Sakhalin Energy is developing the Piltun-Astokhskoye oil field and Lunskoye gas field off Sakhalin Island in Russia, including building infrastructure to enable year-round oil and gas production and export. Phase 1 involves seasonal oil production while Phase 2 expands this to include two new offshore platforms connected by pipelines to an onshore processing facility and LNG plant. Significant progress was made in 2004 on construction projects and infrastructure upgrades to support the large-scale development.

1. Sakhalin Island (Head
Office)
Sakhalin Energy Investment Company Ltd
35, Dzerzhinskogo Str
Yuzhno-Sakhalinsk, 693020, Russia
Moscow branch
Sakhalin Energy Investment Company Ltd
Novinsky boulevard, 31
Moscow, 123242, Russia
Rijswijk branch
Sakhalin Energy Investment Company
Visseringlaan 25, P.O. Box 60
2280 AB Rijswijk, The Netherlands
www.sakhalinenergy.com
DesignedbyJazCreative/www.jazcreative.com.au
2 0 0 4 A N N U A L R E V I E W
Sakhalin Energy
The New Energy Source for The Asia Pacific
Sakhalin Energy
The New Energy Source for The Asia Pacific

2. Completed CGBS
at sunset.
2 0 0 4 A N N U A L R E V I E W 1
2 Message from the CEO
4 The Sakhalin II Development
– An Overview
8 The Sakhalin II Development
- 2004 Progress
9 Celebrating Six Years of Production
10 Infrastructure Projects and Logistics
15 Offshore Platforms: Concrete gravity
Based Structures (CGBS) and
Topsides
16 Onshore Processing Facility (OPF)
19 Onshore and Offshore Pipeline
Projects
20 LNG Plant and Oil Export
Terminal (OET)
22 The Markets
24 Meeting the challenge
25 Russian Content
26 Employment Opportunities for
Sakhalin Island Residents
29 Indigenous People
30 Social Investment - Korsakov
32 Pipeline River Crossings
35 Western Gray Whales
36 Oil Spill Response
39 Waste Management
40 Health, Safety,
Environment, Security
(HSES) and Social
Activity in 2004
contents

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Message from the CEO
2004 was another remarkable year for Sakhalin Energy. It was a year in which the Sakhalin II development achieved yet more
“firsts” for Russia thanks to Phase 1 crude sales and Liquefied Natural Gas (LNG) marketing. We also made good progress on
our Phase 2 Project. Overall progress on this groundbreaking project – which includes design, procurement and construction
– was almost 50% complete at the end of 2004.
Reflecting on some of the highlights in 2004, Sakhalin Energy commenced its sixth crude oil production season earlier than usual
and produced a total of 11.7 million barrels, a 14% increase in comparison with 2003. In November 2004, we delivered the
first shipment of Russian Far East crude direct to Japan’s Tohoku Electric Power Company, representing the first sale of Vityaz crude
directly to a power company. We also expanded our existing customer base with the first shipments to Thailand.
In October we achieved a major breakthrough when we signed an historic agreement that will see Sakhalin Energy deliver
Russian gas to the extremely competitive North American market. This landmark deal represents the first sale of Russian natural
gas to North America and strengthens Russia’s position as a global supplier of natural gas.
Other LNG sales developments in 2004 include the signing of a binding Heads of Agreement with Toho Gas and the execution
of fully termed Sales and Purchase Agreements with both Kyushu Electric and Tokyo Electric. By the end of 2004, we had sold
over 50% of the capacity of our two LNG trains and with a number of commercial opportunities in Japan, Korea and China we
aim to substantially complete selling the remaining capacity in 2005.
In March 2005 we decided to reroute the offshore pipeline routes linking the two production platforms in the Piltun-Astokskoye field
off Sakhalin Island to the shore. We selected the most southern route as this alternative allows us to find a balance between meeting
regional energy needs, contributing to Russian’s economic development and protecting the endangered western gray whale.
Major project construction milestones were achieved in 2004. The successful completion of the main concrete works of the
Lunskoye platform - the first concrete gravity based structure to be built in Russia - is a magnificent achievement, and a tribute to
the many Russian companies and workers who have played a key role in this success. We also made considerable progress
on infrastructure upgrades, including extensive road and bridge works, as well as upgrades to Nogliki airport, which opened
for daylight operation in October 2004.
Whilst the Company achieved some significant safety milestones in 2004 and early 2005 thanks to the efforts made by both
Sakhalin Energy employees and our contractors, our overall safety performance still needs improvement. It is with deep regret that
we recorded six fatalities associated with our operations in 2004, four of which involved road traffic accidents. Recognising that
safety is one of our biggest challenges, we have launched a road safety campaign that involves both Company employees and
our contractors. The three-year campaign will focus on training, education and road safety awareness in an effort to reduce road
traffic accidents.
As we journey into 2005 the Company looks forward to building upon the production successes of Phase 1 and the overall
progress of the Phase 2 Project in a safe, efficient and environmentally responsible way. I hope that you will find this report a
useful and informative review of Sakhalin Energy’s activities during 2004.
Ian Craig
Chief Executive Officer
1 Construction of the Sakhalin II Onshore Pipline networks.
2 Molikpaq platform.

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4 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 5
The Sakhalin II development is an oil and gas exploration
and production project undertaken by Sakhalin Energy,
a Shell-led operating company, in partnership with Mitsui
and Mitsubishi, for the Sakhalin II Production Sharing
Agreement (PSA). Sakhalin Energy was formed in 1994
to develop the Piltun Astokhskoye (PA) oil field and the
Lunskoye gas field in the Sea of Okhotsk, offshore Sakhalin
Island in the Russian Far East.
Sakhalin II operates under the first PSA signed in Russia
and when we produced our first crude oil in 1999 it
represented Russia’s first offshore oil production.
The multi-billion dollar Sakhalin II development represents
the largest single foreign direct investment project in Russia.
Phase 1 of the project has been successfully producing oil
from the Vityaz complex since July 1999, and during that
time, over 60 million barrels of oil have been produced
and exported.
Phase 1 of the development focused on oil development
and went into seasonal production during the summer
period in 1999 at the Vityaz Production Complex. The sea
around the Vityaz Production Complex is covered with ice
for approximately six months of each year and, as such,
production from Phase 1 is currently limited to the ice-free
period – about 180 days.
The Phase 2 Project focuses on extending the existing Phase
1 development to enable export of condensate and crude
oil year round from the Sakhalin II oil and gas assets. Phase
2 also includes the construction of Russia’s first LNG plant,
which will have an annual capacity of 9.6 million tonnes
(mtpa). In addition to the construction and installation of two
new offshore platforms, a system of offshore pipelines will
be constructed to bring the oil and gas onshore from the
platforms. The hydrocarbons will then be sent to an Onshore
Processing Facility (OPF), where the gas and condensate
will be separated and further processed in order for it to be
transported via two 800 kilometre onshore pipelines – one
each for oil and gas. These pipelines lead to an Oil Export
Terminal (OET) and LNG plant at Prigorodnoye on Aniva Bay
in the south of the Island, where the sea remains largely ice-
free all year round.
The Sakhalin II
Development –
An Overview
1 LNG construction site.
2 Completed LUN-A CGBS.

