Sakhalin Energy Wins LNG Tender from Korea Gas Corp.

Sakhalin Energy has achieved a major marketing breakthrough with the announcement by the Korean Ministry of Commerce, Industry and Energy (MOCIE) that the Sakhalin II Project has won a tender to supply 1.5 million tons per annum (mtpa), plus a possible option of a further 0.5 mtpa, of LNG to Korea.

Sakhalin Energy has signed a Heads of Agreement with Korea Gas Corporation (KOGAS) that will result in the first major strategic energy deal between Korea and Russia, and represents the first supply of Russian natural gas to the country. Negotiations will continue with KOGAS to complete a full Sales and Purchase Agreement during the first half of this year, which will commit to the supply of LNG for 20 years with deliveries expected to commence in early 2008. This LNG sales deal brings the volume of natural gas committed from the Sakhalin II Project to up to 7 million tons per annum for periods of 20 years or more.

This LNG sales agreement reinforces Sakhalin Island as the new strategic source of natural gas in the Asia Pacific Region, and Korea as a major new market for Russian gas supplies. KOGAS is the largest LNG buyer in the world and this deal confirms Russia and Sakhalin Energy as major players in the worldwide LNG market.

Sakhalin Energy's Chief Executive Officer, Ian Craig, said: "We are pleased and honoured that we have been selected by Korea and KOGAS to become one of their major LNG supply sources. It is a testament to KOGAS' confidence in both the Sakhalin II Project and Russia as a reliable supplier of gas.

Sakhalin Energy's shareholders, Shell, Mitsui and Mitsubishi, have built up a long-term relationship with Korea and KOGAS in the LNG business over many years. LNG from Sakhalin will strengthen that relationship even further."

"The agreement with KOGAS means that we have now pre-sold about 70% of the plant's two LNG production trains under long term supply agreements, " Craig added. "We expect to make further announcements in the near future as negotiations mature with other potential customers in Japan and the Asia Pacific Region."

This deal also has special significance for Sakhalin Energy because Korean companies already play a major role in helping to construct the Phase 2 Project. The topsides for the two new platforms are being built in Korea and other Korean companies are working on construction activities on Sakhalin Island.

The deal follows a major tender exercise carried out by KOGAS during the past five months among major LNG suppliers world-wide. KOGAS is seeking up to 6 million tons per annum over a 20-year period split between up to three different suppliers with deliveries commencing in 2008. Following initial bids, Sakhalin Energy was short-listed for further negotiations which has now culminated in Sakhalin Energy wining a deal to supply a major part of KOGAS' requirements.

LNG will be supplied from Sakhalin Energy's new LNG plant, which is under construction at Prigorodnoye on Aniva Bay on the southern tip of Sakhalin. This will be the first LNG plant to be built in Russia and overall design and construction work on the plant is now some 55% complete. The plant will have two gas liquefaction process trains, each with a capacity of 4.8 mtpa – the largest LNG trains currently under construction in the world.

Governor of the Sakhalin Region, Ivan Malakhov, said: "This LNG deal with Korea marks yet another milestone on the road to Sakhalin becoming a major gas supplier to the Asia Pacific Region. Our existing customers in Japan and North America have already shown their confidence in Sakhalin as a reliable future supplier of Russian Far Eastern gas, and we are extremely gratified that Korea and KOGAS have reinforced that confidence even further now. This also contributes to the development of economic relations between Sakhalin and the Republic of Korea. We look forward to building a long and lasting relationship with our close neighbour, Korea, through this landmark LNG supply deal."