TOP INTERVIEWS Interview with Mrs. GALINA PAVLOVA Director, Department of Oil and Gas Complex of the Sakhalin region Yuzhno-Sakhalinsk, July 16th, 2002 Could you provide us with a quick introduction of the role of the oil and gas Governmental department, and its contribution towards the development of Sakhalin projects? This department was created in 1996 by the Governor of Sakhalin region, working directly under Governor's supervision. The role of our department is to work on all aspects of the development of Sakhalin projects. These are unique to Russia due to the involvement of Profit Sharing Agreements [PSAs]. The sea shelf is federal property, yet these projects are governed from Sakhalin and our Governor is participating in their regulation. The regional administration has been the one to design and initiate the development of the projects in the Sakhalin region. It took us several years to prove to the Russian government that working on those offshore fields in Sakhalin must be done under PSAs. Since such agreements are new to Russian business, this department has been working together with investors to create new procedures which are then presented to the Russian government for approval. Another objective of this department is to create regulations for projects and supervise the work of production chains. This department has created a number of committees and work teams which are responsible for the creation and enforcement of regulations for the projects. In this manner, we are actively involved in attracting subcontractors for the projects, while others are working on designing, developing and preparing licenses for the Sakhalin projects. This department is also at the heart of all the projects. It is where all company representatives - local, national and foreign subcontractors - come to solve their problems. Here we create a database of all the companies available to work as subcontractors with project leaders. Our department also works on environmental safety. Although this is not our primary responsibility, we consider it to be one of the most important aspects of our work. We coordinate the work of all participants and environmental regulators in order to protect the Sakhalin region from long-term ecological damages. Our department develops and implements plans that deal with potential oil spills and product waste which might result from oil and gas projects, and we also conduct seminars to study the influence of oil and gas projects on the natural environment of the island. In fact, the Governor of Sakhalin Region and the Governor of Alaska signed an agreement to promote environmental and economic cooperation. Similar agreements also exist between our Governor and the Governor of Hokkaido. Are you satisfied with the progress and development of oil and gas projects so far? Progress has been positive, but we hope that work on the ocean shelf will accelerate. We have been working on this for many years... in the early nineties we started plans to develop the island's potential, and we hoped to get first oil in 1995. Yet because we are pioneers for these types of projects in Russia, progress has been a challenge in the initial stages. Nevertheless, our success has been impressive: Sakhalin1 and Sakhalin2 have passed the design stage and we are now preparing for the next stage of production. Right now we have to solve more practical problems such as deciding where to base refineries and what construction needs to be done. By the end of this year we are planning to start the construction of factories for the pipelines and the development of the oil terminal in Khabarovsk under the Sakhalin1 project. The Sakhalin2 project is very important for us in light of the fact that it promises to create a major industrial/energy infrastructure on the island. From the oil and gas fields in the north, two pipelines will travel straight through Sakhalin to the first LNG [liquid natural gas] plant, which will be located in the Korsakov region. This will be useful for both Sakhalin Energy and the region as a whole. In addition to the energy infrastructure, the industrial infrastructure will also be modernized, involving the upgrading and development of new roads and railroads, as well as the modernization of ocean ports. We have already started a full reconstruction and renovation of the airport in Nogliki, and we are creating technical sectors for communications development. In essence, the Sakhalin1 and Sakhalin2 projects will bring not only oil and gas to the region, but they will also an inject new life into the economic and international relations of the region. The role of the department is very important, especially due to the PSA and the need for a Russian content. Therefore, what is your role to bring together Russian companies and foreign investors? In these huge oil and gas projects, the government is also playing an important role. On the Russian side we have the government of the Russian Federation and the regional administration. For example, Sakhalin2 is supervised by the supervisory board, which represents Russian side and foreign investors. Meanwhile, the board of Sakhalin1 has an equal amount of representatives from the regional and federal government, and the director of Sakhalin1 must make all the decisions in agreement with the committee. This is in fact the first time that the Russian government has full access to oil and gas projects, actively working on budgets, planning and design. One of our most important role is attracting subcontractors. For example, one of my deputies is responsible for creating a list of potential contractors, creating the base for an extensive database of companies, including applications listing their respecting areas of expertise. Applications have been created together with the Exxon and Sakhalin Energy, then after the analysis of these questionnaires we decide whether or not to include the contractor into this list. The next selection step is when operator companies make their own evaluation and chose contractors from the provided lists. After that the Russian contractors have the right to participate in these tenders. If