5. 6 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 7
Piltun Astokhskoye Platform -
A (PA-A)/Molikpaq
The Sakhalin II Phase 1 Project involves the development
and production of oil hydrocarbons on the Astokh feature
of the Piltun Astokhskoye field. The Molikpaq forms the
central feature of the Vityaz Production Complex, which
also consists of a Single Anchor Leg Mooring (SALM) buoy
and the Okha Floating Storage and Offloading (FSO)
vessel. Oil produced in the ice-free summer season from
the Vityaz Production Complex is transported by sub-sea
pipeline to the SALM and FSO where it is transferred to
shuttle tankers for sale to customers.
During the Phase 2 Project, the Molikpaq platform will be
connected to the new pipeline infrastructure to enable
year-round production.
Piltun Astokhskoye Platform - B (PA-B)
PA-B will be a manned integrated oil and gas platform with
drilling facilities. Its oil production capacity will be 70,000
barrels per day (11,000 cubic metres per day) and it
will export 2.6 million standard cubic metres (92 million
standard cubic feet) of associated gas per day. The drilling,
processing and production platform will extract oil and
associated gas from the Piltun reservoir. The platform will
be located approximately 12 kilometres off the northeastern
coast of Sakhalin in a water depth of 32 metres.
Lunskoye Platform (LUN-A)
The LUN-A Platform will have drilling facilities,
accommodation and minimum processing facilities. It will
have the capacity to produce 51 million cubic meters of
gas per day (1,800 million standard cubic feet per day),
and approximately 50,000 barrels of condensate per
day (8,000 cubic meters per day). It will be located 15
kilometres off the northeastern coast of Sakhalin Island in
a water depth of 48 metres. Separation, including gas
treatment of LUN-A’s oil/condensate will be undertaken
onshore at the OPF, which will also supply power to the
platform via submarine cable. This platform will produce
the majority of the gas for the LNG Plant in Prigorodnoye.
Pipelines
The pipelines, one oil and one gas, will transport
hydrocarbons from the three platforms via the OPF, to the
LNG Plant and OET. The offshore pipelines running from
PA-A to shore will each cover a distance of approximately
46km while the offshore pipelines running from PA-B to
shore will each travel a distance of approximately 72km.
Once onshore, the oil and gas pipelines will be co-
mingled respectively and will each cover a distance of
approximately 800 kilometres, and will share a standard
43 metres width right of way (ROW). The total length of
onshore pipelines to be installed is some
1,670 kilometres.
Onshore Processing Facility (OPF)
The OPF is located in the northeast of Sakhalin Island,
inland from the landfall of the Lunskoye Platform
gas pipeline.
The primary function of the OPF is the processing of gas
and condensate received from the Lunskoye field prior to
transportation to the LNG plant and Oil Export Terminal
(OET). The OPF will also receive oil and gas streams from
the two platforms on the PA field for onward transportation
by pipeline to the OET.
The OPF will include a 100 Mega Watt power plant,
which will generate power for the OPF itself as well as the
LUN-A Platform. At full capacity, the plant will be capable
of processing 51 million cubic meters per day (1,800
million standard cubic feet), and about 10,000 cubic
meters of condensate/oil per day (65,000 barrels).
The condensate will be integrated with oil production from
the PA field, and transported by pipeline via the OPF. The
combined condensate and oil will then be sent through the
main onshore oil line to the OET using booster pumps at
the OPF with a capacity to pump up to 195,000 bbl/d.
Infrastructure Projects and Logistics (IPL)
Sakhalin Energy has upgraded a significant amount
of Sakhalin Island’s infrastructure to support the Phase
2 Project construction activities. These are collectively
referred to as the Infrastructure Upgrade Project (IUP).
In total these works will involve approximately $US
350 million worth of improvements to Sakhalin Island’s
infrastructure. At the end of 2004, the Company had
already spent $US 225 million on upgrades to the island’s
roads, railways, bridges, hospitals, waste disposal sites,
Kholmsk Fishing Port and the Nogliki Airport.
LNG Plant and Oil Export Terminal (OET)
The LNG processing plant and OET are being built
on a 490 hectare site at Prigorodnoye on Aniva Bay,
approximately 15 kilometres east of Korsakov. The LNG
Plant is intended for the reception, treatment, processing and
liquefaction of gas from the Lunskoye field and associated
gas from the PA field. It includes storage and loading
facilities and is the first LNG plant to be built in Russia.
The LNG plant will consist of two gas liquefaction process
trains, which will use a dual mixed refrigerant process
particularly suited to Sakhalin’s cold climate. Both trains
will have an annual capacity of 4.8 million tonnes each.
The LNG plant will also include two 100,000 cubic metre
storage tanks and a jetty, with two loading arms and a
vapour return arm, that will extend offshore some
800 metres.
The OET will be located 500 metres east of the LNG plant.
Crude oil will be exported via a sub-sea pipeline to a tanker
loading unit located approximately five kilometres offshore.
The OET will support the storage and export of 170,000
barrels per day of crude oil, along with 5,000 barrels
per day of condensate from the LNG facility. The OET will
comprise of two floating roof oil storage tanks with export
pumps and associated facilities.
The LNG plant and OET will be self sufficient having their
own integrated facilities including power, water, fire fighting,
waste water treatment services and oil spill
response capability.
1 Sakhalin Island and the Sakhalin II Project.

6. 1
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8 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 9
P H A S E 1
Celebrating Six Years of Production
2004 was the sixth year of production for the Complex
and cumulative oil production for the season was 11.7
million barrels. In total, Phase 1 has now produced
and exported more than 60 million barrels to markets in
Asia and beyond. In June 2005, it is anticipated that
the hundredth cargo of Sakhalin Vityaz crude oil will be
loaded at the Vityaz Terminal.
Oil production levels have fallen during recent production
seasons due to natural pressure reduction in the reservoir.
The Pressure Maintenance Project (PMP) designed to boost
production, started operations in March 2004. The PMP
facilities are designed to treat seawater and inject it into
the reservoir thus raising reservoir pressure and increasing
annual oil production levels and ultimate recovery from
the reservoir. Construction and commissioning work was
completed on the surface facilities in the first quarter
of 2004. Following drilling of the first water injection
well, injection of water into the reservoir commenced in
March 2004. Three additional water injection wells were
subsequently drilled and by the end of April 2005 up to
90,000 barrels per of day were being injected into the
reservoir through these four wells.
Molikpaq Tie in Project (MTI)
In early 2005, work began offshore on the Molikpaq
platform and at fabrication yards onshore for the
construction of new modules for the MTI project. This
project which forms part of the Phase 2 project, will
enable year round oil and gas production and export
from the Molikpaq by connecting it to the new pipeline
infrastructure which will deliver gas and oil to the LNG
plant and OET being built at Prigorodnoye in the south
of the Island.
The Sakhalin II
Development -
2004 Progress
1 Molikpaq platform.
2 PMP module lifted onto Molipaq platform.
3 Hose reel on FSO (Okha).
4 Molikpaq platform.

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10 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 11
P H A S E 2
Infrastructure Projects and Logistics
Hospitals:
In 2005, Sakhalin Energy will begin upgrades on
hospitals in Nogliki and Poronaysk, as well as on the
region’s main hospital in Yuzhno-Sakhalinsk at a total
cost of $US 7.2 million. These upgrades will include
construction works, the provision of medical equipment
(in excess of $US 3 million), training in emergency care
and the provision of operation and maintenance funding.
The list of the medical equipment to be provided includes
X-ray machines, blood banks, digital ultrasonic scanners,
artificial kidney machines and more. In addition to
this, Sakhalin Energy will also provide fully equipped
ambulances to six district hospitals – Nogliki, Poronaysk,
Kholmsk, Korsakov, Argi-Pagi (Tymovsk) and
Yuzhno-Sakhalinsk.
The upgrades will allow for the provision of safe,
unimpeded emergency healthcare services for local
residents and communities as well as Sakhalin Energy
employees, contractors and subcontractors.
Roads and Bridges:
Road and bridge infrastructure upgrades commenced
in late 2002 when Sakhalin Energy and the Sakhalin
Oblast Administration agreed on a programme of road
and infrastructure construction works. Work under this
programme is expected to continue until the end of 2007.
By the end of 2004, Sakhalin Energy had already
reconstructed more than 15 kilometres of roads and
175 culverts. The Company has also constructed more
than 60 kilometres of gutters, 13 temporary bridges
and 18 permanent bridges. Work to date has been
completed in cooperation with Sakhalin Road Department
(Sakhavtodor), and involved local Island contractors
Vostokdorstroy, Tymovsk Road Construction Department
and Sakhalin Construction and Investment Company.
Agreements have also been executed with seven of
the Island’s Municipalities (Korsakov, Kholmsk, Dolinsk,
Makarov, Poronaysk, Nogliki and Yuzhno-Sakhalinsk) for
road and bridge upgrades and asphalting of roads in
townships that are experiencing increased traffic flow as a
result of the Phase 2 construction period. The cost of this
work is approximately $US 14.5 million.
Kholmsk Port:
In 2003-2004 Sakhalin Energy upgraded Kholmsk Fishing
Port to permit the receipt of Phase 2 construction materials,
including line pipe and cargo for the OPF. In 2004, the
port serviced 45 vessels and unloaded more than 114
thousand tonnes of pipe. Ancillary works at the port,
including office upgrades, were also undertaken. At the
end of 2004, Sakhalin Energy’s contractor, 3-S, employed
approximately 100 local people full-time in the port. In
addition, three Sakhalin freight companies were working
permanently in the Port managing the onward transfer
of cargo.
In 2005, warehousing requirements at the port will be
reviewed to ensure they meet the longer-term onshore
and offshore supply requirements of the Project. Sakhalin
Energy will also investigate the establishment of an
economical development zone to encourage local service
providers to supply the Company during the operational
stage of the Project (supply of construction consumables,
filters, oil and other materials) from 2007 onwards.
Nogliki Airport:
In October 2004, following extensive upgrades, the
Nogliki Airport was opened for daylight operation. The
upgrade work at the airport was completed in conjunction
with Exxon Neftegas Limited, the Sakhalin I PSA project
operator. In 2005, work will focus on the installation
of health monitoring systems in all aircraft and the
modification of offshore helicopters to
international standards.
1 IUP road upgrade.
2 IUP bridge upgrade.
3 IUP road repair.
4 IUP bridge upgrade.
5 Nogliki Airport.

