TOP INTERVIEWS Interview with Mr. FARKHUTDINOV The Governor of Sakhalin Region   Yuzhno-Sakhalinsk, July 4th, 2002 Read our exclusive Interview in Russian In a recent interview you said: "We now need to develop the oil deposits". Is this the next challenge: to optimize production of Sakhalin-1 and Sakhalin-2 to show the world that Sakhalin is the right place to invest in? I think it is very important for us to do both. As we all know, the profitability of a project increases through minimization of expenses. We will closely supervise the work of foreign companies participating in these projects, and most of these companies' expenses are reimbursable by our government, with our natural gas and oil. By helping them to optimize their expenses, we are therefore saving our own money. This is ultimately a primary objective of the Sakhalin Administration. We also demand that these companies contribute to the development of the transportation infrastructure on the island. For example, we cannot allow a company which happens to damage a road during transportation of freight not to be responsible for its restoration. At the same time, we will work to help minimize other operational expenses of companies that work on the island. We also consider it important to increase the attractiveness of our region for other foreign investors. I can confirm that so far we are successful in doing so. Just recently the Administration of Sakhalin Region has completed license agreement with a consortium for the geological research work under the Sakhalin-5 project. More specifically, the license was given to Rosneft, but BP is playing an important role in the consortium. Would you say that PSAs [Product Sharing Agreements] were an advantage or a disadvantage to the development of oil and gas in Sakhalin? I think that PSA agreements are used in many foreign countries, and that such agreements are useful and profitable for Russia as well. However, these agreements should not be used for all projects, only the largest ones with the largest capital investment. In Russia there are numerous oil exploration projects, but almost none with the size of investments in Sakhalin. For all of them, there should be a high guarantee of return on investment. PSA agreements are important, but they should not be misused. How is your working relationship with the Russian federal government? I would say that on one hand we can be satisfied with the projects of Sakhalin-1 and Sakhalin-2. We know that these are the first projects and therefore they have gone through some problems at the initial stages. We should not dramatize what is going on there. However, many people lack sufficient information about the projects and re-enforce certain stereotypes. On the other hand, we are upset that the project Sakhalin-3 could not get started at this time. All the documents are ready, which should have led to an agreement. An agreement itself should be completed and signed as soon as possible between the Russian side and foreign investors. Energy needs of China, Japan, Korea are rising. Therefore, Sakhalin will become even more important to supply energy. How are you positioning Sakhalin on an international platform to increase relations and energy cooperation? Sakhalin is located on the Northern hemisphere, while all other oil production countries are located in the Southern hemisphere (such as Australia and Indonesia). Therefore, I would say that we are in first place to lead such cooperation. What is the next step towards promoting Sakhalin to foreign investors? First of all, we have a federal law concerning Production Sharing. Our regional government actively participated in creation of this law. We have also signed new regional laws concerning foreign direct investment. In addition to that, we have created a government agency that specifically deals with these projects, so we have set the base for a stable investment environment. Do you think that the revenue created from oil and gas will help Sakhalin to leapfrog developmental challenges and become a very modern and dynamic region? We need revenues to make these changes - but it is a gradual process. In addition to that, Sakhalin region was never known to be a dynamic region with a high level of production development. First of all, the Sakhalin region is geographically complicated. It consists of 59 islands, of which Sakhalin Island is the largest. Nothing like this exists anywhere else in Russia, and all the services that uphold the lifestyles of people on the islands cost a lot of money. What you will see in the middle Russia is different from what you will see here in the middle of the ocean. Our region needs more money than Tombovskaya region, for example. If they need to transport the fuel to the region they just need to get in the car, while we have to cross water. Everything is imported here - food, clothes, etc. - while we only can grow potatoes and vegetables. Is this why it is so important for you to link Sakhalin to the mainland? What are you doing to help increase understanding of this project by the Russian people and in Moscow? The right people in Moscow know about our project to link Sakhalin to the mainland. Last year the federal program called Modernization of Transportation in Russia was established by our government, and one of the purposes of the program is to build this crucial link. But Russia is very big, and our government cannot do everything all at once. Therefore, we have to work on this ourselves and create partners for ourselves. After the first step of creating feasibility documents needed for this project, we will start attracting foreign investors. We will also make sure that this will be a transparent project. You were working as an engineer in the Dymovskaya power plant in the 1970's. What brought you into politics? I would not call it a change into politics. I consider it a continuation of my career as a manager. I was a manager of the largest department in the power plant, then I worked in the Regional Committee in the economic department. This was planned production economics and not free market economics, but it was economics nonetheless... After that I was working as a chairman in the Nevelsk' administration - this was also a management job. After that I was a Mayor of Yuzhno-Sakhalinsk, and in 1995 I was appointed as a Governor by the Russian president. Then I was elected to this seat by the people. I believe that, due to the unique organization of Russian government, the Mayor and the Governor are not politicians, but we are more like managers. What was your biggest challenge and your biggest accomplishment? The earthquake in the Neftegorsk was the biggest challenge I faced, and we did our best to take care of all the survivors. My biggest accomplishment was when we started our oil and gas projects in 1996, and our oil production in 1999. What would you like to leave for the future generation? A full and balanced budget; a developed transportation infrastructure with modern roads, bridges, ports and airports; and a strong electricity and energy supply, especially on Kuril Islands, since living conditions of people there are determined by these factors. Once you solve these housing questions - light, water, heat - everything else is much easier. Note: WINNE cannot be held responsible for the content of unedited transcriptions.