FFC: Sakhalin: Interview with Mr Ian G. Craig

The investment level by Sakhalin energy in 2005 seems to be decreasing. Is this a transition phase for the project?

Construction activity is at a plateau. Investment levels in 2005 will therefore be broadly similar or slightly higher than 2004 depending on the phasing of certain activities.

Construction is broadly on track but there are certain areas where we are not satisfied with the progress of the project. We are learning from our experience and we are taking corrective measures in order to prevent future delays.

Construction approvals has been a key issue - we have had to obtain multiple approvals for so many things, and there was no guarantee that we would obtain approvals on time. At present we are managing this issue and I am nonetheless confident that we are going to complete the construction phase by the end of 2007. That was our initial target and it has not changed.

There have also seen numerous functional and personnel changes in the Russian Federation Agencies, which has also slowed the process down slightly.The Sakhalin government administration has been very helpful in trying to coordinate and assist us in order to obtain project approvals as quickly as possible.

The tender for the Sakhalin 3 block is coming up in September. Will Sakhalin Energy bid on the project as a group?

Sakhalin Energy is a joint venture established only to work on the Sakhalin 2 PSA [Product Sharing Agreement]. Therefore, for the Sakhalin 3 option, participation in the bidding process will be a matter up for each of the individual shareholders.

There have been rumours that Gazprom is seeking to join Sakhalin Energy and take part in the project. Is this a future possibility?

That has been a public statement by our shareholders, so it is not a decision to be taken by the management of Sakhalin Energy. It is a question of equity-sharing between shareholders.

Do you believe that it would be beneficial?

. Sometimes it is more difficult to reach an agreement with a large number of shareholders, but if you have a shareholder with a great deal of local knowledge like Gazprom, this could greatly contribute to certain issues such as approvals. The shareholders would combine Russian knowledge and western knowledge, that would be beneficial to develop new solutions to particular problems.

CNPC [China National Petroleum Corporation] has also expressed an interest in cooperation. Are they a potential partner as well?

It is not an issue for me to decide. The shareholders will decide what they want to do.

Essentially, all our shareholderss have had a very beneficial role in the project. They are all unique: Mitsubishi is the largest importer of LNG in Japan, Shell is the biggest LNG player in the world, and Mitsui is the second largest... This unique combination has allowed us to make good progress for marketing development.

Gazprom could also help in terms of increasing Russian content and contributing through local knowledge. Other players could also support our development, depending upon the markets we concentrate on in the future.

As far as new markets, what is the status of LNG supplies to Mexico and California?

We signed an agreement to supply 37 million tones of LNG over a 20-year period to Shell Eastern Trading Ltd for the North American natural gas market. It represents the first sales of Russian natural gas to North America, while helping to increase value and long term sales of Sakhalin's gas.

Is this part of a strategy to diversify and decrease dependence on the Asian market?

It is better not to put all your eggs in one basket - and this will spread out our market exposure, leading to approximately 20% to North American markets.

Through this deal we are exposed to the North American price mechanisms rather than the Japanese basket of crude price mechanisms. American mechanisms tend to be more volatile and are driven by different market factors. This forms a useful diversification of the portfolio.

Rumours are that Exxon Neftegas is considering a change of plans, from pipeline sales to LNG sales, which would require a collaboration agreement with Sakhalin Energy for the use of its LNG plant... In retrospect, do you think that the pipeline route was the wrong strategy?

I do not think that it was the wrong strategy. I think that any pipeline option requires a very substantialcommitment from the buyers you are approaching. In our case, with LNG we are bringing together a host of buyers in order to combine demand in various markets. We are combining various customers and establishing a strong marketing portfolio. With a pipeline option you have less flexibility and it may take longer to get the commitments you need..

Having said this, is Sakhalin Energy taking Exxon's market share?

I do not think that Sakhalin 2 is taking away market share from Sakhalin 1. There is enough potential demand in Asia Pacific to accommodate both of our projects. The Sakhalin 1 project simply depends on the scale of the commitment from Japan in order to make the pipeline option work. It increases marketing difficulties and often takes longer to establish. It depends on what each supplier and the buyer perceive at the time of market development.

After five months as CEO of Sakhalin Energy, could you tell us about your personal experience in Sakhalin?

It has been very challenging and very exciting. This is just the start, and it is a great privilege and a great advantage to be here at the beginning, taking a part in building the vision of the company. I am enjoying the experience because there are a lot of challenges - it is a new frontier, and we have to adapt and work in different ways, while dealing with cultural and communication gaps. You are going to hear much more from Sakhalin in future years.

We are truly building a company that is going to perform here for next 40 years, and I am very hopeful for the future of Sakhalin. The potential is enormous and the talent we have in Russia is excellent.