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12 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 13
Unexploded Ordnance:
Sakhalin Energy funds the work for clearance of the
Company’s construction sites and pipeline right of way;
this includes the demolition or removal of unexploded
ordnance (UXO) (carried out by Russian military sappers),
demolition or removal of military chemicals and the
disinterment and reburial of war dead (Russian and
Japanese). All work is done in conjunction with the Military
Commissariat and districts administration and follows
Russian Federation legislation. By the end of 2004 more
than 3,500 live UXO had been demolished and 29,750
litres of chemicals had been removed. The search for
war dead discovered 41 Russian soldiers – who have
been reburied with full military honours - and 33 Japanese
soldiers – who have been cremated according to the
Shinto Rites.
In addition, Sakhalin Energy is working with military
support teams who are responsible for responding to
civilian callouts on military UXO, materials and equipment.
Sakhalin Energy’s support for these works started in 2002,
during the past few years the Island’s capacity to deal
with UXO and military chemicals has strengthened. These
works are reducing the threat to both human and animal
life, and ensuring increased safety.
Telecommunications Project:
In order to complete the Phase 2 Project, a number of
telecommunications works are being carried out by
Sakhalin Energy, including the installation of an 850
kilometre fibre optic cable network that will connect all
of the Company’s facilities for safety and operational
purposes. The installation of this cable will also allow
the public telecommunications operator on Sakhalin
Island, Dalsvyaz, to provide modern telecommunications
in towns and villages along the route of the new cable,
thus providing a long-term benefit to these communities.
Installation of the 850 kilometre fibre optic cable will
commence in 2005.
Kholmsk:
Following the grounding of Cristoforo Colombo off the
port of Kholmsk, Sakhalin Energy, as a responsible oil
and gas operator and long-term citizen is carrying out a
number of goodwill projects in this town. These projects
have been agreed with the Kholmsk District Administration,
and include the deployment of oil spill response equipment
for use in the town, Primorsky Boulevard beautification,
replacement of a local kindergarten roof, first aid
equipment and furniture for children’s clinic, and provision
of an emergency medical centre at the hospital. All of
these initiatives are currently being implemented and are
scheduled for completion by the end of 2005.
Please refer to page 36 for details on Sakhalin Energy’s
Oil Spill Response (OSR) plan.
1 The start of beautification work at Kholmsk boulevard.
2 Fibre optic cable ready to dispatched from St. Petersburg factory.
3 David Greer, Deputy CEO and Phase 2 Project director (right), Ivan Malakhov, Governor of the
Sakhalin Region (centre), Anatoly Gusto, Mayor of the Kholmsk District (left), and Irina Stepuk,
Chief Medic of the clinic, attend the opening of the Kholmsk Children’s Health Clinic. The
renovation of the Clinic premises was financed by the Administration of the Sakhalin Region while
Sakhalin Energy purchased all the medical equipment and furniture.
4 Conduit (for fiber optic cable) installed on Askasai river crossing.

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Offshore Platforms: Concrete gravity
Based Structures (CGBS) and Topsides
Concrete gravity Based Structures (CGBS)
Norwegian GBS specialist Aker Kvaerner Technology AS
and Finnish Company Quattro Gemini OY are undertaking
the engineering and construction of the PA-B and LUN-A
CGBS. Both of the CGBS have been built in the Russian
Far East at a purpose built dry dock in Vostochny Port,
near Vladivostok.
The two CGBS are amongst the biggest structures ever
built in Russia and the varied geometry of their legs puts
them amongst the most complex concrete slip forming
jobs ever undertaken. The design specifically takes into
account the winter sea-ice conditions and seismic nature
of the area in which they will be located. They are the
first structures of their type to be built in Russian and a
workforce of some 2,000 were involved in
their construction.
The construction of the two CGBS has a high percentage
of Russian involvement – in total over 85% Russian
content - and has provided an opportunity for local
industry to gain extensive experience in the construction
of such structures through the transfer of knowledge and
technology. It has also created significant business
opportunities for Russian companies who are providing
materials and other services to the construction site.
Construction of these substructures commenced in March
2004 when the first concrete was poured. In November
Sakhalin Energy reached a significant milestone with the
completion of the main concrete works on the CGBS for
the Lunskoye platform. The Lunskoye concrete substructure
consists of a base slab and four cylindrical legs that
support the topsides of the new offshore platform. It has a
total weight of 103,000 tonnes. The base is 105 metres
by 88 metres and 13.5 metres high. The diameter of each
leg measures more than 20 metres and they are some 56
metres high. Total height of the entire structure is
69.5 metres.
The main concrete slip forming works were also
completed on the CGBS for the new PA-B platform at the
beginning of 2005, which was followed by completion of
fabrication and installation of all the required mechanical
equipment of the Lunskoye and Piltun-B substructures.
In summer of 2005 the two structures will be floated out
of the dock, towed to their locations on the Lunskoye and
Piltun feature of the PA fields, and then carefully ballasted
to place them gently on the seabed.
Topsides
Simultaneously, at the Samsung Heavy Industries
construction yard on Geoje Island in Korea, the LUN-A
and PA-B platform topsides are under construction. First
cutting of steel for the LUN-A topsides was undertaken in
July 2003 and in January 2004 for PA-B topsides.
By the end of 2004, progress on the 22,000 tonne
Lunskoye topsides reached 65%. All living quarters had
been lifted into position on the main deck and all the
main deck blocks had been erected - leaving only the
drilling module, flare boom and helideck to be installed.
Fabrication of piping was over 65% complete and tenders
for a subcontractor for the offshore installation activities
was also underway.
Fabrication on the 28,000 tonne PA-B topsides started in
February 2004 and is making good progress, with the
lower deck now erected on site. Erection of the upper
deck is planned for March 2005 and overall progress at
the end of 2004 was over 35%.
Installation of the topsides onto the CGBS will be
undertaken offshore Sakhalin. In order to ensure a
successful installation of both topsides, a second
installation barge is now being built in a Chinese yard.
1 Completed CGBS in dry dock.
2 Topsides construction.
3 LUN-A CGBS at sunset.

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16 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 17
Onshore Processing Facility (OPF)
By the end of 2004 overall design and procurement
progress was more than 85 % complete and the majority
of bulk purchase orders had been placed. Completion of
detailed design is planned for June 2005.
Construction work continued in 2004 with piling,
casting of foundations, construction of concrete and steel
buildings, piperacks and off-site prefabrication of piping
spools. Piling was completed by mid 2004 when in
excess of 5000 piles had been drilled and cast.
A significant success for the Phase 2 Project in 2004 was
the beach landing campaign at the OPF site in July and
August 2004. This included the successful delivery of three
barge loads of heavy and large equipment items - such
as gas turbines, compressors and heat exchangers, which
due to their size and weight could not be transported
over land.
Overall construction at the OPF was approximately
40% complete by the end of 2004, and multi-discipline
construction, including electrical and instrumentation works
will continue through 2005, in anticipation of phased
commissioning commencing in 2006.
The OPF is planned to commence delivery of first power to
the LUN-A Platform in 2006, initially using diesel fuel for
the gas turbines. It is expected to receive first gas and first
year-round oil from the PA field when the Molikpaq tie-in
works are completed and commissioned.
1 OPF heat exchangers. Pipe rack in background.
2 OPF heat exchangers at sunset.
3 Work continues throughout the winter months at the OPF site.

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18 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 19
Onshore and Offshore
Pipeline Projects
2004 was a year of intense activity on the Sakhalin
II Phase 2 pipelines, with the start of construction both
onshore and offshore, manufacture and delivery of a large
amount of line pipe and substantial progress on supporting
engineering, design and approval activities.
Russian pipe and steel manufacturers are participating
in the delivery of line pipe. By the end of 2004 ZAO
United Metallurgical Company had completed successful
delivery of 42,500 tonnes (330 kilometres) of line pipe
worth a total of some $US 35 million from its Vyksa Steel
Works pipe mill - with the major Russian steel manufacturer,
Severstal, supplying the steel plate. This order is part of a
joint venture with the Japanese company, Mitsui & Co., Ltd.
Other suppliers involved are a joint venture between Russian
company OOO Transpromresurs and Metal 1 (whose major
shareholder is Mitsubishi Corporation of Japan), and ILVA
from Italy. OOO Transpromresurs in partnership with
Metal 1 has constructed a new high technology pipe
coating plant in Vostochny for coating the majority of line
pipe. This commenced first production in the early 2004.
Work continued throughout 2004 and is expected to
complete pipe coating sometime in the third quarter of
2005. This coating plant, which cost approximately $US
15 million to construct, will carry out pipe coating work
worth some $US 30 million for the Sakhalin II
Phase 2 Project.
Total investment for supply of all onshore and offshore
line pipe exceeds $US 400 million, and involves some
515,000 tonnes of steel. Cumulative coated line pipe
supply for onshore use reached 275,000 tonnes (1200
kilometres) at the end of 2004, of which more than
1000 kilometres is already stored on Sakhalin. Delivery
of offshore line pipe (32,000 tonnes, 170 kilometres to
date) to Kuantan, Malaysia, also began during 2004. It
is being transferred to the offshore pipelines engineering,
procurement (excluding line pipe) and construction
contractor, Saipem.
During 2004 offshore pipelines dredging and installation
activities in the Lunskoye field and in Aniva Bay were
completed as planned. This followed completion of relevant
detailed design, weld procedure qualifications and civil
works at Aniva Bay and Lunskoye landfalls.
For 2005 a full season of construction work is planned
for the offshore pipelines, to largely complete the pipeline
and cable systems in the Lunskoye field and in Aniva Bay.
Work will comprise dredging, pipeline installation and pre-
commissioning. The offshore pipeline spreads will also carry
out a variety of work in support of the CGBS installation.
Providing conditions are favourable, the pipeline connectors
for the PA-A platform will be completed.
The engineering, procurement and construction contract
for the onshore pipeline system is being executed by
Starstroi. In 2004 engineering substantially progressed
and construction work commenced following a ‘first weld’
ceremony for the onshore pipelines in January 2004. By
the end of 2004, mainline welding of 312 kilometres of
pipe had been completed, and a further 1000 kilometres
is planned for completion in 2005. Nearly all engineering
and construction work has been subcontracted to
Russian companies.
Onshore pipelines construction is progressing rapidly, and
work is being carried out in the field by major Russian
pipeline construction subcontractors. In total there are
approximately 5,000 staff now onsite, operating from main
construction camps in Val, Nogliki Onor, Tumanovo, Sokol
and several secondary camps along the pipeline Right-Of-
Way (ROW). In 2005 engineering activities will be largely
completed and procurement of pipeline valves, shelters, pig
traps and a variety of supporting equipment finalised.
In addition, winter river crossing construction has started
with 39 oil pipeline and 11 gas pipeline crossings
completed in the 2004/2005 winter - the remaining
crossings are planned to be installed in the 2005/2006
winter. . Detailed crossing design for some 21 seismic
faults and 30 kilometres of the pipeline route which passes
through landslide areas in the Makarov mountains is
ongoing, with completion of planned design in 2005 and
subsequent construction in 2006.
At particularly sensitive locations onshore, such as seismic
faults, roads and railways and in the vicinity of settlements,
the thickness of the pipeline wall will be increased, and
numerous block valves will be installed along the length of
the pipeline to optimise the control of the transportation of
hydrocarbons. The pipeline systems will also be equipped
with a highly sensitive leak detection system, and will
operate under a comprehensive maintenance programme.
1 Inspection of 48-inch pipe.
2 Work continues throughout winter months.
3 Local Community Liaison Officer views pipeline progress.

