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. Last Updated: 07/27/2016

Sakhalin Puts Energy Into a Rich Future

In Sakhalin, the island off the Russian Far East coast, Galina Pavlova sits behind a desk piled high with briefs projecting billions of dollars of investment in oil and gas development. Pavlova, deputy manager of the local Development of Offshore Mineral Resources department says, "We joke that Sakhalin will become the United Sakhalin Emirates."


In June, Pavlova's vision came a step closer to realization when Russian Prime Minister Viktor Chernomyrdin signed a multibillion-dollar energy deal with international companies to develop oil and gas reserves off Sakhalin's northeast coast.


Over the next 30 years, should three major oil deals go forward, Sakhalin stands to gain upwards of $20 billion in foreign investment. By comparison, foreign investment in the Russian Federation for 1994 is projected to be between $1 and $2 billion.


Saddled with a reputation as a tsarist penal colony and the site of the ill-fated KAL 007 airplane shootdown in 1983, Sakhalin is ready to turn the page on a dark past of neglect and build durable links with its Asian neighbors. Valued at $10 to 12 billion, the Sakhalin-2 agreement signed in Washington should get the ball rolling on the island's development.


It is on Sakhalin that Russia's two-headed eagle cranes its neck farthest east. Sakhalin runs a brisk trade in fish with Japan, its neighbor 50 kilometers to the south, which occupied the southern half of the island for 40 years until 1945. In spite of a territorial dispute which has strapped Russo-Japanese economic links, Sakhalin's officially registered exports to Japan jumped 35 percent in 1993, from $130 million to $176 million. The real figure is probably even higher given the unreported nature of much fish trading.


Since the establishment of diplomatic relations between Moscow and Seoul in 1990, Sakhalin's ties with South Korea have boomed. Trade, tourism and transportation links have increased each year.


And, with abundant oil and gas reserves targeted for development by American, Dutch and Japanese multinationals, Sakhalin has a commodity to sell to the world. Says Pavlova, "Oil and gas will be our real entrance to Asia."


But that entrance is a race against time. Cut adrift by Moscow's budgetary woes and victimized by high transportation costs and rising crime, Sakhalin residents are leaving the island in droves.


In the first four months of 1994, 17,000 Sakhalin residents emigrated to other parts of Russia, a rate that, if projected over the whole year, would see the island lose a tenth of its 700,000 population. Of particular worry to western oil specialists is that the mass exodus includes top-notch geologists, chemists and oil and gas engineers, who can no longer wait on meager salaries for international oil projects to kick in.


Daily life on Sakhalin is grueling. Food prices are among the highest in Russia. Drawing on an average salary of 150,000 rubles (about $75), a Sakhalin worker must fork out the equivalent of $2.50 for 10 eggs, $3 for a kilo of bananas and $80 for a plane ticket to nearby Vladivostok. Many residents make ends meet by growing vegetables and fishing the island's abundant streams. Hospitals depend on uncertain shipments of humanitarian aid for needed drugs. Life expectancy for men reportedly is down to 54, while women live to 60.


In a appeal to the State Duma in early June, the chairman of the Sakhalin Regional Parliament, Valyulla Maksutov, said the island was "on the verge of a social explosion. To be poor in spite of having the only energy resources in the Russian Far East is not just a shame," he said, "it's criminal." If measures are not taken, Maksutov warned parliamentarians, "we will get a repeat of what happened with Alaska, which Russia lost because of weak economic ties and a dwindling Russian population."


Sakhalin residents blame the Soviet Union's backwards energy policy for the island's woes. Since occupation by the Soviets in 1945, Sakhalin has served the energy needs of Moscow. This means that the island's only pipeline carries crude oil not to Sakhalin's population centers, but to the Komsomolsk-na-Amur refinery on the mainland from where it is shipped back to the island. Yuzhno-Sakhalinsk residents routinely endure power outages because of insufficient energy supplies.


In 1994, much to Sakhalin's chagrin, Moscow still holds the key to the island's future. Oil and gas agreements like the one signed in Washington last June will be useless without accompanying legislation that defines property rights and taxation rates in the energy deals. Codified in Russia's first production sharing law, the legislation awaits passage by both houses of the Russian parliament in the fall.


An export tax of $5 a barrel has already crippled at least one major foreign oil venture in Russia. Western oil executives warn that a repeat is possible on Sakhalin if the Russian parliament does not act. "The current tax is severe enough that we wouldn't go through with out project," says a western executive with the Sakhalin Energy Corporation, a Dutch, Japanese and American consortium which won the rights to develop the Sakhalin-2 oil fields.


Observers are optimistic that the production-sharing law will be passed this fall, freeing three large-scale oil development projects, including Sakhalin-2.


Sakhalin residents hope the law is passed. Once the projects get underway, "there will be billions and billions of dollars spent over the next 15 years on Sakhalin," says the western oil executive.


In negotiating the oil contracts, Sakhalin officials inserted infrastructure improvement clauses to ensure the island's development regardless of the profitability of the deals.


In the populous southern rim of the island, coal-powered electric power stations will be converted to gas, freeing the island from dependence on outside sources of energy. Says Pavlova, "The oil projects should raise Sakhalin's standard of living to the level of the progressive regions of Russia." Adds a western employee of Sakhalin Energy, "In five years this place could be bustling."


There are already signs that foreign investment is kicking in, particularly in the service and trading sectors. Closed for military reasons until 1990, Sakhalin has opened its doors to foreign investors.


"We came in because of the oil," says Ivan Chivers, the manager of Sakhalin Telecom Ltd., a long-distance telecommunications joint venture between Cable & Wireless and the local telephone company. According to Chivers, business is up 40 percent so far in 1994.


For Nimir-Petrosakh, a joint venture with Nimir Petroleum of Dallas, the oil boom has already arrived. In May, Petrosakh started refining Sakhalin oil at its $70 million refinery on Sakhalin's east coast. It plans to export to Japan and South Korea. "We are in the middle of the hottest crude-oil market in the world," says Petrosakh's president Donald Joiner.