Construction Machinery Market – Sakhalin Region, Russian Far East

February 2006

Author: Elena Sabirova, BISNIS representative in Yuzhno-Sakhalinsk

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SUMMARY

The construction industry is a leading sector in the Sakhalin region, and mostly focuses on the needs of the major driver of the local economy, the oil and gas complex. For the past two years, with the construction of a trans-island pipeline and major developments in the oil and gas sphere, local construction companies were able to expand their activities. In addition, some new companies came to Sakhalin Island to work on major contracts, including foreign ones, such as Chicago Bridge and Iron (www.cbi.com) and several Turkish construction companies (in 2005, the number of Turkish expat workers in the region almost tripled compared to 2004). The number of foreigners who came to work in the local construction sector in 2005 was almost 8,000 people. This report gives a general overview of the construction sector on Sakhalin and the market for construction machinery.

Construction Development in Sakhalin Region – General Trends

The main potential end-users for construction machinery are the oil consortia and their subcontractors, which are developing the largest construction projects in the region.

Oil and gas sector

Investment in the Sakhalin-1 project increased from $1.4 billion in 2004 to $1.8 billion in 2005. Sakhalin-2 has a total budget of $10 billion, which is planned to be significantly increased. The two projects increased spending by 20-25 percent each (to $2 billion for Sakhalin-1 and $4 billion for Sakhalin-2) in 2005.

Sakhalin-1 built a 225-kilometer pipeline to transport crude oil westerly across Sakhalin Island and the Tatar Strait to the DeKastri terminal in Khabarovsk. Nippon Steel Corporation and its Russian affiliate NS Neftegazstroy Limited, as well as two Russian companies—LUKoil-Neftegazstroy, and SMU-4—were involved in the construction of the pipeline. In February 2004, U.S. Fluor Corporation was chosen to provide engineering and procurement services for Sakhalin-1. The value of the contract to Fluor is in excess of $80 million. In Summer 2003, Exxon Neftegas Limited selected Fluor for a separate contract to provide construction management services for the project. The scope of work under this management contract is valued at more than $500 million. Under this contract, 80 percent of which is subcontracted, Fluor manages several large Russian construction companies to install an onshore oil and gas processing facility and well-pad infrastructure near the Chayvo field.

Sakhalin-2 is building the first in Russia LNG plant in the south of the Island, and it is possible the scope of the project will be expanded if more contracts for LNG sales are signed. The second phase consists of installation of an offshore platform at the Piltun Astoskhskoye field and the installation of a single large platform at the Lunskoye gas field. These platforms, as well as the Molikpaq (part of the Phase 1), will be linked to the shore by offshore pipelines. The oil and gas will then be transported via 800 km of onshore pipelines to Prigorodnoye, in the south of Sakhalin Island, the site of a new LNG plant and oil and LNG export terminals. The platform at Lunskoye field will produce the major part of gas processed at the LNG plant. Nine subcontractors are involved in this construction, and the total amount of workers involved is more than 6,000.

Additional opportunities will arise from the planned Sakhalin-3 and Sakhalin-5 projects, which significantly exceed Sakhalin-1 and Sakhalin-2 in reserves, and where the construction is still ahead (Sakhalin-5 is in its exploration drilling stage).

Residential and commercial construction

The increase of business activity due to oil and gas projects has led to high demand for housing, hotels, and office space. The hotel construction boom is almost over in Yuzhno-Sakhalinsk, the regional center, where two large hotel complexes are in different stages of construction. Therefore, the local hotel market, which was in decline just a few years ago, is now stable.

The demand for office space is still not satisfied, despite several office buildings that were recently constructed in the city. ExxonMobil is currently building its own large office in Yuzhno-Sakhalinsk.

The rate of residential construction is still lagging behind the actual market demand. Oil companies have even had to build their own residential complexes in order to provide housing for their workers.

Companies

1. The largest local construction companies (Sakhalinmorneftemontazh, Transstroy-Sakhalin, JV Su-4, JV Grenada & FSC, and Sphera) have contracts with oil consortia, which account for half of all the regional construction potential.

2. Sphera, one of the leading local construction companies on the Island, completed such projects as the Zima village (housing complex for expat oil project workers); the school at Zima; housing for expats in Yuzhno-Sakhalinsk; several hotel projects; and an office complex. The company has been buying both Russian manufactured and imported road and construction equipment for its projects. Due to harsh climatic conditions and the softness of the soil on certain parts of Sakhalin Island, domestically manufactured machinery tends to be more suitable and cheaper to maintain than imported analogues. Sphera is utilizing all kinds of construction machinery – wheel excavators, large front-end loaders, bulldozers, cranes, vibrorollers, and dump trucks.

3. Sakhalin Machinery, an official Caterpillar dealer, has been active on Sakhalin since 1997. It has 200 employees and a 3,000 square meter workshop that will be awarded its first star rating for contamination control by Caterpillar in 2006. The company’s equipment qualifies as 100 percent Russian content.

4. InterraMasService is an official dealer of Komatsu on Sakhalin and has a well-established depot. The company sells both new and used machinery including bulldozers, excavators, loaders, vibrorollers, trucks, cranes, and autograders.

5. Liebherr company (www.liebherr.com) made a number of successful sales on Sakhalin after establishing an office on the Island. Liebherr cranes, for instance, are used on large office construction sites.