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Liquified Natural Gas (LNG) Plant and
Oil Export Terminal (OET)
In 2004 work on the LNG/OET project shifted from
the design and procurement centre in the offices of
Chiyoda Corporation in Japan to the construction site at
Prigrodnoye. By the end of 2004, the main contractor,
CTSD, had awarded all of the major subcontracts for
construction of the permanent facilities to contractors from
Russia, Japan, Korea, USA, UK, Ireland, Turkey.
The early works programme - site preparation, site
bypass road and the Material Offloading Facility (MOF)
- commenced in August 2003 and has been successfully
completed. Construction of a 6000-man accommodation
camp also commenced at the same time, and is now
complete with final accommodation and recreational units
within the camp finished by the end of March 2005. The
early works programme paved the way for the permanent
engineering, procurement and construction works that took
place in the spring and summer of 2004. In April 2004,
the concrete batching plant which produces concrete from
locally provided raw materials was opened by HRH Prince
Andrew, The Duke of York. April 2004 also marked
the start of construction of the major equipment and
piperack foundations within the OET, utilities area and
process train 1.
Structural work commenced on the two 100,000 cubic-
metre LNG storage tanks in September 2004, and the 37-
metre high steel vapour barrier now dominates the skyline
at Prigrodnoye. In the spring of 2005, the concrete walls
of the giant outer tank will start to appear, and the roof
that is currently being built inside the tank will be raised by
air pressure to the top of the tank.
On another area of the site TOA Corporation has created
a crushed stone ring foundation for the 100,000 cubic
metre oil export tanks. Following this, Russian contractor,
Koksokhimmontazh, has made excellent progress in
erecting the tanks. By October 2005, it is expected that
the tank shells will be complete and ready for
pressure testing.
In April 2004 the Sakhalin Energy construction office
on site was officially opened, allowing staff to be
permanently located at the worksite. The permanent
buildings, including substations and the operations and
administration buildings are all progressing well, ensuring
that follow-on contractors will be able to work in relative
comfort during the winter of 2005.
In October 2004, subcontractors Daewoo and Gama
commenced steel erection across the entire site to bring
a significant change to the LNG site’s skyline. Steel
piperacks create the backbone for the entire plant, and
in the second half of 2005 the pipe racks will start to be
filled with process piping from half inch to 72 inches
in diametre.
2004 also marked the opening of the main pipe
fabrication facilities in which pipe will be cut and welded
to final configuration for installation in the LNG/OET
plants. More than 80 kilometres of both carbon steel and
stainless steel pipe will be welded here. Teams of welders
from a number of different countries will be engaged to
complete the fabrication work.
Numerous material deliveries have been made direct
to the site and offloaded at the MOF since the start of
2005. Planning is in process for the single heaviest lift to
be carried out on site - a 600 tonne pressure vessel to be
lifted into place in the main process area.
Throughout the year, work underground will continue
with piping and the 1000 kilometres of electrical and
instrument cable that will be installed throughout the plant.
1 Construction work at the LNG site.
2 LNG train 1 under construction. LNG tank construction in background.
3 Workers at the LNG construction site.
4 OET tanks under construction. LNG site in background.

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LNG Sales
2004 was an impressive year for Sakhalin Energy for
our LNG and oil marketing activities. The Company
strengthened its presence in the Asia-Pacific market place
by confirming existing commitments and expanding the
customer base for both LNG and crude oil sales.
In May 2004 Sakhalin Energy signed a binding Heads of
Agreement (HOA) with Toho Gas and executed fully termed
Sales and Purchase Agreements (SPAs) with Kyushu Electric
and Tokyo Electric. Japan remains Sakhalin Energy’s core
market with foundation customers continuing to expand their
offtake commitments, and negotiations are ongoing with
other key Japanese buyers.
In October 2004 Sakhalin Energy concluded an SPA to
supply 37 million tonnes of LNG over a 20-year period,
to Shell Eastern Trading Ltd. for the North American natural
gas market. This pioneering deal represents the first sales
of Russian natural gas to North America and marks the
beginning of Sakhalin Island as a strategic new source
of natural gas for both Mexico and the US West Coast
markets. LNG from Sakhalin Energy will be supplied to the
new Energía Costa Azul LNG receiving terminal that will be
constructed in Baja California, Mexico
Natural gas from the new terminal will be used to satisfy
Mexico’s growing energy needs, with excess natural gas
exported from the Mexican terminal to California in the US
where, as in Mexico, there is an increasing requirement
for new natural gas supply sources. The agreement calls
for a plateau supply of 1.6 million tonnes per annum, with
significantly higher volumes of LNG deliveries during the first
three years.
Vityaz Crude Oil Sales
Sakhalin Energy continues to see a healthy appetite for
Vityaz crude within Asia-Pacific as buyers seek to diversify
energy sources away from the Middle East. Not only did
Sakhalin Energy achieve record premiums for its crude oil
sales over the Oman oil market price – which is a similar
type of oil and is used as a benchmark price for Vityaz
crude - the Company also expanded its customer base
with its first ever sales to Thailand, in addition to continuing
deliveries to Japan, Korea, China, USA and the Philippines.
Moreover, Sakhalin Energy achieved another milestone with
the first sale to Tohoku Electric. This is the first time Vityaz
crude has been delivered direct to a power generation
company – all previous sales have been to refineries.
Overall in 2004 Japan increased its dominant position as
the Company’s primary crude customer by purchasing 76%
of total production with four new customers.
Sakhalin Energy continues its preparations towards year-
round oil exports from Prigorodnoye. At peak production,
Sakhalin Energy will produce around 180,000 barrels of
oil and condensate per day. Combined with the future
production from the Sakhalin I Project, Sakhalin will be
exporting almost 420,000 barrels of oil per day, which
is a substantial figure for Asia. Overall Sakhalin crude
production will be larger than oil exports from Vietnam
(350,000 barrels of oil per day), Malaysia (400,000
barrels of oil per day) and close to that of Indonesia
(500,000 barrels of oil per day).
LNG Shipping
In 2004 Sakhalin Energy geared up its shipping capacity
to facilitate the delivery of LNG supplies as called for under
some of the sales contracts. Following a detailed tender
process for the long-term charter of LNG ships, Sakhalin
Energy awarded deals for three new-build 147,200 cubic
metre Moss-type LNG carriers in November 2004. Two
ships will be chartered from a consortium of Sovcomflot and
Nippon Yusen Kabushiki Kaisha (NYK), and one ship to the
consortium of Primorsk Shipping , Mitsui OSK lines, K Line.
The two ships to be chartered from by Sovcomflot and NYK
will be constructed by Mitsubishi Heavy Industries. The third
carrier to be chartered from Primorsk/Mitsui/K Line will be
built at Mitsui Engineering & Shipbuilding.
These deals represent Russia’s first entry into the LNG
shipping business. The Japanese-Russian partnership
combine Japanese experience of 20 years of accident-free
LNG shipping with unique Russian skills in ice navigation
and experience of Russian ports. These landmark deals
demonstrates the benefits of the Sakhalin II Project to
Russia through opening up new areas of industry and the
introduction of new technologies.
Latest Update – 2005 Gas Sales
Sakhalin Energy achieved another major marketing
breakthrough in February 2005 winning a tender to
supply 1.5 million tonnes per annum (mtpa), plus a
possible option of a further 0.5 mtpa, of LNG to Korea
Gas Corporation (KOGAS). The Heads of Agreement
(HoA) with KOGAS represents the first major strategic
energy deal between Korea and Russia.
In addition in the first week of June 2005 Sakhalin Energy
signed three more long term (20+ years) LNG supply
deals with Japanese utilities - a HoA with Hiroshima Gas,
for 0.21 mtpa, a HoA with Tohoku Electric for 0.42 mtpa
and an SPA with Toho Gas for 0.5 mtpa.
These 2005 gas sales bring the total commitments for
LNG from the Sakhalin II Project to up to 8.0 mtpa for
period of 20 years or more.
The Markets
1 Energy use in South Korea.
2 Ian Craig, Sakhalin Energy CEO (right), Ivan Malakhov,
Governor of the Sakhalin Region (left) and Ann Pickard,
Executive Vice President Shell Gas and Power (centre),
celebrate as a pioneering LNG supply deal is signed with
Shell for North American Markets.
3 Celebrations at LNG shipping ceremony.
4 Okha FSO (part of Vityaz complex).
5 Tokyo Electric SPA signing.
6 Kyushu Electric SPA signing.

