Sakhalin Energy Signs 3rd LNG Deal with Kyushu Electric

The multi-billion dollar Sakhalin II Phase 2 Project achieved another major marketing success with the signing of a substantial liquefied natural gas (LNG) supply agreement between Sakhalin Energy Investment Company Ltd. and Kyushu Electric Power Company, Incorporated. The deal calls for the supply of up to 0.5 million tons per year for a period of some 21 years.

The sales deal with Kyushu Electric is the third successful deal signed with a major utility company in Japan, which reinforces Sakhalin Energy's firm position as a major new supplier of LNG to the Japanese market. Since the Company's formal Declaration of Development Date for the Lunskoye gas and condensate field this May 2003 - which launched the Phase 2 development of the Sakhalin II Project - the momentum of the project has also been accelerating on the marketing front. This deal brings volumes of natural gas sold from the Sakhalin II Project to more than 2.8 million tons per annum for periods in excess of 20 years.

This LNG sales agreement further reinforces Sakhalin Island as the new strategic source of natural gas for Japan, and confirms the wider Asia Pacific Region as a major new market for Russian gas supplies. It also represents the beginning of Russia and Sakhalin Energy as major new players in the worldwide LNG market.

Steve McVeigh, Chief Executive Officer, signed the Heads of Agreement (HoA) on behalf of Sakhalin Energy, and President Shingo Matsuo, for Kyushu Electric. The long-term supply of LNG will begin with first deliveries expected in 2010. The two companies will now continue negotiations to enable a full sale and purchase agreement (SPA).

"This latest deal with Kyushu Electric from the southern main region of Japan represents a growing chain of commitments from Japan. It is a tribute to both the Sakhalin II project and the Russian Far East that customers are confident and are keen to tap the abundant gas supplies from Sakhalin, which represents the closest possible available supply source to Japan," said Sakhalin Energy Chief Executive Officer Steve McVeigh.

"We are extremely pleased that Kyushu Electric has become one of our foundation customers, and a leader in opening up this new strategic far eastern gas supply source. With our strength in terms of capacity and proximity, we shall work in cooperation with Kyushu Electric to establish a strong relationship between us and become their preferred supplier," added Steve McVeigh.

The LNG market is fiercely competitive at the moment. There are many other suppliers competing for business, coupled with uncertainties over deregulation and slow economic growth in the region. However, the Kyushu Electric agreement again indicates that a strategic and competitive supply source will bring success for Russia and Sakhalin Energy in the LNG business despite these tough conditions.

Steve McVeigh added, "This agreement with Kyushu Electric keeps our successful momentum in the marketing effort moving forward, and means that we have now pre-sold a significant part of the first train. We will continue the effort and expect further announcements of success in the near future as negotiations progress and mature over the remaining volumes from the plant. Sakhalin Energy believes that its strategic and competitive positioning will overcome challenges posed by today's tough market."

LNG will be supplied from Sakhalin Energy's major new LNG plant, which is planned for construction at Prigorodnoye on the southern tip of Sakhalin. Front-end engineering design work on the plant has been completed, and full construction activities on the plant are expected to commence shortly following final approvals from the Russian Government. The LNG plant is a major part of the Sakhalin II Phase 2 project. It is the first LNG plant to be built in Russia and will have a total capacity of 9.6 million tons per annum (mtpa). The plant will have two gas liquefaction process trains, each with a capacity of 4.8 mtpa – currently the largest LNG trains planned in the world.

The oil and gas resources located offshore of Sakhalin are world-class in size and quality, and in the future there is a possibility for the Sakhalin II facilities to be expanded to accommodate additional hydrocarbon export capacity from other projects, thereby becoming a "Corridor to the marketplace".

Sakhalin Oblast Governor Igor Farkhutdinov commented: "With the commitment from Kyushu Electric, we are pleased that our very close neighbor continues to confirm their interest in Sakhalin as a strategic and reliable supplier of natural gas to Japan. It is a great pleasure to share the development of this world class project with Kyushu Electric. Sakhalin will become even more attractive not only as a source of energy supply but as a partner of Japan through strong and long-term relationships.

Mr. Shingo Matsuo, President of Kyushu Electric, commented, "We recognize the importance of Sakhalin as a close, competitive and flexible supplier of liquefied natural gas for the future."