COMMERCIAL UPDATE - SAKHALIN ISLAND (RUSSIAN FAR EAST)
DECEMBER 2000

Author: Elena Sabirova, BISNIS Representative, American Business Center, Yuzhno-Sakhalinsk

This report contains the following news:
1) Reeve Aleutian Airlines flights cancellation;
2) News on the oil and gas industry of Sakhalin for the past two months;
3) Changes in some administrative positions in Sakhalin region;
4) List of trade shows on Sakhalin for the year 2001;
5) Brief list of several trade associations from Sakhalin region.

REEVE ALEUTIAN AIRWAYS CEASES OPERATIONS

Anchorage-based Reeve Aleutian Airways, the only US carrier providing regular flights between Sakhalin Island and Anchorage, announced on December 6 that it is suspending all regularly scheduled flights and plans to file for Chapter 11 bankruptcy protection. A smaller customer base (primarily in areas within Alaska Reeve specialized in flying to), competition, an aging fleet and rising fuel prices were given as the reasons for this action.

It is reported that the company intends to reorganize under the Chapter 11 rules. In the short run, Reeve will continue to fly charter and contract flights.

The Russian Far East market was one of the positive spots in Reeve Aleutian's business, with a tripling of flights over the past two years. Continued oil and gas development on Sakhalin might have contributed to a good future for that route.

Reeve Aleutian provided the only direct flights from the region to Alaska, and the possibilities to fly to US are now via Seoul, South Korea, or Moscow. Magadan carrier MAVIAL has a direct flight to Anchorage, with a US$ 742 roundtrip within a month, but flying MAVIAL to and from Sakhalin means flying via Khabarovsk. It is being rumored that the local SAT carrier may start international service to the US, as well as any and that other interested carriers may take the advantage of the opportunity to serve on the this popular line route between Sakhalin-and Anchorage.

OIL RIM DISCOVERY AT CHAYVO FIELD

The Chaivo-6 appraisal well found a sizeable oil rim around the Chayvo gas deposit, and production tests show an encouraging inflow rate of 6,000 barrels/day. A Nnew Chaivo-6 appraisal well has been drilled for with 3,075 m of depth. This discovery significantly improves the economics of a quick development start-up for the Sakhalin-1 project. Russian and Japanese geologists and geophysicists contoured a major oil collector in the western block of Chaivo field (discovered in 1979) with 3D seismic survey. (Gubernskiye Vedomosty, October 03)

SAKHALIN ENERGY ADVISED NOT TO ANNOUNCE THE RESULTS OF RECENTLY PUBLISHED TENDERS

Interfax agency reported that the Russian Ministry of Energy and the Governor for Sakhalin region , Governor Igor Farkhutdinov, advised that Sakhalin Energy should not to announce the results for of Sakhalin-2 project tenders that were published recently for construction of marine platforms and pipelines, an oil shipment terminal, and possibly others possible contracts. The explanation provided: Aaccording to existing agreements, the Russian content the Sakhalin-2 project should be contain at least 70% Russian content, and current levels are much lower than this target.Sakhalin Energy can offer only 18% for now. This situation caused the Ministry (Head - Valerij Garipov) to make this statement to the press, saying that negotiations with Sakhalin Energy will be in process, underscoringlining that the Russian point of view on this is not going to change. Sakhalin Energy announced that it is too early to speak of zany tender results, according to established schedule they should be announced only by December 2000. The Russian side also views it as critical that the technical design parameters not be set such that foreign-manufactured equipment is favored over Russian.

Sakhalin Energy announced that it is too early to announce the tender results-according to their established schedule, tender results are to be announced only by December 2000. In late September, Sakhalin Energy announced the results of a tender for $10m in "definition engineering," for the development of technical specifications required to do a feasibility study of 9.6 mmt/y LNG plant at Prigorodnoye. The contract was awarded to a consortium including of Russian JSC "NIPIgazpererabotka" (Scientific Research Institute on Gas processing), Japanese Chiyoda, and Fluor Daniel of the US. The new enterprise is expected to be the first LNG plant using the latest refrigeration technology by Shell. In the near future, there will be another major tender for further engineering and construction of the facility. By 2002, Sakhalin Energy will plans to install a waterflood module as an add-on to the Molikpaq platform to improve formation pressure and produce the maximum amount of oil.

GAZPROM SHOWS INTEREST IN SAKHALIN GAS PROJECTS.

