalin and human–influenced habitats, such spruce grouse, black–billed dunlin and Aleutian tern. The as commercial forestry or capercaillie, Sakhalin dunlin, Aleutian locations of nesting sites and the agricultural land, make up the tern, long–toed stint, great gray owl, number of colonies of dunlin had not remaining 30% of the rare bird Eurasian pygmy–owl, boreal owl, and changed compared with 2008. fauna. northern hawk owl. Also found in However, nesting sites of Aleutian The Company monitored species of adjacent territory were nesting sites tern along the pipeline route were rare and protected birds in 2009 of Japanese white–eye, osprey, reed more variable compared with within the zone of influence of bunting, long–billed murrelet, and previous years. Sakhalin Energy’s facilities as Japanese waxwing, species that In the area of the LNG plant, 16 required by the Environmental could also nest in the zone of protected species were observed, Monitoring Project (officially referred influence. five of them, the white–tailed eagle, to as the System of Industrial The status of populations of most besra sparrow–hawk, Japanese Ecological Control and Local protected species in 2009 did not snipe, Japanese robin, and reed Monitoring). A total of 26 protected deteriorate along the right–of–way bunting were nesting within the zone bird species were recorded in the 2 compared with previous years. A of influence. In 2009, the population km zone of influence along the gradual recovery in the number of of Japanese snipe increased pipeline right–of–way. Nesting species that depend on meadow compared with the previous year, species numbered 16, namely habitats was noted, probably due to probably due to their use of Japanese snipe, Japanese robin, reinstatement of the right–of–way. recultivated sites. Six nesting sites of Japanese snipe were found in the floodplain of Goluboi creek, within the territory of the LNG plant. In the area of the onshore processing facility, 26 protected bird species were observed, 15 nesting at a distance of up to 6 km from the facility. The immediate vicinity of the processing facility is inhabited by Siberian spruce grouse, and their numbers have not changed compared with previous years. Construction of access roads in forested areas and the large number of voles probably contributed to an increase in the numbers of northern hawk owl, boreal owl, and Eurasian pygmy–owl. Sakhalin Island’s geographical position makes it a potential migratory bridge for birds travelling between Japan and the Far East

2009 Sustainable Development Report 55 mainland. A large number of the and the Russian Federation. Surveys previous years, 0.67 chick per Sakhalin Oblast RDB are also listed in focus on north–eastern Sakhalin, breeding pair. Bear predation rates the Japan–Russia Migratory Bird including lagoon areas and the lower were much lower than from 2005 to Treaty (1973). Notable among these parts of rivers crossed by the 2008, and the number of nests is the Steller’s Sea Eagle, one of the pipeline. destroyed was less than 10%. Bear largest birds in the world with a In April 2009, the Company protection previously installed on wingspan of up to 2.4 m. In Japan, it completed the first survey, during some of the nesting trees most likely is a designated ‘natural monument’ the early nesting period, to assess helped reduce predation rates. species and is protected according to the condition of breeding areas and Within the zone of potential the ‘Law for the Conservation of to identify active nests. These ‘early– impact around operating assets Species’. season’ data were used to inform the where disturbance may be caused by The Steller’s Sea Eagle breeds annual update of our SSE impact human and industrial activities, 165 along the Okhotsk Sea in Far East mitigation plan. A second, more eagle nests were identified in 61 Russia, and about 2,000 migrate to extensive survey was carried out in breeding areas. In 38 occupied areas, Japan every winter, mainly to the July and August at the end of the 26 were active, and the eagles eastern part of Hokkaido Island in nesting period, to assess population successfully raised 31 nestlings Japan. As a result, Japan is very and breeding characteristics. during 2009. Breeding success interested in conserving the habitat To date, 274 nesting areas, within the zone of influence was 0.82 and population of the sea eagle on including 619 nests of Steller’s Sea chick per breeding pair, higher than Sakhalin. Eagle, and nine areas containing18 outside the zone. Although this Sakhalin Energy launched its Sea nests of the white tailed sea eagle demonstrates the success of Eagle Research Programme in 2004 were recorded. About 40% of the Sakhalin Energy’s SSE impact to ensure preservation of the areas were active and 33% more mitigation plan, and the condition of Steller’s Sea Eagle (SSE) and the were occupied. The eagles bred 108 the population is considered white–tailed sea eagle, which is chicks. The breeding success of the satisfactory overall, some of the listed in the Red Books of Sakhalin SSE population was higher than in population indices may be considered

56 2009 Sustainable Development Report low. For example, juveniles made up on the patterns in these data from water of all monitored water bodies only 15% of the population, and the the first year of monitoring. complied with standard criteria breeding success rate in 2009 was Water quality and sediment during all periods of monitoring. lower than in 2004, so protection characteristics were monitored in 25 Oxygen levels in the rivers during measures will be maintained to rivers during the spring high water both periods were considered ensure the conservation of this RDB period in 2009, when snow melt and normal, and seasonal fluctuations of species. runoff introduce allogenic materials suspended solids were recorded in (that is, not typical to this area) to accordance with the hydrological River ecosystems the watercourse, and during the regime. Concentrations of Rivers summer low water period, when substances such as ammonium ions, Linked to hydromophologic concentration effects may cause nitrites, nitrates, and phosphates monitoring, assessment of benthic water quality to deteriorate when were relatively low. Overall, these organisms living in the sediments of benthos growth rates peak. results indicate that our river rivers and streams crossed by Data indicated that, in some crossings have not affected water Sakhalin Energy’s onshore pipelines is rivers, the reduced flow from the quality outside of normal conditions. an important measure of water upstream control station towards quality and habitat integrity. the downstream control station was Sakhalin Taimen Compared to other aquatic groups due to riverbed deformation. Physical The Sakhalin taimen is one of the like fish stocks, benthic organisms and chemical properties of surface world’s largest and most ancient tend to be more stable over time, characterize a local situation, are sensitive to environmental disturbance, and provide useful ‘early warning’ signals of potential control failures and impacts to river communities. River benthos surveys were conducted during August and September 2009, on 27 watercourses crossed by Sakhalin Energy’s onshore pipelines, and on one watercourse located within the zone of influence of the onshore processing facility. This was the first survey carried out under the operations phase. In total, 292 benthic samples were taken at 146 stations, comparing upstream and downstream characteristics, including abundance, biomass, diversity of species and groups, and indicator species. It is difficult to conclude any technogenic influence

2009 Sustainable Development Report 57 species of salmon. It is a migratory Project’s impact on them. Many vessel traffic in Aniva Bay. Tankers species, and is found only in Sakhalin, experts have provided advice and arriving at the port for LNG and oil the Amur Basin in Russia, and wetlands management is a key part cargoes took on ballast water in northern Hokkaido Island in Japan. of Sakhalin Energy’s Biodiversity other parts of the world where Based on historical and recent data Action Plan. marine flora and fauna differ from on species abundance across its The Company’s onshore pipelines those in Aniva Bay. Thus, ballast range, the International Union for right-of-way (ROW) passes through water that is not ‘exchanged’ prior Conservation of Nature (IUCN) has wetlands in places, affecting less to arrival at the port may contain listed the taimen as critically than 0.5% of the total area of species that are ‘alien’ to local endangered. Sakhalin wetlands. Sakhalin Energy marine ecosystems and have the Because it occupies the highest established a long-term monitoring potential to become invasive. trophic level in Sakhalin rivers, the programme to (a) control processes Recognising the importance of the taimen is an ideal indicator species to of wetland recovery within the ROW risks faced by invasive species in gauge the health of freshwater and in adjacent areas, and (b) assess ballast water Sakhalin Energy has ecosystems. Studies were conducted and treat any long-term negative taken a proactive approach to dealing in 2009 to provide evidence of impacts on wetlands, which may with this issue. successful natural reproduction, to occur as a result of construction or A ballast water risk assessment estimate the density of juveniles, to subsequent operation of the onshore was undertaken for the port of identify habitat types that are most pipelines. Prigorodnoye, and controls put in important for spawners and juveniles, A good understanding of wetlands place to manage the potential effects and to assess any impact from is important because of the of ballast exchange in Aniva Bay. construction on the populations and wetland’s fragility. When affected, Sakhalin Energy monitors the habitats of this species. wetlands can take a very long time to effectiveness of these controls by From August to September, the recover, which is why they remain a conducting surveys of marine study surveyed seven river basins. focus for the Company. At the time plankton and benthos. In 2008, The highest indices of the average of writing it is difficult to say what baseline studies were conducted of density of taimen juveniles in 2009 long term impact the pipeline the community composition of zoo-, were observed in the Nabil River construction has had. Preliminary phyto-, and ichthyo–plankton in the (0.1242 pcs/m2) and in the results from the monitoring Prigorodnoye area. Seasonal Severnaya Khandasa River (0.0254 programme show soil and vegetation patterns were indicated by changes pcs/m2). are slowly recovering, in line with in the relative abundance of different expectations. The level of influence species and groups and their Wetlands on areas adjacent to the ROW was biomass. In addition to plankton, Wetlands are a very important lower than expected. The Company baseline assessments of benthos and and complex habitat on Sakhalin plans to continue monitoring marine fouling were also completed Island. They support vital ecological wetlands in the future to mitigate from 2007 to 2008. processes such as water regulation any possible negative impact. In 2009, established monitoring and purification, and provid stations took samples of plankton, sanctuary for birds (including rare Marine ecosystems benthos, and marine fouling and protected species) during Ballast water characteristics. A few species that seasonal migrations. Sakhalin Energy Operation of the LNG plant and oil had not been recorded during the has gone to great lengths to protect export terminal at the port of baseline studies were identified, but these wetlands and limit the Prigorodnoye have led to increased none were invasive alien species.

58 2009 Sustainable Development Report biomass and density remain lower at some locations. Concentrations of pollutants in sea water did not exceed baseline levels, and concentrations of hydrocarbons and most heavy metals in bottom sediments were within background values, and less than concentrations that may lead to biological effects.

Western Gray Whales The western Pacific population of gray whales is one of only two surviving populations of this species. Both populations were brought to near extinction by commercial whaling during the 19th and 20th centuries. The eastern Pacific Offshore monitoring benthic community were caused by population, which migrates annually Sakhalin Energy monitors benthos, sediment deposition. Benthic from Mexico and Alaska to Chukotka sediment and water quality around samples collected in the autumn and and Kamchatka, has recovered its platforms, pipelines, and other winter of 2004 showed benthic considerably following an offshore infrastructure, to see if biodiversity significantly decreased international ban on hunting and now industrial activities such as dredging, across all groups of organisms. numbers about 20,000. By dumping, drilling, and discharges have However, subsequent monitoring comparison, the western Pacific caused any changes. showed a rapid re–colonisation of population remains extremely small, Dredging works were undertaken the disposal area, and recent results approximately 136. in Aniva Bay during construction of indicate many of the species Although unconfirmed, it is the LNG jetty and the materials expected in the area are now thought the western population offloading facility. Dredged material present, providing evidence of a overwinters and breeds in the South was deposited at an approved site recovery in benthic fauna. China Sea. The whales then migrate about 25 km due south of the LNG Overall, the results from 2009 to feeding grounds off the northeast jetty. Prior to dredging and dumping, surveys around the platforms, coast of Sakhalin during late spring baseline characteristics for chemical pipelines, and other offshore to autumn. Sakhalin Energy has done and biological parameters in the infrastructure indicate ecological significant research and monitoring water column and seabed were conditions are good at many to better understand the population determined, against which potential monitoring stations, where benthos status and ecology of the Western change could be later compared. community composition and Gray Whale. Earlier work began in The disposal site in Aniva Bay has distribution are stable and species 1997, and an extensive joint been monitored annually during and diversity is high. Benthos recovery is research and monitoring programme after construction to assess benthic generally well underway within the was initiated by Sakhalin Energy and re–colonisation and recovery. Data post–construction impact zone Exxon Neftegas started in 2001, show that initial effects on the around offshore facilities, although supported by a large team of

2009 Sustainable Development Report 59 independent Russian and 2009 demonstrated that whale densities, but understanding these international scientists. This abundance increased and was similar fluctuations is key to understanding programme is also subject to third- to the previously observed levels. The the densities and distribution of the party verification by the IUCN’s cause of the 2008 anomaly has not Western Gray Whale population. Western Gray Whale Advisory Panel yet been fully established. One Because of the change in whale (WGWAP). The establishment of this possible reason is their food supply. abundance in 2008 and the need for independent advisory body was Analysis of long–term datasets for further scientific study, Sakhalin initiated by Sakhalin Energy in 2004 amphipod biomass in the Piltun Energy agreed with the WGWAP to and represents an unprecedented feeding ground indicates a large postpone execution of a seismic step in the oil and gas industry. decrease in biomass in 2006 survey planned for 2009. Meanwhile, Much of what is known about this compared with 2002 to 2005. the Seismic Task Force of the population is the direct result of this Amphipod biomass then increased in WGWAP, comprising Panel members detailed research. The monitoring 2007 to 2008, and this upward and scientific experts, continued programme currently comprises five trend was maintained the next year. their extensive work to develop main components: acoustics, benthos In 2009, amphipod biomass reached mitigation and monitoring methods to or food source, whale behaviour, the level of 2004 to 2005, but was minimise disturbance of the whales distribution, and photo–identification. still lower compared with 2002 to during the 2010 seismic survey. After an observed decline in whale 2003. In short, current analysis of When 2009 distribution surveys densities in 2008, distribution and amphipod data does not clearly found that whale densities in the photo–ID surveys conducted in reflect the 2008 anomaly in whale Piltun area offshore Sakhalin had returned to pre–2008 levels, Sakhalin Energy and the WGWAP agreed the seismic survey should proceed in 2010. Preparations are underway for the survey to take place in June 2010. At the eighth meeting of the WGWAP in Geneva, Switzerland, the chairman of the Panel noted:

‘Seismic surveys are taking place every year on the Sakhalin shelf, but this [Sakhalin Energy] project is unique in terms of what has been invested in mitigation and monitoring. We hope it will come to be regarded as a good model for other companies in Sakhalin and other parts of the world.’

