29 december 2010

Prime Minister Vladimir Putin meets with Sakhalin Region Governor Alexander Khoroshavin

Discussions focused on socioeconomic development in the Sakhalin Region over the year. The prime minister highlighted the sizeable increase in lending to businesses in the region. Implementation of the Sakhalin 1 and 2 investment projects and infrastructure were among the other key issues discussed at the meeting.

Transcript of the beginning of the meeting:

Vladimir Putin: Mr Khoroshavin, I have looked through the latest statistics on Sakhalin. They are satisfactory, on the whole, though the rise in industrial output is below the national average. However, there was a slight uptick in wage and investment, and unemployment was lower than average. I'm happy to see that loans to business in the real economy have grown in your region by more than 28%, and there has been a 60% increase in loans to small and medium-size businesses. Agricultural output has also increased. So far so good, but why have fish and seafood catches dropped, in contrast to all this success?

Alexander Khoroshavin: Mr Putin, gross regional product grew by roughly 7% this year. Industrial output, on the contrary, has declined somewhat due to the decline in oil production at the Sakhalin 1 and 2 fields due to technical reasons. The situation in Sakhalin 1 is complicated by the fact that gas extraction is impossible now – the issue of where to deliver the gas from Sakhalin 1 has yet to be resolved. Sakhalin 1 produces roughly 8 billion cubic metres of gas a year. But surely you are aware of this problem.

As for fishing, we had record catches in the 2009 fishing season. We broke all records for Sakhalin – about 310,000 tonnes of salmon alone. This year's catch was much smaller. You know how it is – there are fat and lean years. We have caught only a bit over 110,000 tonnes of salmon this year. So the overall catch has dropped as well, and the production of canned fish has declined dramatically. The food industry has increased its output this year, though by less. That's the situation in the fishing industry.

Vladimir Putin: What about the other investment projects? Which of them are successful?

Alexander Khoroshavin: Let me tell you briefly about our main investment projects. A report on one project was given at the United Russia party conference in Khabarovsk and about four were presented at the exhibition. Sakhalin 1 and 2 are obviously our main projects. We had a ceremony during the conference in September during which a second oilfield, Odopta, was put into service. We are also working on a third field, Arkutun-Dagi. Things are going according to schedule. Base plates for derricks are being made in Primorye. So Sakhalin 1 is on schedule.

As for Sakhalin 2, it really is a big job, and I know that you are setting the pace on this one. We had a very important conversation about it in the North, when you chaired the meeting on gas supplies and liquefied natural gas. At present, Sakhalin is an exporter of LNG to the Asia-Pacific region. I think we can increase these exports as part of the Sakhalin 2 project or in conjunction with it. This should be given careful consideration.

Your meeting with Mr Voser (Peter Voser, Shell CEO) led us to hold consultations with spokesmen from Shell, which is among the Sakhalin 2 shareholders. They see an opportunity to increase output at the LNG plant by about another five million tonnes. If preliminary negotiations with Gazprom are held and the statement is signed, as you know, and if the understandings set forth in the statement are observed and the schedule of assets exchange is adhered to, then in 2011 this schedule may be signed and in 2012 design work may be performed and we will have a realistic chance of launching the third LNG production train at the existing plant between 2015 and 2016.

Today, our deliveries amount to 5% of the world LNG market. Our current research indicates – and companies acting as project operators confirm this – that by 2020 LNG will be in very high demand and the market will double to reach as much as 230 million tonnes, according to some estimates.

Where the Asia-Pacific region is concerned, if we are to increase LNG output, we fit this niche well. I would like to emphasise that we are capable of this, and also that this will not come at the expense of our national projects, nor the Sakhalin-Khabarovsk-Vladivostok project. We can achieve synergy between the two projects.

Vladimir Putin: How is your infrastructure developing, including airfields? Not only on the main island but also on the other islands.

Alexander Khoroshavin: Mr Putin, when you appointed me to this position, you had a number of questions and I remember them very well. We had a long talk and I remember the tasks I was to carry out. One of them was Nevelsk. I have reported to you on it at the government meeting and will not go into detail now. It's all in the schedule. We know that we will complete the work.

The second issue was infrastructure: power projects, ports, roads etc. Regarding power projects, we have adopted some important documents, a strategy for energy security. Then, as part of this strategy, we have also adopted a programme to develop the coal industry, a programme to develop power production and a programme to expand gas infrastructure. These three programmes.

