OREANDA-NEWS. October 01, 2012. 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 spend the next 15 minutes giving you a progress update on the Sakhalin-2 project. But, I would also like to go well beyond the facts that describe Sakhalin Energy’s current activities.

Eighteen years in operation, 20 years of Sakhalin-2 Feasibility Study have given us a long experience that we can talk about, and this wealth of experience will be important and useful for those who follow in our footsteps. This is one of the subjects I’d like to address in this forum.

So let’s return to our programme, namely the status of the Sakhalin-2 project. We used to begin with an update on our platforms off the northeast coast of the island and then gradually move southwards. Today, we will focus instead on our corporate priorities, not on our facilities. And these priorities are: safety, reliability, cargoes, cost efficiency, and growth.

Safety is our number one priority. We pay special attention to industrial, occupational, and personal safety, and safety on roads.

Almost a year has passed since the last road incident involving a Company vehicle. The previous record was more than two and a half years of incident-free driving, or 996 days. Given that the average annual mileage with Company vehicles on Sakhalin roads totals 11 million km, our safety performance is extremely good.

For several years now, we have talked about the world-class work we do in preventing pollution of the local environment. Since 2009, when we achieved full production under the project, no spill of oil or oil products that could be classified as an emergency has been recorded. Last year, we said the ratio of leakage to the volume of oil produced was less than one-millionth of one percent; this year, as of today, that figure is ten times less.

Sakhalin Energy aims to reduce the volume of associated gas it flares to what is considered reasonably practicable. In 2011, the Company used 93% of this associated gas at the Company assets.

Though no centralised statistics database exists on greenhouse gas emissions in Russia, the Company maintains its own emissions inventory.

We pay close attention to ways of preserving biological diversity. Sakhalin Energy was the first private company to develop and to put into place a system of actions and measurements for preserving the Island’s diverse flora and fauna. Monitoring the Steller's sea eagle and wetlands, preserving Western or so called Sakhalin grey whales, which are on the endangered species list, have a special place in the Company’s environmental programme. The control of ballast waters is yet another large-scale environmental programme of ours. Sakhalin Energy has addressed ballast waters discharge from the outset of offshore operations, not waiting for the Russian Federation to ratify an international convention for the activity.

Creating a Company culture and a body of best practices for health, safety, and the environment is not our only arena. We are working closely with our contractors, to also help them create corporate culture of risk prevention. Our work with them is aimed at reducing accidents, and developing proactive personal behaviours in health, safety and the environment.

In conclusion, on the topic of safety, our work is never finished. Safety requires vigilance and constant attention, and on that we’ll never ease up.

The safety of all industrial processes is closely related to the reliability of production. Any record of a serious incident can potentially close the door forever to repeat business.

Our goal is to ensure a high quality of service and operational safety is maintained at all of the Company’s industrial facilities. Our objective is to prevent an incident. This is definitely one of our most important tasks.

Regarding cargoes, currently standard shipments of oil and gas cargoes start from our facilities offshore. All three platforms of the Company, located in the offshore are operating normally.

We have updated the development plan for the Ashtokh field, where the Molikpaq platform is located. The plan calls for sidetracking, overhauling mature wells, and drilling new wells.

We are ready to use a technique called barrier water-flooding at the second platform of Piltun-Astokhskoye field. In this method, injection wells are drilled in the area where you come into direct contact with oil and gas. With this method, we are making the transition from injecting water into multiple layers to selective injection into specific layers by using horizontal barrier water injection wells. We will gradually introduce this technique in the field by following up with the drilling of a pilot well.

The LUN-A platform is the main supplier of gas for the first in Russia LNG plant.

So, the oil and gas we produce are pumped from the offshore platforms to the south of the island, where they are offloaded. Today, our gas deliveries are running ahead of our targets. By the end of the year, we plan to reach the records of the previous oil production season of 44 million barrels.

In addition, I’d like to remind the audience that we supply some of the gas through the Northern and Southern gas transfer terminals. This gas is delivered to customers in Sakhalin, under the Eastern Gas Programme.

In March the Company reached an important milestone – we started our production sharing agreement with the Russian Federation ahead of schedule. This is mainly because our operations performance has been excellent.

Next year, we will start paying a profit tax of 32% based on the results of the current fiscal year. It is planned that the Company will pay at least 440 million dollars more than this year.

As I mentioned earlier, the cost efficiency of the Sakhalin-2 project largely depends on the integrated operational excellence programme that the Company adopted. Now after the three years at full production capacity, efficiency is more important than ever. My colleague, Thomas Zengerly, our Production Director at Sakhalin Energy, will talk about this tomorrow in his presentation.

Growth is another Company’s priority. By development, we mean not only development of the project, but also of our team. Today these two are equal priorities for us.

Even though we ramped up to full-scale production in 2009, our development projects continue. These projects pursue multiple objectives: optimising the operation of our facilities, and optimising the production of oil, LNG and gas that we supply to the local market.

We achieve all these goals by using a package of measures. The most important among them are the early prevention of industrial risks, the efficient development of fields, the reduction of production losses by efficient planning, and increasing the volume of hydrocarbons production and the capacity of our equipment.