Sakhalin Energy met with the Panel twice in 2009. In addition, the seismic survey task force and the

60 2009 Sustainable Development Report photo identification task force each line with international best practice, Monitoring and follow–up met twice. Sakhalin Energy is implementing an Sakhalin Energy’s monitoring A total of 117 whales were oiled wildlife rehabilitation programmes improve our identified offshore Sakhalin in 2009 programme. As part of its integrated understanding of the environment in compared to 98 in 2008. A near– oil spill response plan, the Company which we operate. We have a record 10 calves were identified. developed a plan that details how an systematic approach to collect data, Photo–identification effort from oiled wildlife incident response should analyse and report to facilitate 2007 on shows evidence of fairly be initiated, implemented, and informed decision–making. Different active whale migration between the managed by Sakhalin Energy. programmes are derived from feeding areas in northeastern The plan describes measures specific objectives. Baseline Sakhalin and newly–identified ones in aimed at prevention of and response monitoring provides a reference point southeastern Kamchatka. In general, to oiled wildlife, the required for identifying trends and is an results from the 2009 surveys response capability, resources and indicator of sustainable development. indicate the population is stable and procedures, and protocols for Measurements help us assess routine mitigation measures appear coordination and cooperation compliance with our standards, adequate and effective. between corporate and third–party permits and licenses, while effects This is a unique project, and capabilities and resources. assessments help us determine the Sakhalin Energy and its shareholders Priority areas for wildlife success of our industrial controls and are committed to ensuring continued protection in the event of an oil spill mitigation plans. Monitoring best practice consistent with their include the coastal bays and lagoons programmes are reviewed regularly stated objectives for environmental that sustain migrating birds, seabirds to improve information collection, management. and other wildlife, spawning rivers, accommodate changes to scope, and and wetlands. introduce new methods and Oiled wildlife rehabilitation Sakhalin Energy bought specialist techniques. programme equipment that is held in readiness Sakhalin Energy’s management Sakhalin Energy’s Oil Spill should it ever need to be deployed. system also requires reporting Response plans set out the incidents and non–compliance, which organisation and responsibilities for Training and awareness are subject to investigation, preparedness and response. The Sakhalin Energy believes education corrective action and close–out. Our plans were developed in compliance is critical to securing support for process of corrective action is with Russian Federation legislation environmental management and necessary to ensure our operating and comprise required procedures, biodiversity conservation. Training, requirements are met, our guidelines, checklists and other development and competence performance continually improves, information so that the Company can assurance processes are well and the likelihood of future incidents plan, respond to, and manage oil established within the Company’s is minimised. spills coming from Sakhalin Energy management system; basic In addition, all business processes operations. environmental awareness training is and activities are audited periodically, Our oil spill response plans take delivered during HSE induction, while depending on the activity risk profile into account key sensitivities and training needs for task–specific and previous performance. Audits contain appropriate measures to competencies are addressed in more enable the Company to verify the ensure ecological interests are targeted programmes. Capacity effectiveness of internal controls safeguarded. In keeping with our building inside and outside the intended to manage our commitment to biodiversity and in organisation is encouraged. environmental risks.

2009 Sustainable Development Report 61 HUMAN RESOURCES MANAGEMENT AND DEVELOPMENT

HR management and HR policy approaches As part of its social responsibility and commitment to sustainable development, the Company is building up its human resources capacity and provides good remuneration to its employees. Dividing of the Sakhalin-2 Project into two phases, construction and operation, determines the corresponding approaches the Company has taken to HR management. Company's relations with its • Diversity and Inclusiveness Policy Basic human values, such as employees. The HR Director leads • Conflict of Interest Procedure integrity, honesty, and respect for development of the Company’s HR • Harassment and Discrimination others, are top priorities for Sakhalin policy and determines its key Procedure Energy. We encourage diversity and objectives. • Whistle Blowing Policy respect the personalities of all The key objectives of the • Whistle Blowing Procedure employees. Company's HR policy are: • Grievance and Inquiry Procedure The Company implements its HR • To improve the staff structure of for Sakhalin Energy Personnel tasks and objectives through its HR the Company's business units • Learning and Development policy, which is based on a detailed • To develop an effective motivation Guideline HR strategy and tactics in all areas. and incentive system • Recruitment Procedure for The HR policy is a comprehensive • To develop and maintain the Russian National Staff strategic policy governing the Company's organisational • Employees' Personal Data structure; to promote employee Confidentiality Policy loyalty and responsibility; to • Occupational Health Standard. In December 2009, Aleksandr improve labour discipline and Khoroshavin, governor of the Sakhalin working standards General Oblast, awarded Sakhalin Energy Employer Credibility Certificate No. 001. • To deploy employee training and At the end of 2009, the Company The Company’s efforts were talent development programmes employed 1,916 people, 80 per recognised to ensure the labour rights • To establish and enhance the cent of them Russian nationals or of its employees, stated in its declaration submitted to the State corporate culture. about 1,500 people. A total of Labour Inspectorate of the Sakhalin To achieve these objectives, the 1,871 were based in Sakhalin sites Oblast. The initiative to declare job Company has adopted policies, and offices; the rest worked in the activities under the respective part of the law was launched in the Sakhalin guidelines, procedures and other Moscow office. Full-time Oblast only this year. The main objective regulations, which are in line with employment contracts with the of the initiative is to promote socially Russian law and the best Company were held by 1,347 people responsible business practices. The Company was the first in the international HR management or 70 per cent of total number of region to be awarded this certificate, practices. The basic documents employees. At the end of 2009, the indicating that the holder respects regulating HR management are: Company employed 982 Sakhalin employees’ rights and is in compliance • The Code of Conduct residents, 141 of whom held with the labour law. • Internal Working Rules executive positions.

62 2009 Sustainable Development Report The per cent of Russian nationals in the Company’s work force is expected to reach 90 per cent over the next few years. Russian citizens held 264 executive positions or 64 per cent of the total in 2009 while 67 executives were women. By 2018, Russians are expected to hold 75 per cent of executive positions. The Company has an action plan to achieve these goals. In addition to the proactive Company makes every effort to Ensuring safety is a complex approach to training and promoting provide a high quality of activity that involves a number of key Russian nationals who are already accommodation for its employees areas such as road safety, employed, the action plan calls for (see Section Housing policy). behavioural safety, operational hiring new highly-skilled Russian safety, and safe start–up of facilities specialists and arranging internships Labour safety with the introduction of as a resource of technicians for the and protection hydrocarbons during commissioning. Company. Sakhalin Energy is committed to The 2009 results show a The Company carried out a pursuing the goal of doing no harm to significant leap forward in safety massive recruitment drive mostly in people and promoting a culture performance. Sakhalin Energy the construction phase. As the where employees share this achieved zero fatalities or significant Sakhalin-2 Project reached the commitment. We aim to have an HSE incidents, the number one safety operation phase, its workforce performance we can be proud of, to priority for the Company. decreased and will be sustained at earn the confidence of customers, Sakhalin Energy also recorded this level. Yet the Company is shareholders and society at large, to another significant safety currently hiring, as it replaces be a good neighbour, and to achievement in 2009: road accidents expatriate employees with Russian contribute to sustainable involving vehicles of the Company and nationals, including engineers, development. its contractors dropped sharply. By technicians and operators. In 2009, To achieve this commitment, late 2009, close to 500 motor employee turnover was 4.46%. Sakhalin Energy has a systematic vehicles involved in the project In 2009, the average age of the approach to HSE management operated for more than 10 months Company's employees was 36 years. designed to ensure compliance with free of road injuries. On 23 February Employees below 35 years of age the law and achieve continuous 2010, the Company entered its account for two–thirds of the improvement. We also require our second year without injuries from Company's payroll; most of them contractors to manage safety in line road accidents. From February 2009 majored in oil and gas engineering at with this policy. to February 2010, vehicles involved leading Russian universities. in the project travelled nearly 19 In 2009, 28% of the Company's Performance million km. employees worked rotating shifts. The Company has continuously Although there were seven lost– They were accommodated in fully improved its safety performance time injuries in 2009, this is still a furnished shared housing facilities, through its relentless focus on labour major improvement from 41 injuries such as hotels and shift camps. The protection and industrial safety. recorded in 2007.

2009 Sustainable Development Report 63 Improvement trend in Lost Time Injuries (number of incidents)

the island. As a result of joint actions taken by the Company, the State and the public, the accident rate on Sakhalin roads has dropped significantly. The rate of drivers who use safety belts whilst driving is higher on Sakhalin today than anywhere in Russia. The activity of The Company achieved its 3. Improving defensive driving skills the Sakhalin Road Safety Partnership progress by emphasising road safety, 4. Consistent consequence and Sakhalin Energy’s internal road behavioural safety, operational management for violating safety accident prevention programme were safety, and the safe start–up of rules highly praised by the International facilities by introducing hydrocarbons 5. Systematically reducing exposure Energy Institute and honoured with during commissioning. 6. Installing in–vehicle monitoring an award as the best international Road safety systems in all vehicles to monitor project in terms of safety. A critical review in 2007 of the driver behaviour Company’s approach to road safety 7. Influencing the community through Operational safety led to fundamental changes in partnership activities in While still in the construction leadership focus and the conjunction with the Global Road phase, Sakhalin Energy introduced implementation of controls. The Safety Partnership. ‘HSE Golden Rules’ which are Company launched a CEO–led road Acting as a responsible citizen, in mandatory for Company personnel safety programme for Company and 2005 Sakhalin Energy joined efforts and contractors. With the transition contractor personnel that covered with the government of Sakhalin from construction to operations, seven areas: Oblast, GIBDD and the public to the risk profile of Sakhalin Energy 1. Visible and leading by example establish the Sakhalin Road Safety changed, but the risk levels did not senior management Partnership. This organisation, in become lower. With process safety 2. Rigorously implementing road which Sakhalin Energy plays an becoming even more important, the safety standards, tailored to the important role, implements long-term Company updated and detailed its road safety culture in Russia projects to improve road safety on internal safety rules to match its new focus. The most serious hazards critical to life safety were identified, and the Company’s new ‘10 Life Saving Rules’ were established. To also address the increased risks associated with the introduction of hydrocarbons during commissioning, the Company introduced the ‘Go Live!’ training programme to improve hazard recognition and adjust risk perception for workers near hydrocarbon.

64 2009 Sustainable Development Report Sergey ROZINOV, a Senior Process Engineer at the Onshore Processing Facility (left), receives the CEO safety award from Andrei GALAEV, Sakhalin Energy CEO (right)

The Company also put in place a labour safety and environmental programme to identify improvement protection. opportunities in worksite hazard To make safety visible and relevant management and to leverage best for all staff and contractors, Sakhalin practices across Sakhalin Energy. The Energy holds a Safety Day each year, staff–swap programme allows where everyone reflects on how they operational personnel to move as part of the Company’s behavioural can further improve their safety between different assets to conduct safety programme. To better behaviour – in the field, in the office facilitated reviews. understand the safety culture of and at home. contractors and inside the Company, Behavioural safety Sakhalin Energy deployed the Energy Protecting the health The goal of behavioural safety at Institute’s Hearts and Minds tool. of personnel Sakhalin Energy is for the staff and The tool also helped the Company Sakhalin Energy supports a contractors to want to do the right take further action to strengthen the structured and efficient approach to thing, because they see the value in culture of safety. manage and protect the health of our it, not because they are told to do it. To help maintain high safety personnel. After developing minimum In addition to systematically awareness and to recognise HSE health management standards, these identifying and controlling risks, the leaders at all levels, Sakhalin Energy standards were well–maintained at Company introduced several created a monthly CEO Health, the assets and in the project groups initiatives and ongoing activities in Safety and Environment Award. The in 2009. The outcome: assets and 2009 to kickstart the HSE award is given to individuals and project groups made a satisfactory management system. departments of the Company and its contribution to the health All staff and contractors undergo contractors, for actions and performance scorecard. observation and intervention training behaviour that exemplify our values. As part of its revised medical The award is not only for single emergency response processes, the ‘DO THE RIGHT THING!’ – IS achievements, but also for Company completed a gap analysis for THE MESSAGE OF SAFETY DAY systematic work and initiatives in all relevant sites, in order to develop and implement new training modules and medical emergency response manuals at new operational sites. Medical fitness for high–risk groups emerged as a significant issue. Based on a review of non– accidental deaths in earlier years, the Company developed an additional health screening programme focusing on cardio–vascular diseases. Medical fitness screening for all workers continued, including a risk assessment for heart attack. An internally promoted Wellness Campaign supported the Safety Day at the LNG plant programme. The campaign

2009 Sustainable Development Report 65 encourages personnel to maintain a The Company recognises Housing policy healthy state of body and mind, sexually–transmitted diseases, The Company provides comfortable especially through deliberate effort. including HIV/ AIDS, as an issue that housing for all its employees who To further encourage a healthy poses health, social, and come to Sakhalin to work. Non–local lifestyle, the Company built a sports reputational risks. A joint employees and their families live in and leisure centre in Yuzhno- community health initiative fully–furnished housing. The Company Sakhalinsk for Sakhalin Energy addresses the issue, and in 2009 covers all moving and relocation employees. The centre comprises carried out a pre–hospital care expenses for new employees and sports amenities, a gym, a project, first aid training, an HIV / their families. swimming pool, and leisure facilities. AIDS awareness campaign and To accommodate engineering and Sports and health facilities are also conference, and a billboard operating staff, the Company built in every camp and permanent campaign. shift camps at each project site. The accommodation for the The Influenza Contingency Action camps offer comfortable facilities for Prigorodnoye complex personnel in and Communication Plans work, leisure, and sport. Korsakov. Moscow office employees progressed in 2009. Due to an get compensation towards sport Influenza A (H1N1) level six alert, Recruitment, motivation club membership fees. the stock of personal protection and assessment Alcohol and drug awareness equipment on remote sites was The Company has adopted a programmes were developed with increased, regular communication number of documents regulating the help of materials from alerts were sent, and all employees recruitment, employee assessment, Alcoholics Anonymous in Yuzhno– and contractors arriving from and employee motivation. The Sakhalinsk, in line with the affected areas were monitored. documents establish mandatory Company’s alcohol breath–testing Under the Staff Development and procedures for selecting and approving programme at operational sites and Russian Content policy, the candidates, evaluating personal and the Yuzhno offices. Random drug international training programme for professional skills, and planning tests were conducted at offshore Russian physicians continued. A total personal and professional growth. installations. The Company also of nine Russian physicians The Company's recruiting process recognised World No Tobacco Day successfully completed refresher is conducted in four main stages: on 31 May. training abroad.

Prigorodnoye staff housing In 2009, a new housing facility was commissioned in Korsakov to accommodate employees of the Prigorodnoye complex. Until recently, LNG plant personnel lived in a temporary camp near the plant site. The housing facility consists of five buildings and accommodates 100 people. It has all the amenities for comfortable work and leisure, including gym, library and lecture room, conference hall, canteen, sauna, Jacuzzi, tennis court, volleyball court and even a special barbecue site.

66 2009 Sustainable Development Report • Attraction • Screening • Selection • Hiring. Sakhalin Energy posts all vacancies at its corporate website where an applicant questionnaire is conveniently available. The Company also uses mass media, recruiting agencies, and employment agencies to announce vacancies and invite candidates for interviews and to events. To help new employees get off to a good start, Sakhalin Energy adopted an adjustment procedure to • Competitive salaries equal to or remunerations based on ensure high employee performance higher than average wages in the performance. from day one, and faster promotion Russian oil and gas industry Our compensation policy, practice and career growth: • Transparent bonus schemes in all and methods are aimed at rewarding The procedure includes: personnel categories and encouraging operational • Arranging workplaces for new • Competitive benefits to attract a performance and personal employees highly–skilled workforce achievement in the short and long • Ongoing briefings, feedback, and • Career planning for employees term. The incentive programme is mentoring • Training programmes designed to reward special • Arranging and conducting the first • An ongoing career planning and achievements based on a standard meeting with the Company; performance evaluation cycle, integrated approach in all Company introducing an employee to the including regular monitoring setting business units. direct supervisor and achieving targets, evaluation The Company offers an employee • Arranging and performing and feedback; as well as identifying benefits package that includes induction, information improvement areas and setting compensation, perks, and additional management, and other sessions target for the next period privileges that goes beyond Russian to help new employees adapt. • Regular monitoring of the financial labour law. The employee motivation system aspects of the labour market. The package includes: adopted by Sakhalin Energy To keep wages competitive, the • Voluntary health insurance provides for: Company annually reviews employees • Health benefits • Free or discounted travel packages and health resort Employing disabled people accommodations for employees The Company offers employment opportunities to disabled people. These individuals and their children receive priority in the selection process for any vacancies, provided they meet the qualification eligibility criteria and taking into account workplace limitations. All Company • Round–trip vacation travel for offices are equipped for the disabled. The Company has been a partner with the Government employees and their children Employment Agency of the Sakhalin Oblast since 2005. As of end 2009, the Company • Lump sum cash allowances for employed eight disabled people. difficult personal situations.

