27 September: Read Sakhalin Energy CEO's speech to the Sakhalin Oil and Gas Conference being held on the island for the first time.

Mr Chairman, Ladies and Gentlemen.

Allow me to add my personal warm welcome to the 10th Sakhalin Oil and Gas Conference, the first to be held on the island.

It is a great privilege and pleasure to be here to provide an update on the Sakhalin II development.

In this brief presentation I will describe the substantial progress that has been made in the last year or so.

But first of all, as I am sure you are all aware, the Sakhalin II project has featured prominently in media around the world recently.

The commentary should have been about how this ground-breaking frontier project, a world class development utilising the best of Russian and International know-how and expertise, was on track to deliver a much needed boost to energy security.

It should have been about how Russia, a reliable partner and energy supplier to Europe for several decades, was looking east and positioning itself do the same for the booming Asia Pacific Region.

It should have been about how such collaborative ventures could provide a model for the next wave of technically challenging arctic developments that are so crucial if Russia is to achieve its full potential as one of the world’s key energy suppliers.

Sadly, the headlines were rather different.

They focussed on threats to revoke the State Environmental Expert Review, or SEER as it is known, which gave a positive conclusion for the project way back in 2003. Interestingly, the prime argument being put forward for revocation is not any failure on the part of the Company, although the noise in the media might lead you to think otherwise. The prime argument is alleged procedural failures of the relevant Russian Authorities during the preparation of the SEER in 2003.

This development is surprising when one considers that the Ministry, which is threatening revocation, robustly defended the very same SEER against almost identical claims in a Moscow court about one month ago on the 29th of August. The court dismissed the case in its entirety based on the merits.

Let me assure you that Sakhalin Energy has spent years ensuring that this project complies with the expectations of the Russian authorities, the international community and, of course, the potential lenders. Safeguarding the environment is one of the cornerstones of a sustainable business and is clearly one of our top priorities.

Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed. There are numerous examples of our commitment to preserve the unique and diverse eco-system of Sakhalin, including programmes on research and protection of Western Gray Whales, Steller’s Sea Eagles, and, of course, salmon.

Our aim is, wherever possible, to get it right first time, every time and to minimise any negative environmental impacts. It is, of course, unrealistic to expect that the execution of a project of this scale and complexity will be faultless. I readily admit, for example, that control of sub contractors on onshore pipelines in particular has been unsatisfactory. Where such problems have occurred we have, however, worked closely with the Oblast and other authorities to take speedy corrective action.

We hold the Ministry of Natural Resources, its agencies and its staff in high regard. For example, you may recall that last year at this conference I described their very proactive and professional approach in expediting the approval of re-routing the Piltun pipelines so as to minimise impact on the Western Gray Whales feeding grounds. I am therefore hopeful that any concerns that they may have can be properly addressed with minimal disruption and I look forward to the opportunity for the Company to engage with senior RPN representatives later this week.

Let me now turn to what has been achieved over the last year.

Allow me to remind you that Sakhalin II Phase 2 is an integrated oil and gas development in a frontier environment, which requires the simultaneous execution of several projects:

· A second production platform on the Piltun field, in addition to tying in the Molikpaq for year round production;

· A platform on Lunskoye, capable of producing up to 17 bcm/year of non-associated gas;

·300km of offshore pipelines;

· An onshore production facility (OPF) for the gas and crude oil from both fields;

· 1600 km of onshore oil and gas pipelines to the south of the island.

· An oil export facility capable of year round operation

· The first LNG plant and associated export facilities in Russia.

· And of course island infrastructure upgrades

This is not only the world’s largest integrated oil and gas project, it has already achieved Russia’s first offshore oil production, the installation of Russia’s first offshore integrated gas platform and it will, in due course, deliver Russia’s first LNG plant.

Overall, the project is now approaching 80% complete.

We’re now in the second year of peak activity with almost 70 million man-hours per year being consumed and over seventeen thousand people employed on Sakhalin Island, some 70% of them Russian nationals.

You may recall that last year we built and installed the two offshore gravity base structures, each weighing over 100,000 tonnes.