This year, we completed construction of the Northern gas transfer terminal. From this terminal, gas is fed into the Sakhalin – Khabarovsk – Vladivostok pipeline. For already two years the Company has been transferring gas through the Southern gas transfer terminal. The gas supplies Sakhalin facilities. In August, the new power generating unit of the Yuzhno-Sakhalinsk thermal power plant switched over to the gas produced under the Sakhalin-2 project.

I would also like to tell you about a few other noteworthy development projects: to raise production at the Lunskoye field, we intend to commission a system of associated water re-injection and provision of two standby gas wells for the winter season. Combined with other measures, this will help us increase the operating rate of the gas system.

Ten days ago, the Company submitted its budget and work programme for the next three years to the Russian party for their approval. This updated budget and development plan includes production estimates out to 2041, when our license expires. We prepared the previous plan and budget in 2008, before year-round production of oil and LNG began. That earlier plan was based on models and project estimates. Now, the experience we have accumulated over four years of production has enabled us to make a more accurate estimate, taking into account the data on the geological structure of the fields and the operation of production systems.

This document reflects our latest production objectives, including objectives for further development of the project. Our development plan calls for drilling new wells at the Lunskoye and Piltun-Astokhskoye fields, in line with approved process flow diagrams, implementing of additional gas compression project at the onshore processing facility and other projects.

As chairman of the UN Global Compact Network in Russia, I would like to take the liberty of saying a few words about our work in sustainable development. This year, we attended the largest sustainable development forum in the world – Rio+20.

Invitation to a forum of this stature is a recognition of our leadership in sustainable development. We have a lot to share on some of these issues, notably on respecting and observing human rights, on corporate social responsibility and on protecting the environment.

Sustainable development issues are becoming more important, and business is increasingly shouldering more of the responsibility. Responsibility means creating the right conditions so poverty can be reduced, promoting social justice, and taking measures to safeguard the environment.

Taking part in activities undertaken by the international community on these issues is an important step for the Company to achieve its strategic goal – to be the premier energy source for the Asia-Pacific.

I can’t help but say a few words about our prospects for future development. It’s no surprise that building a third LNG train is among them. Building a third train makes good economic sense if you consider the current trends in the growing world market for LNG production and consumption.

The company’s shareholders are intently exploring the subject, and we are preparing all the necessary documents to be ready by the end of this year. We are expecting to get the decision to go ahead from our shareholders and the Russian Party.

In addition, we are working on a project to develop the South Piltun area. Soon we will complete a plan that elaborates our options for developing and constructing it. In July, the Company conducted a geotechnical survey. The work included an acoustic study of the seabed and coring. Shareholders and the Russian Party will make the final decision.

Third, we have another development project to use the condensate from the initial phase of Sakhalin-3.

I said in the beginning that we are willing to share our experience in a more proactive way. As operator of the first offshore oil and gas platforms in Russia and of the only LNG plant in the country, I'm sure it is not only the right thing to do. It is our duty to share our valuable experience with those who will come after us.

I hope this day will give momentum to a crucial dialogue about the lessons learned in a country that is host to such massive oil and gas projects as we have developed here in Sakhalin. The oil and gas industry is mobilising in the Arctic regions. It is there the big prospects for the next few decades have been identified. In this regard, our experience – working in a remote region, under the subarctic conditions of the Sea of Okhotsk – is more useful and more relevant than ever.

The Sakhalin project road-tested the latest technologies, new approaches, and identified many potential risks and ways to circumvent them. We were there first, and our track record can serve as a comprehensive guide of what to do in a wide array of situations. We have devised technical solutions on how to operate equipment at ultra-low temperatures, and engineering solutions that help our facilities operate in this earthquake-prone region, not to mention the environmental and social impact practices we have put into place.

Considering the time, I’d like to focus on just a few important lessons we have learned.

Our experience indicates it is not possible to anticipate every expenditure when planning a project. So we assign a special part of our planning to the management of risks, which we break down into two kinds: knowns and unknowns. While a known can be identified, analysed and a response can be planned, the unknowns are much more difficult to anticipate and plan for. In fact, unknowns are really circumstances of force majeure.

Therefore, one of the most important lessons is to be a bit more careful about forecasts. Over the past 20 years, quite a few of our figures, dates, and plans have changed – many times. As I mentioned before, often we changed our plans after geological studies and assessment of available reserves, as well as due to challenges in global and Russian markets that cropped up, not to mention the unique climatic, geographic, logistical, and personnel challenges of Sakhalin.

As a pioneer, or "first wave" project operator as many call us, we have the following advice: your approach to major projects should be more conservative. It is important to make a thorough and balanced analysis, not only of the current situation, but also of prospects and trends, and you need to consider many factors and many risks.

Only time and experience will reveal all the potential difficulties and risks in a project: economic, political, technical, environmental, legal and social. But there is no problem that cannot be solved, no difficulty that cannot be managed. Making use of global experience and best international practices is the key to your success.

Once again, this proves the importance of taking responsibility for your own behaviour in every domain. You cannot get hung up on only one thing at a time. You cannot forego excellent performance, and you cannot ignore the human dimension. You cannot think only about production safety and forget about social responsibility. The mandate of our era is that we need to be efficient in everything we do, or else we won’t be the best. For beginners, this means being efficient by borrowing from the experience of others, in this case, from us.

Thank you for your attention.