2009 Sustainable Development Report 67 HR training and development

Corporate approaches To maintain a high level of skills and highly-motivated employees, which are necessary to succeed in a highly competitive industry domestically and internationally, the Company needs to pay constant attention to professional growth and development. Our top priority is to achieve performance excellence at all levels by tapping the full potential of employees. We are committed to the ongoing professional development of our workforce. Our HR policy aims to provide training and development Sakhalin Energy has unique entree • Management and business opportunities to all employees. The to training resources. The Company administration Company has adopted special has established close relations with • PC, Internet, and Intranet training procedures to do this and uses them more than 20 educational institutions and other IT courses to prepare annual and strategic and training centres of its major • Long–term educational training and development plans. shareholder, Gazprom, which are programmes for certification Employees and management integrated into Gazprom‘s system of (CIMA, ACCA, CIPS) supervise the performance of these continuing education. This integration • Training for graduates of plans. gives Sakhalin Energy access to the educational institutions knowledge and experience of top • General training programs and specialists at the Russian gas giant. language courses for Russians and Survey of personnel motivation Company employees also have access expatriates. and corporate culture to remote learning from another More than 1,800 people The Company launched an employee opinion survey in late 2009 to look into shareholder, Shell, under Shell’s participated in workshops, training, the most significant aspects of employee Open University initiative. and skills improvement sessions in motivation and corporate culture, in line On–the–job training, conventional 2009. Sakhalin Energy invested more with best corporate practices. The survey included career and professional training, and workshops are available than RUB 150 million in personnel development, wages, benefits, and on a wide range of subjects: training in 2009. corporate communications. • Operation and maintenance for The objective of the survey was to get employee feedback on these issues for technical and engineering Apprenticeships use in developing the Company’s personnel An apprenticeship programme for development strategy. The survey motto • Health, safety and environment Sakhalin residents has been in place was ‘Everyone’s voice will be heard! Our (HSE) and statutory briefings since 2003. By the end of 2009, future and our success are in your hands!’ • Special technical courses and in 150 people had been trained based Findings and recommendations will be other professional areas, such as on this programme; many now work presented to the Committee of Executive finance, contracts, and human at the LNG plant, the onshore Directors in 2010. resources processing facility, and the offshore

68 2009 Sustainable Development Report A TOTAL OF 10 GRADUATES internship programme for • To train executives and employees OF THE YUZHNO–SAKHALINSK undergraduates of Russian able to manage the Company’s FUEL AND ENERGY COLLEGE, universities. The objectives of the operations under changing EIGHT MEN AND TWO programme are: conditions; to sustain management WOMEN, COMPLETED • To give students an opportunity to continuity and succession, as well work in a large international as vertical and horizontal staff A YEAR–LONG TRAINING corporation rotation PROGRAMME FOR PROCESS • To teach students best business • To ensure scheduled replacement UNIT OPERATORS AT practices of expatriate employees with SAKHALIN ENERGY’S • To identify students with high highly–skilled local personnel in PROFESSIONAL TRAINING potential who may become eligible accordance with the CENTRE. THE CENTRE WAS candidates for permanent or Sakhalin-2 PSA SET UP SEVERAL YEARS AGO temporary jobs in the Company. • To smoothly fill executive vacancies IN PARTNERSHIP WITH The internship programme was with internal candidates THE COLLEGE. TODAY, THESE launched in 2000 to allow students possessing top professional and YOUNG SAKHALINERS to put their theoretical knowledge managerial skills HAVE STARTED WORKING into practice and to develop practical • To reduce the adjustment period AT THE LIQUEFIED NATURAL skills. The internship lasts four to for executive positions GAS PLANT. eight weeks and takes place during • To improve employee motivation for regular working hours in accordance professional and personal growth with Russian law. by creating opportunities for facilities. A total of 10 more In 2009, 45 students completed career growth specialists went through the an internship at Sakhalin Energy. • To reduce personnel turnover programme in September 2009. In • To lower personnel–related costs. hiring, Russian residents get priority, Developing the talent pool especially from Sakhalin, where the To continue developing the Company operates. This is not only potential of Company personnel, and commitment under the PSA but is to train managers and specialists to first and foremost part of the respond to changes in all areas and Company’s HR policy. work efficiently in current market Another Company objective is to conditions, the HR Directorate sees provide job training in skills which are developing the talent pool as a high new to Russia, such as operating gas priority. Developing the pool of talent liquefaction process. While this shortens the adaptation period of specialty was previously done by specialists upon promotion, reduces expatriate employees, by early 2010, the risks of mistakes in filling the first three Russian specialists positions, and ensures completed the required certification insufficiently–trained employees are to operate this technology. replaced with well–trained employees in a timely manner. Operational internship programme The objectives of developing To enlarge its talent pool, Sakhalin the talent pool for smooth Energy adopted an operational succession are:

2009 Sustainable Development Report 69 SOCIAL INVESTMENT AND CONTRIBUTION TO REGIONAL SUSTAINABLE DEVELOPMENT

Company principles and approaches to Social Investment and Sustainable Development Sakhalin Energy has made social investments through its charitable and sponsorship programmes since the Sakhalin-2 Project began. Aware of its responsibility to develop society, the Company strives to improve and develop the territory where it operates. Implementing socially The Company supports projects as part of its social investment In the Corporate Donor of Russia IN EARLY 2009, SAKHALIN programme, according to its 2009 competition for charitable projects, and the Second Annual Survey of sustainable development policy and ENERGY WON THE REGIONAL Corporate Philanthropy, conducted by COMPETITION, procedure for implementing social Vedomosti newspaper, Forum of Donors ‘PHILANTHROPIST OF THE investment and sustainable and PriceWaterhouseCoopers, Sakhalin YEAR’ FOR THE FIFTH TIME. AT development projects on the basis of Energy ranked among the most effective project evaluation criteria. The corporate philanthropists in Russia. The THE AWARDS CEREMONY ON Company took third place among Russia’s amount of finance for projects and 20 MARCH, THE COMPANY most prestigious national projects on the RECEIVED AN AWARD IN THE programmes is approved annually by effectiveness of its corporate charitable the Company’s shareholders. The programmes. The Sakhalin Salmon CATEGORY ‘CORPORATE decision to support a particular Initiative project, presented by Sakhalin PHILANTHROPIST OF THE YEAR’. project is made within the budget limit Energy for this competition, received ‘Best Programme Illustrating the Policy relevant programmes in the Sakhalin by the relevant competent bodies of of Corporate Philanthropy and Principles region has been a priority for the the Company – Social Investments of the Company’s Social Investments’. Company since it was founded in 1994. and Sustainable Development The Company’s programme to support Following public consultations, Committee, supervisory boards of charitable initiatives of company’s since 2005 the Company has focused corporate programmes, etc. employees was nominated for ‘Best Programme (Project) Facilitating its social programmes on education, Our social programmes and aCulture of Philanthropy in Society’ biological diversity, business, projects have won recognition at infrastructure and healthcare. A variety of projects have been carried ON 28 JANUARY 2009, SAKHALIN ENERGY RECEIVED THE out under these programs, ranging MOST PRESTIGIOUS RUSSIAN AWARD IN PUBLIC from financing Internet centres at RELATIONS – ‘THE SILVER ARCHER’ NATIONAL PRIZE, rural libraries on Sakhalin to BESTOWED ANNUALLY ON THE BEST PROJECTS IN RUSSIA. constructing and equipping THE AWARD INCLUDED A RANGE OF SOCIAL PROJECTS healthcare institutions and sponsoring foster care. SAKHALIN ENERGY IMPLEMENTED ON SAKHALIN ISLAND. The Company invested RUB 65.7 PRESENTED AS PART OF A JOINT PROGRAMME, ‘BREAKING million (US$ 2.27 million) in social STEREOTYPES’, THESE MULTIFACETED SOCIAL PROJECTS programmes in the Sakhalin Oblast, REINFORCE THE COMPANY’S CORPORATE REPUTATION AND in 2009 alone. BUILD TRUST AMONG THE PEOPLES OF SAKHALIN.

70 2009 Sustainable Development Report Sports and health complex opens its doors In July 2007, the Sakhalin Oblast administration, the Aniva municipal district and Sakhalin Energy signed an agreement to jointly finance reconstruction of social facilities within the municipality. One of them was the long–awaited sports and health complex in Aniva which opened early in 2009. The new three–story building houses a wrestling room, a gym and fitness hall, and a hall for team sports. The local junior and youth sports schools are also located there. The Sakhalin Oblast administration, the Aniva municipal district, and Sakhalin Energy allocated RUB 48 million for the sports and fitness complex, with RUB 10 million coming from Sakhalin Energy.

programmes, we have supported projects to develop the island’s social infrastructure. We launched our programme to upgrade social infrastructure in 2001 and largely completed it by 2007, although some activities continued in 2008 and 2009. The programme envisages: • Constructing new roads • Reconstructing existing roads • Repairing bridges and culverts regional, federal and international Development of the regional • Modernising ports levels. Over the last few years social infrastructure • Modernising airports Sakhalin Energy has been named Sakhalin Energy aims to develop • Modernising health care facilities. winner of the regional competition the socio–economic fabric of the From 2001 to 2009, the Company Philanthropist of the Year. The region, given that high regional invested over US$ 600 million Company’s programmes have won development indicators are key to modernising the infrastructure of the and been nominated in several the Company’s long–term sustainable Island. categories of Corporate Donor – development. As part of The Company provided financial a prestigious Russian competition for infrastructure modernisation and support for the following projects best practice in social investment. sustainable development which started up in 2009: • Opening of a new sports and health complex in Aniva. The Sakhalin Sakhalin Energy funds new polyclinic Oblast administration and Sakhalin In early 2009 a polyclinic in the city of Korsakov opened, one of Sakhalin Energy’s recent social projects, implemented jointly with the administration of the Korsakov city district and Energy jointly financed the the Korsakov Central District Hospital. construction and sport equipment The three floors of the centrally–located polyclinic can accommodate 200 patients per • Reopening of Spartak stadium in shift. The polyclinic has a medical prevention centre diagnostics, X–ray imaging departments, and a dental office. Yuzhno–Sakhalinsk; reconstruction The clinic took three years to build, at a cost to Sakhalin Energy of over US$ 5 million. of the stadium was financed from The company paid for modern medical equipment for several other healthcare facilities in the Oblast budget with a financial the Korsakov District in 2009. contribution from Sakhalin Energy

2009 Sustainable Development Report 71 • Opening of a children’s dental of the US. Sakhalin Energy started biodiversity of salmon populations surgery in Poronaysk financing of development the concept and their habitats in Sakhalin • Purchasing of new medical and the strategy for the Initiative the rivers equipment for the Korsakov following year. The goal of the • Salmon basin councils in six Central District Hospital programme is to support the districts tackled poaching and • Opening of dental surgery in the preservation and rational use of wild restored migration routes to village of Ozersk, Korsakov salmon and salmon ecosystems, and salmon spawning sites, which were municipal district. to facilitate sustainable economic and disrupted by destructive cyclones social development on Sakhalin Island. in the summer of 2009 Social investment and Sakhalin Energy and the Wild Salmon sustainable development Centre signed an agreement in 2008 THE SAKHALIN SALMON programmes supported to finance a four–year programme INITIATIVE WON ‘THE by Sakhalin Energy that runs through 2011 to preserve CORPORATE DONOR 2009’, Social investments on the island wild salmon on Sakhalin Island, with A RUSSIA–WIDE include large projects, such as the a budget of US$ 8.8 million, of partnership programmes Sakhalin which Sakhalin Energy provides COMPETITION FOR SOCIAL Salmon Initiative, and What to do in US$ 4.4 million. INVESTMENT IN THE Emergency Situations, as well as Activities are carried out by the CATEGORY OF ‘BEST smaller projects. For several years, Wild Salmon Centre and the Sakhalin PROGRAMME our social investment and Salmon Initiative, an autonomous, ILLUSTRATING PRINCIPLES sustainable development strategy non–profit organisation created in OF CORPORATE CULTURE have been based on partnering. The 2007 and directed by a coordination AND FACILITATING approach is reciprocal: in addition to committee. The committee is DEVELOPMENT OF projects initiated by the Company as staffed by representatives from the CORPORATE STANDARDS part of its own policy, local government of the Sakhalin Oblast, FOR COMPANY’S PUBLIC stakeholders and local initiatives can regional and federal agencies, SERVICE ACTIVITIES’, define, develop and propose socially– research organisations, businesses, ESTABLISHED BY THE important projects. fisheries, communities of Sakhalin RUSSIAN UNION The Company sponsors indigenous minorities, and local and OF INDUSTRIALISTS competitive grant programmes that international NGOs. Projects of the AND ENTREPRENEURS. offer organisations and initiative initiative fall under six priority areas: groups throughout the Oblast the salmon basin councils, monitoring opportunity to receive funding for salmon rivers, education and • Preliminary evaluation was small–scale projects, a programme awareness, preservation of salmon completed on ecological to support charitable initiatives of habitats, creation of the Salmon certification of salmon fishing, employees, and many others. Park educational and recreational according to the criteria of the zone, and development of Marine Sponsor Council (MSC); in Partner project: sustainable fishing. the long term, this certification Sakhalin Salmon Initiative The following activities were will allow the fishermen of Sakhalin The Sakhalin Salmon Initiative carried out in 2009: to benefit from the rising demand (SSI) started in 2004. The project • Two extensive research expeditions for seafood caught using the was initiated by the non–profit • Ongoing comprehensive principles of rational nature organisation the Wild Salmon Centre monitoring of the abundance and management

72 2009 Sustainable Development Report • A series of cultural events, • According to the results of a • In mid–December 2009, the Far including an ecological forum, themed competition, 12 schools on Eastern Regional Centre of Salmon 2009, an ecological the island received modern Emercom invited Sakhalin Energy educational gathering the Salmon equipment for life safety for use in to take part in an exhibition as part Festival, along with grant– classrooms: PCs with specialised of the annual meeting of the Far financed projects software, multimedia equipment, Eastern rescuers in Birobidzhan. • Financing secured for the first and visual aids. international salmon camp Competitive corporate programme attended by junior ecologists from SAKHALIN ENERGY RECEIVED ‘Small grants – Big deeds’ the USA and Sakhalin A LETTER OF APPRECIATION Small Grants – Big Deeds is a • Around 200 children went on IN JANUARY 2009 FROM charitable project that supports local educational trips to study the life THE SAKHALIN OBLAST initiatives in districts of the Sakhalin of salmon in their natural habitat. ADMINISTRATION FOR Oblast in operation since 2003. Information about specific ASSISTING WITH Grants are available on a competitive activities is available on EMERGENCY PREVENTION. basis to initiative groups, non–profit and nongovernmental organisations, the Initiative’s website: THE COMPANY WAS http://sakhsalmoninitiative.org/ and institutions in the Sakhalin Oblast REWARDED FOR ITS for social, environmental, cultural, FOUR–YEAR CORPORATE Partner project: and educational initiatives targeting What to do in emergency PROGRAMME ‘WHAT TO DO specific local problems. Over the situations IN EMERGENCY years, the programme has helped Sakhalin is one of the few Russian SITUATIONS’, WHICH bring to life 200 projects in 47 island regions where many kinds of natural INSTRUCTED CHILDREN AND communities. disasters are possible – earthquakes, ADULTS. avalanches, forest fires, blizzards, and tsunamis. Since 2005, Sakhalin We are proud the programme has Energy has been working in attracted a great deal of interest partnership with Emercom and the outside Sakhalin, notably: Department of Education in the • Senya cartoons are broadcast in region to teach local children what to 10 Russian regions do in an emergency using game– • Following an expert review of the playing techniques. series, the Emergency Programme accomplishments over Psychological Aid Centre of the the period 2003 to 2009 include: Russian Emercom Central • 23 cartoons were created, Administration described What to featuring a memorable character do in Emergency situations as ‘an Senya, broadcast by local interesting and relevant solution to television channels, instructing the problem of life safety children how to act in an education’; since 2009, Senya emergency cartoons have been available on • A colourful comics book for first– the children’s website of the graders in the Sakhalin Oblast was Russian Emercom: published http://www.spas–extreme.ru/