The programme to develop power production, which we presented in Khabarovsk, consists of three parts. The first part involves converting the South-Sakhalin Thermal Power Station-1 over to gas. I believe you have recently signed a government order on Entitlement Gas. Thank you, it allows us set gas prices and compensation independently, though only after 2014. We expect to be producing at a profit then. It will be fairly soon.

We are switching Yuzhno-Sakhalinsk Thermal Power Plant No. 1 over to gas not only for economic reasons but also for the sake of the environment and public health. The plant emits about 13.5 tonnes of pollutants a year into the city, so cancer is much more frequent here than in similar cities. That's why we're doing this, and we make it a point to slow the rise in prices. We know that the gas industry will eventually make profits equal to other industries' but we also have the coal industry to think of. We have raised 3 billion roubles to switch the plant over to gas. Foundations are being laid, and we are buying the power unit, turbines and other equipment. When the job is complete, we will move on to a second part of the project to build a new power plant – a state-of the-art plant that runs on coal and produces 330 megawatts. Our region does not participate in that project. The Eastern Power Grids company did the design work and is the recipient of budget funds. We are working together on this, however, and we monitor its performance. That is another part of our energy programme.

There is a third part – grid reconstruction. We estimate this will cost about 6 billion roubles. It will be funded through the Far Eastern programme from the federal and regional budgets, and other sources...

Vladimir Putin: How are you managing with the winter?

Alexander Khoroshavin: Fine so far.

Vladimir Putin: Have you had any pipe fractures?

Alexander Khoroshavin: None so far. There were blizzards but we have stocked up on equipment with your assistance through the Ministry of Regional Development. We have about 250 snowploughs, so we manage.

Vladimir Putin: How are your seaports and airports doing?

Alexander Khoroshavin: Three airports are under reconstruction, Yuzhno-Sakhalinsk among them, and one is being built in Iturup Island.

Vladimir Putin: How much money were you given to begin construction?

Alexander Khoroshavin: We have already spent 1.2 billion roubles on it. The Mendeleyevo Airport in Kunashir Island is being upgraded. The Yuzhno-Sakhalinsk project is on schedule. There are no problems here. As for the Kunashir and Iturup airports, both being funded through the Kuril programme, they do have some problems. Though the federal government is funding it 100%, the Iturup project was changed mid construction following a government decision to adjust runways to be able to handle aircraft of other classes. So we need more money. As for the Mendeleyevo Airport, its problems are smaller, and they are being taken care of.

Vladimir Putin: So the Yuzhno-Sakhalinsk project will cost more?

Alexander Khoroshavin: Yes, because it has to adapt to handle heavier planes with greater carrying capacity. Now we have to make changes to the Kuril Islands programme.

Vladimir Putin: Good. I'll see what can be done about it.

Housing construction in your region has essentially recovered after declining in previous years. What are your prospects, and how is the region managing with the programme for earthquake-proof housing?

Alexander Khoroshavin: Mr Putin, I can quote the figures on housing construction from memory. We commissioned 65,000 sq m in 2006, 104,000 in 2007, 147,000 in 2008, and 200,000 this past year. We are planning to commission 250,000 sq m in 2011 and 300,000 a year starting in 2012.

Vladimir Putin: That's a good pace.

Alexander Khoroshavin: That's the trend. Sakhalin built approximately 340,000 sq m of housing a year in the most successful times. We had three integrated house-building factories in the Soviet era. We will reach that level again in two or three years, at the latest.

Before 2009 we were helped greatly by allocations to [earthquake-destroyed] Nevelsk. It was tremendous help. We found substitutes for these funds later. We fully funded housing construction from the regional budget for a part of last year and this entire year. Investment on the quakeproof housing programme started this year, with a huge amount of funding.

Vladimir Putin: How much have you received?

Alexander Khoroshavin: 1.8 billion roubles. That's our own share, plus slightly over 600 million in the latest redistribution of funds from Kamchatka.

Vladimir Putin: Have you spent it all?

Alexander Khoroshavin: We will surely use up our own share. As for the Kamchatka money...

Vladimir Putin: ...the extra funds...

Alexander Khoroshavin: ...we have just received it. If it can be rolled over, we will surely have things to spend it on. I will present the projects we are implementing in the Sakhalin Region. These are projects to build low-rise housing in communities with its own infrastructure – its own power stations, services. Everything would be their own.

Vladimir Putin: Good.