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Russian Content
Russian Content remains a key element of the benefits that
the Sakhalin II development will bring to Russia throughout
the life of the Project. The involvement of Russian industry
in both the construction and operational phases will play
an important role in the overall success of the Project.
The Sakhalin II Production Sharing Agreement (PSA)
defines russian content in terms of manhours and the
volume of materials and supplies, recognising the difficulty
Russian industry would have in providing unique processes
and equipment required during the construction phase. In
line with this approach the PSA also states that Sakhalin
Energy must use its best efforts to achieve a 70 percent
target for Russian Content over the life of the Project.
The Company and its partners in the Federal and Regional
Government are working together, through the auspices of
the Joint Committee, to promote the use of Russian industry.
This committee seeks to identify Russian businesses and
industry that can undertake contracts for the Sakhalin
II Project. The committee is also advised of all contract
awards and checks that the Procurement Procedures
used by Sakhalin Energy have been applied in a fair,
transparent and consistent manner.
The work of the committee has played a key role in
promoting the involvement of Russian companies in
the Sakhalin II Project. Since construction activities
commenced – initially on Phase 1 and now on Phase 2 –
between 1996 and the end of 2004 Russian contractors
and subcontractors have won thousands of contracts worth
up to a total of $US 4.2 billion.
The figures also show that not only is the PSA target of
70% already being achieved, but is being exceeded.
63 million Russian labour man-hours had been expended
on the Project by the end of 2004 - 73% of total - and
material and equipment supply had exceeded 3 million
tonnes, some 86% of the total.
Russian Content Performance in 2004 has been the
Company’s highest to date. In order to ensure this
performance is continued in the coming years - particularly
into the operations phase of the Project, the Company
is in the process of developing its Russian Content
Development Policy and Strategy. This will create a
renewed focus within the Company of looking to the
future and of developing Russian Content opportunities.
The Joint Committee will continue to play a pivotal role
in the Company’ Russian Content Development activities,
particularly in working with the Company to review the
forthcoming 2005 –2010 Contracting and Procurement
Activity Plan, in order to identify Russian Content
Development opportunities.
The Company will continue to work with other oil and
gas operators and engage the major oil and gas service
companies on the island to collectively identify resource
sharing/synergy opportunities required by the Sakhalin
oil and gas industry. The development and retention of
Russian skilled tradesmen/workforce will also be a key
focus area.
Sakhalin Energy believes that with the continued support
of the Russian Party and the Joint Committee it is on track
to meet the Russian Content requirements of the PSA and
possibly even exceed them.
1 CGBS construction site.
2 Line pipe coating plant in Vostochny.
2 Russian Supervisor inspects pipe welding.
Meeting the challenge

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Employment Opportunities for
Sakhalin Island Residents
As part of Sakhalin Energy’s commitment to provide jobs
for the local population, the Company launched an
apprenticeship scheme in October 2003. The scheme
focuses on providing training for Russian men and women
from Sakhalin Island who have a keen interest in working
as technical professionals in production operations and
maintenance for Sakhalin Energy. The apprentices will be
the future operations and maintenance technicians for the
Sakhalin II onshore and offshore facilities.
The scheme is a structured course combining theoretical
study and on-the-job training for people with little or
no knowledge of operations and maintenance. The
first period of study involves English language training,
followed by technical and as well as safety training in the
classroom and workshop in Russia as well as overseas.
Following this, up to two years will be spent with on-the-
job-training, depending on the apprentice’s ability and his
or her chosen discipline.
The training programme ensures that each apprentice
becomes a specialist in one of four fields – either
operations, mechanical, electrical or instrumentation, whilst
receiving a solid grounding in all disciplines.
Sakhalin Energy hopes to recruit and train in excess of
270 Sakhalin residents in its apprenticeship scheme
between 2003 and 2018. The first group of 11
apprentices was recruited in October 2003, and in
November 2004 they attended a six-week training
course in China. As part of the overseas training course,
which was conducted entirely in English, the apprentices
completed a number of tasks in a workshop setting and
had the opportunity to develop their technical skills and
their awareness regarding Health, Safety and Environment
issues. At the end of the six weeks, the apprentices were
independently assessed against internationally recognised
standards and were rated as exceptionally high.
By January 2005 the first four apprentices had successfully
completed their English language and technical training
and had commenced their competence based
on-the-job training.
In 2004 a further five groups were recruited – in total
more than 60 apprentices. Three of these groups started
their English-language training programme in early 2005
in preparation for the technical training to follow.
Sakhalin Energy’s Recruitment scope reaches far beyond
the apprentice programme and is following international
best practice: all applicants get screened against a
standard competency framework, starting with initial
handling of incoming CV’s, followed by selection based
on structured interviews and other validated tools. To meet
the significant staffing challenge in the coming years, the
Human Resources recruitment function of Sakhalin Energy
has been significantly staffed up. To ensure that Sakhalin
Energy generates the large numbers of applications
by experienced Russian nationals that are required,
the Company has extended its Attraction scope to the
Russian Far East and beyond. For details on available
opportunities, interested parties can check the Sakhalin
Energy internet site (www.sakhalinenergy.com).
1 On-site training at the OPF site.
2 On-site training at the OPF site.
3 Apprentices – classroom training.
4 Apprentices – English language training.

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Indigenous People
Sakhalin Energy has a history of engaging, supporting
and working with local communities and the indigenous
groups of Sakhalin Island. In 1992 SEIC initiated a
programme of consultation for indigenous people (IP). For
the Phase 2 project, this programme has been expanded
to meet the requirements of the Russian legislation, as
well as the spirit and intent of the World Bank Group
Operational Directives (OD 4.20 and OD 4.30).
As part of its IP programme the Company’s ongoing
monitoring and consultation activities include:
• Communication with herders relating to construction
schedules and pipeline routes;
• Indigenous people socio-economic surveys;
• Assessment and discussion of potential and perceived
Project-related impacts on indigenous people
communities, their natural resource base, livelihood
activities and settlements;
• Assessment and discussion of proposed and already
implemented mitigation measures;
• Regular consideration and consultation with
stakeholders on indigenous people issues;
• Determination if supplemental assistance is needed;
• Identification of community needs and discussion of
potential programmes/ projects to be supported.
In 1994 the Company started to conduct public meetings
with Nivkh, Evenk, Orok and Nanai people to build
closer relations with the different groups and organisations
representing the interests of indigenous people.
Since then the Company has supported indigenous people
through a wide range of social initiatives and projects
including education programmes, the preservation of
traditional culture and community development, culture and
sports promotion and financial support of IP conferences,
congresses and other events.
In 2004 the Company started active stakeholder
engagement with reindeer herders. Sakhalin Energy, in
partnership with the Nogliki District Administration initiated
quarterly workshops with reindeer herders to inform them
of the Project schedule and discuss their concerns related
to the Sakhalin II Project.
At the end of 2004 and in early 2005 the Sakhalin
indigenous peoples made demands that all of the oil and
gas operators on the Island carry out an ethnological
expertiza to determine the cumulative impacts to their
traditional way of life and subsequently define levels of
compensation owed to them.
An agreement signed in January 2005 between the
Sakhalin Oblast Administration, some representatives
of the indigenous people and oil and gas companies
proposes the development of effective coordination
between the Oblast programme, “Economic and Social
Development of the Indigenous People of Sakhalin in
2005-2008” and other activities and social assistance
programmes being implemented by the companies aimed
at supporting the indigenous minority peoples of the north
of Sakhalin Oblast.
In March 2005, more than 70 delegates of indigenous
people came to Yuzhno from all Sakhalin districts to
elect an IP Council and coordinate their views on the
main priorities for the socio-economic development of
indigenous population of the island. Sakhalin Energy has
welcomed this Council’s election and has encouraged
them to work with all oil and gas operators and the
Sakhalin Oblast Administration to address these needs.
The Company has also committed to the development
of an IP Development Plan during 2005 with the full
participation of the indigenous peoples of Sakhalin Island.
1 Regular SEIC workshop with reindeer herders.
2 David Greer, Deputy CEO and Phase 2 Project
Director, at the IP agreement signing in January 2005.