2009 Sustainable Development Report 73 In 2009, 13 grant projects were Educational grants Programme to support implemented with Company funds, programme volunteer charitable including: For the seventh year in a row, initiatives of employees • Central library system of Yuzhno– Sakhalin Energy has a grant Employee involvement in the Sakhalinsk, ‘Through Culture to programme in place for students community is a crucial element of our Peace and Accord’ leaving Sakhalin schools to pursue corporate culture. In support of • ‘Green Necklace of Sakhalin’ by the higher education. Eleventh–graders employee efforts, a company municipal educational institution of of the Sakhalin Oblast schools and programme, Support of Charitable advanced education for children, graduates of oil and gas technical Initiatives of Sakhalin Energy the Poronaysk Centre for schools are eligible to participate. Employees, continued in 2009, based Children's Creativity Winners are awarded educational on a widely–used international model • ‘The Sea Teaches Us,’ by the grants before they leave school and of corporate social investment that is municipal educational institution of enroll at a university. The grants relatively new in Russia. The advanced education for children, include scholarships and trips to the Company doubles the funds the Uglegorsk Centre for Children's university and back home. employees donate to a socially Creativity. Scholarship recipients who study an important project. The programme’s ‘Small grants – Big deeds’ is the oil and gas discipline have the motto is ‘Hurry up For Good Deeds.’ first project of its kind in the opportunity to get practical or pre– The programme gives employees Sakhalin Oblast. We are thankful to graduation training at Sakhalin an opportunity to take part directly all participants for their Energy. in a strategic corporate social endeavours, their readiness to The annual budget of the programme, understand the progress and study together, and programme is close to RUB 6 million. Company’s approaches and for their small but exciting projects, A total of 82 grants have been principles in this domain, apply their which have in most cases become awarded since 2003, including 12 knowledge and skills in their own significant. grants in 2009. project, act as initiators and

Cities where scholarship holders pursue education

74 2009 Sustainable Development Report creators of charitable ideas, and practice their communications and project planning skills. Since 2008, over 300 employees have taken part in the programme. As a rule, employees focus on the most vulnerable social groups: children in orphanages and social shelters, children left without parental care, children with disabilities, and the elderly. We have been working with Minorities Development Plan. The Projects implemented in 2009 Sakhalin’s indigenous minorities since plan is a trilateral programme include: the Company was established in implemented jointly by Sakhalin • Audio books for a library for blind 1994. The Company's social Energy, the government of the children initiatives support cultural, sports Sakhalin Oblast,and the Regional • New Year’s celebration for children and educational projects. In the first Council of Authorised with disabilities at the stage, the Company worked mainly Representatives of Sakhalin Preodoleniye Rehabilitation Centre with reindeer herders who were Indigenous Minorities. • ‘New Year’s Miracle’ – directly affected by construction of The document was drawn up with a celebration for children from the the Sakhalin 2 Project, and key the participation of the three Rehabilitation Centre in Yuzhno– stakeholders. parties, following extensive Sakhalinsk and the Pravda village Since 2005, we have been consultations in areas densely orphanage, organised by working with all Sakhalin’s indigenous populated by Sakhalin’s indigenous employees at the Olympia Park minorities groups as part of our minorities, and is based on best Entertainment Complex corporate Sakhalin Indigenous Russian and international practices. • Sports gear purchased for children The Plan is the only document of its with disabilities at the social IN 2009, THE PROGRAMME kind on Sakhalin Island. rehabilitation centre, and a sports TO SUPPORT CHARITABLE Key tasks of the Development festival at the Nadezhda Social INITIATIVES OF COMPANY Plan include: Rehabilitation Centre (Poronaysk). EMPLOYEES ‘HURRY UP • Prevent or minimise potentially FOR GOOD DEEDS’ WAS adverse impacts of the Sakhalin-2 Sakhalin indigenous NOMINATED FOR BEST Project on indigenous peoples minorities PROGRAMME (PROJECT) • Contribute to improving the quality FACILITATING A CULTURE of life of Sakhalin’s indigenous Profile of the Sakhalin minorities, through social OF PHILANTHROPY IN Indigenous Minorities development programmes that SOCIETY, ANNOUNCED BY Development Plan (SIMDP) address their cultural specificity Sakhalin is home to about 3,500 THE RF PUBLIC CHAMBER • Assist the potential development representatives of indigenous COMMISSION FOR of Sakhalin indigenous minorities, minorities (about 0.7% of the DEVELOPMENT OF by encouraging their active island's population) belonging to four PHILANTHROPY AND involvement in managing the major ethnic groups: Nivkhs, Uilta IMPROVEMENT OF NGO implementation of the Plan, and (Orok), Evenkis and Nanais. LEGISLATION. other similar programmes.

2009 Sustainable Development Report 75 First book of ABCs for the children of Uilta In September 2009, Sakhalin Energy was invited to attend the All–Russian Practical Research Conference in Yakutsk, titled ‘Native Languages of Indigenous Minorities of the Russian Federation in the Russian Education System’. Representatives of 13 Russian regions, 15 municipalities of the Republic of Sakha, and guests from five countries, attended. A Sakhalin Energy representative delivered a report on collaboration as part of the Development Plan, including working together to preserve the native languages of Sakhalin indigenous minorities. Publication of the first book of the Uilta alphabet is one of the outstanding projects of the Development Plan, aimed at preserving the unique language and culture of the Northern Sakhalin peoples. The Uilta language is on the brink of extinction: the number of native speakers is no more than 20 or 30 people. Until recently, other members of this group were having difficulty learning their native tongue. A Cyrillic–based script for the Uilta language was developed by a famous Japanese linguist, Professor Dziro Ikegami. In 1993, this project was approved by the Language Studies Institute of the Russian Academy of Sciences. It took a large team of scientists and native speakers several years to prepare the book of ABCs of the Uilta language. Preparing the book for publication proved equally challenging. For example, the Cyrillic script lacks certain characters that convey specific phonemes: this is why the developers of the electronic version had to come up with special software to replace the missing characters. The scientific community highly rated the ABC book’s publication. This is an excerpt from the conference recommendations from the authorities: ‘Spread the positive experience of implementing the Development Plan… in the spheres of social, cultural and educational development of the indigenous minorities of the Sakhalin Oblast, which is shared by Sakhalin Energy, the Sakhalin Oblast Administration and the indigenous peoples.’

The first five–year Development populated by Sakhalin indigenous timely fashion by a multi– Plan covering 2006 to 2010 minorities. disciplinary team of doctors from envisaged annual financing for the From 2006 to 2009, Sakhalin the regional centre development programmes for Energy financed over 200 projects • Providing additional university Sakhalin indigenous minorities of US$ approved by the governing bodies of scholarships: tuition was paid for 300,000. The Company stated that the Plan. 140 students from Sakhalin this Plan is the first of a series that indigenous minorities will last for the duration of the SIMDP Social development • Focusing on the potential Sakhalin-2 Project. programme development of local organisations Progress reports of the Plan are Initial consultations preceding and communities; seminars and published and widely circulated preparation of the Plan identified the training sessions were held on a among representatives of Sakhalin need for social development wide range of issues. indigenous minorities. Regular programmes in support of education, independent monitoring of the Plan health care and ethnic culture, which SIMDP Competitive mini-grants by outside experts is envisaged. remains relevant. These programmes programme Monitoring reports are published on are implemented in close cooperation One of the strategic goals of the the Company’s public website. with the relevant departments of the Development Plan is for Development programmes under regional authorities and district representatives of indigenous peoples the Plan are implemented along the administrations, and educational, to independently manage the plan or following lines: health care and cultural institutions. its separate programmes. In this • Social development Activities financed under the social context, the competitive programme • Competitive mini grants development programme as part of of mini grants offers a way to • Support of traditional economic the Development Plan include: achieve this goal. As one step activities. • Procuring equipment for remote towards this goal, all funding Efforts along all three lines paramedical and obstetrical decisions for mini grants are made by continued in 2009, factoring in the stations in areas densely populated the Council of the Mini-Grants Fund, positive and negative feedback by indigenous minorities staffed exclusively by representatives from the interim evaluation of the • Setting up a mobile dental office of the Sakhalin indigenous minorities. Plan conducted in 2008. The • Conducting medical checkups by The objective of the popular annual evaluation is available on the airborne units in areas densely mini-grant competitions is to Company’s website and has been populated by indigenous minorities, encourage and support initiatives and circulated in areas densely to detect and treat diseases in a proposals from representatives of

76 2009 Sustainable Development Report Implementing the Development Plan continues to interest the Russian national authorities and the Russian and international communities, reflected in these events and activities in 2009: • In April 2009, the 6th Congress of Indigenous Minorities of the North, Siberia and the Far East of the Russian Federation gave Sakhalin Energy a laureate for the Vitus Bering international prize in the category, Best Industrial Company. The prestigious award was established by the Association of Indigenous Minorities of the North, Siberia and the Far East of the Russian Federation and the Batani Russo–Danish Foundation. The award comments on expresses appreciation to the partners of Sakhalin indigenous minorities that have made the greatest contribution to the socioeconomic and cultural development of these minority groups • In October 2009, as part of the Development Plan, the State Duma of the Russian Federation hosted a photography exhibition titled, Sakhalin Indigenous Minorities to promote the unique culture and traditions of these minority groups. The United Nations Special Representative on Human Rights and Fundamental Freedoms of Indigenous People attended the event while on an official visit to Moscow. Also attending were the representatives of indigenous minorities of the North, specialised committees of the State Duma and the Federation Council, regional authorities, and the scientific community. the indigenous peoples. The Mini- Grants Fund makes up 10% of the budget of the Development Plan.

SIMDP Programme to support traditional economic activities Projects to revive the traditional economic activities of the indigenous population of the island are extremely important for preserving age–old traditions. Such programmes include a revival of Nivkhi dog breeding, assistance for the Uilta reindeer herders and support for communities of Sakhalin indigenous minorities. The programme supporting traditional economic activities aligns with the goal of entrepreneurs among the indigenous peoples, who want to develop their businesses for the benefit of their communities. The programme is also designed to gradually increase the competitiveness of products made by the indigenous peoples.

Nivkhinka club: from generation to generation The Nivkhinka Club was created over a decade ago at the Nogliki Museum of Local Studies. Two dozen like–minded individuals (the oldest is now over 80) rallied around the idea of preserving the national and cultural heritage of the Nivkhi. A Nivkhi settlement was located on the shore of the Sea of Okhotsk in the Nyivo Bay until the mid–20th century. Eventually all the residents were resettled in the nearby community of Nogliki. The bay shore remains a favourite location for Sakhalin indigenous peoples to practice their traditional crafts. Members of the Nivkhinka Club live there for long periods in the summer and autumn. They come with their children, grandchildren and great grandchildren. Fishing, hunting sea animals, harvesting wild plants, sewing traditional clothing and footwear – all these skills are passed on to future generations of the Nivkhi. One of the projects Sakhalin Energy finances to support traditional economic activities as part of the Development Plan is to establish a seasonal base for the Nivkhinka club at Nyivo Bay. This project involves buying boat motors and power generators and improving living conditions.

2009 Sustainable Development Report 77 2010 PLAN

In 2010, Sakhalin Energy's major Large–scale construction required policy of open and efficient dialogue operating tasks will be to complete to ensure efficiency of the Project with stakeholders. Sakhalin Energy the transition of the commissioned and to transfer facilities to full–scale expects to become a global leader in facilities from trial operation mode operations is over. In 2010 the these areas by maintaining to full–scale operations and to reach Company will complete construction compliance to the highest the scheduled performance level. and commission its BS 2. BS 2 will international standards or even The LNG plant, the Piltun area of enable additional gas volumes to be setting new standards. the Piltun–Astokhskoye field and the transferred through the pipeline, The Company expects to Lunskoye field are scheduled to reach thus boosting the LNG output. complete its HR motivation survey in their design capacity. The Astokh As agreed, shortly Sakhalin Energy 2010, and based on its findings, will area reached its design capacity to will pay royalty in the form of gas; it take measures to improve the producing hydrocarbons in 2009. will also transfer entitlement gas of efficiency of its HR management, An important task to be the Russian party under the PSA. To including improving procedures and performed at the final stage of the deliver the gas to Gazprom, which guidelines. Later in the year, the facilities commissioning is to fine– was appointed by the government to Company plans to implement its tune all the systems and equipment sell the Russian share in royalties and corporate pension programme that and to ensure complete entitlement gas, the Company has to was frequently discussed by synchronization of the complex build two gas transfer terminals. Company personnel. infrastructure deployed by Sakhalin Construction of the southern gas We also plan in 2010 to broaden Energy. By completing this task, the transfer terminal near Troitskoye anti–bribery and corruption efforts Company will ensure reliable and village has already started. Sakhalin and enforce the ‘Anti–Bribery and efficient operation of all production Energy expects major construction Corruption Procedure’ that was processes. work to be completed by the end of developed in accordance with our The drilling programme to be 2010 to commission the gas transfer business principles and Code of carried out at the PA–B and LUN–A terminal in 2011 and to start gas Conduct. platforms is another Company supplies to the Yuzhno–Sakhalinsk In social investment and priority. At the Piltun area, the thermal power plant. Construction of sustainable development, we will Company will proceed with water the northern gas transfer terminal continue giving top priority to social injection to sustain formation near Boatasino settlement will be partnerships and socially–oriented pressure. coordinated with Gazprom plans. The initiatives. The Company will The Company will embark on a northern gas transfer terminal will proceed with its partnerships, such large–scale upgrading programme in transfer gas to the Sakhalin– as the Sakhalin Salmon Initiative, 2010 for the Molikpaq platform Khabarovsk–Vladivostok pipeline What to Do in Emergency (PA–A), which has been under the Russian Far East gas Situations, and grant programmes operating for 10 years. The supply programme. within the allocated funds. programme will enable the Company The Company intends to continue The Company will also finalise its to build new wells from its first with its environmental initiatives in second Sakhalin Indigenous platform. A 4D seismic survey has 2010 and remains committed to Minorities Development Plan been scheduled at the Astokh area socially responsible practices. The (SIMDP–2) in 2010, for the period to determine the area’s current Company will also continue to be 2011 to 2015. As part of this effort status after 10 years of operation, responsible for its HSE and social and in line with best international to plan new wells and eventually to commitments and standards, as well practices, a working group will be improve oil recovery. as the transparency principle and the formed where the majority will be

78 2009 Sustainable Development Report representatives of Sakhalin Throughout 2010 and 2011, the In summary, we will continue to indigenous minorities, and two Company will continue its perform scheduled operational and rounds of large–scale and intensive participation in the UN international financial activities in accordance consultations with all indigenous initiative testing of the Ruggie's with our business principles and communities will be held. The principles, setting new standards for Sustainable Development Policy, the SIMDP–2 will be developed and grievance management in business. principles of UN Global Compact that discussed within the framework of The test results of the project will be we joined in November 2009, and to the World Bank Operational Directive used in developing recommendations make efforts for further 4.20 Indigenous Peoples. for the global business community. development in this area.

