OREANDA-NEWS. September 29, 2011. Read Andrei Galaev’s speech on the Sakhalin-2 project recent key milestones at Sakhalin’s major energy conference, reported the press-centre of Sakhalin Energy.

Ladies and Gentlemen,
I would like to extend my greetings to all of you who are attending the 2011 Sakhalin Oil and Gas Conference.

Sakhalin Energy was one of the founders of this important event, now in its fifteenth year. We have been active in the conference since it began in 1997.

The plans our company introduced in its first few years have now been converted into a vast infrastructure, that has been in operation already for three years. It has been fifteen years of hard work: from the initial design on paper, to final construction of a huge production infrastructure. From a dot on a map rose up an energy complex that today supplies around 5% of the world’s liquefied natural gas.

Just last year we renewed our mission statement – to be the premier energy source for Asia-Pacific. Today, I am pleased to confirm that the company has been steadily moving towards that goal.

What is behind our success? First and foremost, it is a professional team of the highest calibre. I would like to emphasise that our greatest asset and our primary resource is our employees. We have a very young team: the average age is 35. Perhaps, this is the way it should be: young and energetic people in a young and cutting edge undertaking … namely, the Sakhalin-2 project.

Now that all our project facilities are up and running, let me elaborate a little bit on our infrastructure.

Molikpaq was the first oil production platform we installed under the Sakhalin-2 project. It has been producing crude oil since 1999. That platform is now under refurbishment.

By upgrading Molikpaq, we will be able to drill new wells and boost production efficiency. We expect to complete the works by the end of this year; and then, we plan to begin drilling new wells. As part of the drilling programme, we aim to drill four production wells and one water injection well before 2015. This will allow us to ramp up production by 27%.

During refurbishment, we focused on well and reservoir management and Operational Excellence, which were two main objectives of the modernisation. Thanks to excellent field management and platform operations work, we have increased production of the Astokh area by over 10,000 barrels of oil per day (a more than 20% production increase) since the end of 2010, without drilling new wells. At the same time, we have boosted platform reliability. This month the company receive Shell award for this achievement.

To the north of Molikpaq lies Piltun-Astokhskoye-B (PA-B), an oil-producing platform. PA-B is now in its third season of operation. We expect to drill an oil-producing well by the end of the year, the first operating well to follow drilling of an exploration well, in the as-yet undeveloped Block 2 of the Piltun area. The exact location and operating mode of future wells will depend on the results of the follow-up exploration. PA-B currently encompasses nine producing wells.

The Lunskoye-A and PA-B platforms each contain so-called “smart” wells. With a smart well, an individual valve can be installed in each zone, to more precisely control the flow of oil, gas and water.

We then reinject water into the zones, which are isolated by packers. The smart well equipment also regulates the volume of water injected into each zone. With this technology, it is now possible to ensure the most effective injection of water into a multi-layer formation – using only one well. From the platform, a subsurface engineer receives information, in real time, on pressure, temperature and other parameters, at each interval. So we are now able to optimise the processes used to maintain pressure in oil production zones. To increase production from the layer, we can also immediately change the injection rate.

This year, we installed smart well equipment in one well at the PA-B platform. The well now produces daily, from four zones, more than 9,000 barrels of oil. Daily gas production has fallen in four times, while daily oil production has risen on 3,700 barrels.

In the Lunskoye field, we produce natural gas from seven large-diameter gas wells – the largest wells of their kind in Russia. Each well can produce up to 10 million cub. m/day. That is, each well delivers a volume sufficient to supply a 2 giga-watt, gas-fired power station. Put another way, two of our wells can produce the same amount of energy as Bratskaya, one of Russia’s largest hydropower plants.

Start of gas supplies to domestic market is one of our key milestones for this year. We are doing theis via two gas transfer terminals (GTT). Russian Prime Minister, Vladimir Putin, officially inaugurated the first of these terminals, southern GTT, and Gazprom’s gas distribution station in March. And just two weeks ago the northern GTT started providing gas to the Sakhalin-Khabarovsk-Vladivostok pipeline operated by Gazprom.

These plans to supply gas to the domestic market are in accordance with the Sakhalin-2 Production Sharing Agreement. The agreement states that the company must allocate the Russian Party’s share of available hydrocarbons production and additional revenue, and pay a royalty to the Russian Party in kind, in the form of gas. We are now able to deliver more than 19 billion cubic meters of gas up to 2020. We will transport about one third of this amount to the Southern GTT and then to the Yuzhno-Sakhalinsk power station. We will deliver the rest to the Sakhalin-Khabarovsk-Vladivostok pipeline operated by Gazprom.

Let me mention one final element of our project: the Prigorodnoye Production Complex, which comprises an LNG plant and an oil export terminal. Last year, after we finished debottlenecking the plant, we were able to raise LNG production from 9,6 million tonnes to 10 million tonnes.

This year, for the first time since the LNG plant went into operation, we conducted an integrated shutdown of all the facilities that produce, transport, and process gas. All the shutdowns were completed successfully and without affecting production. At present we have already exceeded our 2011 target for the number of oil and LNG cargoes to be supplied.

Today, we remain the largest hydrocarbons producer for the Sakhalin Oblast. In 2010 alone, the company produced more than 10 million tonnes of LNG, and produced and offloaded more than 6 million tonnes (over 47 million barrels) of Vityaz crude oil. Last year, we produced 10% more oil than in 2009. Also last year, Sakhalin Energy accounted for more than 45% of the crude oil and more than 65% of the gas produced on the Island.