Here you see one of the structures, the Lunskoye CGBS, on location during the winter. Please note the stainless steel cladding to protect the reinforced concrete from gouging by the ice flows. Note also that one of the legs is wider than the others to accommodate the conductors used in the drilling of the development wells. The last point I would like to highlight is that strong currents in the area are continually moving the ice giving rise to these breaks in the ice, or leads, behind the platform legs.

This summer we installed the 23,000 tonnes topsides for the Lunskoye-A with a world record float over in which the T-shaped transport barge is gradually ballasted down, transferring the load to the legs. The Piltun topsides will be installed next year and the record will be broken once more.

An innovative feature of both platforms, derived from developments in earthquake-prone California, is the pendulum bearings at the top of each leg. These bearings, being used offshore for the first time, are designed to minimise seismic loading on the topsides by providing a degree of isolation from the seabed acceleration forces.

The Lunskoye platform is currently undergoing hook up and commissioning with the aid of a flotel , a floating hotel, accommodating some 500 workers. A major milestone was achieved last week when the platform was certified fit for habitation – a crucial step in preparing for drilling the development wells at the turn of the year.

We have also installed two new modules on the existing production platform, the Moliqpak. Once the Onshore Processing Facility and onshore pipelines are complete, these will allow Moliqpak to move from summer season only to year-round production.

I am pleased to report that the installation of all the offshore pipelines for the project is now complete, subject to tying in some spoolpieces.

The noise generated by all of the offshore work described above was, once again, monitored by acoustic sentinel buoys placed near the edge of the WGW feeding zone to alert us if noise levels exceeded those that might significantly disturb the whales feeding. This was only one element of a suite of measures including dedicated whale watchers on each vessel, restricted vessel speeds, prescribed vessel corridors and noise suppression measures, which ensured minimal impact on the whales.

In this context, we have been instrumental in assisting IUCN and the international scientific community in the establishment of the WGW Advisory Panel, which will provide valuable independent input to our planned activities through the remaining construction phase and well beyond. We hope that others with an interest in preserving the whales will join this initiative.

In the remote northeast of the island, the Onshore Processing Facility is progressing well – it will be ready to, amongst other things, start supplying power to the Lunskoye platform before this winter. It is also destined to become the upstream operations centre.

Over 1450 km of onshore pipeline has now been welded. When complete, the pipelines will include 104 block valve stations (of which about 35 are common oil and gas sites) and 5 Pipeline Maintenance Depots to allow maintenance and repair teams to provide full coverage.

Our pipeline corridor crosses just over a thousand watercourses but less than half the crossings occur at a sensitive location. According to our calculations, even the sensitive crossings would, at the most, impact for one or two seasons about one percent of the total affected spawning grounds.

Where ground conditions permit, the most sensitive large rivers are crossed by horizontal drilling techniques. Others are crossed only in the winter when the river is frozen or flows are low so as to minimise the impact. Given the sensitivity of many of the crossings we elected to use independent monitors for the 05/06 winter crossing campaign. Their reports were summarised on our website. Almost 80% of the sensitive crossings are now complete with the remainder to be completed during the 06/07 winter.

These winter river crossing efforts were followed by a spring erosion control campaign to ensure that, following the thaw, the river banks and adjacent water protection zones were stabilised prior to the summer salmon runs.

The aim now is to achieve as much permanent reinstatement as possible on the sections of completed works on the Right of Way before the onset of winter.

Construction of the LNG plant is on schedule with the LNG tanks complete and substantial completion of the LNG loading jetty. Train 1 is well progressed and the heart of the refrigeration process, the cryogenic heat exchangers, have already been installed on Train 2.

Installation of the rotating head for the Tanker Loading Unit some 4.5 km out in Aniva Bay was also achieved this summer.

With the first LNG cargo scheduled for 2008, our focus is turning more and more to the operations phase. Last year we hired 305 Russian staff, more than double the 2004 number. A further 390 or so are scheduled to be hired in this year.