6. Sakhalin Logistics Trading has been selling machinery for several years, and is currently interested in expanding its business with the help of an international partner (To get more details on SLT, please contact BISNIS representative on Sakhalin).

Market Access

The Sakhalin-based BISNIS representative can provide information for U.S. companies interested in the local market. Getting contacts and e-mailing to companies is a good start, but it is recommended that interested U.S. companies visit the Island and meet with at least five local companies of potential interest. BISNIS can support such a trip, to the extent of its capabilities, by providing available contact lists, and assisting with some meetings arrangement and simple local logistics.

Local Trade Shows

The experience of many U.S. companies has shown that participation in a local event can be one of the most successful ways to explore local business opportunities. Unlike regular business visit with a set of pre-planned meetings, it provides the opportunity to meet more companies and get a picture of the market more quickly. To participate, it is usually enough to contact the organizers (www.sakhexpo.ru) several months before the trade show and to secure a place for a booth (please note that space is usually limited due to insufficient size of expo facility). Sakhexpo usually has materials in English available for potential participants and can handle the initial correspondence in English. Two popular local events that are recommended for visit are:

1.	4^th Annual Trade Show SakhalinStroyExpo	May 16-18, 2006	Machinery, technologies, services, and innovations in industrial and dwelling construction and public utilities.
2.	8^th Annual Trade Show Oil, Gas, Infrastructure/SIGOLD	August 22-24, 2006	Technology, equipment, exploration; transportation an other related industries

SIGOLD – Oil, gas, infrastructure http://www.sakhexpo.ru/prev/eng/sigold.php

Total amount of participants in 2005 was 61 companies (five companies advertised in the Trade Show catalog only, which is also an option). The participants were companies from Sakhalin region – 46 percent; companies from other regions of Russia – 43 percent; foreign companies – 11 percent.

The representatives of Kentech, KCA Deutag Drilling, Romona Geosolutions, Halliburton, Starstroy (pipelines construction), Energostroy, Neftegasenergostroy, Sakhalin Energy, Exxon Neftegas, Bets (Bechtel/Enka; TekhnoStrojexport) visited the show. According to the organizers, the amount of preliminary concluded contracts at the trade show totaled more than $10 million. More than 1,000 people visited the show during the three-day expo.

Sakhalinstroyexpo http://www.sakhexpo.ru/prev/eng/stroy.php

In 2005, the trade show had more than 2,000 attendees, including local Administration Construction Department officials, and delegations from Japan and China. Construction and trading companies from different Russian regions, companies from South Korea, Sweden, Germany, and Austria also participated in the trade show. The event was visited by more than 20 local construction companies who did not have booths at the show, but were interested to talk to the participants; the amount of preliminary contracts discussed at the event totaled more than $20 million.

In addition, the 10th Sakhalin Oil & Gas Conference 2006 will take place during September 27-28, 2006, in Yuzhno-Sakhalinsk, organized by IBC Energy Conferences. For more information, visit www.ibcenergy.com/sakhalin

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Services available from the U.S. Commercial Service in Russia (CS)

Gold Key Program has been designed to assist U.S. exporters enter and expand in overseas markets. The Gold Key-Matching Service is designed to be the most cost effective means for American exporters to enter the important and complex Russian market. A full schedule of business meetings (generally 4-5 meetings/day) with potential agents, distributors or joint venture partners will be organized by CS staff who will accompany the client and share their industry sector knowledge and insights. The basic Gold Key Service cost is $685.

Customized Market Research (CMR) provides U.S. firms with customized, individualized information on overseas markets. The service provides specific information for specific products or services. CMR answers questions such as the overall marketability of a product or service, market trends and size, customary distribution and promotion practices, market entry requirements, regulations, product standards and registration, key competitors, and potential agents, distributors, or strategic partners. U.S. companies have the flexibility to design their own question/set of questions or to choose from a Core Menu of standardized questions. Post

reserves the right to subcontract work depending on Post’s resource at the time of the request. Cost dependent on the scope of the research.

Contact List Service ($100) provides a list of at least 10 quality contacts, with contact information verified, but whose interest in your specific product has not been vetted.

For complete information on services available from the Commercial Service in Vladivostok, please visit http://www.buyusa.gov/russia/en/

For more information on the Russian Far East, visit BISNIS online at www.bisnis.doc.gov

Contacts

Sphera Constructon Co.

1A, Kholmsk Shosse,

Yuzhno-Sakhalinsk, Russia 693000

Tel +7-4242-467967

Fax +7-4242-773251

Alexey Krestin; Deputy Director; Transportation

Tel/fax +7-4242-773251

Sakhalin Logistics Trading

32, Kommunisticheski Ave.

Yuzhno-Sakhalinsk, Russia 693009

Tel/fax +7-4242-462092

Fax +7-4242-728512

Anatoly Gavrish, Deputy Director

Slt_sakhalin@karafuto.ru

Sakhalin Machinery

1B Mira Ave.

Yuzhno-Sakhalinsk, Russia 693000

Tel +7-4242-462181

Fax +7-4242-463707

http://www.sakhalinmachinery.ru/

InterraMashService

5, Mira Ave.,# 40

Yuzhno-Sakhalinsk, Russia 693000

Tel +7-4242-463800

Tel/fax +7-4242-463808

http://www.interramashservice.ru/

SakhalinEXPO

76, Kommunisticheski Ave., # 313

Yuzhno-Sakhalinsk, Russia 693000

Tel/fax +7-4242-744169

Sakhepo@isle.ru