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Message from Ian Craig, CEO, Sakhalin Energy

Action taken by Ministry of Natural Resources

Update: Developments regarding the Russian Ministry of Natural Resources’ decision to revoke the SEER 600 – the environmental permit for the Phase 2 Project.

On Saturday 16 September, a public statement was issued by the General Prosecutor’s (GP) Office of the Russian Federation concerning the opinion of the GP’s Office on the legality of Ministry of Natural Resources (MNR) order 600 that approved the 2003 SEER conclusion for Sakhalin II Phase 2. The statement, which is defined as a protest, expressed the view that the MNR order had been issued illegally.

On Monday 18 September, MNR issued a press release stating that it had considered the protest of the GP’s Office and had taken a decision that the order 600 should be invalidated. MNR stated that it had issued a relevant instruction that will become valid after approval by Rostekhnadzor, the technical evaluation agency of the MNR.

It should be noted that none of these developments relate to the existing Phase 1 activities which are not impacted in any way.

In response to these developments, Sakhalin Energy has issued a media release which you can find in the media centre of the website.

I recognise that these events may give rise to concern but every effort is being made with the relevant authorities to resolve this issue in the best interests of all stakeholders.

Regards,
Ian Craig

Relevant Media Release

Response to MNR revoking ecological approvals

Sakhalin II is the world’s largest integrated oil and gas project, and with $20 bln of inward investment it is the biggest foreign direct investment in Russia.

The lifetime economic benefits to the Russian Federation from this project will total over $50 bln assuming oil prices in the mid-30s.

We are confident the 2003 SEER conclusion does not violate any applicable law and indeed, has been the basis for successful execution of the project to date.

Although there have been various environmental challenges on this project these have been tackled and largely overcome. Specific issues referred to by RPN and MNR are not material.

All concerns are being addressed expeditiously in co-operation with the relevant authorities and do not constitute any legal grounds for nullification.

We are confident there are no valid grounds to revoke the order 600, which approved the SEER conclusion for Sakhalin II Phase 2 in 2003, and thus, to invalidate the SEER conclusion, which has been successfully defended in the Russian court, as recently as August 29, 2006.

Annulment of the order 600 could be damaging for the project and for Russia and lead to delays in project development. Extra costs would fall under the cost recovery mechanism of the PSA.

We have no doubts that the Government of the Russian Federation will honor its obligations under the PSA, and thereby, ensure that Russia meets its commitments to provide energy securely to its customers.

We will continue to work with the Russian authorities to resolve the issue and thereby, maintain confidence of international customers in Japan, Korea and North America, where Sakhalin gas is contracted for supply in 2008.

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