EXTERNAL REVIEW OF THE REPORT

This Sustainable Development interest to the public. This feedback will be presented to stakeholders in a Report has been developed in represents the initial stage of our timely manner. dialogue with Company stakeholders. external review. The primary focus of our external After two rounds of dialogue with Within three months after review is on the substance and stakeholders during development of publication, the report will go through comprehensiveness of the Company the report the Company decided to a process of external verification, a performance information in the non– include answers and commitments public review of corporate reports financial report,according to the for 2010 and beyond, and in the done at the highest professional level principles of best and accountable 2009 report add core issues of in the Russian Federation. The results business practices.

2009 Sustainable Development Report 79 LIST OF ACRONYMS

AA1000SES International Stakeholder Engagement Standard АА1000 ALARP As Low As Reasonably Practicable APR Asian–Pacific Region BAP Biodiversity Action Plan BS2 Booster Station 2 CEO Chief Executive Officer CEO Chief Executive Officer CSR Corporate Social Responsibility EHSIA Environmental, Health, and Social Impact Assessment EMERCOM Ministry for Civil Defence, Emergencies and Disaster Response ERC Emergency Response Committee GRI Global Reporting Initiative GTT Gazprom Transgaz Tomsk HSE Health, Safety, Environment IFC International Finance Corporation IMO International Maritime Organisation INPO Independent Non–Profit Organisation IP Sakhalin Indigenous Minorities of the North or Indigenous Peoples ISO International Organisation for Standardisation IUCN International Union for Conservation of Nature and Natural Resources IVMS In–Vehicle Monitoring System LNG Liquefied natural gas LUN–A LUN–A (Lunskoye) platform MHMS Minimum Health Management Standards MNR Ministry of Natural Resources MPC Maximum Permissible Concentration MPE Maximum Permissible Emission OET Oil Export Terminal OPF Onshore Processing Facility OSR Oil Spill Response PA–A Molikpaq (Piltun–A) platform PA–B Piltun–B platform PMD Pipeline Maintenance Depot Prisco Primorsk Shipping Corporation PSA Production Sharing Agreement RAS Russian Academy of Sciences RTI Road Traffic Incident SIEC&LM System for Industrial Environmental Control and Local Monitoring SIMDP Sakhalin Indigenous Minorities Development Plan SP Social Performance SSI Sakhalin Salmon Initiative TEO Feasibility Study (Technical and Economic Substantiation) TLU Tanker Loading Unit UN United Nations WWF World Wildlife Fund

80 2009 Sustainable Development Report APPENDIX 1: GRI STANDARD DISCLOSURES (VERSION 3.0)

Aspect Index Report clause Page Disclosure Comments and references GRI to other sources

1. STRATEGY AND ANALYSIS

Introduction from the Statement from the CEO 1.1 5-7 + Chief Executive Officer

Introduction from the Chief Description of key impacts, risks and 5-7 1.2 Executive Officer + opportunities 12-14 Introduction

A description of the significant impacts Introduction from the Chief 5-7 the organisation has on sustainability, 1.2 Executive Officer + 12-14 and associated challenges and opportunities Introduction

Introduction from the Chief An explanation of the approach to prioritizing 5-7 1.2 Executive Officer + these challenges and opportunities 12-14 Introduction

Key conclusions about progress in addressing Introduction from the Chief 5-7 these topics and related performance 1.2 Executive Officer + 12-14 in the reporting period Introduction

A description of the main processes in place Introduction from the Chief 5-7 to address performance and/or relevant 1.2 Executive Officer + 12-14 changes Introduction

A description of the most important risks Introduction from the Chief 5-7 and opportunities for the organisation arising 1.2 Executive Officer + 12-14 from sustainability trends Introduction

Prioritization of key sustainability topics as Introduction from the Chief risks and opportunities according to their 5-7 1.2 Executive Officer + relevance for long–term organisational 12-14 Introduction strategy

Table(s) summarizing: Targets, performance Introduction from the Chief 5-7 against targets, and lessons learned for the 1.2 Executive Officer + 12-14 current reporting period Introduction

Introduction from the Chief Outlook on the organisation’s main challenges 5-7 Executive Officer and targets for the next year and goals 1.2 12-14 + Introduction. for the coming 3–5 years 78 2010 plans

Concise description of governance Managing non-financial risks mechanisms in place to specifically manage in health, safety, these risks and opportunities, 1.2 44-46 + environment and social and identification of other related risks issues and opportunities

2009 Sustainable Development Report 81 Aspect Index Report clause Page Disclosure Comments and references GRI to other sources

2. ORGANISATIONAL PROFILE

Name of the organisation 2.1 About Sakhalin Energy 16 +

Primary brands, products, and/or 2.2 About Sakhalin-2 18-19 + services

Operational structure of the organisation, including main divisions, operating companies, 2.3 Management structure 17 + subsidiaries, and joint ventures

Location of headquarters 2.4 Management structure 17 +

Number of countries where the organisation operates, and names of countries with either major operations or that are specifically 2.5 About Sakhalin-2 18-19 + relevant to the sustainability issues covered in the report

Nature of ownership and legal form 2.6 Management structure 17 +

About Sakhalin-2 Project Markets served (including geographic Implementing plans to 18 breakdown, sectors served, and types of 2.7 + produce and export 35-36 customers/beneficiaries) hydrocarbons

Social and economic benefits Scale of the reporting organisation (number of Sakhalin-2 Project for the of employees, net sales, total capitalization, Russian Federation and quantity of products or services provided, Sakhalin oblast total assets, beneficial ownership (including Main production and 27-37 identity and percentage of ownership of business achievements, 35-37 largest shareholders, breakdowns by 2.8 + Human resources 63-64 country/region sales/revenues that make up 5 management and 70-71 percent or more of total revenues; Costs by development, countries/regions that make up 5 percent or Social investment and more of total revenues; and number of contribution to regional employees) sustainable development

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Significant changes during the reporting No significant changes in scope, period regarding size, structure, or 2.9 + structure and ownership in 2009 ownership

About Sakhalin-2 Project, Essential completion and 20 status of facilities, 30 Approaches to HR Awards received in the reporting period 2.10 32 + Management and HR Policy, 62 Social investment and 70-77 contribution to regional sustainable development

3. REPORT PARAMETERS

REPORT PROFILE

Reporting period for information provided 3.1 About the report 8 +

Date of most recent previous report 3.2 Introduction 13-14 + (if any)

Reporting cycle 3.3 + Annual

Contact point for questions regarding the 3.4 About the report 8 + report or its contents

REPORT SCOPE AND BOUNDARY

Definition of report Process for defining report content 3.5 8-10 + contents

Definition of report Boundary of the report 3.6 11 + boundaries

Definition of report State any specific limitations on the scope or contents, 3.7 8-11 + boundary of the report Definition of report boundaries

Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced Definition of report operations, and other entities that can 3.8 11 + boundaries significantly affect comparability from period to period and/or between organisations

Data measurement techniques and the bases of calculations, including assumptions and Definition of report techniques underlying estimations applied to 3.9 contents, 10-11 + the compilation of the indicators and other Report Quality Assurance information in the report

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Explanation of the effect of any This report is the first one re–statements of information provided in 3.10 – prepared in accordance with GRI earlier reports, and the reasons for such standards re–statement

Significant changes from previous reporting This report is the first one periods in the scope, boundary, or 3.11 – prepared in accordance with GRI measurement methods applied in the report standards

GRI CONTENT INDEX

Table identifying the location of the Standard GRI standard disclosures 3.12 81-92 + Disclosures in the report (version 3.0)

ASSURANCE

Policy and current practice with regard to 3.13 External review of the report 79 + seeking external assurance for the report

4. GOVERNANCE, COMMITMENTS, AND ENGAGEMENT

GOVERNANCE

Governance structure of the organisation, including committees under the highest governance body responsible for specific 4.1 Management structure 16-17 + tasks, such as setting strategy or organisational oversight

Indicate whether the Chair of the highest governance body is also an executive officer The Chair of the highest (and, if so, their function within the 4.2 + governance body is not an management of the organisation and the executive officer reasons for this arrangement)

For organisations that have a unitary board structure, state the number of members of 4.3 Management structure 16 + the highest governance body that are independent and/or non–executive members

Company’s mission, core Mechanisms for shareholders and employees values and business to provide recommendations or direction to 4.4 19-22 + principles. the highest governance body Corporate culture

Linkage between compensation for members of There is a unified compensation the highest governance body, senior system acting in the Company managers, and executives (including departure 4.5 + based on performance evaluation arrangements), and the organisation’s (including social environmental performance (including social and performance) environmental performance)

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Avoiding any conflict of interests Company’s mission, Processes in place for the highest with regulative core values and business governance body to ensure conflicts of 4.6 19-22 + authorities/committees have been principles. interest are avoided stipulated in the shareholders Corporate culture agreement

Process for determining the qualifications and expertise of the members of the highest One single system of competence governance body for guiding the 4.7 + evaluation acting in the Company organisation’s strategy on economic, environmental and social topics

Internally developed statements of mission or values, codes of conduct, and principles Company’s mission, relevant to economic, environmental, and 4.8 core values and business 19-21 + social performance and the status of their principles implementation

Procedures of the highest governance body for overseeing the organisation’s identification and management of economic, Company’s mission, environmental, and social performance, 4.9 core values and business 21 + including relevant risks and opportunities, and principles adherence or compliance with internationally agreed standards, codes of conduct and principles

Performance evaluation by the highest governance body takes into Processes for evaluating the highest consideration economic, governance body’s own performance, 4.10 + environmental, and social particularly with respect to economic, performance achieved against the environmental and social performance planned performance indicators (on issues management)

COMMITMENTS TO EXTERNAL INITIATIVES

Explanation of whether and how the Hazards and risk precautionary approach or principle is 4.11 45 + management addressed by the organisation

In November 2006 the Company joined Global Agreement of UN. The Company complies with Externally developed economic, environmental international environmental, safety and social charters, principles, or other Introduction from and labour protection, and social 4.12 6 + initiatives to which the organisation the Chief Executive Officer standards. subscribes or endorses These standards have been captured in HSESAP which is publicly available and put on the Company’s public website

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Memberships in associations (such as industry associations) and/or The Company is a member of national/international advocacy organisations 4.13 + Russian network of the Global in which the organisation has positions in Compact of UN governance bodies

STAKEHOLDER ENGAGEMENT

Definition of report contents, List of stakeholder groups engaged by the 9 4.14 Stakeholder engagement + organisation 38 strategy and principles

Basis for identification and selection of Stakeholder engagement 4.15 38 + stakeholders with whom to engage strategy and principles

Approaches to stakeholder engagement, Stakeholder engagement including frequency of engagement by type 4.16 38 + strategy and principles and by stakeholder group

Appendix 2 Sakhalin Energy Key topics and concerns that have been answers and commitments The detailed annual report on raised through stakeholder engagement, and as part of the dialogue with public consultations and issues how the organisation has responded to those 4.17 93-103 + stakeholders while manraised agement is available on key topics and concerns, including through its development of the 2009 the Company’s web site reporting social development report

5. MANAGEMENT APPROACH AND PERFORMANCE INDICATORS

ECONOMIC

Disclosure on management approach About Sakhalin Energy 16-21 +

ASPECT: ECONOMIC PERFORMANCE

Social and economic benefits Direct economic value generated and of Sakhalin-2 Project for the distributed, including revenues, operating Russian Federation and costs, employee compensation, donations and 24-25 EC1 Sakhalin Oblast, + other community investments, retained 70-77 Social investment and earnings, and payments to capital providers contribution to regional and governments sustainable development

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Final decision on corporate pension Coverage of the organisation’s defined benefit programme is expected in 2010, EC3 – plan obligations this question was asked by Company’s staff

The Company did not get any Significant financial assistance received from EC4 + financial support from the State government in 2009

ASPECT: MARKET PRESENCE

Procedures for local hiring and proportion of General, senior management hired from the local 62-63 EC7 HR training + community at locations of significant 68-69 and development operation

ASPECT: INDIRECT ECONOMIC IMPACTS

Social and economic benefits of Sakhalin-2 Development and impact of infrastructure Project for the investments and services provided primarily Russian Federation 23-26 EC8 + for public benefit through commercial, in kind, and Sakhalin Oblast. 70-77 or pro bono engagement Social investment and contribution to regional sustainable development

Social and economic Understanding and describing significant benefits of Sakhalin-2 indirect economic impacts, including the EC9 Project for the Russian 23-26 + extent of impacts Federation and Sakhalin Oblast

ENVIRONMENTAL

Policy Goals and performance 48 Disclosure on management approach Biodiversity 50-61 + Training and awareness 61 Monitoring and follow–up

ASPECT: WATER

Industrial environmental Total water withdrawal by source EN8 49-50 + monitoring

Water sources significantly affected by Industrial environmental No water sources significantly EN9 49-50 + withdrawal of water monitoring affected by withdrawal of water

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ASPECT: BIODIVERSITY

Description of significant impacts of activities, products, and services on biodiversity in EN12 Biodiversity 50-61 + protected areas and areas of high biodiversity value outside protected areas

Habitats protected or restored EN13 Biodiversity 50-61 +

Strategies, current actions, and future plans EN14 Biodiversity 50-61 + for managing impacts on biodiversity

ASPECT: EMISSIONS, EFFLUENTS AND WASTE

NO , SO , and other significant air emissions X X EN20 Waste management 50 + by type and weight

Total water discharge by quality and EN21 Waste management 49-50 + destination

Total weight of waste by type and disposal EN22 Waste management 49-50 + method

ASPECT: PRODUCTS AND SERVICES

Initiatives to mitigate environmental impacts of products and services, and extent of EN26 Biodiversity 47-61 + impact mitigation

Percentage of products sold and their This indicator is not applicable packaging materials that are reclaimed by EN27 – for the Company considering category its scope of activities

SOCIAL

LABOUR PRACTICES AND DECENT WORK

Approaches to HR Disclosure on management approach 62 + management and HR policy

ASPECT: EMPLOYMENT

Total workforce by employment type, LA1 General 62-63 + employment contract, and region

Total number and rate of employee turnover + Information on staff flow LA2 General 62-63 by age group, gender, and region - is included in the report

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ASPECT: LABOUR AND MANAGEMENT RELATIONS

Percentage of employees covered by There are no collective LA4 + collective bargaining agreements agreements.