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Social Investment - Korsakov
Sakhalin Energy is committed to maximise the benefits of
the Project to communities impacted by our activities and
works hard to mitigate potential negative impacts. The
town of Korsakov which lies on the northern edge of Aniva
Bay in the far south of Sakhalin Island is an example of a
community effected by the Sakhalin II Project. It is located
42 km south of Yuzhno-Sakhalinsk, the administrative
centre of Sakhalin Island, and 15 km west of the Sakhalin
II LNG site. Korsakov is the district administrative centre of
the Korsakov District, and is the third largest community on
Sakhalin Island with a population of 39,300 (circa census
of October, 2002).
In developing the LNG and oil export facilities there are a
number of negative impacts from the construction activity
that the Company works hard to address and minimise
their impact. Increased vehicle transport in the town and
associated safety risks have been addressed through a
focused safety campaign with the authorities, citizens and
schools. Potential social impacts such as health impacts
from dust and noise, or the impact of an increased
workforce for the site construction are all monitored and
mitigated where possible.
However, the construction of the Sakhalin II LNG and oil
export facilities has also brought various benefits to the
district of Korsakov.
Increased employment, business
opportunities and tax income
The construction and operation of the Sakhalin II LNG
facilities have and will continue to create employment
opportunities for Sakhalin Island residents, particularly
those from Korsakov. To date, in the construction phase,
the main LNG contractor (CTSD) has employed, directly or
indirectly, 57 Sakhalin companies as subcontractors. By
March 2005, CTSD and its subcontractors employed over
1,000 Korsakov residents on the LNG project, making up
25% of the current LNG workforce.
During the start-up and operational phase of the facilities,
it is anticipated that a number of local support services
will be required, including security services, catering and
administration services (camp cleaning, snow cleaning,
grass cutting, etc), which will lead to the creation of new
business opportunities for the community.
The increased level of local business activity also brings an
increase in tax income from Project execution (contractors,
subcontractors) to the local Korsakov budget. In co-
operation with the relevant Russian Authorities, Sakhalin
Energy and our main contractor CTSD are using their
best efforts to ensure that all LNG contractors and sub-
contractors register locally and pay local taxes.
Infrastructure improvements
Projects to improve infrastructure within Korsakov have
also been and will continue to be undertaken by Sakhalin
Energy. These include a culvert upgrade over Chkalovka
and Ulitovka rivers, over 5km of road upgrades and
repairs and the upgrade of the Korsakov landfill site. Also,
navigation polygons, which were not operational prior to
the new construction, were moved from the LNG site to
Aniva – improving navigation safety for Korsakov Port.
In addition to undertaking ongoing repairs of Korsakov
roads utilised by project vehicles, Sakhalin Energy
has signed an agreement with the Sakhalin Oblast
Administration for the concrete asphalt surfacing of the road
between Korsakov and Kvartsitovy Konus, including the
LNG bypass section. This work will be completed
in 2007.
Sakhalin Energy has also signed a contract with the
Korsakov Administration for the re-construction of the
Korsakov Park as compensation for loss of beach access
due to the construction of the LNG/OET facilities.
Sakhalin Energy is committed to open and transparent
dialogue with residents and the District Administration of
Korsakov on any matters related to the implementation of the
Sakhalin II project. In addition to holding regular meetings
with the District authorities, in 2004, the company began
quarterly community engagement sessions in Korsakov.
Local residents are also able to obtain information and
express any concerns that they may have in the community
liaison office that is located in the city centre.
1 Dust suppression truck on the Korsakov – Prigorodnoye Road.
2 Construction camp at the LNG site.
3 Financial support given to fish farm reconstruction in Ozersky.

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Pipeline River Crossings
Sakhalin Energy is constructing pipelines to carry oil
and gas from the offshore hydrocarbon fields northeast
of Sakhalin Island to the south of the Island as part of
the Phase II Project. The pipelines will cross more than
1000 watercourses. These mostly comprise small brooks
and streams, but also include rivers with economically
significant salmon fisheries and a small number of rivers
that possibly contain Red Book fish species. Sakhalin
Energy recognises the importance of these watercourses to
the ecology and local economy of the Island - particularly
in terms of the salmon fisheries - and is committed
to ensuring that the impact of river crossings during
construction and operation of the pipelines will have only
a minor short-term effect on the environment.
Sakhalin Energy has spent more than five years
undertaking surveys to collect environmental baseline data
collection along the onshore pipeline route to assess the
potential impact of pipeline crossings on the environment,
in particular on salmon streams. The research has been
undertaken together with Sakhalin Scientific Research
Institute for Fisheries Management and Oceanography
(SakhNIRO), the Sakhalin State University and Russian
environmental survey company Averina.
The research has enabled Sakhalin Energy to design river
crossing methods, which determine how and when a river
is crossed based on its sensitivity. River crossing timing
and construction methods are approved by the relevant
Russian Federation regulatory agencies, including local
fish inspectorates, the regional fishery regulatory agency,
Sakhrybvod, and the Federal level agency, Tsuren.
During construction, trenching methods employed to cross
a river can produce a short-term and localised increase
in water turbidity, or suspended silt particles in the river.
Although temporary in nature, this could potentially have
an effect on fish and salmon spawning grounds. This
potential effect is minimised by avoiding salmon spawning
grounds wherever possible, reducing construction
durations, adjusting the timing of the crossings to non-
critical periods, construction in low flow situations and, in
a few cases, drilling under the river. The silting effect
is expected to be no worse than that experienced
naturally by rivers each year during the spring thaw or
from heavy rain.
Construction of pipeline crossings on rivers identified
as important to salmon spawning and those which may
contain Red Book species will be carried out during the
winter months. This is typically from December to April
when many of the rivers and riverbanks are frozen. This
minimises silt generation and transport during construction
and after spring thaw. This winter period is also outside
the salmon spawning season when there are no salmon
present, thereby limiting physical disturbance to the
river and virtually eliminating the impact of construction
activities on these fish.
By the end of 2004, 17 fish sensitive streams had
been crossed with one pipeline, with no measureable,
permanent negative impact to the environment.
Seven of the most sensitive larger rivers are planned to
be crossed with the use of Horizontal Directional Drilling
(HDD) technologies. Here pipelines will be drilled and
installed underneath the river, without disturbing the river.
This method is not suitable for all rivers and geographical
conditions because of the need for a suitable subsurface
geological profile. This method also requires the use of
special drilling muds, which is not recommended for use in
highly permeable soils where there is potential for release
into to the environment. The first two HDDs were executed
by a specialist contractor on the Vazi and Nabil Rivers in
the north of the Island in early 2005.
Sakhalin Energy has developed an awareness programme
that focuses on compliance with construction procedures
and erosion control for river crossings. River crossings with
the highest sensitivity will have dedicated drawings, work
execution plans, inspection and test plans. They will be
executed only in the presence of environmental inspectors,
who will verify compliance with environmental procedures
during construction. The environmental inspectors have the
authority to stop the work if they consider that procedures
or regulations are being breached, or if the environmental
impact is not acceptable.
In addition to stringent Company, Russian and international
standards that are being applied to river crossings,
Russian regulatory requirements also include a system of
fish damage assessment and monetary compensation.
This compensation is paid whether or not there is any
actual damage and represents some of the most stringent
regulation of its type anywhere in the world. The damage
the onshore pipelines and other Sakhalin II Project
facilities may potentially cause to fish has been calculated
according to Russian legislation. This has resulted in a
sum of approximately $US 11 million in compensation.
This is being paid into a government fund and used to
improve the fishing industry on the island. Part of these
funds will be used to establish two new fish hatcheries.
1 Winter river view.
2 Preparation for winter river crossing.
3 Winter river view.

