Economic Development

The Sakhalin-2 project delivers benefits both to Russia nationally and to Sakhalin Island itself. Even now, prior to the commencement of large-scale production, Sakhalin-2 is providing funds to Russia from taxes paid by the Company and its contractors at the Federal level, and locally to the Oblast (regional government). It also creates new jobs, develops skills and introduces new technology to Sakhalin. There are also direct benefits to the island from infrastructure upgrades including roads, ports, railways, hospitals, airports and waste management.

	The higher the oil price, the more funds Russia gets from the project. Assuming a forward oil price of $70/barrel, the Project will generate some $120 billion of benefits to Russian party until the end of the PSA agreement.
	Since the start of Sakhalin-2 through to 2008 revenues to the Russian Government from the project development (although Phase 2 is still under construction), exceeded $800 million in bonus payments, royalties and taxes.
	At a local level, living standards in the Sakhalin region are growing. The island’s internal revenues increased by more than ten times between 2002 and 2008, demonstrating that Sakhalin is the most economically dynamic of all the districts in the Russian Far East.
	The advent of oil and gas investment in the region has helped drive down unemployment on Sakhalin to 1.2% in 2007, which is a record low for the Russian Federation. During peak construction Sakhalin-2 Phase 2 employed approximately 25,000 people, the majority of whom (70%) were Russian. In the operations phase, Sakhalin Energy and its contractors will create 2,400 permanent jobs.
	Growth is also being propelled by the Sakhalin-2 $600 million infrastructure upgrade programme. As the AEA Report states, “The funds are being used to improve roads, health care facilities, telecoms and waste disposal facilities. Upgrades to three hospitals (Nogliki, Proronysk and Yuzhno-Sakhalinsk) commenced in 2005 at a cost of $7.2 million bringing in new medical equipment and providing emergency response ambulances for six district hospitals. ” * *Page 217
	In December 2007 Sakhalin Energy signed a joint venture agreement with Sovcomflot, Russia's largest shipping company, to manage operations in the newly named Prigorodnoye port under the Sakhalin-2 project. The Prigorodnoye port naming process was accomplished in October 2007. It is the first specialised port in Russia, and will be used to handle liquefied natural gas (LNG) carriers and oil tankers, from Sakhalin Energy’s LNG plant and oil export terminal (OET) in the same area. Prigorodnoye port was opened to foreign vessels by a Russian Government decree in May 2008.
	Sakhalin Energy sponsored the refurbishment and equipping of a new technical training centre in Yuzhno-Sakhalinsk. More than 150 Sakhalin Energy or its contractors’ apprentices will pass through its doors, every year, for vocational training and certification. The apprentices are trained in four disciplines vital to the oil and gas industry: as operators of processing units, electricians, mechanics, and instrumentation and calibration engineers.
	Sakhalin Energy invites Russian and Sakhalin contractors to workshops to raise awareness about heatlh and safety requirements, quality control etc. The vendors development programme, which is held monthly, has been running since 1997 and is aimed at newcomers to the oil and gas industry as well as more experienced providers.
	In 2007 Sakhalin Energy hosted several industrial fairs in Sakhalin cities titled: “Sakhalin-2: New Opportunities for Russian Companies”. With the LNG plant soon to be operational, Sakhalin Energy has offered Sakhalin and Russian companies the opportunity to take part in tenders for various post-construction works such as road maintenance, electrical engineering, catering, provision of storage premises, etc.
	As at the end of 2007 the level of Russian content under the project, determined in man-hours of provided services and volume of equipment and materials, significantly exceeded 80%. In accordance with the Sakhalin-2 PSA the level of Russian Content is measured in the man-hours of the provided services and volume of materials and equipment. Since the beginning of the Project, Russian Contractors have achieved 283 million work-hours generally totalling 85% of total man-hours, while the volume of Russian materials and equipment exceeded 10.2 million tons, or 91% of the total volume.Contracts totalling more than $10.9 billion have been awarded to Russian companies under the Sakhalin-2 project.
	In 2008 revenue to the Russian government from Sakhalin Energy was around 1 billion rubles in royalties and more than 2.4 billion rubles in profit tax.