Minimum notice period(s) regarding In accordance with Russian labour operational changes, including whether it is LA5 + code (not less than 2 months) specified in collective agreements

ASPECT: OCCUPATIONAL HEALTH AND SAFETY

Rates of injury, occupational diseases, lost Labour safety days, and absenteeism, and number of LA7 63-64 + and protection work–related fatalities by region

Education, training, counseling, prevention, and risk–control programmes in place to Protecting the health assist workforce members, their families, or LA8 65 + of personnel community members regarding serious diseases

Health and safety topics covered in formal LA9 + No agreements with trade unions. agreements with trade unions

ASPECT: TRAINING AND EDUCATION

Average hours of training per year per HR training + The information on employees LA10 68 employee, by employee category and development – trained is included in the report.

Programmes for skills management and lifelong learning that support the continued HR training LA11 68-69 + employability of employees and assist them in and development managing the end of their career

Percentage of employees receiving regular LA12 + 100% performance and career development reviews

ASPECT: DIVERSITY AND EQUAL OPPORTUNITY

As of the end of 2009, the Company employed 982 Sakhalin residents, 141 of whom held executive positions. The percentage of Russian nationals in the Company's personnel is expected to reach 90 per cent over Composition of governance bodies and the next few years. As regards breakdown of employees per category executive positions, 264 of them (or according to gender, age group, minority LA13 + 64 per cent) were held by Russian group membership, and other indicators of citizens in 2009; 67 executives being diversity women. By 2018, the percentage of Russian executives is expected to hit the 75 per cent level. In 2009, the average age of the Company's employees was 36 years. People below 35 years of age account for two–thirds of the Company's payroll.

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Ratio of basic salary of men to women by Basic salaries of man and women LA14 + employee category do not differ

HUMAN RIGHTS

Company mission, core values and business 19-22 Disclosure on management approach principles. + 41 Community grievance procedure

ASPECT: INVESTMENT AND PROCUREMENT PRACTICES

Total hours of employee training on policies 100 % of employees are trained and procedures concerning aspects of human + HR3 on business principles of the rights that are relevant to operations, – Company including the percentage of employees trained

ASPECT: NON–DISCRIMINATION

No registered cases of Total number of incidents of discrimination HR4 + discrimination during the and actions taken reporting period.

ASPECT: FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING

No operations identified in which Operations identified in which the right to the right to exercise freedom of exercise freedom of association and collective HR5 + association and collective bargaining may be at significant risk, and bargaining may be at significant actions taken to support these rights risk

ASPECT: CHILD LABOUR

Operations identified as having significant risk for incidents of child labour, and measures No operations identified involving HR6 + taken to contribute to the elimination of child child labour labour

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ASPECT: FORCED AND COMPULSORY LABOUR

Operations identified as having significant risk for incidents of forced or compulsory labour, No operations identified involving HR7 + and measures to contribute to the elimination forced or compulsory labour of forced or compulsory labour

ASPECT: INDIGENOUS RIGHTS

Total number of incidents of violations No registered cases of violation of involving rights of indigenous people and HR9 + rights of indigenous people and actions taken actions taken

SOCIETY

Stakeholder engagement strategy and principles Company principles and 38 Disclosure on management approach + approaches to social 70 investment and sustainable development

ASPECT: COMMUNITY

Nature, scope, and effectiveness of any programmes and practices that assess and Social investment And manage the impacts of operations on SO1 contribution to regional 70-77 + communities, including entering, operating sustainable development and exiting

ASPECT: CORRUPTION

Prevention of corruption is one of the basic components of Company’s Code of Conduct. For 2010 we plan to reinforce preventive measures against Percentage of employees trained in the bribery and corruption and will organisation’s anti–corruption policies and SO3 + adopt the Anti–bribery and procedures Corruption Procedure in Sakhalin Energy which has been developed in accordance with our General Business Principles and Code of Conduct

2009 Sustainable Development Report 91 Aspect Index Report clause Page Disclosure Comments and references GRI to other sources

Prevention of corruption is one of the basic components of Company’s Code of Conduct. For 2010 we plan to reinforce preventive measures against Actions taken in response to incidents of bribery and corruption and will SO4 + corruption adopt the Anti–bribery and Corruption Procedure in Sakhalin Energy which has been developed in accordance with our General Business Principles and Code of Conduct

ASPECT: PUBLIC POLICY

Total value of financial and in–kind No registered cases. contributions to political parties, politicians, SO6 + The Company does not support and related institutions by country any political parties

PRODUCT RESPONSIBILITY

Company mission, Disclosure on management approach core values and business 20 + principles

ASPECT: CUSTOMER HEALTH AND SAFETY

Life cycle stages in which health and safety Impact on health and safety of impacts of products and services are production and services are assessed for improvement, and percentage of PR1 + evaluated according to Russian significant products and services categories legislation requirements applied in subject to such procedures the Company

92 2009 Sustainable Development Report APPENDIX 2: SAKHALIN ENERGY’S ANSWERS AND COMMITMENTS AS PART OF ITS DIALOGUE WITH STAKEHOLDERS FOR DEVELOPMENT OF THE 2009 SUSTAINABLE DEVELOPMENT REPORT

While developing the 2009 non– In addition to this first round of placed in the left–hand side, in the financial report, the Company the dialogue, the Company met with order in which they were raised at conducted two rounds of dialogue representatives of international the meetings. The answers to the with stakeholders. The dialogues environmental NGOs in December questions are placed on the right– were done in accordance with the 2009, during the Western Gray hand side. The answers include both Company’s principles and Whales Advisory Panel in Geneva. those provided at the first round of international standards. In April 2010, the Company held dialogue in November 2009 and In November 2009, the Company the second round of the dialogue with later, for those questions requiring held the first round of dialogue with stakeholders, aimed at providing additional study. stakeholders aimed at listening and answers to the questions and The answers were provided by listing all their expectations and suggestions voiced during the first relevant specialists of the Company. recommendations in the report. round of dialogue. The Company’s The text is just a summary of the The participants of this dialogue commitments and answers to the Company’s position related to the were the representatives of local questions were distributed beforehand question or issue. Detailed and regional NGOs including those to the participants of the dialogue. information can be obtained from with a social or environmental The table that lists the questions this report or from other public focus, the indigenous peoples of raised at these meetings, along with sources, such as Sakhalin Energy’s Sakhalin, officials, and many other the Company’s answers to them, is website, and documents available in groups. provided below. The questions are the public domain.

2009 Sustainable Development Report 93 No. Comment, question or pointed remark Company reply

Yury Ivanovich Andreev, Deputy Chairman of the Regional Council of Veterans

‘For whom is the report intended? Is the report intended for Clarification on the report audience is included in the report 1 internal use?’ (see Section Introduction from the Chief Executive Officer).

The report will go through a professional certification process of an authorised and 2 ‘Who will assess the report?’ qualified specialist organisation, which will provide an independent assessment (see Section External review of the report).

3 ‘Is the report mandatory?’ The report is not mandatory, it is a voluntary initiative of the Company.

Alla Ivanovna Gafner, Chairman of Stroitel gardening community council

The environmental impact of the Prigorodnoye Production Complex is limited by the size of the sanitary protection zone (SPZ) set for this industrial facility in accordance with the RF legislation. According to Item 2.14 of SanPiN 2.2.1/2.1.1 1200–03 Sanitary protection zones and sanitary classification of enterprises, erections and other facilities, ‘Gardening land plots are located 1 km from the LNG plant. the SPZ width for facilities not included in the sanitary classification as well as I have been in contact with the Company for six years, asking comprising new technologies which have no domestic analogues is set for each for resettlement. Forty senior citizens live in this area. particular case, based on the decision of the RF Chief Medical Officer or his deputy. For the LNG plant and the oil export terminal (hereafter ‘the OET’) in the Prigorodnoye ‘We are concerned about the way LNG plant impacts Port, S.I. Ivanov, the Deputy Chief State Medical Officer of Russia, set the SPZ size as vegetation. We are too close to the plant and our plants and 1,000 m from emission sources (letter dated 16 July 2002). soil are covered with hazardous stuff. The SPZ size data (3,500 m) was given as an expert opinion regarding a possible ‘I consulted with a Rospotrebnadzor specialist and received a 4 variant. Due to that, this value cannot be taken as the approved SPZ size. confirmation that Sakhalin Energy had created a sanitary protection zone. In 2000, a sanitary protection zone of size The legitimacy of taking 1,000 m as the SPZ size for the LNG plant/the OET has been 1 km was set by the Chief Medical Officer of Russia. After checked many times by the office of the Sakhalin inter–district Prosecutor’s Office for that, the TEO project was carried out, in 2003, according to Environmental Protection. No violations of existing legislation have been observed. the TEO, the zone was 3.5 km wide. But now Sakhalin Energy It should be noted that in 2009, based on the instruction of the Federal Supervision refers to the fact that the Chief Medical Officer of Russia had Agency for Customer Protection and Human Welfare (Rospotrebnadzor), the Research set the zone with a size of 1 km.’ and Development Institute named after Sysin, which is a State Enterprise, performed a hygienic assessment of the materials in the Inventory Report and the Draft MAE Limits for the Atmospheric Air Emission Sources of the LNG Plant /the OET in the Prigorodnoye Port, Korsakov District, and Sakhalin Oblast. and reissued expert conclusion No. 5. EKZ 2/09, of 14 January 2009, that confirmed the calculated SPZ set at 1,000 m in 2002.

94 2009 Sustainable Development Report No. Comment, question or Company reply pointed remark

The compensation package was set out by the Company in 2006 and endorsed in 2006/2007 in the course of consultations with the members of Stroitel non–commercial gardening community. A professionally licensed appraiser participated in the elaboration of the compensation package to determine the market price of plots of land. The results of the appraiser’s work were not disputed by the stakeholders in the course of creating the compensation package. The assessment was carried out in accordance with the size and nature of particular land plots, and in accordance with appraisal standards and the requirements of existing legislation. As a result of the independent assessment, the average market price of a site in the Stroitel non–commercial gardening community in 2006 was 212,569 rubles. In 2005, the sociological laboratory of the Sakhalin State University performed a study, Assessment of the Parameters of Potential Loss of Value ‘The Company offered a compensation for Gardening Land Plots in Stroitel Non–Commercial Gardening Community in the Prigorodnoye, Korsakov package of 100,000 rubles, but it is District, due to Construction of the LNG Plant. Within the framework of this study, a price comparison 5 impossible to buy a land plot with this between land plots in the Korsakov (Pervaya Pad, Vtoraya Pad, Tretiya Pad, Nechaevka and Prigorodnoye) money. The current prices for the land and Aniva Districts was carried out. According to the study results, the price of land plots in the Korsakov plots are 700,000 to 800,000 rubles.’ District in the period of 2003/2005 was 54,109 rubles (maximum price – 125,120 rubles, minimum price – 6,000 rubles). So the amount of compensation offered by the Company was sufficient for purchasing similar land plots in the Korsakov District [Korsakov City District] in the period when the compensation package was offered. According to the Company information, those who wished purchased similar land plots (moreover, some of them had better characteristics), including in the Vtoraya Pad.

In summary, we believe that at present the Company has fulfilled and continues to fulfill all its responsibilities to the Stroitel non–commercial gardening community. There is no legal justification for resettlement of the community’s members. The Company plans to continue engaging with the community within the framework of effective Russian legislation.

At the request of the owners of the gardening land plots, since 2005 the Company has been continually monitoring the ambient air quality and noise level on the territory of the Stroitel non–commercial gardening community during the summer season from May to October. During the observational period, not a single case of pollutant levels exceeding the maximum permissible concentration was registered in the air or concerning noise level. Monitoring is performed by a licensed organisation, Gydromet, according to the RF– stated rules and standards.

Studies of soils, agricultural and gardening production performed by the Company in 2006/2007 by the Sakhalin Research and Development Institute for Agriculture did not reveal any impact on the crops or soil ‘The Company performs air and noise or any deviations from the specified standards. Therefore, arguments concerning the negative impact of monitoring, but doesn’t use expensive emissions generated by the activities of Prigorodnoye Production Complex, used by the members of 6 chemicals which could reveal negative Stroitel non–commercial gardening community, are of a subjective character and are not confirmed by the environmental impact factors (nitrogen results of ambient air quality and noise monitoring. dioxide, benzopyrene, formaldehydes, etc.)’ Carrying out an inventory of emission sources and developing a MAE (maximal allowable emissions) volume include identifying a list of substances which may be present in the output of the facility. The emission volume of all identified substances is controlled according to calculations for compliance with the standards approved by the Sakhalin branch of the Federal Environmental, Engineering and Atomic Supervision Service. The preparation of the programme for monitoring the emissions impact on the ambient atmospheric air quality considers those substances that contribute most of all to pollution together with carcinogenic substances. All calculations and assessments for identifying the list of substances present in the plant’s emissions are carried out in accordance with the existing regulatory documents and method recommendations.

2009 Sustainable Development Report 95 No. Comment, question or pointed remark Company reply

The Company offered to invest US$ 50,000 in the target social investment ‘The Company invested US$ 50,000 towards equipping the co– programme, which should have been aimed at improving the co–operative operative with necessary facilities. But the land owners refused, 7 infrastructure, in accordance with the recommendations by members. That since they think that they need resettling rather than modernisation proposal was not supported by the co–operative’s members. Concerning of their co–operative.’ justification for re–settling, see the Company answer above, question No. 5.

Vladimir Ivanovich Vorontsov, Chairman of the Committee for Economic Development, Sakhalin Oblast Duma

‘This meeting is a good example of communication between business, authorities and society.

‘Sakhalin-1 and Sakhalin-2 Projects as well as further offshore development are important for the region. These projects will Information about the Sakhalin-2 Project significance and advantages is included contribute to the development of the economy, budgetary recharge, in the report (see Section Social and economic benefits of Sakhalin-2 project for and the development of infrastructure, community, young people and 8 the Russian Federation and Sakhalin Oblast). In addition, the report covers business. activities aimed at environmental protection and ecological monitoring (see ‘However, the society is concerned with the state of the Section Environment protection, ecological and industrial safety). environment, we appreciate that the Company takes steps to mitigate its environmental impact: pipeline route change, compensation for damages, investing funds in ecological activities, and so on.’

9 ‘I suggest that the audience of such meetings should be increased.’ This will be taken into account during the preparation of the 2010 Company report.

‘I suggest that the format created within the Company together with The Company will continue its commitment regarding environmental safety and 10 its attention to environmental problems should be continued in the will adhere to the accepted standards of environmental protection and other future.’ issues. This is supported by all shareholders of the Company.

The Company is implementing several programmes aimed at developing and ‘It is necessary to pay more attention to the training of local training local specialists. They include: an educational grant programme, 11 specialists and to supporting our university, to establish a good, solid internship programme, and the founding and supporting of a Chair of Sustainable oil and gas faculty in collaboration with other operators.’ Development at Sakhalin State University, and others. Information on this area of activities is included in the report (see Section HR training and development).