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Western Gray Whales
The northeast coast of Sakhalin Island is rich with marine life
and is a summer feeding area for the critically endangered
western gray whale (WGW). Two known feeding grounds
for the WGW have been identified off the northeast coast
of Sakhalin, a near-shore one in the Piltun Bay area, and an
offshore feeding ground further south adjacent to Chayvo
Bay. The two feeding grounds have a total area of 1570
square kilometres.
In a clear demonstration of it’s commitment to ensure that its
activities will have no adverse impact on the WGW, the
Company halted its offshore pipeline construction activities
in the PA field for two seasons to allow for additional studies
after the Company’s own research suggested that acoustic
impacts on the whales might be greater than anticipated.
During 2004 Sakhalin Energy evaluated three possible
pipeline route options for the PA field – the existing
identified route and two alternatives. Additionally, the
Company carried out offshore and onshore environmental
and engineering surveys of the three route alternatives, and
completed another season of extensive WGW surveys. The
body of information collected from past surveys combined
with the 2004 work helped Sakhalin Energy assess the
potential impacts and establish effective mitigation measures
to ensure that the WGW is not adversely impacted by
the Company’s planned offshore activities in the PA field.
Sakhalin Energy collated and assessed all of these results in
the “Comparative Environmental Analysis of the Piltun-Astokh
Field Pipeline Route Options” (CEA) report. One of the
conclusions of the CEA was that with varying
levels of mitigation, all three route options would be
technically viable.
However, in parallel with it own study and research
activities on the WGW, Sakhalin Energy took the bold
step of asking IUCN – the World Conservation Union to
convene an Independent Scientific Review Panel (ISRP)
to review the effectiveness of it proposed mitigation
measures to minimise the impact of its operations on the
WGW and associated biodiversity in the context of the
Sakhalin II Project.
The ISRP report was published in mid-February 2005.
Taking into account the advice contained withon the report
and based on the conclusions of the CEA Sakhalin Energy
announced its decision to reroute its offshore pipelines in
March. The pipelines - linking the PA-A and PA-B platforms
off Sakhalin Island to shore – will be moved 20 kilometres
south of the original location, away from the key feeding
area of the WGW. Sakhalin Energy is currently seeking
approval from Russian government agencies for this change.
This decision is in line with the ISRP’s Report which called
for a conservative risk management approach. The selected
pipeline route is the most precautionary alternative that
maximises the distance between the Company’s activities
and the whales.
The ISRP Report identified further measures to minimise the
impacts on the whales and Sakhalin Energy has already
included many of these measures in revised mitigation plans
for its offshore activities. As a follow-up to the Panel’s report,
IUCN has invited members of the ISRP to review these
plans for mitigating risks to the whales associated with the
development.
Protection of the environment and species like the WGW
form part of Sakhalin Energy’s overall commitment to
sustainable development. Sakhalin Energy is determined
to ensure that the Phase 2 Project can be developed in
line with international environmental standards and the
Company’s commitment to mitigate potential impacts as far
as is practicable - not just to the WGW, but to the Island as
a whole.
1 Sakhalin Energy Western Gray Whale acoustic research.
2 Western Gray Whales offshore Sakhalin Island.
3 Sunset near Piltun Bay.

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36 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 37
Oil Spill Response (OSR)
Sakhalin Energy takes the issue of oil spills seriously and
has implemented a number of measures to ensure that
the likelihood of spills is minimised and any potential
consequences are reduced. Our primary goal is prevention
of oil spills. This is achieved through the robust design of
production, export and transport facilities, it is also achieved
by ensuring sound maintenance and operating procedures
– in both regards Sakhalin Energy is committed to the
implementation of high international standards and
best practices.
Sakhalin Energy has a comprehensive Oil Spill Response
(OSR) plan, which has been approved by the Russian
authorities, for operations under Phase 1 of the Sakhalin II
development that involves the Molikpaq offshore platform
and tanker loading facilities. The Company maintains an
efficient and effective OSR organisation and has access to
its own regional resources. The OSR facilities for our existing
production operations have a 24-hour response capability
from the OSR base that is maintained in Nogliki. The
OSR vessel, Irbis, is maintained on standby in the Piltun-
Astokhskoye field 24 hours a day throughout the ice-free
production season.
The OSR organisation has a clear and tested chain of
command, with clearly identified roles and responsibilities.
A thorough training programme, tested regularly, ensures that
response teams have the right skills, and all potential team
members are familiar with OSR procedures.
During the last two years, less than one litre of oil has been
spilt from the Phase 1 offshore operations – a spill record that
puts Sakhalin Energy amongst the top performers in
the world.
The high standards set for Phase 1 OSR will be maintained
for the Phase 2 facilities. OSR plans for the Company’s
Phase 2 facilities are under preparation and will be
completed, agreed with the Russian authorities and put
in place before these facilities commence production.
Sakhalin Energy will deploy permanent OSR equipment and
resources at each asset, and at strategic locations along the
onshore pipeline route. Helicopter drop off points will be
identified along the coast and the pipeline route for the air-
transportation of OSR equipment and teams to ensure that a
rapid response can be achieved in the unlikely event of
a spill.
Field surveys were undertaken in the summer of 2004
and these will be continued in 2005. These are aimed at
identifying sensitive areas, developing site-specific response
strategies and logistical information. Ground surveys will be
supported by aerial surveys. Data obtained will be added
to the Sakhalin Energy Geographical Information Systems-
based sensitivity maps and database. These already cover
the coastal and lagoon areas adjacent to the Phase 1
facilities along the northeast Sakhalin coast.
In 2004 Sakhalin Energy also reviewed equipment
specifications, with particular regard to Sakhalin Energy’s
light oil and to prevailing weather and sea conditions in
Sakhalin. In addition, Sakhalin Energy will ensure that
equipment is suitable for third party spills that may occur
on or around Sakhalin Island. In this respect, Sakhalin
Energy is committed to supporting Russian Federation and
Oblast agencies in third party spills, and will respond to
any incident if registered under the ‘Unified Command”
arrangements.
Sakhalin Energy will continue to promote and be involved in
regional OSR workshops and training courses, and to foster
regional OSR cooperation.
Cristoforo Colombo
On September 8 the dredger Cristoforo Colombo was
blown aground at Kholmsk by the strong winds and waves
caused by the typhoon ‘Songda’ when its engines failed. At
the time of the accident the vessel, which was not owned or
directly contracted to Sakhalin Energy, was at rest anchored
several kilometres off Kholmsk Commercial Port awaiting
remobilisation to the Lunskoye area.
Sakhalin Energy has no production operations at Kholmsk.
The Company and its contractors use this port in the same
way any other industry may use a port for normal shipping
activities. Any ship in the vicinity of Kholmsk, such as a ferry,
fishing boat or merchant ship, could have suffered the same
fate under such severe weather conditions. Under such
circumstances, there is no requirement for Sakhalin Energy to
have an oil spill contingency plan or equipment for the port.
Sakhalin Energy however, reacted immediately and was
requested to manage the ongoing response under the
“Unified Command” system. The Company established
its own emergency response team and mobilised its own
oil spill contractor’s command group and response team
within one hour. Clean up of effected areas was essentially
completed by September 12, with certain areas of the
Primorsky Boulevard reopened to the public that day.
The entire clean up was completed in about two weeks.
1 OSR exercise – boom deployment.
2 Cristoforo Colombo in Kholmsk.
3 OSR training.

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38 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 39
Waste Management
Sakhalin Energy has developed a responsible waste
management strategy. Central to this strategy is an
integrated approach to the management of waste. This
places emphasis on the minimisation, re-use and recycling
of waste wherever practicable, and the safe treatment and
disposal of remaining materials. This approach is not only
in accordance with international best practice, but also
complies fully with Russian Federation regulations.
The largest volume of waste to be generated in Phase
2 will be during the construction period (2002-2008).
Sakhalin Energy’s approach to waste management
involves waste being disposed of as close to source as
possible. This means that each project facility has full duty
of care for the waste.
To support this strategy, Sakhalin Energy has developed
a system that will track waste generation, classification,
transport, storage, treatment and disposal. As a
commitment to the management of waste as close to
source as possible, each project facility will have a
specific waste management plan for the construction and
operational phases of the Project.
In 2004, under a cooperative agreement signed with
the Sakhalin Oblast Administration, Sakhalin Energy
conducted upgrades to three existing municipal waste
landfills in Korsakov, Nogliki and Smirnykh. The landfill
upgrade project provides for technical solutions in line
with international best practice. These landfill facilities will
be used for the disposal of the Company’s non-hazardous
wastes during the construction of Phase 2, as well as for
the disposal of municipal waste originating from local
communities. Upgrade of the Nogliki landfill has been
conducted in partnership with Exxon Neftegaz Limited.
In addition to the upgrades at existing waste management
facilities, Sakhalin Energy is developing an oily waste bio-
treatment project and comprehensive waste minimisation
plan to allow for minimisation and recycling of hazardous
wastes. Sakhalin Energy will also assist the Sakhalin
Oblast Administration in the development of the local
waste recycling industry.
In this way, Sakhalin Energy is pursuing a co-operative
approach with local authorities to improve waste
management on the island, which will be of significant
benefit to local communities and the environment.
1 Korsakov waste site.
2 Waste monitoring at the OPF site.
3 Korsakov waste site.