Last year, we supplied Vityaz crude oil to 14 buyers in Japan, South Korea, China, the Philippines, Thailand and other countries.

Also in 2010, we delivered LNG from Sakhalin-2 mostly to customers in Japan, South Korea, Taiwan, and China. The LNG was delivered either by the ship of a buyer or by one of three LNG carriers under a long-term charter agreement with us: the Grand Elena, the Grand Aniva, and the Grand Mereya.

We offload oil and gas from Prigorodnoye, one of Russia’s most modern ports.

This year, we have safely and reliably supplied 175 oil tankers and LNG carriers. Port safety means not only using safe technologies and operating correctly, but also protecting the environment. Sakhalin Energy has developed and introduced the most comprehensive and stringent controls of ballast water in Russia. The company’s standards exceed those mandated by legislation. We did this to regulate the conditions of the local aquatic biota, and to minimize the possibilitity that hazardous, invasive organisms could infiltrate Aniva Bay when ballast water is dumped from tankers.

I would like to take a moment here to talk some more about safety. The company focuses on industrial and road safety, and safe conduct. In 2010, we had no major incidents relating to process safety at company facilities. That same year, we achieved a new record: no man-hours were lost to injuries.

Last year, we spilled some 2 litres of oil. That is less than one billionth of one percent of the oil we produced. It is an impressive global record. During 2011, so far no oil or petroleum product spill rated as an emergency.

I am also pleased to reveal that this year we have had excellent results in road safety. Since February 2009, our company has registered not a single traffic accident with serious consequences on life and health. This is a stellar outcome, given the number of kilometers that vehicles involved in the project have logged.

Regarding our environmental agenda, we continue to monitor the gray whale population. Our joint programme of satellite tagging the western gray whale with Exxon Neftegas Limited extends into this year. Last year, tagging produced some very unexpected results. These results could dramatically alter our knowledge of this species of whale, the largest animal in the sea, which migrates each year to Sakhalin Island for summer feeding.

Regarding responsible corporate stewardship more generally, the company is an active member of the United Nations Global Compact, a corporate citizenship initiative at world scale. A number of our sustainable development and social programmes have also gained international recognition. Sakhalin Energy represented Russian business and the oil and gas industry in a test of the Ruggie Principles (set out by the Special Representative of the UN Secretary-General). For two years, the company, together with four other companies worldwide road-tested these principles. This summer, the UN Council on Human Rights approved the principles as a new international standard.

One more noteworthy example of our corporate responsibility practices was lauded by the UN, the International Finance Corporation, and the World Bank: Sakhalin Energy was one of the first companies to apply the principle of “free, prior and informed consent” in our working relations with indigenous peoples.

This year, we chaired the United Nations Global Compact Network in Russia. The UN Global Compact has more than 6,000 participants worldwide. Let me take this opportunity to invite the enterprises of Sakhalin to join us in the effort, and subscribe to the ten general principles regarding human rights.These principles relate to establishing decent working conditions, protecting the environment, and anti-corruption. By working together, we will get better and more efficient at these practices.

Now I would like to say a few words about our development prospects for the Sakhalin-2 project. We expect the South-Piltun area will be a good reserve to develop, to help us maintain oil and gas production. Today, we are studying the data we have gathered from developing the Astokh and Piltun areas, to update our estimates on oil and gas reserves, and we are reviewing our options for field and infrastructure development. By this time next year, I hope to announce our development plans.

While we are on the subject of future changes to our oil and gas production, I would like to address a question I have been asked a lot recently: have there been any changes in Sakhalin Energy’s hydrocarbons supplies due to the increased energy demand in Japan, in the aftermath of the earthquake in the northeast of that country?

Let me remind you that 98% of our hydrocarbon products were already contracted before we launched the LNG plant. Most of these cargoes were contracted by customers in Japan. But when we suddenly realised that our neighbour had an urgent need for more LNG, the company found a way to supply extra cargoes of LNG to our Japanese customers.

So far this year, we have supplied Japanese customers with 26 standard cargoes of LNG above and beyond what was under contract, including extra cargoes obtained from our shareholders. Nine of them have been produced above plan. Remember that each standard cargo equals 145,000 cubic metres of LNG. We were able to make this happen, thanks to the flexibility of our LNG transport system, which if necessary can redirect cargoes to different buyers, and due to our consistently elevated production of LNG.

Regarding market conditions for our LNG, prospects are very favorable right now. Demand for liquefied natural gas in the Asia-Pacific region is constantly growing. To meet that growing demand, we will increase our annual LNG production capacity by 1.5% over the next few years. This will also give us an opportunity to increase our market share.

Of course, delivering this increase will depend heavily on sound daily operational management. In 2010, the company committed to achieving the very highest standards in Operational Excellence. Operational Excellence for us includes five key elements: total reliability, well and reservoir management, best contractor management, lean execution and excellence in people.

This brings us back full circle, to what I said at the beginning of my speech – to our people. The most important reason behind the company’s success is its staff. That is why we have added three more values to our existing ones of honesty and integrity. These new values are: respect and care for people; individual accountability for performance, supported by good teamwork; and professionalism and continuous improvement. I believe that adopting these values will ensure our continued good performance and create an atmosphere that will motivate us, spurring us on to greater success.

We have set the ambitious goal to be one of the leading companies on the world’s energy market. Sakhalin Energy will not take pride only in what has already been achieved. As ever, we are committed to pushing the envelope even further – and going farther in our development.
Thank you very kindly for your time.