On October 2nd, Rem Vyakhirev, Chairman of the Executive Board of Gazprom, sent an official letter to Sakhalin Governor Farkhutdinov about Gazprom's intent to participate in Sakhalin hydrocarbon projects. The first stage of such cooperation envisages study of the economic effectiveness of developments and possible financing schemesoptions. According to Governor Farkhutdinov, Gazprom's interests at this point are in developing the onshore gas deposits in the southern onshore of Sakhalin Island (such as Aniva, above). (TIA Ostrova) To follow up, Gov Farkhutdinov on 18 Oct was visited by a delegation representing a newly formed subsidiary of Gazprom, JSC Vostokgasprom, headed by its president Sergey Zhvachkin, and accompanied by Governor of Tomsk region Viktor Kress. The latter had regularly supported the proposals of Governor Farkhutdinov in the Federation Council on PSAs. Vostokgasprom has headquarters in Tomsk and 22 subsidiaries of its own in Krasnoyarsk, Omsk, Irkutsk and other Russian cities. As a result of the meetings, a memorandum was signed on establishing a new company, Sakhalingazprom, a "granddaughter" of Gazprom. (TIA Ostrova, ASTV Channel) Note - no further news available on this deal at the moment).

GOVERNMENT OF INDIA AGREED TO PURCHASE 20% OF SHARES FOR THE RIGHT TO EXPLORE AND DEVELOP OIL DEPOSITS RELATED TO SAKHALIN-1 PROJECT

India is going to participate in future year a planned 2001 auction in 2002 for where 40% of the shares in Rosneft- Sakhalinmorneftegas shares for the right to explore and drill on Sakhalin shelf will be sold. For now the plan is to buy half of the shares and to invest US $ 1.2 billion into Sakhalin oil deposits development. (ITAR-TASS, Sovetski Sakhalin newspaper)

SAKHALIN OIL AND GAS CONFERENCE IN LONDON

The Sakhalin Oil and Gas Conference took place in London's Le Meridien Hotel, 20-21 Nov 00. Keynote addresses were made by Governor Farkhutdinov, Deputy Energy Minister Valery Garipov, and Galina Pavlova, of the Sakhalin Administration Oil and Gas Shelf Department Representative of the Regional Administration Galina Pavlova. ; oOther presentations were given by SMNG, ExxonMobil, Shell, Sakhalin Region Vice Governor of Sakhalin Region Mr. Kholodin, ABC director Michael Allen, Dave Parish of Parish & Assoc., Natchiq General Director Bill Cheek, Bill Stamps, President of the Alliance Bill Stamps (of , Peak Oilfield Services), Dennis Steffy, General Director of the University of Alaska's Mining and Petroleum Training Service Mr. Dennis Steffy, and others. Allen, Parish and Cheek served on a panel to discuss the importance of Russian content. Stamps and Steffy discussed the importance of training, and described joint Alaska-Sakhalin efforts to improve the situation, including announcing the transfer of a wellhead simulator to the Alaska- Sakhalin Technical College, and USAID-funded programs for workforce development and assessment.

MITSUBISHI CORPORATION INCREASES STAKE IN SAKHALIN ENERGY.

Mitsubishi Coporation (Japan) will buy from Shell an additional 7.5% share in the Sakhalin Energy Investment Company. This will put Mitsubishi's share of the Sakhalin -2 project at 20%; Shell's share in the project will therefore be 55%. The remaining shares are held by Mitsui and Co. (Source: RussiaToday.com from Agence France Presse)

SAKHALIN PROJECTS EXPECTED TO ATTRACT US$600-700 MILLION NEXT YEAR.

According to Sakhalin Governor Farkhutdinov, investment in the Sakhalin shelf projects will reach US$600-700 million in 2001, and increasinge from the $400 million in investment in 2000 (US$400 million). According to Farkhutdinov, a spike in investment will occur in 2002 (US$2 billion), when the Sakhalin- 1 and Sakhalin- 2 projects will build major infrastructure. (Source: FSU Oil and Gas Monitor, Dec 5 from SKRIN EMITENT, November 30)

LOCAL AIRPORT CHANGES DIRECTOR.

The former director of Sakhalin airport, Mr. Bagrov, was arrested in Moscow and accused of stealing about US$ 500,000 from that enterprise, but providing privileges to certain companies. It was also being rumored that foreign carriers did not cover a large amount of their debts payable to the local airport. Nevertheless, Mr. Bagrov was soon released as and amnestied. The new director appointed is Andrey Lobkin, SAT copmpany representative, who was elected to the local Duma this year. For a one-month period Mr. Lobkin will be the acting director, after that period his nomination should be approved by the Ministry for Transportation.