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40 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 41
2004 was a year in which Sakhalin Energy Investment
Company (SEIC) put in place many of the structures,
systems, techniques and training to manage HSES and
Social issues in the Sakhalin II project. It was also a year
in which the company achieved many, but not all of the
targets it set.
Looking back over 2004, it is clear that safety,
environmental compliance and social responsibility will
be the main areas of focus in 2005. SEIC has expanded
its HSES and social programmes to match the increased
scale of the main construction operations, and can look
forward to significant improvements in HSES and social
performance in the coming years.
SEIC planned for 2004 knowing that it was going to
be a challenging year from the perspective of health,
safety, environment and security (HSES). With the Phase
2 major construction projects due to reach peak working
levels, and over 16,000 staff and contractors expected
to work more than 46 million man hours, the nature of
the company’s activities would expand and change
significantly during the year.
To adapt to these changes, a detailed plan was
formulated to manage the HSES aspects of SEIC’s
construction and operations activities throughout the
year. The HSES plan contained a range of targets and
milestones designed to monitor performance and provide
continuous improvement to the SEIC HSES framework.
While not all of the specific targets in the plan were
reached, significant structural progress was achieved, and
SEIC is looking forward to further improvements in HSES
during 2005.
Health
The benchmark for health in 2004 was to achieve a target
of having less than 8.5 occupational illness cases per
million man hours worked. There were in total 262 cases
of occupational illness, 74 of which resulted in absences
from work. This represents 5.6 cases per million man hours
worked. Occupational Illness case reporting by contractors
has significantly improved during 2004, although under
reporting in some projects areas was observed.
To improve the standard of health amongst staff and
contract workers, the HSES Plan called for a number of
programmes to be run throughout the year. In accordance
with the plan SEIC:
• started to upgrade the emergency response
capabilities in regional and district hospitals and
built helipads at the major construction sites to speed
medical evacuations
• jointly organised with the Sakhalin Oblast
Administration, a high-level workshop on ‘State,
Business and Community leaders response to STI/
HIV/AIDS and other diseases of a social character’.
The workshop resulted in a joint action plan that later
was confirmed by an official resolution issued by the
Vice Governor responsible for Social and
Health Affairs
• conducted the first health risk assessment programme
of the onshore projects, bringing in expert industrial
hygienists to train managers and staff in each area
• upgraded the sanitation, water supply, catering and
medical clinics at contractor sites in response to a
government sanitary audit, resolving 95% of the issues
raised within four months
• ran a series of first-aid training courses and health
awareness workshops, and made a $10,000
donation to the Sakhalin Regional HIV/AIDS centre
• further improved the compliance of fitness-to-work
tests for all local SEIC staff, conducted a number of
health incident investigations (food poisoning and
non-accidental death cases) and conducted a series
of audits of contractor staff health certificates
• continued to promote health awareness among
employees through a series of educational
programmes on topics such as tobacco, alcohol and
stress management.
As a result of these initiatives, the company is confident
that in 2005 the health objectives will once again
be achieved.
Health, Safety,
Environment, Security
(HSES) and Social
Activity in 2004
1 OPF construction site.
2 Working at heights – LNG site.
3 OPF construction site.

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42 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 43
Safety
Due to their scale, complexity and geographic spread, the
Phase 2 construction projects carried a higher safety risk
than ongoing Phase 1 operations, so safety was made
a major area of focus in the 2004 plan. Despite this
emphasis on safety, regrettably six fatalities related to SEIC
and contractor activities occurred: four due to road traffic
accidents, one from a fall after operational procedures
were not followed and the other following a fight in a
contractor construction camp.
The main safety issue identified in the HSES Plan was
road safety, with the target of less than 3.20 road
traffic incidents per million kilometres driven. By the end
of 2004, there had been 181 motor traffic accidents
involving company and contractor vehicles, representing
3.56 incidents per million kilometres, and 11% over
target. This under performance was recognised early
in the year, and a significant effort put in to developing
road safety through the second half of the year. In
August, a formal Road Safety Steering Committee was
formed and charged with developing and implementing a
comprehensive road safety programme.
The ‘Think, Drive, Survive’ programme was launched
to over 17,000 people in December 2004, and will
be conducted both within the company and among the
community until at least 2008. SEIC also developed
a working relationship with the Global Road Safety
Partnership – an initiative of the World Bank aiming to
promote road safety issues worldwide. In early 2005
the “Sakhalin Road Safety Partnership” was formed on
Sakhalin Island with the assistance of the Global Road
Safety Partnership.
Other aspects of the 2004 safety programme included:
• a comprehensive safety review by Shell Group experts
of all Phase 2 projects. As a result of this review,
improvements to lifting safety and the auditing of
contractor methods are being implemented.
• integrating each project’s emergency response
plan into a centralised approach and successfully
conducting two major emergency field exercises
• designing and implementing a new incident reporting
and investigation system.
SEIC understands the critical importance of safety to the
well-being of workers and the local community, and is
confident that the efforts made this year to improve safety
across the company will result in further measurable
improvements in 2005.
1 OPF road safety initiative.
2 Korsakov Road Safety Day.
3 SEIC staff participate in Korsakov Road Safety Day.

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44 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 45
Environment
To meet the requirements of relevant Russian Federation
and international environmental legislation, SEIC
enforced environmental protection measures and created
improvements using a variety of environmental controls
and activities. Highlights of SEIC’s environmental
activities included:
• the 8th
successive year of research and monitoring
carried out on the western gray whale
• the production of a comprehensive environmental
analysis of three possible Piltun pipeline route options
• the 7th
successive year of ecological monitoring
carried out around the Molikpaq production platform
• the 2nd
year of a three year monitoring and research
programme carried out on the Steller’s Sea Eagle
• industrial control activities including compliance
monitoring to evaluate and ensure requirements of
environmental permits and licences met
• completing the first stage of development of
a comprehensive company-wide integrated
environmental monitoring project for the
operational phase
• finalising the solid waste management plan and
upgrading three landfills
• ecological survey and monitoring of onshore and
offshore habitats
• oil spill prevention, preparedness and
response planning.
SEIC is committed to conducting its operations in
compliance with all applicable Russian Federation
environmental regulations, and in addition has its own
stringent internal standards. SEIC and its contractors
routinely monitor their performance to ensure that their
activities meet the requirements of the permits and licences
that have been issued for their construction activities
and operations.
Two environmental milestones were achieved in 2004
at the Molikpaq platform. The producing operation
underwent two surveillance audits in 2004 and
maintained the ISO14001 certification of its Environmental
Management System that it achieved in 2003. The
platform also met SEIC’s flaring target in 2004. Total
hydrocarbons flared in 2004 were 12.7 million standard
cubic feet per day, below the internal SEIC target of 13
million standard cubic feet per day.
SEIC also met its targets for oil spills from Molikpaq, with
not a single spill over the HSE Plan defined size of 50
litres and indeed no recordable spills during operations,
despite producing more than 11 million barrels of oil.
In September, SEIC’s emergency response team was first
on the scene for the successful cleanup of combined fuel
oil and diesel near Kholmsk port when a contractor-owned
dredger was blown aground during a typhoon.
1 Piltun Bay.
2 March in Sakhalin.
3 Sea birds.

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46 Sakhalin Energy 2 0 0 4 A N N U A L R E V I E W 47
Security
The security priorities defined in the 2004 HSES Plan
were to ensure staff and families had a safe and secure
environment, protect SEIC assets from theft and damage,
review and improve security measures across the whole
operation and investigate incidents in conjunction with the
Russian authorities.
Two security reviews were conducted in 2004. The first
was an assessment of the security threats on Sakhalin and
in the Russian far east which was requested by the lenders.
The second was a standard security review conducted
by the security team. These reviews involved site visits to
the main onshore and offshore assets, and to a number of
pipeline construction sites and
associated camps.
With the exception of a fatal knife attack in one of
the contractor construction camps arising from alcohol
related violence, these reviews found that there were
no major security issues in 2004. The very regrettable
fight incident was thoroughly analysed and several
improvement activities undertaken. However, most of the
security incidents reported were, as would be expected on
such a project, theft of equipment from company sites and
employee accommodations, verbal and physical threats to
employees and other street related crime.
A further success in the year was SEIC achieving
compliance with the International Ship and Port Security
(ISPS) Code, which came into effect in July with Russia as
one of the signatories.
Social
Sakhalin Energy strives to achieve excellence in social
performance, both in the way that the Company and its
contractors work and engage with local communities, and
in the broader sense of having a positive impact
on society, through Project benefits and social
investment initiatives.
Sakhalin Energy has worked hard to ensure that its social
management processes meets international best practice
and seeks to be a leader in this area. The Company
is committed to a broad range of ongoing public
consultations and social assessments during construction
and has already devoted substantial resources to support
this effort.
In 2004, Sakhalin Energy continued to conduct social
impact monitoring and extensive public consultation
programmes in the communities directly and indirectly
affected by the Sakhalin II Project. Under these
programmes, more than 50 communities were visited in
April, June, November and December 2004, to update
them on the Sakhalin II Project and to obtain feedback
from them.
Most of this consultation work was performed by Sakhalin
Energy’s Community Liaison Officers (CLOs). Their key
responsibilities include meetings with local stakeholders
and residents, distribution of information on Project status
and addressing community concerns and grievances in
line with the company’s grievance procedure. In addition,
the CLOs provide information on job opportunities with the
Sakhalin II Project. By the end of 2004 more than 1000
local residents had been provided with Project-related
information and 1300 residents had been consulted on
job opportunities within the Project. Assistance was also
given on resumé development.
In addition to the Company’s on-going CLO activity,
Sakhalin Energy is also involved in supporting the people
of Sakhalin through partnerships and sponsorships. In
2004, Sakhalin Energy donated $400,000 to support
projects that contribute to the environmental, economic
and social development of the Island.
1 SEIC donation of sewing machines to Nysh school.
2 SEIC English language training partnership project.
3 SEIC school road safety presentation.

26. 48 Sakhalin Energy