Sakhalin Energy Signs First LNG Sale and Purchase Agreement

Sakhalin Energy signed its first liquefied natural gas (LNG) sale and purchase agreement (SPA) with Kyushu Electric Power Company Incorporated. This is the first SPA signed with a major Japanese utility company, and includes an earlier start to deliveries.

The SPA follows an earlier initial Heads of Agreement (HoA) signed with Kyushu Electric in July last year, which calls for the supply of up to 0.5 million tons per year for a period of more than 20 years. The SPA completes the full terms and conditions of supply and purchase based on the initial HoA.

As part of the final SPA, Kyushu Electric decided to accelerate the start of LNG deliveries to 2009 from an original plan of 2010 for the long term supply of LNG from Sakhalin.

The finalization of the deal with Kyushu Electric, including the earlier start to deliveries, confirms Sakhalin Energy's decision to opt for LNG as the most efficient way to create a new and dynamic market in Japan and rest of the Asia Pacific for gas from the Russian Far East.

Steve McVeigh, Chief Executive Officer, signed the SPA on behalf of Sakhalin Energy, and President Shingo Matsuo, for Kyushu Electric.

"Sakhalin Energy is glad to welcome Kyushu Electric as our first customer to sign an SPA. We would like to pay special tribute to Kyushu Electric for the remarkable speed we have managed to achieve together to negotiate the SPA. I am grateful for the confidence and value Kyushu Electric places on Sakhalin LNG that has enabled us to achieve this milestone," said Steve McVeigh.

"The fact that Kyushu Electric has decided to accelerate the start of deliveries reinforces the natural advantages of LNG from Sakhalin for Japan. Our position as next-door neighbor and our abundant reserves gives us a strong foundation to build a lasting relationship with Kyushu Electric, and the opportunity to become a long-term core supplier to this key Japanese utility, " added Steve McVeigh.

LNG will be supplied from Sakhalin Energy's major new LNG plant in Prigorodnoye on the southern tip of Sakhalin, where construction has already commenced. With early earthworks at the site virtually complete, work on the plant has now moved into the next phase with construction activity on the LNG storage tanks underway. Work is commencing on the foundations for plant equipment - such as the two 4.8 million tons per annum liquefaction trains, which are the largest LNG trains currently under construction in the world. More than 2000 people have been mobilized to the site, and 80% of equipment for the plant has now been ordered.

Sakhalin Oblast Governor Ivan Malakhov commented: "Russia already has a reputation of being a stable supplier of gas into the European market. Sakhalin is now moving Russia from the European stage to the world stage as a natural gas supplier. We welcome Kyushu Electric as a key player in opening up this new Russian energy supply to the Asia Pacific Region, and we are particularly pleased that this SPA has led to increased supplies of Sakhalin LNG. We look forward to developing further relations with Kyushu Electric in the future, and see it as a significant step in further strengthening ties between Russia and Japan."

Mr. Shingo Matsuo, President of Kyushu Electric, commented: "Kyushu Electric concluded a full Sale and Purchase Agreement with Sakhalin Energy today. Kyushu Electric values the Sakhalin-II project as a new, stable and economic supply source given its abundant reserves and proximity to Japan. It is expected that the development of this project will contribute to the economic development of the Sakhalin Oblast and the increasing energy demand in the East Asia region."