Aleksander Vladimirovich Romanov, First Deputy Minister of Natural Resources and Environmental Protection of Sakhalin Oblast/Head of Subsoil Use Administration

Information on the Project significance and advantages are included in the report (see Section Social and economic benefits of Sakhalin-2 project for the Russian ‘The Sakhalin Oblast Administration has a high opinion of the socio- Federation and Sakhalin Oblast). economic achievements and initiatives of the Company. Fulfilment of the requirements for Russian Content is a necessary condition, ‘I suggest including in the report the following information: Russian according to the Production Sharing Agreement, and a priority for Sakhalin Content, attracting Russian and, primarily Sakhalin-based companies Energy. Information on Russian Content and the relevant strategy is included in 12 to work on the Project, training workshops carried out by the the report (see Section Russian content). Company with the participation of Russian companies. Information about the training workshops for Russian companies together with ‘I also suggest that you include in the report individual cases of examples of the participation of Sakhalin enterprises are included in the report (see Sakhalin companies created from scratch, which then developed and Section Russian content). In addition, information on the workshops and examples of have now become leading companies.’ the participation of Russian (including Sakhalin-based) companies in the Project are available on the Company public web site.

96 2009 Sustainable Development Report No. Comment, question or pointed remark Company reply

‘I suggest including in the report information on educational activities, information on the Company’s training of its personnel, how many people have been trained, including courses for technicians. It would be Personnel training is a priority area for development. Information about the interesting to know which areas you intend to tackle in the future training of personnel, with statistics, and planned areas of development are 13 according to your plans. I also suggest you covering personnel training included in the report (this includes the training of specialists and combined work in collaboration with other operators; it is necessary to talk about efforts with shareholders) (see Section HR development and training). the activities of the main shareholder in this area, which uses the resources of its educational institutions.’

Natalya Mikhailovna Trefilova, Head of the Representative Office of the Kidsave International, Yuzhno-Sakhalinsk

Information has not been included in the report, since the Company didn't ‘I would like to thank the Sustainable Development Fund, since without it collaborate with Kidsave on the projects realised by it in the reporting Kidsave could not exist. It’s a pity that the presentation [during the period (2009 report). Nevertheless, the Company appreciates such a 14 meeting] did not include information on the work carried out on the response, it is proud that its participation within the framework of the adoption of orphans by families; a great deal of money has been spent Sustainable Development Fund has contributed towards the establishment on that.’ and sustainable development of the significant social activities of this organisation.

Since 2007, the Company has been realising a programme to support the ‘The activities of the Company management in the field of social projects charitable initiatives of its employees. This programme anticipates co- are remarkable. I suggest that the Company administration should think 15 investment in charitable activities organised by employees. about supporting Company employees who volunteer in charitable activities.’ Information on the programme is included in the report (see Section Programme to support volunteer employees charitable initiatives).

According to Company procedures, each potential contractor should ‘During contracts awarding, it is necessary to track the social activities demonstrate high standards in the areas of health, environment and safety, 16 of the bidders, potential contractors. That is, to take into account the thus demonstrating its social responsibility in carrying out its business level of social activity of the company when signing contracts.’ activities.

‘A differential approach to non–commercial organisations (NCOs). According to our information, the Company works with 10 NCOs. The Non–commercial organisations function as partners and initiators of the interests of NCOs should be taken into account in making results more greater part of social projects budgeted by the Company. effective. For example, the Programme ‘Small Grants – Big Deeds’. The Budgeting for the implementation of social projects that have passed the money within this programme must not be assigned to administrative bid selection is carried out within the framework of the programme ‘Small needs or personnel. But we are a fully non–commercial organisation, Grants – Big Deeds’. This programme does not provide for the possibility of while there are some who partially perform commercial activities and can compensation for the wage expenditures of the participants. This principle at least pay salaries to their personnel. As for us, we need to find 17 will be kept, since the concept of such programmes excludes the mentioned another job to continue our work on the project during our free time and possibility. at weekends. It is necessary to consider the possibility of diversifying the invested funds; for example, it could be not simply a grant, but a However, budgeting for a part of the expenditures on wages of the compensation of some fixed sum. It might be for expenditures on the programme participants may be included in the major long–term partnership salaries and wages of specialists. Recommendations could be written programmes implemented by the Company or handed over for external or down in the provision for awarding grants, so that the applicant will have combined administration, such as for the Sakhalin Salmon Initiative, and the the possibility of gaining a certain share from the Project, in order to Sakhalin Indigenous Minorities Development Plan. assign it to administrative needs (wages).’

2009 Sustainable Development Report 97 No. Comment, question or pointed remark Company reply

‘We would like to thank you for the simple and convenient 18 method of applying for these grants as well as for the simple The Company appreciates this opinion. and convenient reporting mechanism.’

Yuri Ivanovich Andreev, Deputy Chairman of the Regional Council of Veterans

‘I would like to support this proposal. i.e. the possibility of 19 assigning a share of the grant to the wages of those who will The Company’s answer see above, question 17. work on that grant.’

Natalia Aleksandrovna Lisitsyna, Vice Chairman of Sakhalin Environmental Watch RPO (regional public organisation) Council

‘I suppoprt the statement of A.I. Gafner on the Sanitary 20 Protection Zone, re–settlement and the compensation The Company’s answer see above, question 4. package value.’

Studies of soils and agricultural and gardening production carried out by the Company in 2006/2007 by the Sakhalin Research and Development Institute for Agriculture did not reveal any impact on crops or soil or any deviations from the specified standards. The studies were carried out once and will be continued only if deviations in air quality are ‘Why is vegetation monitoring not being carried out?. identified. Since 2005, the Company has been carrying out continual monitoring of the 21 Vegetation is sensitive to pollution. There is such a thing as ambient air quality in the area of the gardening non–commercial community ‘Stroitel’ ‘hygienic and ecological standards.’ during the summer season, from May to October. During the period of observations, not a single case of pollutant levels exceeding the maximum permissible concentration values was registered in the air or concerning noise level on the territory of the gardening non–commercial community ‘Stroitel.’

‘I suggest including in the report information on drilling wastes, The Company pays particular attention to waste management issues, including drilling 22 on their quantitative and qualitative ratio (what is discharged, wastes. Information on waste management is included in the report (see Section Waste what is transported).’ management).

‘Reinstatment along the pipeline’s route. You’ve mentioned that work on the elimination of problems related to cyclones Information on the elimination of problems related to cyclones in 2009 is included in the has been completed. We carried out our own checks from May report (see Section Restoring the onshore pipeline right of way). 23 to October, and the problems were still in place. The Watch Biological reinstatement along the pipeline’s route has been completed. Information on (Sakhalin Environment Watch) has a full list of problem sites. reinstatement and the relevant monitoring programme are included in the report Besides, biological reinstatement has not yet been carried out (see Sections Restoring the onshore pipeline right of way and Terrestrial ecosystems). everywhere, although the pipeline is already being operated.’

‘I suggest including in the report data on oil spills for the 24 Information on oil spills is included in the report (see Section Goals and performance). reporting period.’

‘How and why are the facilities operated, if a permit to The Company performs its activities according to RF regulatory standards, including operate has not been issued by Rostekhnadzor? You may say, 25 those related to the commissioning works and operation of facilities. Information on this of course, that commissioning works continue, but the fact is matter is included in the report (see Section Transfer to full operation). that the facility is being operated at full capacity.’

98 2009 Sustainable Development Report No. Comment, question or pointed remark Company reply

Lidia Nikolaevna Yevdokimova, Deputy Head of Korsakov Municipal District, Head of the Department for Social Development

‘In 2009, contributions to Korsakov’s budget were the Contributions to the budgets of different levels, related to the Company’s activities, are lowest. regulated by Russian legislation. The social investments volume is not connected with tax 26 ‘It is necessary to pay more attention to social payments, but is rather determined in communication with the Russian party and the investments in Korsakov town.’ Company's shareholders.

‘The proposal is to review the composition of the Korsakov Partnership Council for Sustainable Development for 2010 The Korsakov Partnership Council is at the stage of reorganisation. The proposal has been 27 in relation to changes in the composition of the Regional accepted. In 2010, the Council will resume its work in the new format. Assembly and the course of our life.’

Sergei Mikhailovich Pervukhin, Chairman of Piligrim Tourist Regional Club NGO

‘It is necessary to create an efficiency indicator system for the large social projects. Transparency of information A system of indicators for large projects has been developed and is being implemented by the on the large social projects is important. Where and how Company. In addition, the web site of the Sakhalin Salmon Initiative (SSI) presents data on 28 much money was directed, in order to see how effectively received funds and their use. The annual report on the breakdown of all expenditures is the money was spent and to understand the level of available for the public. The SSI Coordination Council controls SSI activities. This includes effectiveness of a particular project for the ecosystem of financial efficiency. Sakhalin.’

Lada Anatolievna Milchenko, Director of Rodnik Ecological Centre

‘I suggest including in the report information on the Information on the grant programme ‘Small Grants – Big Deeds’, project participants and results of projects within the framework of the the most interesting projects is available on the Company’s public web site. Information on 29 programme ‘Small Grants – Big Deeds)’. It would be the programme is included in the report (see Sections Competitive corporate crogramme interesting to know how successful the projects were, ‘Small grants – Big deeds’ and Educational grants programme). what were the most interesting projects.’

Elena Victorovna Raschupkina-Lopukhina, Head of Knowledge Is Power NGO

Sustainable development projects and other social investment projects are included in a ‘It is necessary to distinguish between social 30 common concept of the Company’s social responsibility. This principle is an integral responsibility and philanthropy.’ component of the Company’s business principles.

‘It is necessary to analyse where funds were invested and The reports and other information materials of the Company on the distribution of funds 31 their size. I guess that similar expenses could be reflected between social investment projects and sustainable development projects demonstrate a in many.’ clear distinction between the different groups of projects.

When implementing the sustainable development and social investment projects, the ‘It is necessary to analyse the failures and those aspects Company conducts an analysis of positive as well as negative experiences in the which need to be corrected. There were projects implementation of these projects. The results of the analysis will be taken into account in the [in Korsakov district], that did not prove worthwhile. future as well, in particular, during the project approval process and interaction with those 32 The causes of their failure should be analysed in order to organisations that implement them. avoid future mistakes. This question is not about money, In addition, in July 2009 an independent expert in corporate social responsibility conducted an but about the criteria used in approving projects, and who assessment of the Korsakov Partnership Council and the results of its work (projects) and will be responsible for the results.’ came to certain conclusions about its strengths and weaknesses. The expert also made recommendations on ways to improve and modernise the Council’s activity.

2009 Sustainable Development Report 99 No. Comment, question or pointed remark Company reply

‘What is the responsibility of those who make applications for The contracts signed between the Company and organisations implementing the 33 the grants (if they can't implement the project adequately, and Project include an obligation on returning money by these organisations that is not money is lost)? This aspect should be analysed and calculated.’ properly spent.

Construction of the LNG plant/the OET required the closure of the part of the beach in the Prigorodnoye port, which is a popular place of leisure for residents of the town of Korsakov and adjacent districts. Holiday–makers still use the rest of the beach for leisure purposes. As a compensation for the effect on the Prigorodnoye beach, the Company paid US$ 800,000 to the Korsakov District administration for reconstruction ‘Compensation payments for the beach zone in the of the local park. This alternative was selected after a series of consultations and Prigorodnoye port. The money is quite substantial – about one discussions with the administration and public of the town of Korsakov. An initiative million dollars. The decision was made to spend the money on a group was established for discussion of the alternatives and decision–making. Sakhalin 34 park development. The money has been spent, but there is no Energy has fulfilled its obligations. The park reconstruction process was completed in park. There is lighting equipment, there is asphalt, but there is accordance with the agreed responsibilities. Moreover, in December 2007, due to a no park.’ change in the US$/RUR exchange rate, Sakhalin Energy, on its own initiative, increased the sum from US$ 800,000 to US$ 930,000, which was appreciated by the local administration and the town residents. This asset is a municipal property, so all work was carried out under the control of the Korsakov administration. The Company regularly informed the public of Korsakov town about the progress and scope of work on the park’s reconstruction.

‘Flarings. The Company had promised in its announcements to The issue of flaring at the LNG plant during the operational stage is covered in the complete all technological processes and to decrease the flare official announcements of the Company and in various informational materials, and it is 35 size to 2–3 m before March. But these promises were not available at meetings with the public. Additional information can be obtained at the fulfilled. The flare is again 60 m high, with kilometre tails. request of interested parties. Reliable information would be desirable.’

Experts and independent auditors are selected according to the standard procedures of ‘Independent experts are very cunning when preparing the Company. Contracts for the supply of materials and services are predominantly reports, and ‘independent’ experts can turn out to be very assigned according to a competitive bidding procedure. Some auditors are assigned by 36 dependent ones. There is a list of things to be done, and they international credit organisations. write that all this has been done, but all this has not been done in practice.’ If the Company’s stakeholders have justifiable complaints relating to assessments given by these independent experts, please inform the Company.

Concerning the coverage of its activities, the Company follows the principles of transparency and availability. The Company uses various means to inform interested parties, including the Company’s web site, mass media, public meetings, and so on. ‘In summer, there was an incident with abandoned open Regarding the volumes of the Project–related information, the Company’s official web warehouses (involving uncertain substances). I looked on the 37 site covers aspects of the Company’s activities, rather than the activities of its Company’s web site for information, but it wasn’t available, contractors or subcontractors. The incident in question was related to the activity of a and it still isn’t.’ subcontractor; that is why it wasn’t presented on the web site, but the public was informed about it in due time through the mass media. This is the main channel of communication with the public in similar cases.

100 2009 Sustainable Development Report ‘I would recommend for other organisations that participate in 38 the ‘Small Grants – Bid Deeds’ programme not to put salary The Company’s answer – see above, question 17. payments in the application to the Company.’

The report presents information on the implemented projects together with a brief ‘Where it deals with social responsibility, let the report cover analysis of positive and negative experiences (see Sections Environmental protection, 39 shortcomings as well as advantages.’ ecological and industrial safety and Social investment and contribution to regional sustainable development).

Natalia Vladimirovna Kizimova, Manager of Sakhalin Salmon Initiative Educational Project

‘If it were not for the Company, the independent non– commercial organisation The Sakhalin Salmon Initiative and the Information on the SSI programme is included in the report (see Section Partner 40 programme would not exist.’ She talked about the areas of project: Sakhalin Salmon Initiative). SSI activities and gave several examples of this projects.

Tatiana Petrovna Roon, Director of Sakhalin Regional Museum of Local Lore

‘Interaction between the Company and local Sakhalin Information on interaction between the Company and local Sakhalin indigenous minorities indigenous minorities should be covered. is included in the report (see Section Engaging Sakhalin indigenous peoples). Interaction 41 between the Company and reindeer herders is frequently presented in the Company’s ‘It is necessary to cover interaction with reindeer herders annual report on information campaigns and public consultations. This report is available (previous project).’ on the Company’s public web site.

The social investment and sustainable development projects implemented or financed by the Company include a lot of projects aimed at cultural and educational development: ‘Socio–cultural programmes remain outside the activities of computer classes, publishing books and catalogues, projects aimed at the development the Company. In Japan the schoolchildren visit other towns in and preservation of the national culture of local Sakhalin indigenous minorities. 42 the country to see different cultural values as part of a Information of these projects is included in the report (see Section Social investment cultural programme.’ and contribution to the regional sustainable development). At the stage of project review, the Company is ready to start a dialogue with cultural organisations, including the Regional Museum of Local History and Culture.