While Sakhalin is a truly global undertaking, Russian skills, expertise and experience are at its heart. Without the depth of the expertise of our Russian staff and contractors we would have never been able to make so much progress. For many Russian companies, the experience they have gained working for Sakhalin II is a gateway to the international market where they are now better equipped to compete with established industry players.

The project provides a major boost to Russian enterprise – about $1 billion worth of new contracts for project-related work was awarded in 2005. Since 1996 the total value of contracts with Russian vendors and suppliers exceeds $7 billion.

A crucial success factor for the future of the island is the ability of local Russian enterprises to take up the business challenge and become the oil and gas industry service providers of the future. In this context, I am delighted to report the award on monday of this week of Letters Of Intent for two key contracts to SakhalinNefteGasService (SMNG) and SakhalinMorNefteMontazh (SMNM)/Veco for maintenance and services activities for the LNG plant and Oil Export terminal and the three offshore platforms respectively. This $200 million dollar commitment to two island based joint ventures marks a major step in the evolution of the island’s oil and gas industry contracting sector.

On the marketing and shipping front

A further 1.4 million tonnes of LNG per annum were committed during the year with the result that, with one last contract still to be formally approved, we have effectively contracted about 98% of the long term capacity for Trains 1 and 2. The remaining 2% will be retained for flexibility and spot market sales.

Once the current phase is complete, we aim to enhance the value of the development by pursuing potential expansion activities. Re-rating of the system and de-bottlenecking of facilities are probable and we continue to study the possibility of a third LNG train.

The first of the three long-term charter LNG carriers is under construction at Mitsubishi Heavy Industry’s yard in Japan and is already 28% complete. The two remaining long term charters are now commencing construction. The Russian shipping companies Sovcomflot and Prisco, which are members of the consortiums providing these vessels, have also already initiated training for their staff in LNG operations.

Oil tanker charters are also required for the Phase 2 production. I am therefore delighted to be able to announce that, later today, the Company will be signing an HOA with Prisco for the provision of the first two of our medium term oil tanker charters.

To sum up

· The Phase 2 Project is about 80% complete and continues to make good progress.

· We have built on our marketing successes and have substantially sold out Trains 1 & 2.

· Momentum continues to build readiness for operations

· We are delivering the development to the highest Russian and international environmental and social standards.

The real significance of Sakhalin II as a truly world class integrated oil and gas project goes far beyond the boundaries of Sakhalin. There is little ‘easy’ oil left. ‘New frontiers’ are to be conquered to provide the world with the energy it needs. Success is possible if we are able to develop new technologies and deploy them effectively. Given its scale and complexity, Sakhalin II is a gateway investment for understanding the challenge of future energy extraction in the Arctic regions – both on and offshore.

With an estimated 45 billion boe recoverable reserves, Sakhalin is a world class oil and gas province equivalent to the North Sea or Alaska in the 70’s and 80’s, or the deep water Gulf of Mexico in the late 90’s. After decades of development there are about 800 installations in the North Sea, and about 4,000 in the Gulf of Mexico. By contrast, the Russian Federation, with the largest oil and gas shelf in the world, has got 2 installations in operation, with another 3 under development. The scope for further development is clear.

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In closing, I would like to take this opportunity to thank our key Russian and international contractors, many of whom are in the audience, for their many achievements to date. Keep up the good work!

Most of all I would like to thank the Governor and his colleagues in the Sakhalin Oblast for their foresight, understanding and outstanding support through good times…….. and, of course, the more difficult times!

We have come along way from the early 90’s. The business environment then was very different to what we see today. The technical challenges were immense, some thought insurmountable, and the risks were very high. But we, the investors, the Oblast and the Russian Federation, had faith and made the joint commitment to open up this new oil and gas province.

Over the years, we've worked hard together to deliver that vision. Yes, it has been hugely challenging and more costly than originally thought but that, after all, is often the nature of such pioneering activity.

We are committed to delivering a world-class oil and gas development that will be safe, environmentally sound and that will maximise the benefits to the Russian Federation, the Oblast and our shareholders. We are confident of delivering a development that all parties will be proud of.

Thank you

Ian Craig, Sakhalin Energy CEO