CHANGES IN THE REGIONAL ADMINISTRATION STAFF

After Governor Farkhutdinov's re-election some changes were made to existing Administration positions. The post of Foreign Economic Committee director will now be taken by Mr. Rukavets (one of the candidates for Governor's post on the last elections, and the author of the draft "Fund of Generations" for Sakhalin region. The newcomer to vice-governor's chair is Anatoly Degtyarov who will be in charge of power and energy sector.

TRADE SHOWS ON SAKHALIN IN 2001

1. Oil, construction and mining industry - PAC COM February, 13-14 (Anchorage, Alaska)

2. Social projects for Sakhalin and Kurils (Yuzhno-Sakhalinsk) April, 21-22

3. The international exhibition of new technologies of mineral and energy resources- SIGOLD August, 29-31 (Yuzhno-Sakhalinsk)

4. The international exhibition of vehicles and accessories August, 29-31 (Yuzhno-Sakhalinsk)

5. International specialized trade show - fishing industry September, 19-21 (Yuzhno-Sakhalinsk)

6. International trade show and conference on coastal fishing September, 19-21 (Yuzhno-Sakhalinsk)

Contact:
Tel/Fax +7-4242-741142;
sakhexpo@sakhalin.ru

BUSINESS ASSOCIATIONS ON SAKHALIN
(Courtesy of Carana Corporation)

I. Association of Fishermen of Sakhalin The association consists of 122 companies, and is one of three \Sakhalin fishery unions. The Association is planning a strategy of fishing industry development, provides the necessary economic and legal support of its members. It represents its members interests in administrative structures, and provides consulting services ancy to its members upon request. Note: The Association is a good contact to present fish-industry- related products and services, to be further forwarded to its members.

Contact: Alexander Ivanovich Vereschak, Executive Director
241b Komsomolskaya Str.
Yuzhno-Sakhalinsk, Russia 693023
Tel +7-4242-428950
e-mail: ars@sakhalin.ru

II. S.I.B.A. (Sakhalin International Business Association) The Association is an informal structure, without registration of members. Its major goal is to facilitate meetings whenever there is an interest to a certain topic, invites officials or experts to cover certain topics of interest to expatriate community on the island.

Contact: American Business Center, Sakhalin

Mr. Michael Lee Allen
32, Kommunisicheski Ave.
Yuzhno-Sakhalinsk, Russia 693009
p/o box 24
Tel\Fax +7-4242-727124/25
e-mail: michaelallen@csi.com

III. Korsakov Association for Small and Medium BusinessM

The goal of the association is to improve business climate in the district, to provide support (legal and informational) to its members. Membership is not on the registration basis, informal.

Contact: Ljudmilla Denisovna Ivanova, Chairman
2, Reidovy Pereulok, office 18
Korsakov, Sakhalin region, Russia
Tel +7-42435-25766
e-mail: incop@mail.ru

IV. Union of Fishing Farms and Companies

Members - 25 companies. Helps to develop fishing industry on Sakhalin, provides consulting, marketing services for its members.

Note: The Union helps to raise finance for vessel construction.

Contact: Yevgeny Aleksandrovich Yarygin, Chairman
51a Karl Marx Str.
Tel +7-4242-722576
Fax +7-4242-722956
e-mail: asrks@snc.ru

V. Forestry Workers Assiciation

The Association aims at to protection of local forestry company interests on the market, and also provides market development, consultancy services, and informational support.

Contact: Yegor Goryachkin,
246a Lenin Str.
Tel +7-4242-725851
Fax +7-4242-721503

VI. Association For Russian and Foreign Investors. This newly formed aAssociation, registered in August, 2000, aims to help Russian and foreign companies with registration, legal advisce, information, and providing data on existing taxation system. It provides information via Does regular e- mail information distribution. Membership- informal. Note: This Association just started their activity, and we can provide no comments on the effectiveness of their services yet.

Contact: Igor Alexandrovich Shlyekhter, President
76, Sovetskaya Str. #22
Tel +7-42433-51179
e-mail: igor@kholmsk.sakhalin.ru

VII. Association for Small and Medium Business, Kholmsk district. The Association carries out support of business in Kholmsk district, holds seminars and consultations for its members. 34 members.

Contact: Oleg Mikhailovich Lankin, Chairman
4, Lenin Str., office 24
Kholmsk, Sakhalin region, Russia
Tel +7-42433-50370
Fax +7-42433-53337