Reeves Randy, Chairman of Western Grey Whale Advisory Panel (WGWAP)

‘Russian attitude to environmental issues’. ‘It is believed in the West that Russian companies do not pay due attention to the environmental issues. According to an opinion generally held, Shell, being the main shareholder of Sakhalin Energy, used to have a determining influence on the development of responsible policy in this respect, and there are some concerns that, as soon as a The Company will continue to follow its commitment regarding the environmental and 43 Russian company becomes the main shareholder, the opinion of industrial safety and will adhere to the accepted standards of environment protection the PSA Russian party will dominate. The Russian party of the and other issues. This is supported by all shareholders of the Company. PSA is known to be displeased with the expenses for environmental protection and profit loss; it is more interested in economic efficiency. There is a doubt that even if your Company has the best of intentions, the Russian party and the main shareholder will not give you a chance to implement them.’

2009 Sustainable Development Report 101 No. Comment, question or pointed remark Company reply

The Company is implementing the Sustainable Development Policy through the social investment programmes and sustainable development projects which enhance the social, economic and environmental development of the society and the territory of presence.

‘If the Company sets itself up as a responsible In particular, from 2001 to 2009, Sakhalin Energy invested over US$ 600 million into member of society, it would be good to discuss the rehabilitation of the island public infrastructure including: Company attitude to the problems inherited from the • construction of new roads historic industrial development of Sakhalin, as well as 44 • reconstruction of existing roads the Company’s possible intentions to participate in • repairing bridges and culverts their solution. We mean the impact of previous • ports modernisation onshore oil developments, contaminated rivers, • airports modernisation; and rusting pump jacks, etc.’ • healthcare facilities modernisation.

The information on the Company projects contributing to sustainable development of the territory will be integrated into the report (see Section Developing regional social infrastructure).

Finn Larsen, International Union for Conservation of Nature (IUCN)

‘I recommend you pay attention to the issue of the way The Company is grateful for this comment. you deal with transparency. Ten years ago, the In course of implementing the Sakhalin-2 Project, Sakhalin Energy strives to follow Russian and materials were provided to the whale experts and IUCN international best practices on information campaigns and public consultations. The General quite reluctantly, and most of the data provided were 45 Business Principles of Sakhalin Energy establish the principles of transparency and open confidential. You have come a long way since then, and stakeholder engagement. The Company is governed by these principles in achieving the set today Sakhalin Energy can serve as a model of targets and in its approaches to such cooperation. openness. Such openness is one of the ways to achieve target quality.’ The information on respective activities will be integrated into the report.

‘Following the above, I suggest including the The IUCN publishes reports of all meetings on their website http://iucn.org/WGWAP/. On this information on the amount and type of 46 site, a list of all recommendations is given and their status. To date, the Western Gray Whale recommendations given by WGWAP scientists, which Advisory Panel has made 194 recommendations, of which 30 remain open. the Company has fulfilled.’

Alexey Yurievich Knizhnikov, Oil&Gas sector environmental policy programme coordinator, World Wildlife Fund (WWF Russia)

Flares are an important safety feature on offshore platforms and are used to burn gas when ‘Disclose the data on gas flaring on the platforms and 47 necessary to ensure the safety of people and the asset. Sakhalin Energy does not flare gas tell why it is impossible to totally avoid this.’ simply to meet production targets, only during emergencies and for safety reasons.

102 2009 Sustainable Development Report No. Comment, question or pointed remark Company reply

‘Conduct a review of the Project’s influence on spawning rivers. The Company has continuously published information on the Sakhalin Energy has an approved programme for monitoring selected rivers during the measures taken to reduce the impact, but it has been a year post–construction phase. According to results of this monitoring, no significant impact 48 since the construction was virtually completed, so it would be of the Project facilities on the environment has been observed. Information on the expedient to assess the condition of spawning rivers and the monitoring of water bodies is included in the report (see Section River ecosystems). Project’s effect on them.’

‘It is necessary to present the measures developed by the The Company is grateful for this comment. Company to save and rehabilitate the birds in case of The Company has developed, together with advice from IFAW, what we believe is a good emergency oil spills. WWF considers this as an important facility. The plan is available on our public web site. It is our sincere hope that we will 49 activity for all oil and gas companies and believes that the never need to implement this plan. Company has become the leader in this issue. Perhaps, the results are not as desired by EcoNPO, but this is definitely Information on the Oiled Wildlife Response Plan is included in the report (see Section best practice.’ Oiled wildlife rehabilitation programme).

Grigoriy Arkadievich Tsidulko, Member of WGWAP, Independent whale expert

The Company has developed oil spill response plans that comply fully with the Russian Federation legal requirements. These plans are available on the Sakhalin Energy public ‘Give detailed evaluation of what has been done for OSR, 50 web site. The plans were all reviewed by an independent organisation at the request of including response on ground, marine and ice marine spills.’ the Project lenders, and their comments have been included. The Company conducts drills and exercises to ensure that responders and equipment are tested regularly.

‘Provide the clear evaluation of OSRP equipment quantity. We The equipment available is based on the worst–case scenarios as defined by Russian appreciate the Company’s efforts in this respect, but there is Federation legislation. The equipment is deployed in various locations onshore and on 51 a doubt that the Company will have sufficient equipment and vessels offshore to ensure its availability if needed. Information on OSR plans is available materials in case of the most pessimistic scenario of events.’ on Company’s public web site.

2009 Sustainable Development Report 103 APPENDIX 3: LIST OF STAKEHOLDERS WHO PARTICIPATED IN DIALOGUES FOR DEVELOPMENT OF THE 2009 SUSTAINABLE DEVELOPMENT REPORT

1. Yu.I. Andreev, Deputy Head of the Regional Council of Veterans 2. А.I. Gafner, Chairman of Stroitel gardening community council 3. V.I. Vorontsov, Chairman of the Committee for Economic Development, Sakhalin Oblast Duma 4. Yu.P. Maltsev, Adviser to the the Chairman of the Committee for Economic Development, Sakhalin Oblast Duma 5. N.M. Gasanova, Adviser to the the Chairman of the Committee for Economic Development, Sakhalin Oblast Duma 6. А.V. Romanov, First Deputy Minister of Natural Resources and Environmental Protection of Sakhalin Oblast/Head of Subsoil Use Administration 7. N.V. Nikitina, Head of design estimate documentation and contracts’ activity control department, Ministry of Natural Resources and Environmental Protection, Sakhalin oblast administration. 8. N.M. Trefilova, Head of Kidsave International NGO representative office in Yuzhno-Sakhalinsk 9. E.G. Milainenko, Manager of Kidsave International NGO representative office in Yuzhno-Sakhalinsk 10. O.F. Devyatkina, training specialist in Preodoleniye rehabilitation centre for children with disabilities 11. N.A. Lisitsina, Vice Chairman of Sakhalin Environmental Watch RPO (regional public organization) Council 12. Ye.N. Sapozhnikov, Sakhalin Environmental Watch RPO 13. L.N. Yevdokimova, Deputy Head of Korsakov Municipal District, Head of the Department for Social Development 14. S.M. Pervukhin, Chairman of Piligrim tourist regional club NGO 15. T.V. Pervukhina, grant-manager of Piligrim tourist regional club NGO 16. L.A. Milchenko, Director of Rodnik ecological centre 17. E.V. Raschupkina-Lopukhina, Head of Knowledge Is Power NGO 18. N.V. Kizimova, Manager of Sakhalin Salmon Initiative educational project 19. T.P. Roon, Director of Sakhalin Regional museum of Local Lore 20. I.G. Minervin, First pro-rector of Sakhalin State University 21. To Ken Sik, Head of Management Chair, Sakhalin State University 22. S.К. Kurmanguzhinov, Chairman of Sakhalin IP Regional Council 23. А.А. Voropsey, member of Korsakov Rotary club 24. Reeves Randy, Chairman of Western Grey Whale Advisory Panel (WGWAP) 25. Larsen Finn, International Union for Conservation of Nature (IUCN) 26. A.Yu. Knizhnikov, Oil&Gas sector environmental policy programme coordinator, World Wildlife Fund (WWF Russia) 27. G.A. Tsidulko, Member of WGWAP, independent whale expert.

104 2009 Sustainable Development Report APPENDIX 4: SAKHALIN−2 RECORDS

• First PSA in Russia • First oil and gas operation from marine stationary platforms in Russia • First simultaneous implementation of several large interconnected green field sub–projects in Russia • Phase 1 Project financing first funding of its kind in Russia’s oil and gas industry • Largest project finance deal in Russia (2008) • First offshore platform installed in Russia (Molikpaq) • Zero to minimal gas flaring, the first system of its kind in Russia (Molikpaq) • First use of directional hydraulic fracturing, of formation for well completion in Russia (Molikpaq platform) • First use of indirect fracture of formation for well completion in Russia (the Molikpaq platform) • First ice class stationary gas production platform installed in Russia – Lunskoye–A platform (Lun–A) • First concrete gravity base structure in Russia, built for the Lunskoye–A platform (Lun–A) • Float–over of the Lunskoye–A, 21,800 tonnes topsides in 2006 a world and Russian record in 2006 • Installation of friction pendulum bearings on Lunskoye–A is first use of these bearings in the oil and gas industry anywhere in the world • Float–over of 28,000 tonnes Piltun–Astokhskoye–B (PA–B) topsides in 2007 broke the float–over record • First liquefied natural gas (LNG) plant – the first of the kind built in Russia • First LNG carrier to enter Russian territorial waters – Granosa in 2007 • First time LNG measurement methodology was used in Russia • First real–time operations centre in Russia • First use of ISSOW electronic permit to work system in Russia • First time an oil and gas company created an initiative, the Advisory Panel for the Western Gray Whales protection, under the aegis of IUCN • First road safety partnership between public administration and business in Russia (Sakhalin Road Safety Partnership).

2009 Sustainable Development Report 105 APPENDIX 5: LIST OF COMPANY INFORMATION CENTRES

District Locality Organisation Address

Aniva Troitskoye Rural library, Branch #07, Unit of Aniva Municipal Centralised Library System 13 Sovetskaya St.

Vzmorye Rural library, Branch #06, Unit of Dolinsk Municipal Centralised Library System 22 Pionerskaya St.

Sovetskoye Rural library, Branch #10, Unit of Dolinsk Municipal Centralised Library System 122 Tsentralnaya St. Dolinsk Dolinsk Dolinsk Central Town Library, Unit of Dolinsk Municipal Centralised Library System 31 Lenin St.

Sokol Rural library, Branch #05, Unit of Dolinsk Municipal Centralised Library System 26 Sovkhoznaya St.

Central District Library named after Yury Nikolayev, Branch of Municipal Culture Kholmsk Kholmsk 124 Sovetskaya St. Enterprise Kholmsk Central Library System of Kholmsk Municipality

Vostochnoye Rural library, Branch #02, Unit of Makarov Municipal Centralised Library System 8 Privokzalnaya St.

Makarov Makarov Makarov Central Library, Municipal Enterprise Makarov Centralised Library System 9a 50 Let Oktyabrya St.

Novoye Rural library, Branch #04, Unit of Makarov Municipal Centralised Library System 11–7 Tsentralnaya St.

Rural library, Branch #4, Poronaysk Central Library System, Unit of Poronaysk Gastello 42– 2 Tsentralnaya St. Municipal Centralised Library System Poronaysk Rural library, Branch #13, Poronaysk Central Library System, Unit of Municipal Vostok 10а Gagarin St. Culture Enterprise Poronaysk Centralised Library System

Rural library, Branch #03, Unit of Municipal Culture Enterprise Smirnykh Centralised Onor 5 Sovetskaya St. Library System

Pobedino Rural Library, Museum, Branch #04 of Municipal Culture Enterprise Pobedino 60 Tsentralnaya St. Smirnykh Centralised Library System

Smirnykh Central Library, Municipal Culture Enterprise Smirnykh Centralised Library Smirnykh Smirnykh 12 Lenin St. System

Rural library, Branch #06, Municipal Culture Enterprise Smirnykh Centralised Library Roschino 4 Komsomolskaya St. System

Rural library, Branch #07, Municipal Culture Enterprise Smirnykh Centralised Library Buyukly 1 Kosmonavtov St. System

Rural library, Branch #17, Unit of Municipal Culture EnterpriseTymovsk Centralised Molodezhnoye 15 Sovetskaya St. Library System

Central District Library, Municipal Culture Enterprise Tymovsk Centralised Library Tymovskoye 68а Kirovskaya St. System Tymovsk Rural library, Branch #13, Unit of Municipal Culture Enterprise Tymovsk Centralised Yasnoye 2 Titov St. Library System

Rural library, Branch #8, Unit of Municipal Culture Enterprise Tymovsk Centralised Kirovskoye 70 Tsentralnaya St. Library System

106 2009 Sustainable Development Report FEEDBACK FORM DEAR READERS, You have just read the 2009 Sakhalin Energy Sustainable Development Report (hereinafter – ‘Report’). Your opinion on this Report is very important to us and we would greatly appreciate it if you help us to improve the quality of reporting by answering the questions in this Form. 1. After reading Report, do you have a better idea and understanding of Sakhalin Energy’s activities in sustainable development? ☐ Yes ☐ Mostly No ☐ Mostly Yes ☐ Unsure ☐ Equal

Please provide comments in support of your answer

2. What is your impression of the information contained in this Report? ☐ Very interesting ☐ Mostly uninteresting ☐ Mostly interesting ☐ Very uninteresting ☐ Equal ☐Unsure

Please provide comments in support of your answer

3. How do you rate this Report in terms of credibility and objectivity of the information provided? ☐ Very favourable ☐ Mostly unfavourable ☐ Mostly favourable ☐ Very unfavourable ☐ Equal ☐Unsure

Please provide comments in support of your answer

4. How easy was it to find the required information in Report? ☐ Very easy ☐ Mostly uneasy ☐ Mostly easy ☐ Very uneasy ☐ Equal ☐Unsure

Please provide comments in support of your answer

5. What Section of Report was the most interesting and valuable to you?

6. What aspects of Sakhalin Energy’s activity, in your opinion, should be improved to strengthen the Company’s social responsibility efforts?

7. What other information would you like to see in the next Sakhalin Energy Sustainable Development report?

8. Please provide general comments on the Report here:

9. Are you or your organisation interested in participating in dialogues with stakeholders during preparation of 2010 Sakhalin Energy Sustainable Development Report?

☐ Yes (please provide your contact information) ☐ No 10. What other organisations in your opinion should be invited to take part in subsequent dialogues with stakeholders during preparation of the next Sustainable Development Report?

11. Which group of stakeholders do you belong to? ☐ Company’s employee ☐ Customer (Buyer) ☐ Representative of public organisation (NGO) ☐ Investor ☐ Partner (Contractor) ☐ Mass media ☐ Shareholder ☐ Representative of authorities ☐ Other group of stakeholders

Please Clarify

Please indicate your contact information below:

Name: Job title: Telephone: Organisation: Fax: E–mail: Address:

12. Which communication is preferable? ☐ By mail ☐ By E–Mail

Please return the completed Form marked ‘2009 Sustainable Development Report’ to: Sakhalin Energy Investment Company Ltd., 35, Dzerzhinskogo Str., Yuzhno–Sakhalinsk, Sakhalin Oblast, Russian Federation, 693020 You may also email this Form to: [email protected] or leave it at the Company’s Information Centre. List and addresses of information centres are given in Appendix 5 to the Report. THANK YOU FOR YOUR FEEDBACK!

2009 Sustainable Development Report 107 108 2009 Sustainable Development Report