the contractors are not qualified enough, we can help them reach the required level. We help them to acquire the needed equipment and increase their level of expertise in order to meet the qualification, and one of the ways we work this out is by helping to create joint ventures between Russian and international companies, which help Russian companies participate in these tenders. We put all our efforts into this, which eventually promotes the creation of qualified Russian companies that are capable of participating in international tenders, with international standards. What role do Asian investors play in Sakhalin? Marketing of oil and gas is a problematic goal not only for foreign investors but also for Russia. Japanese investors play an important role in Sakhalin projects; Mitsubishi and Mitsui are participating in the Sakhalin2 project, and a consortium of Japanese companies is participating in Sakhalin1 through SODECO. Yet gas marketing is more difficult now due to intense competition and low demand. Recently, Sakhalin was visited by the president of the Korean gas company, and I believe that one of the purposes of his visit was a potential purchase of oil and gas. A few days ago representatives of Shell also came to Sakhalin from the U.S. & Mexico gas sales department, looking into sales of Sakhalin gas. Moreover, we are also regularly meeting with Japanese representatives, such as Mr. Muraki, General Manager of TokyoGas, in order to market LNG. We studying two ways to transport gas: by pipeline and LNG, although the LNG version is a primary one since the factory is already in the plans and next year it should start operations. The pipeline option is connected with the Sakhalin1 project and incorporates two plans to build a pipeline to China and Japan. At this point we are developing links to market LNG to these countries, and by 2008 our department will be working on the pipeline plan. We are negotiating with Taiwanese and Chinese companies, we are participating in international conferences with future purchasers of gas and oil, we are receiving numerous delegations to the island and developing strategies in government committees as well. The marketing of LNG is closely related to the marketing of oil. Since 1999, the Vityaz oil complex has started extracting oil as part of the Sakhalin2 project, and Sakhalin Energy is selling this high quality oil to Asian markets. In fact, oil exports help to develop closer relationships concerning supply of natural gas. Do you feel that you are also helping to improve the quality of life on Sakhalin through your work? The Sakhalin projects concepts were developed during a time when I worked as a member of the legislative committee. Many people were trying to persuade me to become the head of this committee, and I admit that was hesitant. Yet when I understood the impact of these projects, I realized that this is to going to be a great boost for the development of the Sakhalin and Far Easter region of Russia, so I accepted. Today, I am already starting feeling these changes. The companies such as Sakhalinmorneftegas have reached such a level of development that it has allowed them to work in numerous major projects, and their leadership role has also allowed them to invest in social development projects which directly benefit the community. They have built housing, hospitals, sport complexes in numerous regions- Oxa, Nogliki and Yuzhno-Sakhalinsk -and many Sakhalin residents have received jobs in the companies involved in these projects. Meanwhile, a new generation of young people from Sakhalin speak fluent English and have the ability to work in international companies. The region has received budget bonuses from the federal government and we are already receiving profits from Sakhalin1, which allows us to invest in our energy infrastructure, for example, to ensure constant and cost-effective energy supplies which uses gas instead of coal energy. Nevertheless, there is a concern that the federal administration is planning to limit the profits which are re-distributed to the region. There is a dangerous tendency to centralize profits into the federal budget, and we are fighting to make sure that we receive the portion of the profits that has been promised to us through our agreement with the federal government. We hope that our rights will be preserved, since we have a support of President Putin and Vice-President Kasyanov, who understand that the majority of work with these projects is done by our regional administration. I used to be a head of the ecosystems laboratory on the island. Therefore, I completely understand the problems arising from working on these projects, and I can assure you that we will not continue exploiting the ocean shelf if we cannot receive any profits in return. Without these profits, the regional administration will lose its interest in doing these projects and then it would be impossible to complete them without our participation. How did you became involved in such male dominated business sector? I never planned to be in this post, which is perhaps why it was given to me. I was educated in Moscow University and had very good teachers and managers, which helped me to gain the skills needed for this position. I am the type of a woman who works well with men - they respect me, and sometimes I can use the fact that I am a woman and make them work even harder. I had to learn from foreign investors how to be tough and work with them as equals. I also surround myself with a good team, and lead through consensus. I never planned to be in this post, which is perhaps why it was given to me. I was educated in Moscow University and had very good teachers and managers, which helped me to gain the skills needed for this position. I am the type of a woman who works well with men - they respect me, and sometimes I can use the fact that I am a woman and make them work even harder. I had to learn from foreign investors how to be tough and work with them as equals. I also surround myself with a good team, and lead through consensus. Note: WINNE cannot be held responsible for the content of unedited transcriptions.