Gazprom's delegation is taking part in the 15th Sakhalin Oil and Gas 2011 International Conference. Viktor Timoshilov, Head of the East-Oriented Project Coordination Directorate addressed the audience with a speech entitled “Developing Gas Supply to Sakhalin Oblast and Neighboring Regions of Far Eastern Federal Okrug”.

He noted that the Eastern Gas Program gave priority to securing natural gas supplies to consumers in Eastern Russia. “Natural gas utilization by the population, industrial and power sectors of the country's eastern regions will raise the living standards, create new jobs and improve the environment,” underlined the speaker.

Despite the abundant natural gas resources, the average gasification level of Eastern Siberia and the Far East is only 6.6 per cent today. Natural gas is supplied to separate eastern regions: the Republic of Sakha (Yakutia) – 24.07 per cent, the Khabarovsk Krai – 17.43 per cent, the Sakhalin Oblast – 8.57 per cent. Gasification of the remaining regions is absolutely insignificant or close to zero.

Gazprom's intense efforts on shaping a resource base, gas production and transmission capacities as well as constructing gasification facilities in Eastern Russia opens up prospects for adequate natural gas supplies to consumers.

The Sakhalin Oblast was the first Russian region to ink a five-year Gasification Program (until 2014) with Gazprom. Its scope of financing is RUB 4.5 billion.

Gazprom has completed the construction of a gas pipeline running to CHPP-1 of Yuzhno-Sakhalinsk and delivered natural gas to the facility in spring 2011. This will significantly improve the environmental situation in Yuzhno-Sakhalinsk.

Before the end of October, Gazprom is going to ensure readiness for gas feeding at an inter-settlement gas pipeline connecting the Dalneye gas distribution station (GDS) to the Novo-Alexandrovsk settlement with laterals to a number of agroindustrial facilities of Yuzhno-Sakhalinsk. Before the year end, the Company plans to finish design and survey for an inter-settlement gas pipeline connecting Novo-Alexandrovsk to the Klyuchi, Sinegorsk and Sanatornoye population centers.

“Gas laterals, GDS and inter-settlement gas pipelines in the Tymovsky, Makarovsky, Dolinsky and other Sakhalin Oblast's regions may only be constructed if connected to the Sakhalin II project gas trunkline crossing the Island from the North to the South. Therefore, gasification of the said regions will be possible when the Sakhalin II Supervisory Board decides on the possibility of connecting to this gas trunkline and the relevant technical conditions are created by Sakhalin Energy ,” said Viktor Timoshilov.

As to the Nogliki municipal district, the reliability of gas supplies there will be improved through a gas lateral from the gas trunkline being built between the Kirinskoye gas and condensate field onshore processing facility (OPF) and the Sakhalin main compressor station of the Sakhalin – Khabarovsk – Vladivostok gas transmission system (GTS) including the Nogliki GDS. These facilities can be commissioned in 2012.

Viktor Timoshilov stated that the main obstacle that recently hindered the gasification development of southern and central Sakhalin and the Primorsky Krai was the absence of the Russian Government's decision on the form of royalty and entitlement gas from the Sakhalin II project. “The September 6 Directive by the Russian Government on generating income in kind as part of the Sakhalin II project until 2014 offers opportunities for further gas penetration in Sakhalin and the Primorsky Krai as well as for the gas supply development in the Khabarovsk Krai. Now we may confidently state that natural gas is available for the top-priority gasification projects in southern and central parts of Sakhalin as well as in the Primorsky region,” he said.

The speaker noted that significance of the Sakhalin gas for gas supplies to Russia's Far East went beyond the bounds of Sakhalin. On September 8, the first startup complex of the Sakhalin – Khabarovsk – Vladivostok gas transmission system (GTS) was commissioned. Built in a record short period of two years, the complex is a key element of the Unified Gas Supply System being built in Eastern Russia. The project became a spectacular example of economic integration in three Far Eastern regions – the Sakhalin, Primorsky and Khabarovsk Krais.

Gazprom's activities in Eastern Russia will fundamentally improve energy resources supply to Far Eastern regions. At the same time, the Company's experience gained from projects in Eastern Russia proves that the state support is necessary,” highlighted Viktor Timoshilov. He stated that the gas production and transmission infrastructure in the offshore areas and in Yakutia was created “from scratch”, remoteness of the region resulted in high costs of procurement, while its geological conditions were more complex than those in Western Siberia.

“We are facing similar business conditions in Eastern Russia like oil companies entitled to state benefits over the initial period of field development. At the same time, the natural gas market is more complex than the oil market. Therefore, granting of benefits similar to the benefits that oil companies are enjoying will be expedient for successful delivery of gas projects in the East. This is primarily needed over the project payback period: abatement of the severance tax, reduction or removal of export customs duties for natural gas produced offshore the Far East and Yakutia. We should also include here reduction or removal of export customs duties for equipment and goods produced only abroad and to be used in eastern gas projects including the construction of gas chemical facilities,” said Viktor Timoshilov.

In addition, it is necessary to include into Federal Target Programs the funds intended for construction of transportation infrastructure and power networks in the regions involved in petroleum projects for Eastern Siberia and the Far East.

Considerable support may also be provided through allocation of the Russian state entitlement gas from the Sakhalin II project for development of the Russian Far East over the whole period of the Production Sharing Agreement as was provided for in the said Agreement. “This will not only serve as a forceful tool to restrain the regional energy tariffs, but also create a great comprehensive effect that will boost investment and business activities in the Far East,” said Viktor Timoshilov in conclusion.

Background

The September 2007 Order by the Russian Federation Industry and Energy Ministry approved the Development Program for an integrated gas production, transportation and supply system in Eastern Siberia and the Far East, taking into account potential gas exports to China and other Asia-Pacific countries (Eastern Gas Program). Gazprom was appointed by the Russian Federation Government as the Program execution coordinator.

Pursuant to the Russian Government Directive No. 1539-r dated September 6, 2011, the Russian Federation takes the income from the Sakhalin II project in kind (natural gas) between 2011 and 2014.